DRAFT II (7/11/00)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
Commission file number 33-61534
Levitz Furniture Corporation
(Exact name of registrant as specified in its charter)
Florida 23-1657490
(State or other jurisdiction (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)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(d) of the Act:
None
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 _____
On June 12, 2000, there were 1,000 shares of the registrant's Common Stock
outstanding, with no shares held by the registrant in its treasury. As of that
date all shares of such Common Stock were owned by the registrant's parent,
Levitz Furniture Incorporated, a Delaware Corporation.
Documents Incorporated by Reference:
None
The registrant meets the conditions set forth in General Instruction J(1) (a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
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PART I
ITEM 1. BUSINESS
THIS ANNUAL REPORT ON FORM 10-K 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 CAPTIONS "BUSINESS" AND "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: (1) BANKRUPTCY COURT ACTIONS
OR PROCEEDINGS RELATED TO THE BANKRUPTCY OF LFI AND ITS SUBSIDIARIES; (2)
COMPETITIVE PRESSURE IN LFI'S INDUSTRY; (3) GENERAL ECONOMIC CONDITIONS; (4)
CHANGES IN THE FINANCIAL MARKETS AFFECTING LFI'S FINANCIAL STRUCTURE AND LFI'S
COST OF CAPITAL AND BORROWED MONEY; (5) INVENTORY RISKS DUE TO CHANGES IN MARKET
DEMAND OR LFI'S BUSINESS STRATEGIES; (6) CHANGES IN EFFECTIVE TAX RATES; AND (7)
THE UNCERTAINTIES INHERENT IN LFI'S OPERATIONS. LFI HAS NO DUTY UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 TO UPDATE THE FORWARD-LOOKING
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K.
Chapter 11 Filing
On September 5, 1997 (the "Petition Date"), Levitz Furniture Incorporated, a
Delaware corporation ("LFI" or the "Company"), 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 "Court") under Case No.
97-1842(MFW). Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, LFI, 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. Because LFI is operating as
debtor-in-possession under Chapter 11 of the Bankruptcy Code, the existing
directors and officers of LFI continue to manage the operations of LFI subject
to the supervision and orders of the Court.
On May 25, 2000, the Debtors filed a "Disclosure Statement" and a "Second
Amended Joint Plan of Reorganization" ("Plan of Reorganization" or "Plan"),
pursuant to Section 1125 of the Bankruptcy Code with the Court. The Disclosure
Statement sets forth certain information regarding, among other things,
significant events that have occurred during the Debtors' Chapter 11 cases and
the anticipated organization, operation and financings of "Reorganized Levitz".
The Disclosure Statement describes the Plan of Reorganization, certain effects
of Plan confirmation, certain risk factors associated with securities to be
issued under the Plan, and the manner in which distribution will be made under
the Plan. In addition, the Disclosure Statement discusses the confirmation
process and the voting procedures that holders of claims in impaired classes
must follow for their votes to be counted. The Plan of Reorganization sets forth
certain information, among other things, the classification and treatment of
claims and interests, means for implementation of the Plan, acceptance or
rejection of the Plan and effect of rejection by one or more classes of claims
or interests, provisions for governing distributions, the treatment of executory
contracts and leases, conditions precedent to confirmation of the Plan and the
occurrence of the effective date of the Plan. The foundation of the Plan is (i)
a management agreement between Seaman Furniture Company, Inc. ("Seaman") and LFI
(the "Management Agreement") and (ii) a shared services agreement between Seaman
and LFI (the "Shared Services Agreement").
Under the Management Agreement, Seaman would perform the general day to day
management of Levitz's stores located on the East Coast. Levitz would perform
the day to day management of its stores on the West Coast. Under the Shared
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Services Agreement, Seaman would provide certain services to Levitz, including:
(i) accounting, (ii) finance, (iii) advertising support, (iv) MIS and
telecommunications, (v) human resources, (vi) insurance, (vii) inventory control
and merchandise loss protection, (vii) real estate, (ix) legal and (x) logistic
support of the merchandise program. The agreements would provide the Debtors
with, among other things, cost savings, streamlined operations, and economies of
scale with respect to purchasing inventory.
The Plan of Reorganization as filed provides, among other things, that as of the
Plan effective date:
(1) All holders of an allowed administrative and priority tax claim are
unimpaired and unclassified, are not entitled to vote on the Plan and
will receive cash or such other treatment as to which LFI and such
creditor shall have agreed in writing.
(2) All holders of an allowed other priority claim (Class 1), setoff claim
(Class 2) and miscellaneous secured claim (Class 3) are unimpaired,
are deemed to have accepted the Plan and, therefore not entitled to
vote on the Plan and will receive cash or setoff or reinstatement or
such other treatment as to which LFI and such creditor shall have
agreed in writing.
(3) All holders of a small unsecured claim (less than $20,000, Class 4)
are impaired and are entitled to vote on the Plan and shall receive in
cash 30% of the allowed amount of the claim.
(4) All holders of an allowed general unsecured claim (Class 5) are
impaired, are entitled to vote on the Plan and shall receive their pro
rata share of the new common stock distribution of "Levitz Home
Furnishings, Inc." ("LFHI"). A beneficial holder of more than one
Allowed Class 5 General Unsecured Claim may elect to reduce the
aggregate amount of such Claim to $20,000 and receive a single
distribution as a holder of an Allowed Class 4 Small Unsecured Claim.
(5) All holders of an allowed subordinated claim (Class 6) are impaired,
are deemed to have rejected the Plan and, therefore, not entitled to
vote on the Plan, and shall not receive or retain any property or
interest in property on account of their subordinated claim.
(6) All intercompany claims (Class 7) shall be cancelled, and their
holders shall not receive or retain any property or interest in
property on account of their intercompany claims.
(7) All holders of Interests (the rights of any current or former holder
or owner of "old equity securities" authorized and issued prior to the
Plan confirmation date, Class 8) are impaired, are deemed to have
rejected the Plan and, therefore, are not entitled to vote on the
Plan. All Interests shall be cancelled and the Interest holders shall
not receive or retain any property or interest in property on account
of their Interests.
On June 23, 2000 the Chancery Court of Delaware issued a preliminary injunction
prohibiting Seaman from performing or taking any further action with respect to
the performance of the aforementioned Management and Shared Services agreements.
While Levitz is not a party to the Chancery Court Action, this decision makes it
unlikely that the Company will be able to implement the Plan of Reorganization
as filed by the Company on May 25, 2000.
As a result of the Chancery Court decision, the Company is currently in the
process of developing a new "stand-alone" plan of reorganization. Such plan
will include measures for obtaining a working capital financing facility to
replace the current revolver facility under the DIP Agreement and sources of
additional capital from existing creditors and vendors which would be required
to finance the Company's "stand-alone" plan. The proceeds of these arrangements
would be used to support future operations. The exclusivity period for the
Company to propose a Plan of Reorganization expires on September 29, 2000.
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See Item 7-"Management's Discussion and Analysis of Results of Operations and
Financial Condition" for a discussion of factors to be considered prior to the
acceptance and confirmation of a new plan of reorganization.
The Company
Levitz Furniture Corporation (which together with its subsidiaries are
collectively referred to as "Levitz"), was organized in 1965 as a Florida
corporation, is the successor to a business originally commenced in 1910 and was
acquired by LFI in 1985. Levitz is one of the largest specialty retailers of
furniture in the United States with, as of March 31, 2000, a chain of 64 stores
serviced by 21 warehouses located in major metropolitan areas in 13 states.
Levitz pioneered the warehouse-showroom concept by opening the first
warehouse-showroom in 1963 in Allentown, Pennsylvania. Levitz stores generated
revenues of $535.1 million in the year ended March 31, 2000 ("Fiscal 2000").
Management believes the Levitz name to be one of the most recognized in
furniture retailing.
Levitz stores offer a wide selection primarily of brand-name furniture and
accessories including living room, bedroom, dining room, kitchen and occasional
furniture and bedding. Some of the well known, nationally advertised brands
offered by Levitz stores include Ashley, Bassett, Benchcraft, Berkline, Douglas,
Klaussner, Lane, Lea Industries, Rowe, Sealy, Simmons, Stanley, and Universal.
Levitz does not manufacture any of the merchandise sold in its stores but
instead devotes all of its resources to the retail sale of furniture.
Levitz has experienced declining profitability and cash flows over the past
several fiscal years. Reference is made to "Restructuring Activities" and Item 7
- "Management's Discussion and Analysis of Results of Operations and Financial
Condition" for a discussion of action taken with an intent to restore profitable
operations.
Business Strategy
Levitz's retailing concept targets value-conscious consumers by offering:
- broad selections of furniture and accessories;
- nationally advertised brands;
- competitive prices; and
- immediate availability of merchandise.
Levitz offers one of America's largest selection of quality brand name furniture
at guaranteed low prices. The Company's large stores facilitate the display of a
broad selection of furniture and accessories. Levitz's sales volumes create a
key channel of distribution for its principal vendors. Management has developed
strong partnerships with these principal vendors from whom it purchases large
quantities of quality merchandise, often at substantial savings. This buying
power enables Levitz to price its merchandise very competitively.
Merchandising
Levitz targets value-conscious consumers between 18 and 44 years of age with a
family income between $45,000 and $65,000 per year. Its customers seek
moderately priced merchandise to upper moderately priced merchandise, appreciate
style and recognize value.
Levitz offers a wide array of choices to the value-conscious consumer. The large
product selection is an inducement for consumers to purchase at Levitz and
differentiates Levitz from its competitors. The merchandise sales mix among
product line groupings for Fiscal 2000 was upholstery/seating 45.3%, bedroom
18.2%, occasional 10.8%, dining room (formal and casual) 11.9%,
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bedding 10.4%, and other 3.4%. Percentage breakdowns have been relatively
consistent for the past several years.
To attract consumers who prefer more customized merchandise, Levitz can special
order fabrics on upholstered products from a wide variety of preselected
patterns ("Choices Program"). Moreover, Levitz has enhanced its special order
leather program, which allows customers to receive their merchandise generally
within four weeks of purchase. During Fiscal 2000 the Choices Program
represented approximately ten percent of upholstery sales for continuing stores.
Advertising and Promotion
Levitz retains independent advertising firms for creative and production
services in connection with its print, radio and television advertisements. For
Fiscal 2000, Levitz's advertising expenditures amounted to $88.2 million or
16.5% of net sales, as compared to $93.4 million or 14.3% of net sales, for
Fiscal 1999. Advertising expenditures include promotional finance fees of $30.1
million and $28.4 million in Fiscal 2000 and 1999, respectively. Levitz's
advertising seeks to attract a broader customer segment and emphasize the
difference between shopping at Levitz and at other stores.
Levitz continues to promote its stores through newspaper inserts and circulars
distributed through the mail ("Preprints"). These Preprint promotions reflect
(i) the great styles offered at Levitz, (ii) the wide array of choices, (iii)
Levitz's low prices and (iv) fast delivery.
Customer Service
Levitz is committed to providing high-quality customer service in all phases of
its business, including instant store credit and prompt delivery. Levitz offers
its customers instant credit at the time of purchase using point-of-sale
terminals on the showroom floors. In the case of any damaged or defective
merchandise Levitz will repair or replace the item or, if impracticable to
repair or replace, will offer a refund to the customer. Management believes its
commitment to customer service has contributed to the substantial percentage of
repeat purchases by Levitz's customers.
Store Operations
Stores
Each of Levitz's sixty-four stores feature selling space of 18,000 to 112,000
square feet. Merchandise is typically displayed in model room settings of which
approximately 240 to 330 are located in each facility containing 50,000 or more
square feet of selling space. Smaller facilities feature approximately 110 to
230 model room settings. Levitz's customers typically have the option to receive
their merchandise at the store immediately upon purchase or within a few days or
to have their merchandise delivered to their homes for a modest delivery charge.
Levitz's stores are typically located within easy access of expressway
interchanges or major highways and have adjacent parking facilities. Levitz
opened one new store in May 1999 and relocated one store in November 1998.
Levitz expects to relocate two to three additional stores in Fiscal 2001. See
"Properties" for information regarding the locations of Levitz's stores.
Levitz's retail facilities are generally open Monday through Saturday from 10:00
a.m. to 9:00 p.m., and on Sundays from 12:00 noon to 6:00 p.m.
Sales Support Centers
Levitz's twenty-one Sales Support Centers (formerly known as warehouses) provide
the selling support for all sixty-four stores. The support provided includes the
warehousing of merchandise, customer service, data processing, inventory control
and delivery. Each Sales Support Center is currently
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attached to a store and is in close proximity to other detached stores that it
services.
Customer Credit Policies
Levitz sells its merchandise either for cash, or through bank credit cards and a
private label credit card program. During Fiscal 2000 and 1999, approximately
47% and 48%, respectively, of sales at Levitz's facilities were for cash
(including bank credit cards), and approximately 53% and 52%, respectively, of
sales were under customer credit plans. The availability of a "private label"
credit-financing program is critical to Levitz's business. Private label credit
supports marketing programs and offers a convenient way for Levitz customers to
spread over time the cost of furniture purchases.
Levitz's private label credit card program is offered under an agreement with
Household Bank (SB), N.A. ("Household"). Under the program, Household approves
the credit application and pays Levitz for the sale. Levitz pays Household a fee
for servicing the accounts and an amount intended to compensate Household for
its invested capital. Levitz receives all income and pays all expenses relating
to the financing of the portfolio. Levitz is also responsible for any bad debts
associated with the portfolio up to 15% of average outstanding receivables in
any contract year. Any amounts in excess of 15% are to be shared equally by
Levitz and Household.
In the event Household denies credit approval to a customer, Levitz endeavors to
obtain credit approval from other third-party finance companies. Under such
arrangements, Levitz sells the sale transaction to the finance company for a
discount and on a non-recourse basis.
Vendor Partnerships/Inventory
Management has established strong partnerships with its principal vendors to
review new merchandise and plan promotions and marketing strategies, as well as
manage inventory levels. Substantially all manufacturers have cooperative
advertising budgets with Levitz. Electronic data interchange ("EDI") is an
important aspect of these partnerships. Ninety-nine manufacturers currently
participate in Levitz's EDI system which enables manufacturers to plan and
produce goods more efficiently while making it possible for Levitz to maintain
an in-stock position with less inventory. The EDI system includes the daily
electronic transmission of purchase orders and bar code data to vendors and
returned receipt of acknowledgements of the purchase orders from vendors. The
acknowledgement authenticates, among other things, price, items and expected
shipment date. The use of EDI combined with the newly implemented demand
forecasting and inventory replenishment system will streamline the merchandise
re-ordering process and allow Levitz to be in a better in-stock position with
less inventory investment. During May 2000, 99% of all furniture purchases were
made through the EDI system, as compared to 96.0% for the same month of the
prior year. Levitz has eleven vendors that send invoices through EDI
representing approximately 43% of all merchandise invoices sent to Levitz. This
process is integrated with the accounts payable system. Levitz intends to
continue working with vendors to increase the number of vendors that use EDI for
invoices and also to introduce additional EDI features such as advance ship
notices which are expected to enhance relations and improve efficiencies for the
Company.
Levitz currently purchases merchandise from over 120 independent manufacturers.
For Fiscal 2000, Levitz's top ten vendors accounted for 58.3% and 50.3% of
purchases for Fiscal 2000 and 1999, respectively. Levitz has no long-term
contractual commitments with any of its manufacturers, and with the exception of
the disruption caused by its 1997 Chapter 11 filing, has had no difficulty in
the past in obtaining merchandise for sale.
Levitz is concentrating its vendor relations on key vendors, which account for
approximately eighty percent of net sales. These enhanced relationships involve
regular assessment reports and periodic strategy planning meetings.
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Management Information Systems
Levitz maintains an IBM AS/400 computer in each Sales Support Center to track
all inventory and sales activity for the stores that the Sales Support Center
services.
When merchandise arrives at the Sales Support Center, it has been or is
immediately bar coded, enabling scanning by hand-held readers. This information
is directly loaded into the AS/400 thereby eliminating clerical errors,
increasing available inventory for sale and minimizing inventory shrinkage. The
sales floors in all stores are equipped with on-line point-of-sale terminals
enabling sales persons to access inventory status, reserve inventory, schedule
delivery and begin the credit approval process for customers. All data is
transmitted to corporate headquarters each night. Management at corporate
headquarters and at the store level monitor inventory composition, age and
condition.
Levitz has completed development of the software for its radio-frequency ("RF")
system which will track all merchandise movement in and out of its stores and
Sales Support Centers. All furniture movement will be scanned and updated
immediately in the inventory files. Testing and implementation of the software
has been deferred pending consideration of changes to information systems that
may arise from the Management and Shared Services Agreements with Seaman.
Competition
The home furnishings industry is a highly competitive and fragmented market with
sales for furniture, bedding and decorative accessories by furniture stores in
the United States estimated at $37.2 billion in 1999. According to a leading
industry publication, the nation's 100 largest furniture retailers accounted for
approximately 53% of all furniture sales by furniture stores in the United
States in 1999. According to the same publication, in 1999 Levitz represented
1.4% of total domestic furniture sales, and was the eleventh largest specialty
retailer of furniture in the United States.
Levitz's competition varies significantly according to geographic areas.
Levitz's principal competitors consist of local independent specialty furniture
retailers. Levitz also competes with national and regional specialty furniture
retailers, general merchandisers, internet and "800" number based retailers and,
in certain limited categories, wholesale clubs. In the future Levitz may have
increasing competition from other major retail operations, some of which may
have greater financial and other resources than Levitz and may derive revenues
from sales of products other than household furnishings.
Employees
As of March 31, 2000, Levitz had 3,140 employees, of whom 989 were engaged in
sales, 382 in merchandising and display, 917 in warehouse and maintenance
functions and 852 in office and administrative work. As of March 31, 2000, 2,432
of Levitz's employees were full-time and 708 were part-time. Sales personnel are
paid primarily on a commission basis. Levitz's store managers and key marketing,
distribution and operations personnel may receive, in addition to their base
salaries, bonus compensation based upon achieving planned sales and operating
performance for the location or locations for which the employee has
responsibility. Certain of Levitz's national staff personnel, including
officers, may receive bonuses based upon favorable operating results during the
fiscal year.
Levitz maintains one facility in the state of Washington which its sales
employees are covered by a collective bargaining agreement with a local of the
United Food and Commercial Workers Union ("UFCW"). This collective bargaining
agreement expires in December 2000.
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In 1995, Levitz withdrew recognition of a UFCW local as bargaining agent for the
employees at a facility in California. That decision was upheld by the NLRB
Regional Director and the local has appealed the matter to the NLRB.
In the past, a number of petitions were received from various unions, including
affiliates of the UFCW and the Teamsters Union, for organization of some or all
of the employees in certain other of Levitz's facilities. Except as noted above,
none of these petitions or other union activities has resulted in a current
collective bargaining agreement. Levitz has not experienced a material work
stoppage due to union activity in the past 10 years.
Levitz expects that union efforts to organize the employees at its facilities
will continue from time to time, but cannot predict what effect these activities
may have on Levitz's business operations, employee relations or income from
operations. Although nationwide organizational campaigns may be instituted by
one or more unions, all union activities to date have been confined to the local
or regional level.
Restructuring Activities
Since the Petition Date, management of the Company and its advisors in the
bankruptcy proceedings have conducted an extensive analysis of business
operations with the objective of making the changes necessary to improve
operating performance. Levitz has devised a comprehensive strategy to focus and
increase its presence in its most productive markets, streamline its warehousing
and delivery systems, and improve its internal operations and selling functions.
The major restructuring initiatives that have been implemented or are currently
underway include the following:
Focus on Markets with Strong Competitive Positioning
Management has studied each of the market areas in which Levitz stores operate.
This study compared the operating performance of Levitz's stores against key
competitors in each market. Levitz determined that a key determinant of the
ability of Levitz to profitably compete was for Levitz to be one of the dominant
furniture retailers, in terms of number of stores and sales revenues, within
each geographic market. The conclusion was based upon the significant
advertising and promotional expenses required to operate in the furniture retail
business and the ability to leverage fixed expenses across a greater sales base
within each market. Accordingly, management decided to close selected markets in
which Levitz did not have sufficient market presence and to refocus those assets
into other core markets by opening new stores or by remodeling existing stores.
Levitz has closed a total of sixty-six stores since the Petition Date, enabling
it to concentrate resources on the remaining core stores, primarily in the
Northeast and on the West Coast. As part of their efforts to increase market
share and to improve profitability, Levitz plans to relocate selected existing
stores and to open additional stores over the next three to five years within
core markets, dependent on general business conditions and Levitz's ability to
finance the openings.
Distribution System Rationalization
Levitz is implementing a "warehouse rationalization program," aimed at limiting
the number of warehouses serving each market. This initiative should provide the
following benefits: (i) reduced in-bound freight costs; (ii) reduced warehouse
operating costs; (iii) lower inventory investments; (iv) improved merchandise
in-stock position; (v) better ability to clear discontinued merchandise; and
(vi) overall logistics simplification. In addition, the warehouse
rationalization program may provide Levitz the opportunity to relocate certain
existing stores into more favorable retail locations.
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The warehouse rationalization program is being implemented in several phases.
The first phase, begun in June 1998 with the closure of the warehouse facility
in the Paramus, New Jersey store was completed in June 1999. Also, during this
time, 15 other warehouse facilities were shut down and the warehousing and home
delivery activities for attached stores were transferred to other
warehouse-showroom stores within the same or adjacent markets. At the completion
of this initial phase, Levitz is operating 64 stores, which are supported by
twenty-one warehouse facilities (Sales Support Centers).
Levitz is analyzing the opportunity to further improve its logistic practices
through the introduction of regional distribution centers in future years. It is
believed such a program would provide significant savings related to in-bound
freight expense, lower the required inventory investment levels and also create
the opportunity to introduce further economies in merchandise buying practices.
Improved Sales Force Staffing and Management Techniques
Levitz has implemented several initiatives to improve the performance of its
sales force, including: (i) hiring additional sales people at its ongoing stores
since the Petition Date, increasing the number of sales people (net of
terminations); (ii) reorganizing the field management structure to provide for
more frequent and detailed store visits; (iii) strengthening individual store
sales management; (iv) installing sophisticated sales force performance
measurement tools designed to identify "best practices" within the stores and to
set benchmarks for performance; and (v) testing various sales force compensation
structures.
Creation of New Store Prototypes
Levitz has created a new store design prototype which features a "race-track"
floor layout, as compared to the traditional "alley" design, and a more open,
brighter feeling store environment with higher ceilings and more lighting. To
date, the prototype has been implemented in the remodeling of stores in King of
Prussia, PA, Paramus, NJ and Garden City, NY and at a relocated store in
Phoenix, Arizona. The performance of these stores has improved significantly as
compared to periods immediately before the implementation of the new prototype
design. In addition, in May 1999 Levitz opened a new store in Valencia,
California with this new design. Levitz intends to introduce additional stores
in the new prototype layout over the next several years, either as new stores or
as remodels of existing stores. Levitz's ability to complete such plans may be
subject to Court approval and is dependent on general business conditions and
the ability to finance the required capital expenditures.
More Focused Vendor Relationships
Since the Petition Date, Levitz has undertaken a comprehensive review of their
merchandise vendor structure and have determined to significantly reduce the
number of vendors that they deal with and increase the strength of their
remaining vendor relationships. As part of a more focused relationship with
ongoing vendors, Levitz is exploring opportunities to: (i) increase frequency
and shorten lead times for deliveries; (ii) improve operational and financial
performance of the vendor-merchant relationship for both parties; (iii) develop
special promotions and financing opportunities; and (iv) improve dating.
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Improved Inventory Planning Systems
Levitz has added specialized employees and dedicated software systems designed
to increase the ability to forecast inventory levels and purchasing requirements
and to allocate inventory to stores so as to improve the in-stock levels at the
stores. The ability to better plan inventory provides Levitz significant
advantages in the following ways: (i) by improving in-stock position, fewer
opportunities are missed to generate sales when a customer wants to purchase an
item but it is unavailable; (ii) by giving vendors more lead time on expected
purchases, Levitz can realize cost savings because of the more orderly
production schedules the vendors can run; and (iii) by implementing tighter
controls on inventory Levitz can operate with a lower inventory investment in
the stores and to transition out of discontinued items with lower mark-downs.
Merchandising Assortment Planning
Levitz is employing new planning techniques to evaluate the appropriateness of
current merchandise assortment. Every category of merchandise has been evaluated
to ensure the assortment achieves the desired breadth of selection considering
quality, style and price and local market differentiation. The assortment plans
incorporate consideration of the availability options to be provided to
customers. Vendors will be selected based on their capability to most
efficiently support the vendor assortment programs.
Improved Advertising Programs
Levitz has adopted a longer time horizon into planning advertising campaigns in
order to better integrate merchandising planning and marketing efforts. New
themes have been developed and a "new look" adopted to improve the clarity of
the message to the customer on why to shop at Levitz. Research is being
conducted to better understand customer profiles in markets where stores are
located. This research will impact the merchandise assortment, pricing and
methods Levitz will use to communicate with customers from market to market.
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ITEM 2. PROPERTIES
On March 31, 2000, Levitz operated 64 retail stores, and 21 Sales Support
Centers located in major metropolitan areas in 13 states, with a concentration
in California. The following table sets forth the number of retail facilities
owned or leased by Levitz on March 31, 2000:
Owned Leased
Stores with attached Sales Support Centers.................. - 21
Stores that are detached or freestanding.................... - 43
On March 31, 2000, these facilities contained a total of approximately 7,000,000
square feet, including approximately 3,100,000 square feet of selling space.
Levitz also leases a 45,000 square feet facility for its corporate offices in
Boca Raton, Florida and owns a 35,000 square foot facility in Pottstown,
Pennsylvania which is used for accounting offices.
The following sets forth, as of March 31, 2000, the retail premises operated by
Levitz:
<TABLE>
<CAPTION>
Leased Premises (2) Leased Premises (Cont'd.) (2)
------------------------------------------------------------ -----------------------------------------------------
Month and Store Month and Store
Location Year Opened Type (1) Location Year Opened Type (1)
------------------------------------------------------------ -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allentown, PA Sep-63 ST Lynnwood, WA (3) Jun-80 ST
Santa Clara, CA Sep-68 WS La Puente, CA (3) Jan-81 ST
Wilmington, DE Jun-69 WS Woodbridge, NJ (3) Jan-81 WS
San Bernardino, CA Aug-69 ST Modesto, CA (3) Nov-81 ST
Huntington Beach, CA Nov-69 WS Anaheim, CA Nov-81 ST
Sacramento, CA (3) Sep-70 WS Laguna Hills, CA Apr-83 ST
Seattle, WA Nov-70 WS Pleasanton, CA Jan-84 ST
Los Angeles, CA Dec-70 WS San Carlos, CA Apr-84 ST
Oxnard, CA (3) Jan-71 WS Stockton, CA Jun-85 ST
San Leandro, CA (3) Aug-71 WS Cerritos, CA Jun-85 ST
So. San Francisco, CA (3) Aug-71 ST Phoenix, AZ Nov-85 ST
Cherry Hill, NJ (3) Sep-71 ST Milford, CT Apr-86 ST
Portland, OR (3) Nov-71 WS Portland, OR (3) Jul-86 ST
St. Paul, MN (3) Dec-71 WS Reading, PA Jan-87 ST
Willowbrook, NJ (3) Dec-71 WS Bakersfield, CA Mar-87 ST
Minneapolis, MN (3) Dec-71 ST Pinole, CA Dec-87 ST
San Dimas, CA May-72 WS Tacoma, WA Jan-88 ST
Northridge, CA (3) Jun-72 ST Smithtown, NY Aug-89 ST
Fresno, CA (3) Aug-72 WS Brooklyn Park, MN Nov-89 ST
Redondo Beach, CA (3) Aug-72 ST Corona, CA Nov-89 ST
King of Prussia, PA Aug-72 ST Nashua, NH Nov-90 ST
Mesa, AZ (3) Mar-73 WS Las Vegas, NV Aug-91 WS
Farmingdale, NY (3) Apr-73 WS Glendale, AZ Nov-92 ST
Langhorne, PA May-73 WS Victorville, CA Dec-92 ST
Southington, CT (3) Aug-75 ST Rohnert Park, CA Mar-94 ST
Paramus, NJ (3) Aug-77 ST Arroyo Grande, CA Apr-94 ST
Garden City, NY (3) Aug-77 ST Cathedral City, CA Apr-94 ST
Dedham, MA Aug-77 ST Tempe, AZ Jun-94 ST
Danvers, MA Aug-77 ST Fremont, CA Aug-94 ST
Westboro, MA Aug-77 WS Middle Village, NY Oct-94 WS
Enfield, CT Aug-77 WS Phoenix, AZ Nov-98 ST
Concord, CA Dec-78 ST Valencia, CA May-99 ST
</TABLE>
____________________
(1) The column refers to stores with attached Sales Support Centers ("WS")
or to detached or freestanding stores ("ST").
(2) The remaining terms of the leases range from 6 months to 39 years,
including renewal options. Lease payments are either fixed or fixed
minimums coupled with contingent rentals based on the Consumer Price
Index or a percentage of net sales.
(3) Subject to Unitary Lease described in Note 8 to the consolidated
financial statements.
11
<PAGE>
In addition to the above properties, as of March 31, 2000 Levitz had available
for disposition one owned and five leased properties formerly operated as retail
stores.
ITEM 3. LEGAL PROCEEDINGS
Chapter 11 Filing
On September 5, 1997, LFI and 11 of its subsidiaries, including Levitz, filed
voluntary petitions for relief under the Bankruptcy Code, Chapter 11, Title 11
of the United States Code, with the United States Bankruptcy Court for the
District of Delaware, Wilmington, Delaware 19801 under Case No. 97-1842(MFW).
Under section 362 of the Bankruptcy Code, during a Chapter 11 case, creditors
and other parties in interest may not, without Court approval: (i) commence or
continue judicial, administrative or other proceedings against the Debtors that
were or could have been commenced prior to commencement of the Chapter 11 case,
or recover a claim that arose prior to commencement of the case; (ii) enforce
any pre-petition judgments against the Debtors; (iii) take any action to obtain
possession of or exercise control over property of the Debtors or their estates;
(iv) create, perfect or enforce any lien against the property of the Debtors;
(v) collect, assess or recover claims against the Debtors that arose before the
commencement of the case; or (vi) set off any debt owing to the Debtors that
arose prior to the commencement of the case against a claim of such creditor or
party in interest against the Debtors that arose before the commencement of the
case.
Although the Debtors are authorized to operate their businesses and manage their
properties as debtors-in-possession, they may not engage in transactions outside
of the ordinary course of business without complying with the notice and hearing
provisions of the Bankruptcy Code and obtaining Court approval.
As debtors-in-possession, the Debtors have the right, subject to Court approval
and certain other limitations, to assume or reject executory, pre-petition
contracts and unexpired leases. In this context, "assumption" requires the
Debtors to perform their obligations and cure all existing defaults under the
assumed contract or lease and "rejection" means that the Debtors are relieved
from their obligations to perform further under the rejected contract or lease,
but are subject to a claim for damages for the breach thereof subject to certain
limitations contained in the Bankruptcy Code. Any damages resulting from
rejection are treated as general unsecured claims in the reorganization cases.
Under the Bankruptcy Code, a creditor's claim is treated as secured only to the
extent of the value of such creditor's collateral, and the balance of such
creditor's claim is treated as unsecured. Generally, unsecured and undersecured
debt does not accrue interest after the Petition Date.
Pre-petition claims that were contingent or unliquidated at the commencement of
the Chapter 11 cases are generally allowable against the Debtors in amounts to
be fixed by the Court or otherwise agreed upon. These claims, including, without
limitation, those which arise in connection with the rejection of executory
contracts and leases, are expected to be substantial. The Debtors have
established reserves approximating what the Debtors believe will be its
liability under these claims. The Court fixed August 10, 1998 as the last date
by which most creditors of the Debtors could file proofs of claim for claims
that arose prior to the Petition Date.
Plan of Reorganization Procedures
For 120 days after the date of the filing of a voluntary Chapter 11 petition, a
debtor has the exclusive right to propose and file a reorganization plan with
the Court and an additional 60 days within which to solicit acceptances to any
plan so filed (the "Exclusive Period"). The Court may increase or
12
<PAGE>
decrease the Exclusive Period for cause shown, and as long as the Exclusive
Period continues, no other party may file a reorganization plan. The Debtors
currently retain the exclusive right to propose and solicit acceptances of a
plan or plans of reorganization until September 29, 2000, and December 31, 2000,
respectively.
If Levitz fails to obtain acceptance of such plan from impaired classes of
creditors during the exclusive solicitation period, any party in interest,
including a creditor, an equity security holder or a committee of creditors, may
file a reorganization plan for such Chapter 11 debtor.
Inherent in a successful plan of reorganization is a capital structure which
permits the Debtors to generate sufficient cash flow after reorganization to
meet its restructured obligations and fund the current obligations of the
Debtors. 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 the Chapter 11 case on the business of the Debtors or on the
interests of creditors.
Generally, after a plan has been filed with the Court, it will be sent, with a
disclosure statement approved by the Court following a hearing, to members of
all classes of impaired creditors for acceptance or rejection. Following
acceptance or rejection of any such plan by impaired classes of creditors, the
Court, after notice and a hearing, would consider whether to confirm the plan.
Among other things, to confirm a plan the Court is required to find that (i)
each impaired class of creditors and equity security holders will, pursuant to
the plan, receive at least as much as the class would have received in a
liquidation of the debtor and (ii) confirmation of the plan is not likely to be
followed by the liquidation or need for further financial reorganization of the
debtor or any successor to the debtor, unless the plan proposes such liquidation
or reorganization.
To confirm a plan, the Court generally is also required to find that each
impaired class of creditors has accepted the plan by the requisite vote. If any
impaired class of creditors does not accept a plan but all of the other
requirements of the Bankruptcy Code are met, the proponent of the plan may
invoke the so-called "cram down" provisions of the Bankruptcy Code. Under these
provisions, the Court may confirm a plan notwithstanding the non-acceptance of
the plan by an impaired class of creditors if certain requirements of the
Bankruptcy Code are met, including that (i) at least one impaired class of
claims has accepted the plan, (ii) the plan "does not discriminate unfairly" and
(iii) the plan "is fair and equitable with respect to each class of claims or
interests that is impaired under, and has not accepted, the plan." As used by
the Bankruptcy Code, the phrases "discriminate unfairly" and "fair and
equitable" have meanings unique to bankruptcy law.
Litigation Regarding the Management and Shared Services Agreements
On April 26, 2000, the holders of approximately 42% of the fully diluted common
stock of Seaman, commenced an action (the "Chancery Court Action") in the Court
of Chancery of the State of Delaware in and for New Castle County against James
Rubin, M.D. Sass Associates, Inc., Resurgence Asset Management, L.L.C., M.D.
Sass Corporate Resurgence Partners, L.P., M.D. Sass Corporate Resurgence
International, Ltd., Robert Symington, Byron Haney, Alan Rosenberg, Steven H.
Halper, and Peter McGeough, as defendants, and against Seaman Furniture Co.,
Inc. as nominal defendant.
13
<PAGE>
The Chancery Court Action seeks, among other things, an injunction against the
Management Agreement and Shared Services Agreement between Seaman and LFI (see
sections VII.C.5 and C.6 for a discussion of this agreement). Alternatively, the
Chancery Court Action seeks to rescind the transactions and/or recover damages
in the event that the transactions are consummated.
In response to the Chancery Court Action, on May 11, 2000, Levitz filed a
complaint, initiating an adversary proceeding in the Bankruptcy Court, seeking
to enjoin the Chancery Court Action. Levitz's motion to preliminary enjoin the
Chancery Court Action was denied by the Bankruptcy Court after a June 6, 2000
hearing.
On June 23, 2000 the Chancery Court of Delaware issued a preliminary injunction
prohibiting Seaman from performing or taking any further action with respect to
the performance of the aforementioned Management and Shared Services agreements.
While Levitz is not a party to the Chancery Court Action, this decision makes it
unlikely that the Company will be able to implement the Plan of Reorganization
as filed by the Company on May 25, 2000.
As a result of the Chancery Court decision, the Company is currently in the
process of developing a new "stand-alone" plan of reorganization. Such a plan
will include measures for obtaining a working capital financing facility to
replace the current revolver facility under the DIP Agreement and sources of
additional capital from existing creditors and vendors which would be required
to finance the Company's "stand-alone" plan. The proceeds of these arrangements
would be used to support future operations. The exclusivity period for the
Company to propose a Plan of Reorganization expires on September 29, 2000.
Other Legal Proceedings
In the ordinary course of business, Levitz is party to various legal actions
which it believes are routine in nature and incidental to the operation of its
business. In the opinion of management, the outcome of the proceedings to which
Levitz is currently party will not have a material adverse effect upon its
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of Levitz's Common Stock is owned by LFI. Prior to September 24, 1997, LFI's
Common Stock was traded on the New York Stock Exchange ("NYSE"). Effective at
the opening of the trading session on December 3, 1997, the NYSE formally
removed from listing and registration the Common Stock of LFI pursuant to an
Order, dated December 2, 1997, of the Securities and Exchange Commission
granting the application for removal by the NYSE. As of June 12, 2000, there
were 758 holders of record of Voting Common Stock and 7 holders of record of
Non-Voting Common Stock.
LFI has not paid dividends on any class of its Common Stock since 1987 and does
not intend to pay dividends in the foreseeable future. LFI's only material asset
is the common stock of Levitz and, therefore, its ability to pay cash dividends,
interest and principal is dependent upon dividends and other payments from
Levitz. LFI's ability to obtain cash from Levitz is restricted by the Bankruptcy
Court, the DIP Facility, the indentures relating to Levitz's outstanding
indebtedness and Florida law.
The Plan of Reorganization as filed with the Bankruptcy Court on May 25, 2000
provides that all holders of equity securities and/or interests shall not be
entitled to, and shall not, receive any property or interest in property on
account of such equity or equity interest.
The range of high and low sales prices for LFI's Common Stock as reported in the
New York Stock Exchange Composite Index through September 24, 1997 and as
reported by the OTC Bulletin Board (OTCBB), which is a regulated quotation
service, for each quarterly period after September 24, 1997 within the two most
recent fiscal years, is as follows:
Quarter Ended High Low
------------- ---- ----
June 30, 1998 0.470 0.440
September 30, 1998 0.260 0.250
December 31, 1998 0.210 0.188
March 31, 1999 0.210 0.190
June 30, 1999 0.734 0.203
September 30, 1999 0.297 0.094
December 31, 1999 0.094 0.031
March 31, 2000 0.344 0.031
ITEM 6. SELECTED FINANCIAL DATA
None.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this document.
General
On September 5, 1997, the Debtors filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code and are presently operating
their business as debtors-in-possession subject to the jurisdiction of the
United States Bankruptcy Court for the District of Delaware. For further
discussion of Chapter 11 proceedings, see "Item 1. Business-Chapter 11 Filing",
"Item 3. Legal Proceedings" and Note 1 to Notes to Consolidated Financial
Statements.
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The Chapter 11 filing, related circumstances and the losses from
operations, raise substantial doubt about the Company's ability to continue as a
going concern. The appropriateness of reporting on the going concern basis is
dependent upon, among other things, confirmation of a plan of reorganization,
future profitable operations, and the ability to generate sufficient cash from
operations and financing sources to meet obligations (see "Liquidity and Capital
Resources" and Note 1 to "Notes to Consolidated Financial Statements"). As a
result of the filing and related circumstances, however, such realization of
assets and liquidation of liabilities is subject to significant uncertainty.
While under the protection of Chapter 11, the Debtors may sell or otherwise
dispose of assets, and liquidate or settle liabilities, for amounts other than
those reflected in the accompanying consolidated financial statements. Further,
a plan of reorganization could materially change the amounts reported in the
accompanying consolidated financial statements. The consolidated financial
statements do not include any adjustments relating to the recoverability of the
value of recorded asset amounts or the amounts and classification of liabilities
that might be necessary as a consequence of a plan of reorganization.
Comparable store sales have increased by 2.8% for the fiscal year ended March
31, 2000 as compared to the prior year. Comparable store sales had declined 0.1%
and 6.4% for the fiscal years ended March 31, 1999 and 1998, respectively.
Comparable store sales increased 9.3%, 4.7% and 6.4% in April, May and June
2000, respectively.
Operating loss was $22.6 million in Fiscal 2000, $22.0 million in Fiscal 1999
and $32.2 million in Fiscal 1998.
16
<PAGE>
The following table sets forth Levitz's results of operations expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Percent of Net Sales
--------------------------------------
Years Ended March 31,
--------------------------------------
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 56.6 57.6 57.5
----------- ----------- ----------
Gross profit 43.4 42.4 42.5
Selling, general and administrative expenses 45.9 43.0 41.5
Unusual operating expenses - - 2.0
Depreciation and amortization 1.7 2.7 3.0
Interest expense, net 3.1 4.5 4.8
Reorganization items 5.1 6.6 6.8
----------- ----------- ----------
Loss before income taxes (12.4) (14.4) (15.6)
Income tax benefit - - 4.9
----------- ----------- ----------
Loss before extraordinary items (12.4) (14.4) (10.7)
Extraordinary items - - (0.7)
----------- ----------- ----------
Net loss (12.4) (14.4) (11.4)
=========== =========== ==========
Comparable store sales increase/(decrease) (1) 2.8 % (0.1)% (6.4)%
=========== =========== ==========
</TABLE>
--------------
(1) Comparable store sales are calculated by excluding the net sales of a
store for any full month of one period if the store was not open during
the same full month of the prior period.
Comparison of Operations for Fiscal 2000 to Fiscal 1999
Net sales for Fiscal 2000 decreased to $535.1 million or 18.1% from $653.1
million for Fiscal 1999. Comparable store net sales for Fiscal 2000 increased
2.8% from Fiscal 1999. The Company closed fifteen stores in June 1998 and
twenty-seven stores in January 1999 in making a decision to vacate all stores in
selected markets. One new store was opened in southern California in May 1999
and a clearance center located in Atlanta, GA was opened in January 2000.
Gross profit for Fiscal 2000 was $232.1 million, or 43.4% of net sales, as
compared to $276.8 million, or 42.4% of net sales, for Fiscal 1999. Before an
increase in shrinkage expense, the gross margin percent increased by 1.3% of net
sales in fiscal 2000 as compared to fiscal 1999. The improvement in gross margin
percent was primarily related to new programs introduced in the last half of
fiscal 2000 designed to enhance maintained margins and the introduction in
January 2000 of an expanded furniture protection warranty program. These
improvements in gross margin were offset by an increase of .3% of net sales in
shrinkage expense as compared to the prior year.
Total selling, general and administrative (SG&A) expenses decreased by $35.0
million or 12.5% to $245.8 million in Fiscal 2000 from $280.8 million in Fiscal
1999. Closed stores accounted for a decrease of $52.6 million, while the one new
store and the Atlanta clearance center added $3.9 million in SG&A expense.
Comparable corporate and store SG&A expense, exclusive of the income from the
private label credit card program, increased by $25.8 million and represented
50.4% of net sales in fiscal 2000 as compared to 46.8% of net sales in the prior
year. As outlined below, income from the private label credit card program
increased for the year by $11.2 million over the prior year and represented 4.6%
of net sales in the current year as compared to 2.4% of net sales in the prior
year.
17
<PAGE>
Controllable expenses for corporate overhead and comparable stores increased by
$6.0 million and represented 27.2% of sales as compared to 26.8% in the prior
year. Salaries and benefits increased by approximately $4.4 million over last
year. While a little over one-half of that increase was related to the higher
comparable store sales volume and sales incentive programs, higher non-selling
labor costs were incurred due to warehouse operating inefficiencies associated
with implementation of the warehouse consolidation program. Other increases in
controllable expenses reflected higher shuttle and delivery expenses and
demurrage charges, particularly in the east region warehouses, and an increase
over last year in write-offs of aged receivables, agency labor costs and junk
merchandise expense.
Corporate office and comparable store occupancy expense increased $8.3 million
and represented 6.7% of sales in the current year as compared to 5.3% of sales
in the prior year. The primary cause for this increase is due to the higher rent
being paid on properties involved in sale/leaseback and lease assignment
transactions completed in the current year. The proceeds from these transactions
were used to reduce outstanding debt resulting in significantly lower interest
expense. $1.8 million of the increase is due to the change in accounting for
certain of the assigned leases from treatment as a capital lease in the prior
year to an operating lease in the current year. Interest and depreciation
expense in the current year is lower than last year due to the change in
accounting for those leases.
Comparable store advertising expense, including the cost of finance discounts
related to credit promotion events, increased $11.6 million and represented
16.5% of sales in the current year as compared to 14.7% of sales in the prior
year. Approximately $5.0 million of the increase was related to higher media
expenditures. The remaining increase was primarily due to an increase in the
cost of credit promotions as the Company was more aggressive in the use of
credit promotions in the current year.
Finance income from the private label credit card program increased by $11.2
million over the prior year. The Company terminated the former agreement with GE
Capital and entered into a new agreement with Household Bank NA in September
1998; however, the economic terms of the new agreement were not fully effective
until Household commenced servicing in December 1998. Under the Household
agreement, higher interest finance charges and other fees were instituted. In
addition, the share of the income stream from sale of credit insurance increased
for the Company under the Household agreement as compared to the GE agreement.
The year over year improvement in income from the portfolio occurred in the
first six months of the current fiscal year. In the last six months, as a result
of store closings, the portfolio decreased in size resulting in decreased net
interest income and a higher bad debt expense. The higher bad debt expense is
primarily associated with losses related to closed store portfolio accounts. The
Company accrued a charge of $14.1 million which is included in reorganization
expense for the estimated remaining losses on the closed store receivable
portfolio which the Company is obligated to pay under its agreement with
Household Bank NA.
Depreciation and amortization expenses decreased to $8.9 million in Fiscal 2000
from $17.9 million in Fiscal 1999. The reduction is primarily related to the
reductions in asset values associated with closed stores.
Interest expense for Fiscal 2000 decreased to $16.8 million or 3.1% of net sales
from $29.5 million or 4.5% of net sales for Fiscal 1999. Interest on
pre-petition unsecured obligations has not been accrued after the Petition Date
except that interest expense continues to be recorded on capital lease
obligations. Contractual interest expense of $23.1 million was not recorded on
certain pre-petition debt for Fiscal years ended 2000 and 1999. Contractual
interest expense of $13.3 million was not recorded for the period from September
5, 1997 through March 31, 1998.
18
<PAGE>
Reorganization items represent the costs to restructure the Company during the
Chapter 11 proceedings. The following costs are included for Fiscal 2000 and
1999 (dollars in millions):
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
Store closings $ - $ 42.3
Loss (gain) on sale of property held for sale 0.4 (5.9)
Setup reserve for HRS closed store portfolio 14.1 -
Adjust store closing reserve 3.1 -
Setup lease rejection claims 1.2 -
Adjust net realizable value of closed property 2.3 -
Professional fees 6.3 6.6
-------------- --------------
$ 27.4 $ 43.0
============== ==============
</TABLE>
Store closing charges include the write-down of assets to their net realizable
value, severance pay and continuing expenses.
As a result of the aforementioned factors, the net loss was $66.9 million or
12.4% of net sales for Fiscal 2000 as compared to $94.4 million or 14.4% of net
sales for Fiscal 1999.
Comparison of Operations for Fiscal 1999 to Fiscal 1998
Net sales for Fiscal 1999 decreased to $653.1 million or 19.7% from $812.9
million for Fiscal 1998. Comparable store sales for Fiscal 1999 declined 0.1%
from Fiscal 1998. Levitz closed forty-two stores during Fiscal 1999. The
comparable store sales decreased 2.5% and 5.4% in the first and third quarter of
Fiscal 1999, respectively. Comparable store sales increased 8.7% and 0.3% in the
second and forth quarter of Fiscal 1999, respectively. The decrease in
comparable store sales for the first quarter of Fiscal 1999 is primarily
attributed to the announcement of fifteen store closings at the end of June
1999. The increase in comparable store sales for the second quarter of Fiscal
1999 is primarily due to the filing of a Chapter 11 petition in the same quarter
of the previous year. The decrease in comparable store sales for the third
quarter of Fiscal 1999 was impacted by the resumption of normal shipments during
the third quarter of Fiscal 1998 which transferred sales that would have
normally been recorded in the second quarter of Fiscal 1998 to the third quarter
of Fiscal 1998.
Gross profit for Fiscal 1999 was $276.8 million, or 42.4% of net sales, as
compared to $345.4 million, or 42.5% of net sales, for Fiscal 1998. Gross profit
for Fiscal 1999 includes a write-down of $4.8 million for excess, discontinued
and damaged inventory in continuing stores of which $0.9 million of the reserve
remained at March 31, 1999. Excluding the effect of the inventory write-down,
gross profit as a percentage of net sales would have been 42.5%.
Selling, general and administrative (SG&A) expenses decreased by $56.5 million
or 16.8% to $280.8 million in Fiscal 1999 from $337.3 million in Fiscal 1998.
The dollar decrease in SG&A expenses is primarily due to the reduction in costs
attributable to the closing of forty-two stores during Fiscal 1999. The increase
in SG&A in Fiscal 1999 as a percentage of net sales to 43.0% from 41.5% is due
to an increase in advertising expense of 1.0%, an increase in salaries and
related expenses and benefits of 0.8% as offset by an increase in the service
fee income of 0.3% under Levitz's private-label credit card program.
During Fiscal 1998, LFI incurred unusual operating expenses of $1.3 million
under the provisions of an employment agreement due to the termination of an
officer. Additionally, LFI recorded a $5.9 million write-off of the future
19
<PAGE>
service revenue receivable under the GECC Agreement when 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. During the fourth quarter of Fiscal 1998, the Company
reviewed certain discontinued and/or slow moving inventory items which did not
complement the new merchandise assortment. In an effort to accelerate the
liquidation of these items, the Company reduced their selling prices. Included
in unusual operating expenses is a $6.1 million charge reflecting the Company's
adjustment to record this inventory at its estimated net realizable value. The
Company also wrote off goodwill in the amount of $2.8 million.
Depreciation and amortization expenses decreased to $17.9 million in Fiscal 1999
from $24.1 million in Fiscal 1998. The decrease is primarily attributable to the
suspension of depreciation on assets of the closed stores. At the same time, the
assets were written down to their net realizable value.
Interest expense for Fiscal 1999 decreased to $29.5 million or 4.5% of net sales
from $39.6 million or 4.9% of net sales for Fiscal 1998. Interest on
pre-petition unsecured obligations has not been accrued after the Petition Date
except that interest expense continues to be recorded on capital lease
obligations. Contractual interest expense of $23.1 million was not recorded on
certain pre-petition debt for Fiscal years ended 2000 and 1999. Contractual
interest expense of $13.3 million was not recorded for the period from September
5, 1997 through March 31, 1998.
Reorganization items represent the costs to restructure the Company during the
Chapter 11 proceedings. The following costs are included for Fiscal 1999 and
1998 (dollars in millions):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Store closings $ 42.3 $ 23.4
Loss on sale of John M. Smyth Company Assets - 22.7
Gain on sale of property held for resale (5.9) -
Deferred finance fees and other - 2.5
Professional fees 6.6 6.9
--------------- ---------------
$ 43.0 $ 55.5
=============== ===============
</TABLE>
Store closing charges include the write-down of assets to their net realizable
value, severance pay and continuing expenses.
During Fiscal 1998, LFI incurred an after-tax extraordinary loss of $5.8 million
due to the write-off of deferred financing fees related to the previous bank
credit agreements.
As a result of the aforementioned factors, the net loss was $94.4 million or
14.4% of net sales for Fiscal 1999 as compared to $93.4 million or 11.5% of net
sales for Fiscal 1998.
Seasonality and Inflation
Management does not believe that seasonal variation has a significant impact on
its business. LFI has generally been able to pass along any price increases
relating to inflation. Accordingly, the effect of inflation, if any, on LFI's
results of operations has been minor.
Liquidity and Capital Resources
Cash Flows
20
<PAGE>
Levitz's primary sources of liquidity are cash flows from operations (including
the proceeds from customer credit obligations under the private-label credit
card program by Household), trade credit and borrowings under the DIP Facility.
During Fiscal 2000, cash flow used in operating activities before changes in
operating assets and liabilities was $53.4 million.
Cash flows provided by changes in operating assets and liabilities was $9.8
million for Fiscal 2000.
Net cash used in financing activities amounted to $73.4 million in Fiscal 2000,
and includes net repayments under the DIP Facilities of $67.2 million, principal
payments on long-term debt and capital lease obligations of $7.5 million and an
increase in the cash overdraft position of $1.4 million which is reflective of
the decrease in inventory levels and the timing of payments. Net cash used in
financing activities amounted to $14.2 million in Fiscal 1999 and included net
repayments under the credit facilities of $4.2 million, principal payments on
long-term debt and capital lease obligations of $2.4 million and a decrease in
cash overdraft position of $7.6 million.
Cash provided by investing activities for Fiscal 2000 includes the proceeds from
the sale of eleven owned properties and leasehold interests and/or rights on
eleven leased properties. Net proceeds were applied to existing mortgages,
including the related accrued interest and fees; the term notes under the DIP
facility; and core costs related to pre-petition liabilities.
Levitz operated 21 warehouses and 64 stores in Fiscal 2000, 27 warehouses and 64
stores in Fiscal 1999, and 58 warehouses and 105 stores in Fiscal 1998. Capital
expenditures totaled approximately $4.9 million, $7.8 million and $14.1 million,
respectively. Capital expenditures during Fiscal 2000 were for existing store
improvements and equipment. Management plans to spend approximately $6.0 million
for capital expenditures in Fiscal 2001 of which approximately $2.6 million is
for maintenance of existing facilities. The recapitalization of the Company as a
result of the Plan of Reorganization would permit additional capital
expenditures in Fiscal 2001 primarily related to new stores and distribution
center facilities. The Company's ability to implement these projects is subject
to confirmation of the Plan of Reorganization.
Debt
LFI and substantially all of its subsidiaries, as debtors-in-possession, are
parties to a DIP Credit Agreement dated as of September 5, 1997, as amended (the
"DIP Facility"), with Bankers Trust Credit Corp. ("BTCC") as agent. The DIP
Facility approved by the Bankruptcy Court initially provided for up to $260.0
million of availability. The DIP Facility contained revolving loans of $223.6
million and a term loan of $36.4 million. Letter of Credit obligations under the
revolving DIP Facility are limited to $25.0 million. The DIP Facility has been
intended to provide Levitz with the cash and liquidity necessary to conduct its
operations and pay for merchandise shipments at normal levels during the course
of the Chapter 11 Cases.
Loans made under the DIP Facility revolving notes bear interest, at Levitz's
option, at a rate equal to either BTCC's prime lending rate plus 1.50% or BTCC's
LIBOR rate plus 3.75%. The term note bore interest at 16%. Levitz is required to
pay an unused line fee of 0.50%, and a letter of credit fee of 2.0%. Levitz paid
financing fees of $3.2 million on the closing date. These
21
<PAGE>
financing fees were amortized over the original life of the DIP Facility.
The maximum borrowings, excluding the term commitments, under the DIP Facility
are limited to 85% of eligible Accounts Receivable, 75% of Eligible Inventory
(as both are defined in the DIP Facility).
The DIP Facility is secured by substantially all of the assets of Levitz and a
perfected pledge of stock of all Levitz companies. 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, sale of assets, and a prohibition on paying dividends.
During the Chapter 11 Cases, the Company has negotitated a number of amendments
to the DIP Facility. Toward the end of July 1998, the Company believed that
additional availability under the revolving line of credit portion of the
Company's DIP Facility was necessary as Levitz entered the fall 1998 retail
buying season. Thus, the Company sought, and by Bankruptcy Court order dated
September 17, 1998, obtained, an order authorizing the Company to enter into an
amendment of the DIP Facility, under which they borrowed $22,000,000 under a
second term loan from AG Capital Funding Partners, L.P. (as agent for and on
behalf of certain affiliates and/or managed, accounts), which monies were used
to reduce outstanding borrowings under the revolving line of credit portion of
the Company's DIP Facility, on the same priority basis as the original term loan
under the DIP Facility.
The DIP Facility was set to expire on March 5, 1999. Levitz negotiated with the
Lenders and reached an agreement extending the maturity date of the loans under
the DIP Facility and obtained an additional $10 million commitment (the
Overadvance Term Loan) from Resurgence Partners, L.P., an affiliate of the
Company's largest claim holder, the proceeds of which were available to reduce
borrowings under the revolving loans under the DIP Facility. On March 2, 1999,
the Bankruptcy Court approved the amendment. On May 28, 1999, the Bankruptcy
Court authorized an amendment to the DIP Facility to repay the AG Capital
Funding Partners Term Loans using proceeds of the Sale/Leaseback Transaction
with a third party and extend the DIP Facility maturity through December 31,
1999. Thus both the original term note in the amount of $36.4 million and the
second term note in the amount of $22 million, both of which had accrued
interest at sixteen percent, were paid in full. Also, the maturity date of the
DIP Facility was extended (by the tenth amendment to the DIP Facility) to
December 31, 1999 and the commitment thereunder reduced to $125 million.
Three further amendments to the DIP Facility were approved by the Bankruptcy
Court, between August and December, 1999. Previously, the DIP Facility had
required that the Revolving Credit Line be repaid before any principal payments
be made on the Overadvance Term Loan. On August 24, 1999, the Bankruptcy Court
approved amendments that provided for principal repayment of the Overadvance
Term Loan, should the Excess Availability surpass $18,000,000 for five
consecutive business days; and, conversely, granting a $10,000,000 term loan,
should the Excess Availability fall below $12,000,000; as well as a provision
for acceleration of the Debtors' obligations under the Overadvance Term Loan
under certain conditions. By final order entered on October 27, 1999, the DIP
Facility was amended to: (1) extend the Expiration Date and Overadvance Maturity
Date to June 30, 2000; (2) extend the Fixed Asset Sublimit to December 31, 1999;
(3) reduce the commitment on the Revolving Line of Credit to $95,000,000; (4)
require the Debtors to pay an amendment fee of $150,000; and (5) and set the
minimum EBITDA at $4,000,000 beginning December 31, 1999, and $9,000,000 as of
March 31, 2000. On December 14, 1999, the Bankruptcy Court approved an amendment
to the DIP Facility to include Levitz Furniture Company of Massachusetts, Inc.
as a party subject to all the provisions of the DIP Credit Agreement.
Subsequently, the Court approved amendments providing for additional overadvance
loans to a total amount of $35,000,000. The Debtors pay interest monthly at an
annual rate of 16% on the
22
<PAGE>
funded portion of the Overadvance Term Loan commitment and a monthly collateral
management fee of .75%, which can be paid by issuing additional notes.
On June 21, 2000, the Bankruptcy Court approved an amendment to (i) extend the
DIP Facility to December 31, 2000, (ii) decrease the availability of the
Revolving Loans and Letters of Credit to no more than $85 million, (iii) waive
violations of EBITDA covenants required as of March 31, 2000, and set minimum
EBITDA at ($2,000,000) and ($0) for the three and six month periods ending June
30 and September 30, 2000, and (iv) provide for an increase in the Overadvance
Term Loan commitment to a total of $45 million.
In connection with a plan of reorganization, Levitz anticipates arranging exit
financing before the Confirmation Date comprised of a working capital revolver
with a total commitment of approximately $95,000,000. The terms, conditions,
collateral requirements and borrowing availability under the working capital
facility are expected to be similar to the current DIP Facility. Proceeds from
the working capital revolver and from existing creditors and vendors will be
used to fund the operating and working capital requirements of Levitz.
Levitz is exposed to market risk as a result of the terms of the DIP Facility
which requires the Company to pay a variable interest rate based on the
fluctuation of Bankers Trust Company's prime lending rate. The change in annual
cash flow and earnings resulting from a 1% increase or decrease in interest
rates based on outstanding borrowings at March 31, 2000 would be approximately
$0.5 million assuming other variables remained constant.
The Company is currently in default of the senior notes, senior deferred coupon
debentures, and senior subordinated notes, all of which are unsecured and have
been classified as liabilities subject to compromise.
On September 4, 1998 Levitz and its operating subsidiaries entered into an
agreement ("Merchant Agreement") with Household Bank (SB), N.A. ("Household")
whereby Household would provide financing to individual consumers purchasing
merchandise from Levitz ("Private-Label Credit Card Program"). The Court
approved the Merchant Agreement and granted a first priority and security
interest and lien to Household on certain reserves retained or accumulated by
Household, totaling $17.3 million at March 31, 2000, and gave administrative
expense status to substantially all obligations of Levitz arising under the
Merchant Agreement.
Also on September 4, 1998, General Electric Capital Corporation ("GECC") and
Levitz terminated the Second Amended and Restated Account Purchase and Credit
Card Agreement (the "GECC Agreement") which was replaced by the Merchant
Agreement. Levitz and GECC jointly released each other from substantially all
obligations under the GECC Agreement. At the same time GECC sold the majority of
the portfolio under the GECC Agreement, approximately $561.0 million, to
Household.
The Company determined that the transfer of the GECC portfolio to Household
qualified for sale treatment under Financial Accounting Standards Board,
Statement of Accounting Standards No. 125, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishments of Liabilities". Accordingly,
the Receivable under Account Purchase Agreement and the offsetting Obligation
Under Account Purchase Agreement were removed from the consolidated condensed
balance sheets.
At March 31, 2000, Household's portfolio balance was $452.8 million. The
portfolio balance includes Levitz customer purchases through Household as well
as customer accounts transferred to Household from GECC. Levitz recorded income
from both the Merchant Agreement and the GECC Agreement of $24.4 million, $13.2
million and $7.9 million, respectively for the years ended March 31, 2000, 1999
and 1998. Finance income from the private label credit card program increased by
$11.2 million over the prior year. The Company terminated the former agreement
with GE Capital and entered into a new agreement with Household Bank NA in
September 1998; however, the economic terms of the new agreement were not fully
effective until Household commenced servicing in December 1998. Under the
Household agreement, higher interest finance charges and other fees were
instituted. In addition, the share of the income stream from sale of credit
insurance increased for the Company under the Household agreement as compared to
the GE agreement. The year over year improvement in income from the portfolio
occurred in the first six months of the current fiscal year. In the last six
months, as a result of store closings, the portfolio decreased in size resulting
in decreased net interest income and a higher bad debt expense. The higher bad
debt expense is primarily associated with losses related to closed store
portfolio accounts. The Company accrued a charge of $14.1 million which is
included in reorganization expense for the estimated remaining losses on the
closed store receivable portfolio which the Company is obligated to pay under
its agreement with Household Bank NA. The decrease in recorded income for the
period ended March 31, as compared to the prior year was due to the write-off of
$5.9 million in future revenue service fees under the GECC Agreement as
explained in Note 7 to the consolidated financial statements.
23
<PAGE>
Levitz is exposed to market risk under the terms of the Household 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 cost
of capital, promotional discount fees and credit losses. Levitz is obligated for
all credit losses under the portfolio, including the GECC portfolio transferred
to Household, up to a maximum of 15% of average outstanding receivables and for
50% of all credit losses above 15%. Levitz is also required under the Merchant
Agreement to fund a merchant risk reserve of 2.5% for the first year and 3.5%
thereafter of all amounts financed up to a stipulated dollar amount. The total
amount in portfolio risk reserve as of March 31, 2000 was $17.3 million.
Going Concern
On May 25, 2000, the Debtors filed a "Disclosure Statement" and a "Second
Amended Joint Plan of Reorganization" ("Plan of Reorganization" or "Plan"),
pursuant to Section 1125 of the Bankruptcy Code with the Court. The Disclosure
Statement sets forth certain information regarding, among other things,
significant events that have occurred during the Debtors' Chapter 11 cases and
the anticipated organization, operation and financings of "Reorganized Levitz".
The Disclosure Statement describes the Plan of Reorganization, certain effects
of Plan confirmation, certain risk factors associated with securities to be
issued under the Plan, and the manner in which distribution will be made under
the Plan. In addition, the Disclosure Statement discusses the confirmation
process and the voting procedures that holders of claims in impaired classes
must follow for their votes to be counted. The Plan of Reorganization sets forth
certain information, among other things, the classification and treatment of
claims and interests, means for implementation of the Plan, acceptance or
rejection of the Plan and effect of rejection by one or more classes of claims
or interests, provisions for governing distributions, the treatment of executory
contracts and leases, conditions precedent to confirmation of the Plan and the
occurrence of the effective date of the Plan. The foundation of the Plan is (i)
a management agreement between Seaman Furniture Company, Inc. ("Seaman") and LFI
(the "Management Agreement") and (ii) a shared services agreement between Seaman
and LFI (the "Shared Services Agreement").
Under the Management Agreement, Seaman would perform the general day to day
management of Levitz's stores located on the East Coast. Levitz would perform
the day to day management of its stores on the West Coast. Under the Shared
Services Agreement, Seaman would provide certain services to Levitz, including:
(i) accounting, (ii) finance, (iii) advertising support, (iv) MIS and
telecommunications, (v) human resources, (vi) insurance, (vii) inventory control
and merchandise loss protection, (vii) real estate, (ix) legal and (x) logistic
support of the merchandise program. The agreements would provide the Debtors
with, among other things, cost savings, streamlined operations, and economies of
scale with respect to purchasing inventory.
The Plan of Reorganization as filed provides, among other things, that as of the
Plan effective date:
(1) All holders of an allowed administrative and priority tax claim are
unimpaired and unclassified, are not entitled to vote on the Plan and
will receive cash or such other treatment as to which LFI and such
creditor shall have agreed in writing.
(2) All holders of an allowed other priority claim (Class 1), setoff claim
(Class 2) and miscellaneous secured claim (Class 3) are unimpaired,
are deemed to have accepted the Plan and, therefore not entitled to
24
<PAGE>
vote on the Plan and will receive cash or setoff or reinstatement or
such other treatment as to which LFI and such creditor shall have
agreed in writing.
(3) All holders of a small unsecured claim (less than $1,000, Class 4) are
impaired and are entitled to vote on the Plan and shall receive in
cash 30% of the allowed amount of the claim.
(4) All holders of an allowed general unsecured claim (Class 5) are
impaired, are entitled to vote on the Plan and shall receive their pro
rata share of the new common stock distribution of "Levitz Home
Furnishings, Inc." ("LFHI"). A beneficial holder of more than one
Allowed Class 5 General Unsecured Claim may elect to reduce the
aggregate amount of such Claim to $20,000 and receive a single
distribution as a holder of an Allowed Class 4 Small Unsecured Claim.
(5) All holders of an allowed subordinated claim (Class 6) are impaired,
are deemed to have rejected the Plan and, therefore, not entitled to
vote on the Plan, and shall not receive or retain any property or
interest in property on account of their subordinated claim.
(6) All intercompany claims (Class 7) shall be cancelled, and their
holders shall not receive or retain any property or interest in
property on account of their intercompany claims.
(7) All holders of Interests (the rights of any current or former holder
or owner of "old equity securities" authorized and issued prior to the
Plan confirmation date, Class 8) are impaired, are deemed to have
rejected the Plan and, therefore, are not entitled to vote on the
Plan. All Interests shall be cancelled and the Interest holders shall
not receive or retain any property or interest in property on account
of their Interests.
On June 23, 2000 the Chancery Court of Delaware issued a preliminary injunction
prohibiting Seaman from performing or taking any further action with respect to
the performance of the aforementioned Management and Shared Services agreements.
While Levitz is not a party to the Chancery Court Action, this decision makes it
unlikely that the Company will be able to implement the Plan of Reorganization
as filed by the Company on May 25, 2000.
Levitz and substantially all of its subsidiaries, as debtors-in-possession, are
parties to a DIP Credit Agreement dated as of September 5, 1997, as amended (the
"DIP Facility"), with Bankers Trust Credit Corp. ("BTCC") as agent. The DIP
Facility has provided Levitz with the cash and liquidity necessary to conduct
its operations and pay for merchandise shipments at normal levels during the
course of the Chapter 11 Cases. The DIP Facility is secured by substantially all
of the assets of Levitz and a perfected pledge of stock of all Levitz companies.
On June 21, 2000, the Bankruptcy Court approved an amendment to (i) extend the
DIP Facility to December 31, 2000, (ii) decrease the availability of the
Revolving Loans and Letters of Credit to no more than $85 million, (iii) waive
violations of EBITDA covenants required as of March 31, 2000, and set minimum
EBITDA of ($2,000,000) and ($0) for the three and six month periods ending June
30 and September 30, 2000, and (iv) provide for an increase in the Overadvance
Term Loan commitment to a total of $45 million. The Company does not currently
have any other sources of financing to support its cash flow requirements beyond
December 31, 2000.
As a result of the Chancery Court Action, the Company is currently in the
process of developing a new "stand-alone" plan of reorganization. Such plan will
include measures for obtaining a working capital financing facility to replace
the current revolver facility under the DIP Agreement and sources of additional
capital from existing creditors and vendors which would be required to finance
the Company's "stand-alone" plan. The proceeds of these arrangements would be
used to support future operations.
25
<PAGE>
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 and stockholders.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Presentation of Unaudited Financial Statements......................... 30
Consolidated Balance Sheets............................................ 29
Consolidated Statements of Operations.................................. 30
Consolidated Statements of Stockholders' Deficit....................... 31
Consolidated Statements of Cash Flows.................................. 32
Notes to Consolidated Financial Statements............................. 33
27
<PAGE>
Presentation of Unaudited Financial Statements
As of July 14, 2000
-------------------
Because of the significant uncertainties facing the Company (See Note 1 to the
Consolidated Financial Statements), Arthur Andersen LLP, the Company's
independent auditors, have not been able, as of the above date, to express an
opinion on the accompanying consolidated balance sheets of Levitz Furniture
Incorporated (a Delaware corporation) and subsidiaries, debtor-in-possession
(the "Company") as of March 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of the
three years in the period ended March 31, 2000.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Chapter 11 filing was the result
of violation of certain debt covenants, recurring losses, deterioration of
vendor support, and cash flow deficiencies. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Although the
Company is currently operating as a debtor-in-possession under the jurisdiction
of the bankruptcy court, the continuation of the business as a going concern is
contingent upon, among other things, the ability to formulate a plan of
reorganization which will gain approval of the creditors and confirmation by the
bankruptcy court, success of future operations, the ability to obtain financing
and the ability to recover the carrying amount of assets and/or the amount and
classification of liabilities. Management's plans in regard to these matters are
described in Note 1. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
The accompanying consolidated financial statements do not purport to reflect or
provide for the consequences of the bankruptcy proceedings. In particular, such
consolidated financial statements do not purport to show (a) as to assets, their
realizable value on a liquidation basis or their availability to satisfy
liabilities; (b) as to prepetition liabilities, the amounts that may be allowed
and priority thereof; (c) as to stockholder accounts, the effect of any changes
that may be made in the capitalization of the Company; or (d) as to operations,
the effect of any changes that may be made in the business.
28
<PAGE>
<TABLE>
<CAPTION>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
March 31,
----------------------------
2000 1999
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,891 $ 3,046
Receivables 21,340 21,861
Inventories 80,293 84,232
Deposits and prepaid expenses 4,347 4,432
Property under agreement of sale - 95,571
------------ -------------
Total current assets 108,871 209,142
------------ -------------
PROPERTY AND EQUIPMENT:
Land 90 3,890
Buildings and building improvements 377 5,860
Leasehold improvements 35,414 31,616
Store, warehouse and transportation
equipment 50,196 43,243
------------ -------------
86,077 84,609
Less-Accumulated depreciation and
amortization 52,002 45,742
------------ -------------
34,075 38,867
Property under capital leases, net of
accumulated amortization of $27,610
in 1999 and $85,623 in 1998 27,772 33,303
------------ -------------
61,847 72,170
------------ -------------
OTHER ASSETS:
Intangible leasehold interests 5,085 5,637
Property held for disposal 2,250 32,469
Deferred income taxes - 5,385
Other 21,321 9,764
------------ -------------
28,656 53,255
------------ -------------
$ 199,374 $ 334,567
============ =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES:
Cash overdrafts $ 10,210 $ 8,823
Current portion of long-term debt - 6,962
Current portion of obligations under capital leases 351 9,846
Accounts payable, trade 23,558 23,060
Accrued expenses and other liabilities 84,491 73,979
Payable to parent 13,622 13,635
Deferred income taxes - 11,696
DIP Facility 77,392 144,618
------------ -------------
Total current liabilities 209,624 292,619
------------ -------------
OBLIGATIONS UNDER CAPITAL LEASES, net of current portion 25,946 29,368
------------ -------------
OTHER NONCURRENT LIABILITIES 15,078 4,290
------------ -------------
DEFERRED INCOME TAXES 6,173 -
------------ -------------
LIABILITIES SUBJECT TO COMPROMISE 293,708 292,609
------------ -------------
COMMITMENTS AND CONTINGENCIES (See Note 13)
STOCKHOLDER'S DEFICIT:
Common stock 1 1
Capital in excess of par 58,453 58,453
Retained earnings (deficit) (409,609) (342,773)
------------ -------------
Total stockholder's deficit (351,155) (284,319)
------------ -------------
$ 199,374 $ 334,567
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
<TABLE>
<CAPTION>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
Years Ended March 31,
--------------------------------------------
2000 1999 1998
------------- -------------- -------------
<S> <C> <C> <C>
NET SALES $ 535,052 $ 653,100 $ 812,948
------------- -------------- -------------
COSTS AND EXPENSES:
Cost of sales 303,016 376,327 467,591
Selling, general and administrative expenses 245,794 280,778 337,231
Unusual operating expenses - - 16,151
Charge for store closings - - -
Depreciation and amortization 8,862 17,948 24,093
Interest expense, net 16,822 29,477 38,974
------------- -------------- -------------
574,494 704,530 884,040
------------- -------------- -------------
LOSS BEFORE REORGANIZATION ITEMS AND
INCOME TAXES (39,442) (51,430) (71,092)
REORGANIZATION ITEMS:
Loss on store closings and other 21,132 36,359 33,649
Acceleration of goodwill amortization - - 14,975
Professional fees 6,262 6,623 6,888
------------- -------------- -------------
Total 27,394 42,982 55,512
------------- -------------- -------------
LOSS BEFORE INCOME TAXES (66,836) (94,412) (126,604)
INCOME TAX (BENEFIT) - - (39,437)
------------- -------------- -------------
LOSS BEFORE EXTRAORDINARY ITEMS (66,836) (94,412) (87,167)
EXTRAORDINARY ITEMS, NET OF TAX
BENEFIT OF $2,630 IN 1998 AND $1,090 IN 1997 - - (5,805)
------------- -------------- -------------
NET LOSS $ (66,836) $ (94,412) $ (92,972)
============= ============== =============
LOSS PER COMMON SHARE:
Loss before extraordinary items $ (66,836) $ (94,412) $ (87,167)
Extraordinary items - - (5,805)
------------- -------------- -------------
NET LOSS $ (66,836) $ (94,412) $ (92,972)
============= ============== =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,000 1,000 1,000
============= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(Dollars in thousands, except share data)
Common Stock Capital Retained Minimum
------------------------ in Excess Earnings Pension
Shares Amount of Par (Deficit) Liability
------------- --------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1997 1,000 $ 1 $ 58,453 $ (155,389) $ (637)
Net loss - - - (92,972) -
Elimination of minimum pension liability - - - - 637
------------- --------- ----------- ------------- --------------
BALANCE, MARCH 31, 1998 1,000 1 58,453 (248,361) -
Net loss - - - (94,412)
------------- --------- ----------- ------------- --------------
BALANCE, MARCH 31, 1999 1,000 1 58,453 (342,773) -
Net loss - - - (66,836) -
------------- --------- ----------- ------------- --------------
BALANCE, MARCH 31, 2000 1,000 $ 1 $ 58,453 $ (409,609) $ -
============= ========= =========== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
<TABLE>
<CAPTION>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended March 31,
-----------------------------------------------
2000 1999 1998
------------ -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(66,836) $ (94,412) $ (92,972)
------------ -------------- --------------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 5,377 10,750 14,421
Amortization 3,485 7,198 9,672
Amortization of deferred financing fees - 2,061 2,318
Pension expense (income) (58) 310 901
Loss (gain) on disposal of property and equipment (29) 58 (39)
Other - 390 6,146
Deferred tax benefit - (53) (42,174)
Extraordinary loss related to early redemption
of debt, before tax benefit - - 8,435
Inventory write-down - 4,836 6,124
Goodwill write-off - - 2,810
Reorganization items 4,692 21,853 45,532
Change in operating assets and liabilities:
Decrease (increase) in:
Receivables 521 3,553 6,265
Inventories 3,939 46,065 19,376
Deposits and prepaid expenses 85 (1,380) (49)
Other, net (11,495) (4,372) 229
Increase (decrease) in:
Accounts payable, trade 879 (9,144) (2,320)
Accrued expenses and other liabilities 9,224 10,828 (4,871)
Payable to parent (151) 268 3,348
Other noncurrent liabilities 6,818 119 (305)
------------ -------------- --------------
Total adjustments 23,287 93,340 75,819
------------ -------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (43,549) (1,072) (17,153)
------------ -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,863) (7,768) (14,130)
Proceeds from sale of property and equipment
and other assets 121,640 20,685 46,775
------------ -------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 116,777 12,917 32,645
------------ -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 628,447 840,799 990,740
Repayments under credit facilities (695,673) (844,951) (992,189)
Principal payments on long-term debt (6,962) (145) (8,503)
Principal payments under capital lease obligations (582) (2,269) (3,174)
(Decrease) increase in cash overdrafts 1,387 (7,572) (3,129)
Payment of deferred financing fees - - (3,165)
------------ -------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (73,383) (14,138) (19,420)
------------ -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (155) (2,293) (3,928)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,046 5,339 9,267
------------ -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,891 $ 3,046 $ 5,339
============ ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. CHAPTER 11 PROCEEDINGS AND BASIS OF FINANCIAL STATEMENTS 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"), filed voluntary petitions for relief under Chapter 11,
Title 11 of the United States Code (the "Bankruptcy Code") with the
United States Bankruptcy Court (the "Court") for the District of
Delaware, Wilmington, Delaware under Case No. 97-1842(MFW). Pursuant to
Sections 1107 and 1108 of the Bankruptcy Code, LFI, 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. Because
LFI is operating as debtor-in-possession under Chapter 11 of the
Bankruptcy Code, the existing directors and officers of LFI continue to
manage the operations of LFI subject to the supervision and orders of
the Court.
Certain subsidiaries were not included in the Chapter 11 filings. These
subsidiaries are inactive and the results of their operations and
financial position are not material to the consolidated financial
statements.
On May 25, 2000, the Debtors filed a "Disclosure Statement" and a
"Second Amended Joint Plan of Reorganization" ("Plan of Reorganization"
or "Plan"), pursuant to Section 1125 of the Bankruptcy Code with the
Court. The Disclosure Statement sets forth certain information
regarding, among other things, significant events that have occurred
during the Debtors' Chapter 11 cases and the anticipated organization,
operation and financings of "Reorganized Levitz". The Disclosure
Statement describes the Plan of Reorganization, certain effects of Plan
confirmation, certain risk factors associated with securities to be
issued under the Plan, and the manner in which distribution will be
made under the Plan. In addition, the Disclosure Statement discusses
the confirmation process and the voting procedures that holders of
claims in impaired classes must follow for their votes to be counted.
The Plan of Reorganization sets forth certain information, among other
things, the classification and treatment of claims and interests, means
for implementation of the Plan, acceptance or rejection of the Plan and
effect of rejection by one or more classes of claims or interests,
provisions for governing distributions, the treatment of executory
contracts and leases, conditions precedent to confirmation of the Plan
and the occurrence of the effective date of the Plan. The foundation of
the Plan is (i) a management agreement between Seaman Furniture
Company, Inc. ("Seaman") and LFI (the "Management Agreement") and (ii)
a shared services agreement between Seaman and LFI (the "Shared
Services Agreement").
33
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
Under the Management Agreement, Seaman would perform the general day to
day management of Levitz's stores located on the East Coast. Levitz
would perform the day to day management of its stores on the West
Coast. Under the Shared Services Agreement, Seaman would provide
certain services to Levitz, including: (i) accounting, (ii) finance,
(iii) advertising support, (iv) MIS and telecommunications, (v) human
resources, (vi) insurance, (vii) inventory control and merchandise loss
protection, (vii) real estate, (ix) legal and (x) logistic support of
the merchandise program. The agreements would provide the Debtors with,
among other things, cost savings, streamlined operations, and economies
of scale with respect to purchasing inventory.
The Plan of Reorganization provides, among other things, that as of the
Plan effective date:
(1) All holders of an allowed administrative and priority tax
claim are unimpaired and unclassified, are not entitled to
vote on the Plan and will receive cash or such other
treatment as to which LFI and such creditor shall have
agreed in writing.
(2) All holders of an allowed other priority claim (Class 1),
setoff claim (Class 2) and miscellaneous secured claim
(Class 3) are unimpaired, are deemed to have accepted the
Plan and, therefore not entitled to vote on the Plan and
will receive cash or setoff or reinstatement or such other
treatment as to which LFI and such creditor shall have
agreed in writing.
(3) All holders of a small unsecured claim (less than $1,000,
Class 4) are impaired and are entitled to vote on the Plan
and shall receive in cash 30% of the allowed amount of the
claim.
(4) All holders of an allowed general unsecured claim (Class 5)
are impaired, are entitled to vote on the Plan and shall
receive their pro rata share of the new common stock
distribution of "Levitz Home Furnishings, Inc." ("LFHI"). A
beneficial holder of more than one Allowed Class 5 General
Unsecured Claim may elect to reduce the aggregate amount of
such Claim to $20,000 and receive a single distribution as a
holder of an Allowed Class 4 Small Unsecured Claim.
(5) All holders of an allowed subordinated claim (Class 6) are
impaired, are deemed to have rejected the Plan and,
therefore, not entitled to vote on the Plan, and shall not
receive or retain any property or interest in property on
account of their subordinated claim.
(6) All intercompany claims (Class 7) shall be cancelled, and
their holders shall not receive or retain any property or
interest in property on account of their intercompany
claims.
(7) All holders of Interests (the rights of any current or
former holder or owner of "old equity securities" authorized
and issued prior to the Plan confirmation date, Class 8) are
impaired, are deemed to have rejected the Plan and,
therefore, are not entitled to vote on the Plan. All
Interests shall be cancelled and the Interest holders shall
not receive or retain any property or interest in property
on account of their Interests.
On June 23, 2000 the Chancery Court of Delaware issued a preliminary
injunction prohibiting Seaman from performing or taking any further
action with respect to the performance of the aforementioned Management
and Shared Services agreements. While Levitz is not a party to the
Chancery Court Action, this decision makes it unlikely that the Company
will be able to implement the Plan of Reorganization as filed by the
Company on May 25, 2000.
34
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
Levitz and substantially all of its subsidiaries, as
debtors-in-possession, are parties to a DIP Credit Agreement dated as
of September 5, 1997, as amended (the "DIP Facility"), with Bankers
Trust Credit Corp. ("BTCC") as agent. The DIP Facility has provided
Levitz with the cash and liquidity necessary to conduct its operations
and pay for merchandise shipments at normal levels during the course of
the Chapter 11 Cases. The DIP Facility is secured by substantially all
of the assets of Levitz and a perfected pledge of stock of all Levitz
companies. On June 21, 2000, the Bankruptcy Court approved an amendment
to (i) extend the DIP Facility to December 31, 2000, (ii) decrease the
availability of the Revolving Loans and Letters of Credit to no more
than $85 million, (iii) waive violations of EBITDA covenants required
as of March 31, 2000, and set minimum EBITDA at ($2,000,000) and ($0)
for the three and six month periods ended June 30 and September 30,
2000, and (iv) provide for an increase in the Overadvance Term Loan
commitment to a total of $45 million. The Company does not currently
have any other sources of financing to support its cash flow
requirements beyond December 31, 2000.
As a result of the Chancery Court Decision, the Company is currently in
the process of developing a new "stand-alone" plan of reorganization.
Such plan will include measures for obtaining a working capital
financing facility to replace the current revolver facility under the
DIP Agreement and sources of additional capital from existing creditors
and vendors which would be required to finance the Company's
"stand-alone" plan. The proceeds of these arrangements would be used to
support future operations. The exlusivity period for the Company to
propose a plan of reorganization expires on September 29, 2000.
The consolidated 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 LFI's debt
structure, its recurring losses, and current economic conditions, such
realization of assets and liquidation of liabilities are subject to
significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or
settle liabilities, for amounts other than those reflected in the
financial statements. Additionally, the amounts reported on the
consolidated balance sheet could materially change because of changes
in business strategies and the effects of any proposed plan of
reorganization.
The appropriateness of using the going concern basis 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.
In the Chapter 11 cases, substantially all unsecured liabilities as of
the Petition Date are subject to compromise or other treatment under a
35
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
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 whose
treatment and satisfaction is dependent on the outcome of the Chapter
11 cases have been segregated and classified as liabilities subject to
compromise under reorganization proceedings in the consolidated balance
sheets. Generally, all actions to enforce or otherwise effect repayment
of pre-Chapter 11 liabilities as well as all 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. LFI 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. A bar date is the date by which claims against
LFI must be filed if the claimants wish to receive any distribution in
the Chapter 11 cases. Differences between amounts shown by the Debtors
and claims filed by creditors are being 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 March 31, 2000, the Debtors had rejected
leases for 27 store locations, reached agreement with the landlord on
seven store locations to terminate without liability and assumed and
assigned leases on 37 store locations without liability. The Court has
extended the time for which the Debtors may assume or reject unexpired
leases of nonresidential real property to August 28, 2000. The
liabilities subject to compromise include a reserve for an estimated
amount that may be claimed by lessors for the stores that have been
closed through March 31, 2000. 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.
2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
Levitz Furniture Corporation (Levitz), a Florida Corporation, was
acquired by Levitz Furniture Corporation (LFI) in 1985. Levitz is a
specialty retailer of furniture with a chain of 64 stores and 21 sales
support centers located in major metropolitan areas in 13 states.
Principles of Consolidation
The consolidated financial statements include the accounts of LFI and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions are eliminated in consolidation.
36
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
Revenue Recognition Policy
Levitz currently recognizes revenue at the time a sales order is
written and the following conditions are met: the merchandise is in
stock and is available for sale; for a credit sale, the credit is
unconditionally approved; and for items requested to be delivered by a
customer, a firm delivery date is set, and a minimum down payment is
received. In December 1999, the SEC issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition in Financial Statements," which is
effective no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. This SAB provides additional
guidance in applying generally accepted accounting principles for
revenue recognition in consolidated financial statements. Upon the
emergence from Chapter 11, or no later than January 1, 2001, the
Company will change its method of accounting to record merchandise
sales upon delivery of merchandise to customers, rather than prior to
delivery, in order to be consistent with the provisions of SAB 101. Had
the Company elected to adopt SAB 101 at March 31, 2000, the pre-tax
amount of the one-time non-cash charge is estimated to have been
between $4.0 - $6.0 million. The cumulative effect of the change
represents the deferral of previously recorded revenue, net of direct
costs, related to merchandise that had not been delivered to the
customer as of March 31, 2000. This change in accounting will impact
future interim and fiscal year reporting periods based on seasonal
trends in sales and corresponding delivery cycles. However, there will
be no impact on the Company's cash flows from operations as a result of
this change.
Cash, Cash Equivalents and Cash Overdrafts
All highly liquid debt instruments purchased with original maturities
of three months or less are considered to be cash equivalents. Cash
overdrafts include checks outstanding that do not have the right of
offset with cash and cash equivalents. The carrying value approximates
fair value because of the short maturity of those instruments.
Inventories
Inventories of furniture and accessories are stated at the lower of
cost or market. In December 1998, the Company reviewed certain
discontinued and/or slower moving inventory as well as damaged
inventory items. Included in cost of sales is a $4.8 million charge
reflecting the Company's adjustment to record this inventory at its
estimated net realizable value. Cost is determined using the last-in,
first-out (LIFO) method. Inventories valued on the LIFO cost method
were approximately $9.1 million and $8.8 million lower than first-in,
first-out (FIFO) costs at March 31, 2000 and 1999, respectively.
During the year ended March 31, 1999, there was a significant reduction
in inventories as a result of the sale of inventory to third-party
liquidators upon the closing of forty-two facilities. The reduction in
inventory caused the liquidation of prior year LIFO layers. The
liquidation of prior year layers at prior year prices reduced the LIFO
reserve and cost of sales by $3.9 million more than would have resulted
if the liquidation of the layers were measured at current year prices.
37
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
Property and Equipment, Depreciation and Amortization
Property and equipment purchased by Levitz are stated at cost. Capital
leases are recorded at the lower of the present value of the future
minimum lease obligations or fair market value of the property.
Depreciation is provided substantially by the straight-line method over
the estimated useful lives of the related assets. The estimated useful
lives range from 10 to 40 years for buildings, building improvements
and leasehold improvements, and 2 to 20 years for store, warehouse and
transportation equipment. Fully depreciated assets are written off
against accumulated depreciation. Capital leases are depreciated over
their initial terms which generally range from 15 to 40 years.
Property Held for Disposal
Property held for disposal represents the net book value or net
realizable value of land, buildings, leasehold improvements and
leasehold interests associated with closed facilities. Property held
for disposal was $2.3 million and $32.5 million at March 31, 2000 and
1999, respectively and is classified in other assets.
Intangible Leasehold Interests
Intangible leasehold interests represent the value associated with
renewal terms of capital leases and original and renewal terms of
operating leases acquired by Levitz at rents below market value.
Intangible leasehold interests are amortized by the straight-line
method over the original and renewal terms of the related leases.
Accumulated amortization related to intangible leasehold interests was
$10.8 million and $9.1 million as of March 31, 2000 and 1999,
respectively.
Income Taxes
Levitz accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been
recognized in Levitz's financial statements or tax returns. In
estimating future tax consequences, Levitz generally considers all
expected future events other than enactment of changes in the tax laws
or rates. The income tax benefit generated as a result of the net loss
during the years ended March 31, 2000 and 1999 was fully offset by a
valuation allowance.
Deferred Financing Fees
Deferred financing fees represent costs associated with obtaining
financing arrangements. These fees were amortized over the original
terms of the related debt. Accumulated amortization of the DIP
financing fees was $1.1 million at March 31, 1998. Net deferred
financing costs as of the Petition Date of $8.4 million and $2.5
million for the senior secured facilities and for the various
unsecured-debt obligations were written off during the fiscal year
ended March 31, 1998 as an extraordinary item and as reorganization
items, respectively.
Advertising Expenses
Levitz expenses all advertising costs the first time the advertising
takes place including direct-response advertising. Advertising expense
for fiscal years ended March 31, 2000, 1999 and 1998 was $88.2 million,
38
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
$93.4 million and $108.1 million, respectively. Advertising
expenditures include promotional financing fees of $30.1 million, $28.4
million and $27.2 million for fiscal years ended March 31, 2000, 1999
and 1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. See Note 1 regarding proceedings under Chapter
11.
Self Insurance
Levitz is generally self-insured up to a maximum of $0.2 million to
$0.3 million for losses and liabilities related to worker's
compensation, health and welfare claims and comprehensive general,
product and vehicle liability. Losses are accrued based upon Levitz's
estimates of the aggregate liability for claims incurred using certain
actuarial assumptions followed in the insurance industry and based on
LFI's experience.
Earnings Per Share
Loss per common share is based on the weighted average number of common
shares outstanding during each year of 1,000 shares.
Reclassifications
Effective March 31, 1999, Levitz elected to reclassify certain revenues
in its consolidated statements of operations. As a result, net sales,
and selling, general and administrative ("SG&A") expenses have been
restated for the fiscal years ended March 31, 1999 and 1998. Levitz now
reflects delivery income and miscellaneous revenue in SG&A expenses.
Previously, these revenues were included in net sales. The effect of
this reclassification was to reduce net sales and SG&A expenses by
$19.8 million and $23.9 million for the fiscal years ended March 31,
1999 and 1998, respectively.
Certain other amounts in prior years' consolidated financial statements
have been reclassified to conform to the current year's presentation.
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 vary significantly from the stated
amount of proofs of claim that were filed by the bar date set by the
Court of August 10, 1998. The difference between claim amounts
scheduled by the Debtors and the claim amounts filed by creditors are
being investigated and will be either amicably resolved or adjudicated
before the Court. The amounts in total will 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
39
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
arise from the rejection of additional real estate leases and executory
contracts by the Debtors.
March 31,
2000
(Dollars in
Liabilities Subject to Compromise thousands)
--------------------------------- ----------
Accounts payable, trade $ 38,901
Accrued expenses 15,313
13.375% Senior Notes due 10/15/98 96,031 (1)
9.625% Senior Subordinated Notes due 7/15/03 101,337 (1)
Reserve for lease rejection claims 20,432
Executive retirement and employment agreements 17,359 (2)
General liability claims 736
Reserve for previous store closings 1,353
Common area maintenance 234
Real estate taxes 1,508
Personal property taxes 504
--------
$293,708
========
(1) Includes accrued interest at September 4, 1997.
(2) Includes $15,824 related to employee benefits and agreements which
were assumed by a creditor in fiscal 1999.
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
$23.1 million was not recorded on certain prepetition debt for Fiscal
years ended 2000 and 1999. Contractual interest expense of $13.3
million was not recorded for the period from September 5, 1997 through
March 31, 1998.
4. REORGANIZATION ITEMS:
Reorganization items represent the costs to restructure the Company
during the Chapter 11 proceedings. Store closing charges include the
write-down of assets to their net realizable value, severance pay and
continuing expenses. The following costs are included for Fiscal 2000,
1999 and 1998 (dollars in millions):
40
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
2000 1999 1998
-------- -------- --------
Store closings $ - $ 42.3 $ 23.4
Deferred financing fees and
other - - 2.5
Loss (gain) on sale of property
held for sale 0.4 (5.9) -
Reserve for HRS closed
store portfolio 14.1 - -
Store closing reserve 3.1 - -
Lease rejection claims 1.2 - -
Adjust net realizable value of
closed property 2.3 - -
Loss on sale of John M. Smyth
Company Assets - - 22.7
Professional fees 6.3 6.6 6.9
-------- -------- --------
$ 27.4 $ 43.0 $ 55.5
======== ======== ========
In Fiscal 2000, the Company accrued a charge of $14.1 million related
to the estimated remaining losses on the closed store receivable
portfolio which the Company is obligated to pay under its agreement
with Household Bank NA. In addition, as a result of unanticipated
closing costs, the holding of certain properties longer than originally
estimated, and unfavorable lease rejection costs, the Company increased
the related reserves by $3.1 million, $1.2 million and $2.3 million
respectively. Professional fees remained consistent with prior years.
In Fiscal 1999, LFI closed forty-two stores in under-performing or
non-strategic markets. Fifteen stores were closed in June 1998 and
twenty-seven stores were closed in January 1999. In addition to the
store closings, certain support functions were or are being eliminated
over a period of time and fifteen warehouses, as part of the "Warehouse
Rationalization Program", were closed where another warehouse in the
same or adjacent market could service the store. The pre-tax charge for
store and warehouse closings and the elimination of certain support
functions was $42.3 million which included non-cash charges of $17.8
million for the write-down of assets to their net realizable values net
of capital lease obligations of $14.7 million, $7.6 million loss on the
sale of inventory to liquidators and anticipated lease rejection claims
of $4.3 million. Cash charges include severance pay of $3.3 million and
continuing expenses of $9.3 million.
During Fiscal 1999, LFI recognized $5.9 million in gains on the sale of
eight previously closed stores. The gains were recorded as
reorganizational items.
During October 1997, the Court approved a motion for Levitz to close
eighteen stores in under-performing markets. The Company recorded a
pre-tax charge of $23.8 million associated with the closing of these
stores. The charge included non-cash items for the write-down of
property, capital lease assets, furniture and fixtures to their net
realizable values of $18.9 million, the loss on sale of inventory
through liquidation in the amount $1.5 million and the write-down of
other assets in the amount of $0.8 million. Cash items include
severance pay of $1.6 million and continuing expenses of $1.0 million.
Additional non-cash reorganization items written off at the same time
included acceleration of goodwill amortization of $4.7 million and
deferred financing fees of $2.5 million. As of March 31, 2000
approximately $2.6 million of this closing reserve remained.
41
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
On January 9, 1998, Levitz sold substantially all of the assets of the
John M. Smyth Company ("JMS"), a wholly-owned subsidiary of Levitz,
which then operated five store locations in the Chicago, Illinois
vicinity. The gross proceeds from the sale, which includes reimbursed
amounts, were approximately $35.6 million. The proceeds were used to
pay mortgages, accounts payable, accrued liabilities and reduce
borrowings under the DIP Facilities. In December 1997, Levitz incurred
a charge of $18.0 million on the sale and closing of the JMS
facilities. The charge included non-cash items for loss on sale of
property and equipment of $5.0 million, acceleration of goodwill
amortization of $10.3 million, lease rejection claims of $1.6 million
and write-off of other assets of $0.2 million. The charge included cash
items of $0.3 million for severance pay and $0.6 million for continuing
expenses. At March 31, 2000, the reserve was fully amortized.
Net sales and operating loss) (exclusive of certain central office
expense allocations and prior to interest expense, income taxes and
reorganization items) from the forty-two stores closed in Fiscal 1999,
and the twenty-four stores closed or disposed of during Fiscal 1998
were (in 000's):
1999 1998
---------------- --------------
Net sales $ 138,257 $ 299,073
Operating (loss) (2,879) (24,044)
Professional fees include accounting, legal and consulting services
provided to LFI and the Creditors' Committee which, subject to Court
approval, are required to be paid by Levitz while it is in Chapter 11.
5. CONSOLIDATED STATEMENTS OF CASH FLOWS:
Supplemental disclosures of cash flow information (dollars in
thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash paid/(received) during
the year for:
Interest $18,391 $26,152 $37,853
Income tax (refunds), net 110 36 (2,417)
</TABLE>
42
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
6. DEBT:
Outstanding balances under debt arrangements are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
March 31, Maturity
----------------------------- Year Ending
Rate 2000 1999 March 31
------------- -------------- -----------------
<S> <C> <C> <C> <C>
DIP Facilities Variable $ 77,392 $ 144,618 2000
Senior notes 13.375% 91,267 91,267 1999
Senior subordinated notes 9.625% 100,000 100,000 2004
Mortgages 8.375%-13% - 6,962 2003 to 2006
------------- --------------
268,659 342,847
Less -
Current portion of long-
term debt - 6,962
DIP Facilities classified
as current 77,392 144,618
Unsecured debt reclassified
as subject to compromise 191,267 191,267
------------- --------------
$ - $ -
============= ==============
</TABLE>
LFI and substantially all of its subsidiaries, as
debtors-in-possession, are parties to a DIP Credit Agreement dated as
of September 5, 1997, as amended (the "DIP Facility"), with Bankers
Trust Credit Corp. ("BTCC") as agent. The DIP Facility approved by the
Bankruptcy Court initially provided for up to $260.0 million of
availability. The DIP Facility contained revolving loans of $223.6
million and a term loan of $36.4 million. Letter of Credit obligations
under the revolving DIP Facility are limited to $25.0 million. The DIP
Facility has been intended to provide Levitz with the cash and
liquidity necessary to conduct its operations and pay for merchandise
shipments at normal levels during the course of the Chapter 11 Cases.
Loans made under the DIP Facility revolving notes bear interest, at
Levitz's option, at a rate equal to either BTCC's prime lending rate
plus 1.50% or BTCC's LIBOR rate plus 3.75%. The term note bore interest
at 16%. Levitz is required to pay an unused line fee of 0.50%, and a
letter of credit fee of 2.0%. Levitz paid financing fees of $3.2
million on the closing date. These financing fees were amortized over
the original life of the DIP Facility.
The maximum borrowings, excluding the term commitments, under the DIP
Facility are limited to 85% of eligible Accounts Receivable, 75% of
Eligible Inventory (as both are defined in the DIP Facility).
The DIP Facility is secured by substantially all of the assets of
Levitz and a perfected pledge of stock of all Levitz companies. 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,
sale of assets, and a prohibition on paying dividends.
During the Chapter 11 Cases, the Company negotitated several amendments
to the DIP Facility. Toward the end of July 1998, the Company believed
43
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
that additional availability under the revolving line of credit portion
of the Company's DIP Facility was necessary as Levitz entered the fall
1998 retail buying season. Thus, the Company sought, and by Bankruptcy
Court order dated September 17, 1998, obtained, an order authorizing
the Company to enter into an amendment of the DIP Facility, under which
they borrowed $22,000,000 under a second term loan from AG Capital
Funding Partners, L.P. (as agent for and on behalf of certain
affiliates and/or managed, accounts), which monies were used to reduce
outstanding borrowings under the revolving line of credit portion of
the Company's DIP Facility, on the same priority basis as the original
term loan under the DIP Facility.
The DIP Facility was set to expire on March 5, 1999. Levitz negotiated
with the Lenders and reached an agreement extending the maturity date
of the loans under the DIP Facility and obtained an additional $10
million commitment from Resurgence Partners, L.P., an affiliate of the
Company's largest claim holder, the proceeds of which were available to
reduce borrowings under the revolving loans under the DIP Facility. On
March 2, 1999, the Bankruptcy Court approved the amendment. On May 28,
1999, the Bankruptcy Court authorized an amendment to the DIP Facility
to repay the Term Loans using proceeds of the Sale/Leaseback
Transaction with a third party and extend the DIP Facility maturity
through December 31, 1999. Thus both the original term note in the
amount of $36.4 million and the second term note in the amount of $22
million, both of which had accrued interest at sixteen percent, were
paid in full. Also, the maturity date of the DIP Facility was extended
(by the tenth amendment to the DIP Facility) to December 31, 1999 and
the commitment thereunder reduced to $125 million.
Three further amendments to the DIP Facility were approved by the
Bankruptcy Court, between August and December, 1999. Previously, the
DIP Facility had required that the Revolving Credit Line be repaid
before any principal payments be made on the Overadvance Term Loan. On
August 24, 1999, the Bankruptcy Court approved amendments that provided
for principal repayment of the Overadvance Term Loan, should the Excess
Availability surpass $18,000,000 for five consecutive business days;
and, conversely, granting a $10,000,000 term loan, should the Excess
Availability fall below $12,000,000; as well as a provision for
acceleration of the Debtors' obligations under the Overadvance Term
Loan under certain conditions. By final order entered on October 27,
1999, the DIP Facility was amended to: (1) extend the Expiration Date
and Overadvance Maturity Date to June 30, 2000; (2) extend the Fixed
Asset Sublimit to December 31, 1999; (3) reduce the commitment on the
Revolving Line of Credit to $95,000,000; (4) require the Debtors to pay
an amendment fee of $150,000; and (5) and set the minimum EBITDA at
$4,000,000 beginning December 31, 1999, and $9,000,000 as of March 31,
2000. On December 14, 1999, the Bankruptcy Court approved an amendment
to the DIP Facility to include Levitz Furniture Company of
Massachusetts, Inc. as a party subject to all the provisions of the DIP
Credit Agreement. Subsequently, the Court approved amendments providing
for additional overadvance loans to a total amount of $35,000,000. The
Debtors pay interest monthly at an annual rate of 16% on the funded
portion of the Overadvance Term Loan commitment and a monthly
collateral management fee of .75%, which can be paid by issuing
additional notes.
On June 21, 2000, the Bankruptcy Court approved an amendment to (i)
extend the DIP Facility to December 31, 2000, (ii) decrease the
availability of the Revolving Loans and Letters of Credit to no more
44
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
than $85 million, (iii) waive violations of EBITDA covenants required
as of March 31, 2000, and set minimum EBITDA at ($2,000,000) and ($0)
for the three and six month periods ending June 30 and September 30,
2000, and (iv) provide for an increase in the Overadvance Term Loan
commitment to a total of $45 million.
Levitz is exposed to market risk as a result of the terms of the DIP
Facility which requires the Company to pay a variable interest rate
based on the fluctuation of Bankers Trust Company's prime lending rate.
The change in annual cash flow and earnings resulting from a 1%
increase or decrease in interest rates based on outstanding borrowings
at March 31, 2000 would be approximately $0.5 million assuming other
variables remained constant.
At March 31, 1999, all mortgages were classified as current due to the
Sale-Leaseback Transaction and Bulk Sale Transaction as described in
Note 8 to the consolidated financial statements. All mortgages have
been paid from the proceeds of both transactions.
The Company is currently in default of the senior notes, senior
deferred coupon debentures, and senior subordinated notes, all of which
are unsecured and have been classified as liabilities subject to
compromise.
7. UNUSUAL OPERATING EXPENSES:
During Fiscal 1998, upon the resignation of an officer, Levitz accrued
severance costs (i.e., future payroll and employee benefit) of $1.3
million under the provisions of an employment agreement. Additionally,
Levitz recorded a $5.9 million write-off of the future service revenue
receivable under the GECC Agreement when 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. The charges increased the net loss by
$5.0 million or $0.17 per share.
During the fourth quarter of Fiscal 1998, the Company reviewed certain
discontinued and/or slow moving inventory items that did not complement
the new merchandise assortment. In an effort to accelerate the
liquidation of these items, the Company reduced their selling prices.
Included in unusual operating expenses is a $6.1 million charge
reflecting the Company's adjustment to record this inventory at its
estimated net realizable value. The Company also wrote off goodwill in
the amount of $2.8 million. The charges increased the net loss by $6.1
million or $0.20 per share.
8. LEASING ARRANGEMENTS:
Levitz leases its facilities generally under non-cancelable leases for
original terms ranging from 10 to 40 years. Most leases are for land
and buildings and contain renewal options and some include options to
purchase the properties.
On June 8, 1999, Levitz sold 11 owned properties and leasehold
interests and/or rights on 11 leased properties for gross proceeds of
$67.3 million ("Contract of Sale"). Net proceeds, which excludes
closing costs, of $67.1 million were used to pay-off existing mortgages
and related accrued interest, default interest and other fees of $7.6
million; the term notes under the DIP Facility including accrued
interest, extension fees and other fees of $59.2 million and cure costs
relating to pre-petition liabilities of $0.3 million. The aggregate
45
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
carrying value of these properties of $72.2 million was classified as
property under agreement of sale at March 31, 1999. Capital lease
obligations relating to these properties were $9.1 million as of March
31, 1999 which were classified as current.
The gain on the sale of owned property and leasehold interests of
approximately $2.2 million, subject to further adjustment, will be
amortized over the initial term of the "Unitary Lease Agreement" as
described below. In addition, the Contract of Sale places certain
limitations on Levitz incurring new unsecured debt following the
approval of a plan of reorganization.
At the same time, Levitz entered into a Unitary Lease Agreement to
lease back all of the owned property as well as the property where the
leasehold interest was sold ("Sale-Leaseback Transaction"). The Unitary
Lease Agreement is for an initial term of twenty years with three
additional option periods of five years each. Rent is payable monthly,
in advance, calculated at 10.75% of the gross proceeds for the first
five years of the initial term with incremental increases of 5% after
each five year period of the initial terms and all option periods.
The Unitary Lease requires Levitz to assume all obligations for
payments and lease terms under the original leases ("the Overleases").
The Unitary Lease allows Levitz to exercise a right to vacate or
surrender all or a portion of the lease space of the properties by
giving notice on or before the two year anniversary of the Unitary
Lease Agreement and vacating within three years. In some instances,
there is also a requirement that Levitz must vacate the warehouse
portion and/or the showroom portion of some of the properties by
specified dates. Levitz would receive a pro rata reduction in the
Unitary Lease rent at the time it vacates the entire property and would
be released of all payment obligations for the Overlease in the
instances described above.
On July 7, 1999, Levitz sold five owned properties and leasehold
interests/rights in six properties, all of which locations had
previously been closed. The gross proceeds from the transaction were
$19.8 million (the "Bulk Sale Transaction"). Net proceeds of
approximately $19.4 million, excluding closing costs, were used to
pay-off existing mortgages and accrued interest of $0.6 million, cure
costs relating to pre-petition liabilities of $0.3 million, proration
of real estate taxes and other costs of $0.4 million and to pay down
the revolver portion of the DIP Facility of approximately $18.1
million. The Bulk Sale Transaction relieved Levitz of all lease
obligations for the leased properties. The aggregate carrying value of
these properties of $20.3 million was classified as property under
agreement of sale at March 31, 1999.
Amortization expense relating to property under capital leases for the
years ended March 31, 2000, 1999 and 1998 was $2.7 million, $6.0
million and $8.3 million, respectively.
Minimum annual rentals on continuing stores at March 31, 2000 for the
five years subsequent to March 31, 2000 and in the aggregate are as
follows (dollars in thousands):
46
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
<TABLE>
<CAPTION>
Capital Operating
Year Leases Leases
---- ------------- ------------
<S> <C> <C>
2001 3,495 22,733
2002 3,407 21,973
2003 3,407 20,624
2004 3,407 19,587
2005 3,593 19,425
Thereafter 70,200 205,386
------------- ------------
Total minimum lease payments 87,509 $309,728
============
Less - Amount representing interest 61,212
-------------
Present value of net minimum
payments under capital leases 26,297
Less - Current portion of
continuing leases 351
-------------
$25,946
=============
</TABLE>
Rent expense includes minimum rentals on operating leases, contingent
payments based on either the Consumer Price Index or a percentage of
sales for both capital and operating leases and amortization of
intangible leasehold interests.
Rent expense consists of the following (dollars in thousands):
47
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
2000 1999 1998
----------- ------------- ------------
Rent expense 17,399 18,630 23,835
Sublease income (481) (810) (519)
----------- ------------- ------------
Rent expense, net $ 16,918 $ 17,820 $ 23,316
=========== ============= ============
Some rental agreements contain escalation provisions that may require
higher future rent payments. Rent expense incurred under rental
agreements that contain fixed escalation clauses is recognized on a
straight-line basis over the life of the lease.
9. PRIVATE-LABEL CREDIT CARD PROGRAM:
On September 4, 1998 Levitz and its operating subsidiaries entered into
an agreement ("Merchant Agreement") with Household Bank (SB), N.A.
("Household") whereby Household would provide financing to individual
consumers purchasing merchandise from Levitz ("Private-Label Credit
Card Program"). The Court approved the Merchant Agreement and granted a
first priority and security interest and lien to Household on certain
reserves retained or accumulated by Household, totaling $17.3 million
at March 31, 2000, and gave administrative expense status to
substantially all obligations of Levitz arising under the Merchant
Agreement.
Also on September 4, 1998, General Electric Capital Corporation
("GECC") and Levitz terminated the Second Amended and Restated Account
Purchase and Credit Card Agreement (the "GECC Agreement") which was
replaced by the Merchant Agreement. Levitz and GECC jointly released
each other from substantially all obligations under the GECC Agreement.
At the same time GECC sold the majority of the portfolio under the GECC
Agreement, approximately $561.0 million, to Household.
The Company determined that the transfer of the GECC portfolio to
Household qualified for sale treatment under Financial Accounting
Standards Board, Statement of Accounting Standards No. 125, "Accounting
for Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities". Accordingly, the Receivable under Account Purchase
Agreement and the offsetting Obligation under Account Purchase
Agreement were removed from the consolidated balance sheets.
Levitz is exposed to market risk under the terms of the Household
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 cost of capital, promotional discount fees and
credit losses. Levitz is obligated for all credit losses under the
portfolio, including the GECC portfolio transferred to Household, up to
a maximum of 15% of average outstanding receivables and for 50% of all
credit losses above 15%. A one percent increase or decrease in the
finance charge to customers or the cost of capital or the credit loss
rate would increase or decrease the annual income from the portfolio by
$2.7 million to $4.9 million.
Levitz recorded income from both the Merchant Agreement and the GECC
Agreement of $24.4 million, $13.2 million, and $7.9 million for the
three years ended March 31, 2000, 1999, and 1998, respectively.
Included in the consolidated balance sheets for the years ended March
31, 2000 are (dollars in thousands):
48
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
<TABLE>
<CAPTION>
2000 1999
---------------------------- ------------------------
Asset Liability Asset Liability
------------ -------------- ---------- ------------
<S> <C> <C> <C> <C>
Net receivable/
payable (1) $ - $ 4,323 $ 2,964 $ -
Merchant risk
reserve (2) 17,336 6,117 -
Promotional discount
accrual (3) - 26,935 - 23,788
------------ -------------- ---------- ------------
Total $ 17,336 $ 31,258 $ 9,081 $ 23,788
============ ============== ========== ============
</TABLE>
(1) The net receivable/payable represents amounts due from or owed to
Household on the settlement of monthly portfolio operations
pursuant to the Merchant Agreement and customer accounts that were
submitted to Household for purchase.
(2) Levitz is also required under the Merchant Agreement to fund a
merchant risk reserve of 2.5% for the first year and 3.5%
thereafter of all amounts financed up to a stipulated dollar
amount. The merchant risk reserve is the amounts paid to Household
in case the Merchant Agreement is terminated or Levitz would
discontinue operations. The cash can be returned to Levitz if a
letter of credit is posted or Levitz emerges from bankruptcy and
meets certain financial covenants. The amount is included in other
long-term assets on the consolidated balance sheets.
(3) The promotional discount accrual represents the estimated interest
that will be charged back to Levitz for those customers that are
likely to take advantage of a "no-interest" finance promotion at
their time of purchase. Levitz is required to make payments of the
estimated amount on a monthly basis. Under the GECC Agreement
these amounts were paid in advance. This accrual is included in
accrued liabilities and other expenses on the consolidated balance
sheets.
10. INCOME TAXES:
Levitz has a Federal cumulative net operating loss ("NOL")
carry-forward of $131.1 million as of the fiscal year ended March 31,
2000. LFI has recorded a full valuation allowance against the federal
and state NOL's for the fiscal year ended March 31, 2000. The
cumulative NOL net tax benefit at March 31, 2000 before full valuation
allowance was $45.9 million. LFI will continue its current practice of
providing a valuation allowance against future net operating losses
pending a change in financial condition. Limitations may be placed on
the realization of these NOL's when LFI emerges from bankruptcy.
Federal NOL carry-forwards are available through Fiscal 2019.
49
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
The benefit for income taxes was allocated as follows (dollars in
thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-------------- ------------ -------------
<S> <C> <C> <C>
Loss before extraordinary items $ - $ - $ (39,687)
Extraordinary items - - (2,630)
-------------- ------------ -------------
$ - $ - $ (42,317)
============== ============ =============
</TABLE>
The components of the benefit for income taxes applicable to loss
before extraordinary items is (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-------------- ------------ -------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State 140 52 57
-------------- ------------ -------------
140 52 57
-------------- ------------ -------------
Deferred:
Federal - - (35,249)
State (140) (52) (4,495)
-------------- ------------ -------------
(140) (52) (39,744)
-------------- ------------ -------------
$ - $ - $ (39,687)
============== ============ =============
</TABLE>
A reconciliation of the statutory benefit for income taxes on loss
before extraordinary items to the actual tax benefit is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-------------- ------------ -------------
<S> <C> <C> <C>
Computed income tax benefit
at Federal statutory rate $ (23,402) $ (33,056) $ (44,544)
State and local income tax
benefit, net of federal
income tax (9,273) (5,676) (7,108)
Permanent differences 2,609 2,938 6,797
Federal valuation allowance 21,381 31,388 1,072
State valuation allowance 7,139 7,198 4,223
Other 1,546 (2,792) (127)
-------------- ------------ -------------
$ - $ - $ (39,687)
============== ============ =============
</TABLE>
50
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
Components of the deferred income tax assets and liabilities are
(dollars in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------------
2000 1999
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Expense deducted for book and
not for tax $ 1,824 $ 7,820
Obligations under capital lease 2,996 18,559
Other liabilities 4,088 21,840
Federal NOL benefit $ 45,901 $ 57,194
Less: valuation allowance (45,901) - (32,460) 24,734
------------- --------------
State NOL benefit 24,834 21,291
Less: valuation allowance (24,834) - (21,291) -
------------- --------------
AMT credit carryover - 2,039
Other (36) 24
Valuation allowance (8,872) -
------------- ------------
- 75,016
------------- ------------
Deferred tax liabilities:
Inventory 1,978 15,757
Property and equipment 1,226 34,593
Property under capital lease 2,414 16,076
Stepped-up values on plant
and equipment due to
purchase accounting 800 15,740
Other 593 -
------------- ------------
7,011 82,166
------------- ------------
Net deferred tax liability $ 7,011 $ 7,150
============= ============
</TABLE>
11. EMPLOYEE BENEFIT PLANS:
Levitz has a non-contributory, defined benefit plan (the Pension Plan).
In March 1996, Levitz amended the Pension Plan to exclude future
benefit accruals for credited service and annual earnings after March
31, 1996 and also excluded any associate from becoming a participant in
the plan after January 1, 1996 (Pension Curtailment). Pension benefits
are based on length of service and final average compensation as of the
Pension Curtailment date and are integrated with Social Security. The
maximum pension benefit per individual is limited to $130,000 per year.
Plan assets consist primarily of marketable equity and debt securities
and cash equivalents. Levitz's funding policy is to make the minimum
annual contributions required by applicable regulations.
Certain officers of Levitz are participants in an unfunded
non-contributory supplemental executive retirement plan (SERP) and a
life insurance plan. The SERP provides supplemental retirement,
disability and/or death benefits. Retirement and disability benefits
are equal to 4.0% of the highest consecutive five-year average of
salary plus bonus paid for each year of service, limited to a maximum
of 60% of compensation or $0.3 million on an indexed basis. Death
benefits are
51
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
equal to 3% per year of service to a maximum of 45% of such
compensation. Benefits are subject to a dollar-for-dollar reduction for
benefits paid under the Pension Plan, Social Security and certain other
specified pension plan payments. The liability for the SERP and
insurance plan is included in liabilities subject to compromise.
The table below reconciles the funded status of the plans with the
amounts recognized in the consolidated balance sheets (dollars in
thousands):
<TABLE>
<CAPTION>
2000 1999
---------------------------- ----------------------------
Pension Pension
Plan SERP Plan SERP
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at
beginning of year $ 58,907 $ 772 $ 61,171 $ 15,080
Service cost - 102 - 319
Interest cost 3,948 60 4,074 105
Actuarial (gain) loss (7,249) 360 347 (760)
Settlements (1) - - - (13,980)
Special termination benefits - - - 14
Gross benefits paid (5,919) - (6,685) (6)
------------ ------------- ------------- ------------
Net obligation at end of year 49,687 1,294 58,907 772
------------ ------------- ------------- ------------
Change in plan assets
Fair value of plan assets at
beginning of year 60,692 - 68,383 -
Actual return on plan assets 12,013 - (882) -
Employer contributions 352 - - -
Benefits paid and expenses (6,420) - (6,809) -
------------ ------------- ------------- ------------
Fair value of plan assets at
end of year 66,637 - 60,692 -
------------ ------------- ------------- ------------
Funded status
Funded status at end of year 16,949 (1,294) 1,785 (772)
Unrecognized net actuarial
(gain) loss (13,498) 360 1,113 -
Unrecognized prior service cost - - - -
Unrecognized net transition
obligation - - - -
Other - - - (2)
------------ ------------- ------------- ------------
Net amount recognized at end
of year $ 3,451 $ (934) $ 2,898 $ (774)
============ ============= ============= ============
Amounts recognized in the consolidated
balance sheets
Prepaid benefit costs $ 3,451 $ - $ 2,898 $ -
Accrued benefit costs - (934) - (774)
------------ ------------- ------------- ------------
Net asset (liability) recognized
at end of year $ 3,451 $ (934) $ 2,898 $ (774)
============ ============= ============= ============
</TABLE>
(1) Included in settlements above for Fiscal 1999 are obligations
related to inactive employees which are included in liabilities
subject to compromise.
52
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
The tables below list the weighted average assumptions and the
components of periodic (benefit) costs (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------------------------ ---------------------- -----------------------
Pension Pension Pension
Plan SERP Plan SERP Plan SERP
----------- ----------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Weighted average assumptions
Discount rate 8.00% 8.00% 7.00% 7.00% 7.00% 7.00%
Expected return on plan assets 9.00% - 9.00% - 9.00% -
Rate of compensation increase - 3.00% - 3.00% - 3.80%
<CAPTION>
2000 1999 1998
------------------------ ---------------------- -----------------------
Pension Pension Pension
Plan SERP Plan SERP Plan SERP
----------- ----------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Components of periodic
benefit cost
Service cost $ - $ 102 $ - $ 319 $ - $ 273
Interest cost 3,948 60 4,074 105 4,258 559
Expected return on assets (4,500) - (4,576) - (4,440) -
Amortization of:
Transition obligation - - 6 - 36
Prior service cost - - 6 - 45
Actuarial loss - - - - 31
Special termination charge 351 - 409 14 114 55
----------- ----------- ----------- --------- ---------- -----------
Net periodic (benefit) cost $ (201) $ 162 $ (93) $ 450 $ (68) $ 999
=========== =========== =========== ========= ========== ===========
</TABLE>
Associates Savings Plan
Levitz has savings plans which were adopted under Section 401(k) of the
Internal Revenue Code. Under the provisions of the Associates Savings
Plans, substantially all employees who meet the age and service
requirements of the plan are entitled to defer a certain percentage of
their compensation. Levitz contributed to the fund 40% of the first 6%
beginning January 1, 2000, 30% of the first 6% beginning January 1,
1999 and 20% of the first 6% beginning January 1, 1998 subject to
certain limitations. Such matching contributions of $0.7 million, $0.6
million and $0.8 million were made by Levitz for the years ended March
31, 2000, 1999 and 1998, respectively.
12. ACCRUED EXPENSES AND OTHER LIABILITIES (Dollars in Thousands):
2000 1999
------------ -----------
Payroll $ 7,945 $ 9,394
Payroll and sales taxes 3,998 4,843
Real estate taxes 2,297 3,238
Interest 444 2,615
Promotional discount accrual 26,935 23,788
Workers Compensation 6,586 6,708
Closed store reserves 9,387 5,062
Customer deposits 8,815 6,446
Other 18,084 11,885
------------ -----------
$ 84,491 $ 73,979
============ ===========
53
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
13. COMMITMENTS AND CONTINGENCIES:
As a result of the bankruptcy filing, the initiation of litigation
against the Debtors involving matters arising prior to the filing for
bankruptcy is stayed. Such stay may be lifted by the Bankruptcy Court
in appropriate circumstances.
Levitz has employment agreements with six officers. Each of these
agreements is for an initial term of eighteen months and will be
automatically renewed for an additional twelve months unless either
party gives prior written notice of intent to terminate the agreement.
The agreements provide that if the officer is terminated by Levitz
other than for Cause (as defined in the agreements) or disability or by
the officer for Good Reason (as defined in the agreements), Levitz must
continue to pay such officer's base salary for eighteen months and, for
certain of the officers, would be required to credit such officer with
three years of additional service and age for purposes of Levitz's
SERP. In the event of such termination following a Change in Control
(as defined in the agreements), Levitz must pay such officer a lump sum
amount equal to one and one-half times his or her annual base salary.
Each agreement also contains certain non-competition provisions.
Levitz is subject to a number of lawsuits, investigations and claims
arising out of the normal conduct of its business, including those
relating to government regulations, general and product liability and
employee relations. Although there are a number of actions pending
against LFI as of March 31, 2000, in the opinion of Management such
actions as currently known would not have a material effect on the
financial position of LFI.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of Levitz's unaudited quarterly results of
operations for the years ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
June 30, September 30, December 31, March 31,
1999 1999 1999 2000
------------ -------------- ------------ -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 119,988 $ 126,331 $ 147,517 $ 141,216
Gross profit 51,887 54,273 65,999 59,877
Net loss (9,050) (11,511) (11,072) (35,203)
============ ============== ============ =============
Net loss per common share $ (9,050) $ (11,511) $ (11,072) $ (35,203)
============ ============== ============ =============
<CAPTION>
Quarter Ended
---------------------------------------------------------------
June 30, September 30, December 31, March 31,
1998 1998 1998 1999
------------ -------------- ------------ -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 171,276 $ 169,285 $ 182,174 $ 130,365
Gross profit 74,094 73,303 74,098 55,278
Net loss (37,967) (14,037) (35,443) (6,965)
============ ============== ============ =============
Net loss per common share $ (37,967) $ (14,037) $ (35,443) $ (6,965)
============ ============== ============ =============
</TABLE>
54
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts and fair values of Levitz's financial instruments
at March 31, 2000 and 1999, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $2,891 $2,891 $3,046 $3,046
Debt obligations including
current maturities 77,392 77,392 151,580 151,580
Letters of credit - 16,385 - 16,936
</TABLE>
The carrying amounts of cash, cash equivalents and debt obligations
approximate fair value because of the short maturity of these
instruments. The fair value of Levitz's long-term debt, including
current maturities, is estimated based on the quoted market prices for
the same or similar issues. The contract amount of the letter of credit
approximates its fair value. The fair value of the Company's
liabilities subject to compromise are not presently determinable as a
result of the Chapter 11 proceedings.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
55
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements filed as part of this report are listed on the Index to
Consolidated Financial Statements on page 31.
Financial Statement Schedules
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedules Page
--------- ----
Schedule I - Condensed Financial Information of Registrant . . . . . . 62
All other schedules have been omitted because the required information is shown
in the Consolidated Financial Statements or Notes thereto or they are not
applicable.
(b) Report on Form 8-K
Not applicable
(c) Exhibits
See Page 58 for Index to Exhibits.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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
Date: July 14, 2000 By: /s/ EDWARD L. GRUND
----------------------------------
Edward L. Grund
Chairman of the Board
and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ EDWARD L. GRUND Chairman of the Board July 14, 2000
---------------------------------
Edward L. Grund and Chief Executive
Officer
/s/ MICHAEL MCCREERY Senior Vice President July 14, 2000
---------------------------------
Michael McCreery and Chief Financial
Officer
Vice President, July 14, 2000
---------------------------------
Edward P. Zimmer General Counsel and
Director
57
<PAGE>
Index to Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit No. Description of Exhibits
----------- -----------------------
3.01 Form of Restated Certificate of Incorporation of the Company. (1)
3.02 Form of By-Laws of the Company. (1)
3.03 Certificate of Incorporation of Levitz. (2)
3.04 By-Laws of Levitz. (2)
4.01 Form of Stockholder Rights Plan, including exhibits. (1)
10.02 Form of Indemnification Agreement. (1)
10.04 Amendment to Shareholders Agreement dated as of May 14, 1993. (1)
10.05 Senior Deferred Coupon Debenture Indenture dated as of December 1,
1992 between the Company and First Bank National Association, as
Trustee. (1)
10.06 Form of Senior Deferred Coupon Debenture (included as Exhibit A to
10.05 above). (1)
10.07 First Supplemental Indenture dated as of April 21, 1993, relating to
the Debenture Indenture. (1)
10.08 Second Supplemental Indenture, dated as of June 16, 1993, relating
to the Debenture Indenture. (1)
10.10 Shareholders Agreement, dated as of December 23, 1986 between the
Company and the Investors. (3)
10.11 Form of Agreement of Indemnification dated March 5, 1985 between
Levitz and certain directors of Levitz Furniture Corporation. (3)
10.14 Supplemental Executive Retirement Plan of Levitz dated April, 1995.
(4)
10.15 Levitz Bonus Plan. (4)
10.16 13-3/8% Senior Note Indenture, dated as of March 1, 1996, between
Levitz Furniture Corporation and American Bank National Association,
as Trustee. (4)
10.17 Form of 13-3/8% Senior Note (included as Exhibit A to 10.16 above).
(4)
10.18 First Supplemental Indenture, dated as of May 29, 1996, to the
13-3/8% Senior Note Indenture, dated as of March 1, 1996 between
Levitz Furniture Corporation and American Bank National Association,
as Trustee. (4)
10.19 Warrant Agreement, dated as of March 25, 1996, by and between the
Company and American Stock Transfer & Trust Company, as Agent.(7)
10.20 Form of Warrant, dated March 25, 1996 (included as Exhibit A to
Exhibit 10.19 above). (4)
10.22 Warrant Certificate, dated as of July 1, 1996, by and between the
Company and Apollo Investment Fund III, L.P. (4)
10.23 Warrant Certificate, dated as of July 1, 1996, by and between the
Company and Apollo Overseas Partners III, L.P. (4)
10.24 Warrant Certificate, dated as of July 1, 1996, by and between the
Company and Apollo (U.K.) Partners III, L.P. (4)
10.25 Registration Rights Agreement, dated as of July 1, 1996, by and
among the Company, Apollo Investment Fund III, L.P., Apollo Overseas
Partners III, L.P., Apollo (U.K.) Partners II, L.P. and Court Square
Capital Limited. (4)
10.26 $150,000,000 Credit Agreement, dated as of July 1, 1996, among
Levitz Furniture Corporation, Levitz Furniture Company of the
Midwest, Inc., Levitz Furniture Company of the Pacific, Inc., Levitz
Furniture Company of Washington, Inc., John M. Smyth Company, each
of the lenders from time to time parties thereto, Apollo Investment
Fund III, L.P., Apollo Overseas Partners III, L.P., Apollo U.K.
Partners III, L.P. and BT Commercial Corporation, as agent. (4)
58
<PAGE>
Exhibit No. Description of Exhibits
----------- -----------------------
10.27 $40,000,000 Credit Agreement, dated as of July 1, 1996, among Levitz
Furniture Corporation, Levitz Furniture Company of the Midwest,
Inc., Levitz Furniture Company of the Pacific, Inc., Levitz
Furniture Company of Washington, Inc., John M. Smyth Company, each
of the lenders from time to time parties thereto, Apollo Investment
Fund III, L.P., Apollo Overseas Partners III, L.P., Apollo U.K.
Partners III, L.P. and BT Commercial Corporation, as agent. (4)
10.28 Intercreditor and Collateral Agency Agreement, dated as of July 1,
1996, among Levitz Furniture Corporation, Levitz Furniture Company
of the Midwest, Inc., Levitz Furniture Company of the Pacific, Inc.,
Levitz Furniture Company of Washington, Inc., John M. Smyth Company,
BT Commercial Corporation and the lenders named therein. (4)
10.29 Intercreditor Agreement, dated as of July 1, 1996, among Levitz
Furniture Corporation, General Electric Capital Corporation, BT
Commercial Corporation and the lenders named therein. (4)
10.30 Revolving Note, dated July 1, 1996, by and among BT Commercial
Corporation, Levitz Furniture Corporation, Levitz Furniture Company
of the Midwest, Inc., Levitz Furniture Company of the Pacific, Inc.,
Levitz Furniture Company of Washington, Inc., and John M. Smyth
Company. (4)
10.31 Term Note, dated July 1, 1996, by and among Apollo (UK) Partners
III, L.P. and Levitz Furniture Corporation, Levitz Furniture Company
of the Midwest, Inc., Levitz Furniture Company of the Pacific, Inc.,
Levitz Furniture Company of Washington, Inc., and John M. Smyth
Company. (4)
10.32 Term Note, dated July 1, 1996, by and among Apollo Overseas Partners
III, L.P. and Levitz Furniture Corporation, Levitz Furniture Company
of the Midwest, Inc., Levitz Furniture Company of the Pacific, Inc.,
Levitz Furniture Company of Washington, Inc., and John M. Smyth
Company. (4)
10.33 Term Note, dated July 1, 1996, by and among Apollo Investment Fund
III, L.P. and Levitz Furniture Corporation, Levitz Furniture Company
of the Midwest, Inc., Levitz Furniture Company of the Pacific, Inc.,
Levitz Furniture Company of Washington, Inc., and John M. Smyth
Company. (4)
10.34 Note, dated July 1, 1996, by and among BT Commercial Corporation and
Levitz Furniture Corporation, Levitz Furniture Company of the
Midwest, Inc., Levitz Furniture Company of the Pacific, Inc., Levitz
Furniture Company of Washington, Inc., and John M. Smyth Company.
(4)
10.35 Security Agreement, dated as of July 1, 1996, by Levitz Furniture
Corporation, Levitz Furniture Company of the Midwest, Inc., Levitz
Furniture Company of the Pacific, Inc., Levitz Furniture Company of
Washington, Inc., and John M. Smyth Company in favor of BT
Commercial Corporation. (4)
10.36 Pledge Agreement, dated as of July 1, 1996, by and between Levitz
Furniture Corporation and BT Commercial Corporation. (4)
10.37 Amendment No. 1 dated as of December 6, 1996 to the Credit
Agreements dated as of July 1, 1996 among Levitz Furniture
Corporation, et al. and BT Commercial Corporation, as Agent. (5)
10.39 Amendment No. 2 dated as of December 16, 1996 to the Credit
Agreements dated as of July 1, 1996 among Levitz Furniture
Corporation, et al. and BT Commercial Corporation, as Agent. (6)
10.40 Amendment No. 3 dated as of June 13, 1997 to the Credit Agreements
dated as of July 1, 1996 among Levitz Furniture Corporation, et al.
and BT Commercial Corporation, as Agent. (7)
59
<PAGE>
Exhibit No. Description of Exhibits
----------- -----------------------
10.41 Amendment No. 4 dated as of June 30, 1997 to the Credit Agreements
dated as of July 1, 1996 among Levitz Furniture Corporation et al.
and BT Commercial Corporation, as Agent. (7)
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. (8)
10.45 $260,000,000 Postpetition Credit Agreement among Levitz Furniture
Incorporated, Levitz Furniture Corporation and certain other
subsidiaries and certain financial institutions, with Levitz
Furniture Corporation, as LFC Funds Administrator and, BT Commercial
Corporation, as Agent, dated as of September 5, 1997. (9)
10.46 Second Amended and Restated Account Purchase and Credit Card Program
Agreement by and among Levitz Furniture Corporation, certain other
subsidiaries and General Electric Capital Corporation, dated
September 5, 1997. (9)
10.47 Amendment No. 1 dated as of October 7, 1997 to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (10)
10.48 Amendment No. 1 dated as of October 7, 1997 to the Second Amended
and Restated Account Purchase and Credit Card Agreement among Levitz
Furniture Corporation, et al. and General Electric Capital
Corporation. (10)
10.49 Amendment No. 2, dated as of December 30, 1997 to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (11)
10.50 Amendment No. 3 dated as of February 23, 1998 to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (12)
10.51 Amendment No. 4 dated as of February 20, 1998 to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (12)
10.52 Amendment No. 5 dated as of May 14, 1998 to the Postpetition Credit
Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (12)
10.53 Amendment No. 6 dated as of June 23, 1998 to the Postpetition Credit
Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (12)
10.54 Form of Employment Agreement by and among Levitz Furniture
Corporation and Edward L. Grund dated as of June 1, 1998. (12)
10.55 Form of Employment Agreement between Levitz and certain officers.
(12)
10.56 Merchant Agreement among Levitz Furniture Corporation and certain
other subsidiaries and Household Bank (SB) N.A., dated September 4,
1998. (13)
10.57 Amendment No. 7 dated as of September 4, 1998 to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (13)
10.58 Amendment No. 8 dated as of September 18, 1998 to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (13)
10.59 Waiver dated as of December 31, 1998 to the Postpetition Credit
Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (14)
10.60 Amendment No. 9 dated as of March 5, 1999 to the Postpetition Credit
Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent.
10.61 Amendment No. 10 dated as of May 14, 1999 to the Postpetition Credit
Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent.
60
<PAGE>
Exhibit No. Description of Exhibits
----------- -----------------------
10.62 Contract of Sale by and among Levitz Furniture Corporation and
certain other subsidiaries and Klaff Realty, LP, Lubert-Adler
Capital Real Estate Fund II, L.P., Lubert-Adler Real Estate Fund II,
L.P. and Lubert-Adler Parallel Fund II, L.P., dated as of April 20,
1999. (15)
10.63 First Amendment to Contract of Sale by and among Levitz Furniture
Corporation and certain subsidiaries and the various purchasers set
forth therein, dated as of June 8, 1999. (15)
10.64 Unitary Lease by and among Levitz Furniture Corporation and certain
other subsidiaries and the various purchasers set forth therein,
dated as of June 8, 1999. (15)
10.65 Amendment No. 11 dated as of July 23, 1999, to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (16)
10.66 Amendment No. 12 dated as of August 4, 1999, to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (17)
10.67 Amendment No. 13 dated as of September 16, 1999, to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (17)
10.68 Amendment No. 14 dated as of December 14, 1999, to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (18)
10.69 Amendment No. 15 dated as of January 7, 2000, to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent. (18)
10.70 Amendment No. 16 dated as of March 1, 2000, to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent.
10.71 Amendment No. 17 dated as of April 21, 2000, to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent.
10.72 Amendment No. 18 dated as of June 27, 2000, to the Postpetition
Credit Agreement among Levitz Furniture Incorporated, et al. and BT
Commercial Corporation, as agent.
21.01 Wholly Owned Subsidiaries of Levitz Furniture Incorporated. (15)
27 Financial Data Schedule.
------------------
(1) Incorporated by reference from the Company's and Levitz's
Registration Statement Nos. 33-61534 and 33-61534-01 on Form S-1
filed April 23, 1993.
(2) Incorporated by reference from Levitz's Registration Statement No.
33-1325 on Form S-1 declared effective on August 13, 1986.
(3) Incorporated by reference from Levitz's Registration Statement No.
33-12639 on Form S-1 declared effective on May 12, 1987.
(4) Incorporated by reference from Levitz Furniture Incorporated's Form
10-K for the fiscal year ended March 31, 1996.
(5) Incorporated by reference to Form 8-K filed December 6, 1996.
(6) Incorporated by reference from Levitz Furniture Incorporated's
quarterly report on Form 10-Q for the quarter ended December 31,
1996.
(7) Incorporated by reference from Levitz Furniture Incorporated's
Annual Report on Form 10-K for the year ended March 31, 1997.
(8) Incorporated by reference from Levitz Furniture Incorporated's
quarterly report on Form 10-Q for the quarter ended June 30, 1997.
(9) Incorporated by reference to Form 8-K filed September 12, 1997.
(10) Incorporated by reference from Levitz Furniture Incorporated's
quarterly report on Form 10-Q for the quarter ended September 30,
1997.
(11) Incorporated by reference from Levitz Furniture Incorporated's
quarterly report on Form 10-Q for the quarter ended December 31,
1997.
(12) Incorporated by reference from Levitz Furniture Incorporated's
Annual Report on Form 10-K for the year ended March 31, 1998.
(13) Incorporated by reference from Levitz Furniture Incorporated's
quarterly report on Form 10-Q for the quarter ended September 30,
1998.
(14) Incorporated by reference from Levitz Furniture Incorporated's
quarterly report on Form 10-Q for the quarter ended December 31,
1998.
(15) Incorporated by reference to Form 8-K filed July 2, 1999.
(16) Incorporated by reference from Levitz Furniture Incoporated
quarterly report on Form 10-Q for the quarter ended June 30, 1999.
(17) Incorporated by reference from Levitz Furniture Incoporated
quarterly report on Form 10-Q for the quarter ended September 30,
1999.
(18) Incorporated by reference from Levitz Furniture Incoporated
quarterly report on Form 10-Q for the quarter ended December 31,
1999.
61
