SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 1-12046
Levitz Furniture Incorporated
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2351830
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7887 North Federal Highway, Boca Raton, FL 33487-2799
------------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
(561) 994-6006
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On July 31, 2000, there were 30,071,621 shares of the registrant's Common Stock
outstanding of which 26,497,959 shares were Voting Common Stock and 3,573,662
shares were Non-Voting Common Stock, with 249,007 shares held by the registrant
in its treasury.
<PAGE>
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT
TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE 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 QUARTERLY REPORT ON FORM 10-Q.
LEVITZ FURNITURE INCORPORATED AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2000
<TABLE>
<CAPTION>
Table of Contents Page
----------------- ----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets.............................................. 3
Consolidated Condensed Statements of Operations.................................... 4
Consolidated Condensed Statements of Cash Flows.................................... 5
Notes to Consolidated Condensed Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of Operations........................................................... 12
Liquidity and Capital Resources.................................................... 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................. 17
Signatures ............................................................................. 18
Exhibit Index............................................................................. 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
LEVITZ FURNITURE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
--------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,597 $ 2,891
Receivables 19,865 21,340
Inventories 87,298 80,293
Deposits and prepaid expenses 5,863 4,347
Income taxes receivable 12 8
--------- ---------
Total current assets 115,635 108,879
--------- ---------
PROPERTY AND EQUIPMENT, net 34,013 34,075
--------- ---------
PROPERTY UNDER CAPITAL LEASES, net 27,203 27,772
--------- ---------
OTHER ASSETS:
Intangible leasehold interests 4,902 5,085
Property held for disposal 300 2,250
Other 24,157 21,321
--------- ---------
29,359 28,656
--------- ---------
$ 206,210 $ 199,382
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdrafts $ 12,226 $ 10,210
Current portion of obligations under capital leases 307 351
Accounts payable, trade 33,170 23,558
Accrued expenses and other liabilities 71,986 84,491
Deferred income taxes 31 31
DIP Facility 95,843 77,392
--------- ---------
Total current liabilities 213,563 196,033
--------- ---------
OBLIGATION UNDER CAPITAL LEASES, net of current portion 25,875 25,946
--------- ---------
OTHER NONCURRENT LIABILITIES 13,945 15,078
--------- ---------
DEFERRED INCOME TAXES 6,982 6,982
--------- ---------
LIABILITIES SUBJECT TO COMPROMISE 302,418 302,424
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, at par value 303 303
Capital in excess of par 213,560 213,560
Retained earnings (deficit) (570,135) (560,643)
Treasury stock, 249,007 shares at cost (301) (301)
--------- ---------
Total stockholders' deficit (356,573) (347,081)
--------- ---------
$ 206,210 $ 199,382
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
3
<PAGE>
LEVITZ FURNITURE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 128,389 $ 119,988
------------ ------------
Costs and expenses:
Cost of sales 71,803 68,101
Selling, general and administrative expenses 57,129 49,735
Depreciation and amortization 1,954 2,921
Interest expense, net 4,709 7,223
------------ ------------
135,595 127,980
------------ ------------
Loss before reorganization items and income taxes (7,206) (7,992)
------------ ------------
Reorganization items:
Loss on store closings 600 --
Professional fees 1,686 1,064
------------ ------------
2,286 1,064
------------ ------------
Loss before income taxes (9,492) (9,056)
Income tax -- --
------------ ------------
Net loss $ (9,492) $ (9,056)
============ ============
Net loss per common share $ (0.32) $ (0.30)
============ ============
Weighted average number of common shares outstanding 30,071,621 30,071,621
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
4
<PAGE>
LEVITZ FURNITURE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,492) $ (9,056)
--------- ---------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,205 1,750
Amortization 749 1,171
Gain on sale of property and equipment and
other long-term assets (3) (17)
Pension expense (175) (13)
Reorganization items 600 --
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables 1,475 1,745
Inventories (7,005) (2,770)
Deposits and prepaid expenses (1,516) (771)
Other, net (2,594) (1,391)
Increase (decrease) in:
Accounts payable, trade 9,612 1,669
Accrued expenses and other liabilities (13,728) (10,206)
Income taxes payable (4) (16)
Other noncurrent liabilities 104 (272)
--------- ---------
Total adjustments (11,280) (9,121)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (20,772) (18,177)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,143) (1,276)
Proceeds from sale of property and equipment and other assets 1,269 75,572
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 126 74,296
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under DIP Facility 162,661 174,342
Repayments under DIP Facility (144,210) (223,183)
Principal payments on long-term debt -- (6,352)
Principal payments under capital lease obligations (115) (252)
Increase in cash overdrafts 2,016 (175)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 20,352 (55,620)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (294) 499
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,891 3,046
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,597 $ 3,545
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
5
<PAGE>
LEVITZ FURNITURE INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
1. CHAPTER 11 PROCEEDINGS AND BASIS OF PRESENTATION:
On September 5, 1997 (the "Petition Date"), Levitz Furniture
Incorporated, a Delaware corporation ("LFI"), and 11 of its
subsidiaries (collectively, the "Debtors"), including, Levitz Furniture
Corporation, a Florida corporation and wholly-owned subsidiary of LFI
("Levitz"), 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 Plan contemplated a management agreement between Seaman
Furniture Company, Inc. ("Seaman") and LFI (the "Management Agreement")
and a shared services agreement between Seaman and LFI (the "Shared
Services Agreement").
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.
On August 10, 2000, Levitz announced that it had been advised that the
parties to the Chancery Court action had reached agreement on the terms
of a settlement of that litigation. Upon satisfaction and performance
of the conditions to the settlement, Levitz and Seaman will be able to
proceed with negotiation of a transaction to combine operations that
would form the basis for an amended plan of reorganization. Levitz
intends to proceed with such a plan of reorganization. The ability of
the Company to obtain confirmation of its amended plan of
reorganization will be dependent upon, among other things, obtaining
additional new capital and negotiating appropriate working capital and
private label credit card agreements.
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
6
<PAGE>
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
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 June 30, 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 June 30, 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.
Levitz Furniture Incorporated, a Delaware corporation, was incorporated
in December 1984 for the purpose of acquiring Levitz Furniture
Corporation (which together with its subsidiaries are collectively
referred to as "Levitz").
In the opinion of Management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments consisting of
normal recurring accruals necessary to present fairly the financial
position as of June 30, 2000; the results of operations and cash flows
for the periods then ended. The results of operations for the period
ended June 30, 2000, are not necessarily indicative of the results to
be expected for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with
the financial statements and notes thereto included in LFI's unaudited
financial statements for the year ended March 31, 2000, which is
included in its Form 10-K.
7
<PAGE>
2. REVENUE RECOGNITION:
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 June 30, 2000, the pre-tax
amount of the one-time non-cash charge is estimated to have been
between $4.0 to $6.0 million. The cumulative effect of the change
represents the deferral of previously recorded revenue, net of cost of
sales and direct selling costs, related to merchandise that had not
been delivered to the customer as of June 30, 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.
3. 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 Commercial Corp. ("BTCC") as agent. The DIP Facility approved by
the Bankruptcy Court provides for up to $140.0 million of availability.
The DIP Facility contained revolving loans of $85.0 million and
overadvance term loans of $55.0 million. Letter of Credit obligations
under the revolving DIP Facility were 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.
The Company does not currently have any other source of financing to
support its cash flows beyond the December 31, 2000 maturity of this
facility.
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%. Levitz is required to pay
an unused line fee of 0.50%, and a letter of credit fee of 2.0%. The
maximum borrowings, excluding the overadvance 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)
less any fixed asset sublimit.
The overadvance term loan bears interest at 16%, payable monthly, and
also requires a monthly collateral management fee equal to .75% of the
funded balance of the overadvance term loan. The collateral management
fee is paid by issuing secondary notes equal to the amount of the fee
due each month. The secondary notes also bear interest at 16%, payable
monthly, and are subject to the monthly collateral management fee which
is payable through issuance of additional secondary notes.
At June 30, 2000, the outstanding balances under the DIP facility were
$60.2 million under the revolver, $35.0 million under the overadvance
term loan and $0.6 million of secondary notes.
The DIP Facility is secured by substantially all of the assets of
Levitz and a perfected pledge of stock of Levitz and all Levitz
subsidiaries. The DIP Facility contains restrictive covenants
including, among other things, the maintenance of minimum earnings
before interest, taxes, depreciation and amortization as defined
(EBITDA), limitations on the incurrence of additional indebtedness,
liens, contingent obligations, sale of assets, and a prohibition on
paying dividends.
8
<PAGE>
On June 21, 2000, the Bankruptcy Court approved the Eighteenth
Amendment to the Agreement which (i) extended the DIP Facility to
December 31, 2000, (ii) decreased the availability of the Revolving
Loans and Letters of Credit to no more than $85 million, (iii) waived
violations of EBITDA covenants required as of March 31, 2000 and set
minimum EBITDA at negative $2,000,000 and $0 for the three and six
month periods ending June 30 and September 30, 2000, respectively and
(iv) provided for an increase in the Overadvance Term Loan commitment
to a total of $45 million.
On August 10, 2000, the Bankruptcy Court approved the Nineteenth
Amendment to the Agreement which (i) increased the overadvance term
commitment to $55 million and (ii) modified the borrowing base fixed
asset sublimit definition to provide for a reduction in the borrowing
base in the amount equal to any net proceeds from the sale of real
property, and (iii) amended the terms of the overadvance term loan to
permit the payment of a .75% collateral management fee on the
outstanding balance of any secondary notes which are issued as
payment-in-kind for the amount of the monthly collateral management
fee. The Company had borrowed the full $55 million available under the
overadvance term loan as of August 18, 2000.
Levitz is currently negotiating with the lenders a new amendment to the
DIP Facility, which would eliminate the requirement for the fixed asset
sublimit and result in an increased availability under the DIP Facility
of $6.1 million. In addition, the overadvance term loan would be
amended to require all prospective payments of interest be made by
payment-in-kind issuance of secondary notes equal to the 16% cash
interest that would otherwise be payable monthly.
Although LFI and Levitz are currently in compliance with the DIP
Facility, Management believes that Levitz must obtain additional
financing and/or other contract concessions to remain in compliance
with the DIP Facility in the near future. No assurances can be given
that additional financing and/or other contract concessions can be
obtained.
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 or
LIBOR rates. The change in annual cash flow and earnings resulting from
a 1% increase or decrease in interest rates based on outstanding
borrowings at June 30, 2000 would be approximately $0.6 million
assuming other variables remained constant.
4. LIABILITIES SUBJECT TO COMPROMISE:
The principal categories of obligations classified as liabilities
subject to compromise under reorganization proceedings are identified
below. The amounts below in total may vary significantly from the
stated amount of proofs of claim that will be filed with the Court and
may be subject to future adjustment depending on Court action, further
developments with respect to potential disputed claims, determination
as to the value of any collateral securing claims, or other events.
Additional claims may arise from the rejection of additional real
estate leases and executory contracts by the Debtors.
9
<PAGE>
June 30,
2000
(Dollars in
Liabilities Subject to Compromise thousands)
--------------------------------- ----------
Accounts payable, trade $ 38,901
Accrued expenses 15,310
13.375% Senior Notes due 10/15/98 96,031 (1)
9.625% Senior Subordinated Notes due 7/15/03 101,337 (1)
Senior Deferred Coupon Debentures due 6/15/02 8,716 (1)
Reserve for lease rejection claims 20,432
Executive retirement and employment agreements 17,429 (2)
General liability claims 736
Reserve for previous store closings 1,353
Common area maintenance 234
Real estate taxes 1,435
Personal property taxes 504
-------------------
$302,418
===================
(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 pre-petition debt without Court approval or until
a plan of reorganization providing for the repayment terms has been
confirmed by the Court and becomes effective. Interest on pre-petition
unsecured obligations has not been accrued after the Petition Date
except that interest expense and principal payments will continue to be
recorded on capital lease obligations unless the Debtors reject the
leases. If a capital lease is rejected the obligation will be limited
to the lease rejection claim. Contractual interest expense of $5.8
million was not recorded on certain pre-petition debt for the three
month periods ended June 30, 2000 and 1999.
5. 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 $19.9 million
at June 30, 2000, and gave administrative expense status to
substantially all obligations of Levitz arising under the Merchant
Agreement.
At June 30, 2000, Household's portfolio balance was $450.5 million.
Levitz recorded income from the Merchant Agreement of $5.6 million and
$10.2 million for the three month periods ended June 30, 2000 and 1999,
respectively.
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 3.5% of all amounts
financed up to a stipulated dollar amount. 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 $3.5 million to $5.5 million.
10
<PAGE>
6. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS:
Supplemental disclosures of cash flow information (dollars in
thousands):
Three Months Ended
June 30,
-----------------------------------------
2000 1999
--------------- ---------------
Interest paid $ 4,755 $ 8,569
=============== ===============
Income tax, net $ 4 $ 17
=============== ===============
7. LOSS PER COMMON SHARE:
Common stock equivalents consist of stock options, restricted stock and
warrants. As of June 30, 2000 and 1999, there were common stock
equivalents outstanding for 5,781,490 and 6,166,865 shares,
respectively. All common stock equivalents have an antidilutive impact
on LFI's loss from continuing operations for the periods presented and,
therefore, are not included in LFI's computations of loss per share.
8. SUBSEQUENT EVENTS:
On August 10, 2000, Levitz announced it had been advised of a
settlement of the shareholder litigation pending in the Delaware Court
of Chancery between Seaman Furniture Company, Inc. ("Seaman") minority
shareholders and parties to the dispute. The satisfaction and
performance of the conditions to the settlement would free Levitz and
Seaman to proceed with the negotiation of a transaction to combine
operations that would form the basis for a consensual plan of
reorganization of Levitz. Although it is expected that both Levitz and
Seaman will continue to operate under their existing banners, the
capital structure of the new or combined operations has not yet been
determined.
On August 10, 2000, Management announced a plan to close six
under-performing stores in the Boston Market, Reading, PA and
Bakersfield, CA. These stores are expected to be closed by October
2000. The pre-tax charge for the store closings is estimated to be
$15.6 million and will include non-cash charges of $12.4 million. Cash
charges will include severance pay estimated at $0.6 million and
continuing expenses estimated at $2.6 million.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Operations
General
On September 5, 1997 (the "Petition Date"), Levitz Furniture Incorporated, a
Delaware corporation ("LFI"), and 11 of its subsidiaries (collectively, the
"Debtors"), including, Levitz Furniture Corporation, a Florida corporation and
wholly-owned subsidiary of LFI ("Levitz"), filed voluntary petitions for relief
under Chapter 11, Title 11 of the United States Code (the "Bankruptcy Code")
with the United States Bankruptcy Court for the District of Delaware,
Wilmington, Delaware 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.
Comparison of Operations
The following table sets forth LFI's results of operations expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Percentage of Net Sales
----------------------------------------
Three Months Ended
June 30,
----------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales 100.0 % 100.0 %
Cost of sales 55.9 56.8
------------ ------------
Gross profit 44.1 43.2
Selling, general and administrative expenses 44.5 41.4
Depreciation and amortization 1.5 2.4
Interest expense 3.7 6.0
------------ ------------
Loss before reorganization items and income taxes (5.6) (6.6)
Reorganization items 1.8 0.9
------------ ------------
Loss before income taxes (7.4)% (7.5)%
============ ============
Comparable store sales increase / (decrease) 6.8 % (0.6)%
============ ============
</TABLE>
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<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Net sales of $128.4 million for the period ended June 30, 2000 increased $8.4
million or 7.0% from net sales of $120.0 million in the same period for the
prior year. Comparable store sales increased by approximately $8.1 million or
6.8% as compared to the prior year. Four of five markets in the East Region
reported sales increases, with overall East Region comparable store sales
increasing by 3.2%. Eight of nine markets in the West Region reported sales
increases, with overall West Region comparable store sales increasing by 9.6%.
The Company opened one new store, located in Valencia, CA, in May 1999.
Gross profit increased $4.7 million or 9.0% for the three month period ended
June 30, 2000 as compared to the same prior year period. Year to date gross
margin has improved to 44.1% in the current year as compared to 43.2% in the
prior year, an improvement of 0.9%.
Total selling, general and administrative (SG&A) expense, excluding the effects
of the finance income from the private label credit card program, for the three
month period ended June 30, 2000, increased $2.8 million or 4.6% over the same
prior year period. SG&A expense before finance income represented 49.0% and
50.1% of sales for the three month periods ended June 30, 2000 and 1999,
respectively.
Comparable store controllable expenses increased by $2.0 million or 6.0% and
represented 27.7% of sales as compared to 27.9% in the prior three month period
ended June 30. While some of the increase was related to the 6.8% increase in
comparable store sales, unfavorable trends in controllable expenses continued in
selected markets related to warehouse consolidation inefficiencies. Actions,
including the closing of stores in the Boston Market, Reading PA and Bakersfield
CA, have been taken, or are scheduled to take place shortly, and are expected to
effect improvements in the controllable expense structure in the near future.
Comparable store occupancy expense and other fixed expenses increased $2.2
million and represented 7.5% of sales in the current three month period ended
June 30 as compared to 6.2% of sales in the same prior year period.
Approximately $1.8 million of this increase is related to higher rent being paid
on properties involved the sale/leaseback and lease assignment transactions
completed last year. The proceeds from these transactions were used to reduce
outstanding debt, resulting in significantly lower interest expense. The
remainder of the increase is directly related to a 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 three month period ended June 30 is less than the
respective prior year period due to the change in accounting for those leases.
Comparable store advertising expense, including the cost of finance discounts
related to credit promotion events, decreased approximately $1.5 million and
represented 13.7% of sales in the current three month period ended June 30, 2000
as compared to 15.9% of sales in the same prior year period. The Company
continues to make increased usage of TV and newspaper media while reducing the
usage of preprints and radio as compared to the prior year. Credit promotion
expense increased approximately $1.8 million or 44.1% over the same three month
period last year.
Finance income, including the closed store segment of the portfolio, declined by
approximately $7.3 million from the amount reported in the prior three month
period ended June 30, 1999. The decline reflected a decrease in net interest
yield on the portfolio (approximately $2.5 million), lower income from fees and
insurance (approximately $3.7 million) and higher bad debt expense
(approximately $2.5 million). Lower servicing costs of approximately $1.5
million offset these factors. A new higher penalty fee structure for bad checks
and late fees had been introduced in December 1998 which resulted in a
significant increase in this income source in the early months of 1999. As a
result of the declining portfolio size and improved customer compliance, such
fees represent a lower portion of total income on the credit card portfolio in
the current year period. The higher bad debt expense is primarily associated
with losses related to closed store portfolio accounts. The Company accrued at
March 31, 2000, the estimated loss related to the closed store segment of the
credit card program. Approximately $2.6 million of the loss reserve was offset
against the portfolio income for the three month period ended June
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<PAGE>
30, 2000, such that the reported finance income for such period was
approximately $4.6 million lower than the respective prior year period.
Reorganization items for the three month period ended June 30, 2000, included a
charge of $0.6 million for the write-down on two previously closed stores.
Professional fees and other expenses related to bankruptcy services rendered
during the three month periods ended June 30, 2000 and 1999 were $1.7 million
and $1.1 million, respectively.
LFI has not recorded any tax benefits for the losses incurred during the periods
ended June 30, 2000 and 1999. LFI does not anticipate recording any tax benefit
for the remainder of Fiscal 2001, subject to changes in operating performance.
As a result of the aforementioned factors, net loss for the period ended June
30, 2000 amounted to $9.5 million or 7.4% of net sales as compared to net loss
of $9.1 million or 7.5% of net sales for the same period of the prior year.
Liquidity and Capital Resources
Cash Flows
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. LFI's only
outstanding obligations are $8.7 million of Senior Deferred Coupon Debentures
due June 15, 2002, which includes accrued interest through September 4, 1997,
that are unsecured and are classified as liabilities subject to compromise.
Levitz's primary sources of liquidity are cash flow 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 the quarter ended June 30, 2000, Levitz used approximately $7.1 million
of net cash flow in operations before changes in operating assets and
liabilities. Changes in operating assets and liabilities further reduced net
cash flow from operations by $13.7 million primarily due to a significant
reduction of accrued expenses and other liabilities. The reduction of accrued
expenses consisted of payments applied against closed store reserves of $3.9
million and a reduction of other items of $9.8 million primarily related to the
private label credit card program with Household Bank.
Cash provided by investing activities of approximately $1.3 million for the
period ended June 30, 2000 was related to proceeds from asset sales of closed
facilities. These proceeds were applied as repayments to the DIP Facility as
required by the agreement.
Levitz's total capital expenditures were approximately $1.1 million during the
period ended June 30, 2000. Levitz spent $0.7 million and $0.4 million on
existing store improvements and equipment, respectively. Management plans
provide for approximately $14.0 million for capital expenditures in the current
fiscal year of which approximately $4.9 million is for maintenance of existing
facilities and $8.3 million is for new warehouse facilities, store relocations
and new store sites. The ability to make these capital expenditures will be
subject to availability of financing and negotiating agreements with regard to
any new facilities.
Net cash used provided by financing activities amounted to $20.4 million in the
period ended June 30, 2000 and includes additional borrowings under the DIP
Facility of $18.5 million and an increase in outstanding checks and cash
overdrafts of $2.0 million. The $18.5 million increase in borrowings under the
DIP facility was comprised of a $15.7 million increase in the overadvance term
loan (including secondary notes of $0.6 million) and a net increase in the
revolver of $2.8 million.
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 Commercial Corp. ("BTCC") as agent. The DIP
Facility approved by the
14
<PAGE>
Bankruptcy Court provides for up to $140.0 million of availability. The DIP
Facility contained revolving loans of $85.0 million and overadvance term loans
of $55.0 million. Letter of Credit obligations under the revolving DIP Facility
were 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. The Company does not currently have any other source of financing to
support its cash flows beyond the December 31, 2000 maturity of this facility.
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%. Levitz is required to pay an unused line fee of 0.50%,
and a letter of credit fee of 2.0%. The maximum borrowings, excluding the
overadvance 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) less any fixed asset sublimit.
The overadvance term loan bears interest at 16%, payable monthly, and also
requires a monthly collateral management fee equal to .75% of the funded balance
of the overadvance term loan. The collateral management fee is paid by issuing
secondary notes equal to the amount of the fee due each month. The secondary
notes also bear interest at 16%, payable monthly, and are subject to the monthly
collateral management fee which is payable through issuance of additional
secondary notes.
At June 30, 2000, the outstanding balances under the DIP facility were $60.2
million under the revolver, $35.0 million under the overadvance term loan and
$0.6 million of secondary notes.
The DIP Facility is secured by substantially all of the assets of Levitz and a
perfected pledge of stock of Levitz and all Levitz subsidiaries. The DIP
Facility contains restrictive covenants including, among other things, the
maintenance of minimum earnings before interest, taxes, depreciation and
amortization as defined (EBITDA), limitations on the incurrence of additional
indebtedness, liens, contingent obligations, sale of assets, and a prohibition
on paying dividends.
On June 21, 2000, the Bankruptcy Court approved the Eighteenth Amendment to the
Agreement which (i) extended the DIP Facility to December 31, 2000, (ii)
decreased the availability of the Revolving Loans and Letters of Credit to no
more than $85 million, (iii) waived violations of EBITDA covenants required as
of March 31, 2000 and set minimum EBITDA at negative $2,000,000 and $0 for the
three and six month periods ending June 30 and September 30, 2000, respectively
and (iv) provided for an increase in the Overadvance Term Loan commitment to a
total of $45 million.
On August 10, 2000, the Bankruptcy Court approved the Nineteenth Amendment to
the Agreement which (i) increased the overadvance term commitment to $55 million
and (ii) modified the borrowing base fixed asset sublimit definition to provide
for a reduction in the borrowing base in the amount equal to any net proceeds
from the sale of real property, and (iii) amended the terms of the overadvance
term loan to permit the payment of a .75% collateral management fee on the
outstanding balance of any secondary notes which are issued as payment-in-kind
for the amount of the monthly collateral management fee. The Company had
borrowed the full $55 million available under the overadvance term loan as of
August 18, 2000.
Levitz is currently negotiating with the lenders a new amendment to the DIP
Facility, which would eliminate the requirement for the fixed asset sublimit and
result in an increased availability under the DIP Facility of $6.1 million. In
addition, the overadvance term loan would be amended to require all prospective
payments of interest be made by payment-in-kind issuance of secondary notes
equal to the 16% cash interest that would otherwise be payable monthly.
Although LFI and Levitz are currently in compliance with the DIP Facility,
Management believes that Levitz must obtain additional financing and/or other
contract concessions to remain in compliance with the DIP Facility in the near
future. No assurances can be given that additional financing and/or other
contract concessions can be obtained.
15
<PAGE>
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 or LIBOR rates. The change
in annual cash flow and earnings resulting from a 1% increase or decrease in
interest rates based on outstanding borrowings at June 30, 2000 would be
approximately $0.6 million assuming other variables remained constant.
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 $19.9 million at June 30, 2000, and gave administrative
expense status to substantially all obligations of Levitz arising under the
Merchant Agreement.
At June 30, 2000, Household's portfolio balance was $450.5 million. Levitz
recorded income from the Merchant Agreement of $5.6 million and $10.2 million
for the three month periods ended June 30, 2000 and 1999, respectively.
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 3.5% of all amounts financed up to
a stipulated dollar amount. 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 $3.5 million to
$5.5 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 Plan
contemplated a management agreement between Seaman Furniture Company, Inc.
("Seaman") and LFI (the "Management Agreement") and a shared services agreement
between Seaman and LFI (the "Shared Services Agreement").
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.
On August 10, 2000, Levitz announced that it had been advised that the parties
to the Chancery Court action had reached agreement on the terms of a settlement
of that litigation. Upon satisfaction and performance of the conditions to the
settlement, Levitz and Seaman will be able to proceed with negotiation of a
transaction to combine operations that would form the basis for an amended plan
of reorganization. Levitz intends to proceed with such a plan of reorganization.
The ability of the Company to obtain confirmation of its amended plan of
reorganization will be dependent upon, among other things, obtaining additional
new capital and negotiating appropriate working capital and private label credit
card agreements.
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,
16
<PAGE>
in general, or the effects of such case on the business of the Company or on the
interests of creditors and stockholders.
17
<PAGE>
PART II OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.73: Amendment No. 19 dated as of July 31, 2000 to
the Credit Agreements among Levitz Furniture Corporation, et
al. and BT Commercial Corporation, as Agent.
Exhibit 27: Financial Data Schedule
(b) Report on Form 8-K:
On June 28, 2000 the registrant filed a Report on Form 8-K
under "Item 5: Other Events" disclosing the issuance of the
injunction against Seaman in the Chancery Court action.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEVITZ FURNITURE INCORPORATED
(Registrant)
Date: August 21, 2000 /s/ MICHAEL McCREERY
-----------------------------------------
Michael McCreery
Senior Vice President and
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
Exhibits to Form 10-Q
Number
Exhibit Table Exhibit
------------- -------
10.73 Amendment No. 19 dated as of July 23, 1999 to the
Credit Agreements among Levitz Furniture Corporation,
et al. and BT Commercial Corporation, as agent.
27 Financial Data Schedule.
20
