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 LEVITZ AND ITS SUBSIDIARIES; (2) COMPETITIVE PRESSURE IN LEVITZ'S INDUSTRY; (3) GENERAL ECONOMIC CONDITIONS; (4) CHANGES IN THE FINANCIAL MARKETS AFFECTING LEVITZ'S FINANCIAL STRUCTURE AND LEVITZ'S COST OF CAPITAL AND BORROWED MONEY; (5) INVENTORY RISKS DUE TO CHANGES IN MARKET DEMAND OR LEVITZ'S BUSINESS STRATEGIES; (6) CHANGES IN EFFECTIVE TAX RATES; (7) YEAR 2000 RISKS; AND (8) THE UNCERTAINTIES INHERENT IN LEVITZ'S OPERATIONS. LEVITZ HAS NO DUTY UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 TO UPDATE THE FORWARD-LOOKING STATEMENTS IN THIS 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, Levitz, as debtor and debtor-in-possession, has continued to manage and operate its assets and businesses pending the confirmation of a reorganization plan or plans and subject to the supervision and orders of the Court. Because Levitz is operating as debtor-in-possession under Chapter 11 of the Bankruptcy Code, the existing directors and officers of Levitz continue to manage the operations of Levitz subject to the supervision and orders of the Court.
On July 7 1999, the Debtors filed a "Disclosure Statement" and a "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 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 Levitz 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 Levitz 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 25% 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 "Reorganized Levitz". (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.
Although the Plan of Reorganization provides for the Debtors' emergence from bankruptcy, there can be no assurances given that the Plan will be confirmed by the Court, or that such Plan will be consummated.
At this time, it is not possible to predict the outcome of the Debtors' Chapter 11 cases or their effect on the Debtors' business. Reference is made to Item 7 - "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the Report of Independent Public Accountants included on page 28 which indicates the substantial doubt about Levitz's ability to continue as a going concern.
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 June 8, 1999, 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 $653.1 million in the year ended March 31, 1999 ("Fiscal 1999"). 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 1999 was upholstery/seating 44.1%, bedroom 20.0%, occasional 11.1%, dining room (formal and casual) 12.3%, bedding 9.9%, and other 2.6%. 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 1999 the Choices Program represented approximately 9.7% 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 1999, Levitz's advertising expenditures amounted to $93.4 million or 14.3% of net sales, as compared to $108.1 million or 13.3% of net sales, for Fiscal 1998. Advertising expenditures include promotional finance fees of $28.4 million and $27.2 million in Fiscal 1999 and 1998, 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 one additional store in Fiscal 2000. 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 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 1999 and 1998, approximately 48% and 40%, respectively, of sales at Levitz's facilities were for cash (including bank credit cards), and approximately 52% and 60%, 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-eight 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 1999, 96.0% of all furniture purchases were made through the EDI system, as compared to 98.1% for the same month of the prior year. Levitz has six vendors that send invoices through EDI. 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 247 independent manufacturers. For Fiscal 1999, Levitz's top ten vendors accounted for 50.3% of purchases. 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.
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 is developing a radio-frequency ("RF") system to 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. The initial test system will be implemented in Fiscal 2000.
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 $37.6 billion in 1998. According to a leading industry publication, the nation's 100 largest furniture retailers accounted for approximately 48.0% of all furniture sales by furniture stores in the United States in 1998. According to the same publication, in 1998 Levitz represented 1.6% of total domestic furniture sales, and was the fifth 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, 1999, Levitz had 2,993 employees, of whom 946 were engaged in sales, 333 in merchandising and display, 779 in warehouse and maintenance functions and 935 in office and administrative work. As of March 31, 1999, 2,322 of Levitz's employees were full-time and 671 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.
Levitz maintains two facilities in New Jersey in which all non-management employees are represented by an affiliate of the Teamsters Union. The Union was certified as bargaining agent for the employees in August 1998. The parties are engaged in contract negotiations with that union.
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.
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, 14 other warehouse facilities were shut down and the distribution and warehousing 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) installing sophisticated sales force performance measurement tools designed to identify "best practices" within the stores and to set benchmarks for performance; and (iv) 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 a remodeling of the store in King of Prussia, Pennsylvania 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.
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) tighter controls on inventory allow Levitz to 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 is being evaluated to ensure the assortment achieves the desired breadth of selection considering quality, style and price and local market differentiation. The assortment plans will 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, and Levitz has hired a new advertising agency. 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.
ITEM 2.
ITEM 2. PROPERTIES
On June 8, 1999, 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 June 8, 1999:
OWNED LEASED ----- ------
Stores with attached Sales Support Centers............ 1 20 Stores that are detached or freestanding.............. - 43
On June 8, 1999, 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 June 8, 1999, the retail premises operated by Levitz:
- ---------- (1) The column refers to stores with attached Sales Support Centers ("WS") or to detached or freestanding stores ("ST").
(2) The Los Angeles, CA property is part of the collateral for borrowings under the DIP Facility and is pending an agreement of sale. (3) The remaining terms of the leases range from 16 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. (4) Subject to Unitary Lease described in Note 18 to the consolidated financial statements.
In addition to the above properties, as of June 8, 1999 Levitz had available for disposition nine owned and nineteen leased properties formerly operated as retail stores.
As part of its "warehouse rationalization program", the Company has completed the closing of its warehouses in Dedham, MA, Danvers, MA, Paramus, NJ, Garden City, NY, Northridge, CA, Minneapolis, MN, San Bernardino, CA, Cherry Hill, NJ, South San Francisco, CA, Hartford, CT, Redondo Beach CA, Lynwood, WA, Allentown, PA, Concord, CA and Modesto CA.
ITEM 3.
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 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 30, 1999.
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.
On July 7 1999, the Debtors filed a "Disclosure Statement" and a "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 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 Levitz 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 Levitz 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 25% 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 "Reorganized Levitz". (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.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
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 8, 1999, there were 738 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 July 7, 1999 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, 1997 $3.000 $1.438 September 24, 1997 1.688 0.219 September 30, 1997 0.516 0.391 December 31, 1997 0.250 0.234 March 31, 1998 0.359 0.344 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
The Company has insufficient information to determine the accuracy of the quotations after September 24, 1997.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with 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 declined 0.1%, 6.4% and 1.3% for the last three fiscal years ended March 31, 1999, 1998 and 1997, respectively. Comparable store sales increased 1.9% in April 1999 and decreased 2.2% and 0.9% in May and June 1999, respectively.
Operating loss was $22.0 million in Fiscal 1999 and $32.2 million in Fiscal 1998. In Fiscal 1997 operating income was $16.0 million.
The following table sets forth Levitz's results of operations expressed as a percentage of net sales for the periods indicated:
PERCENT OF NET SALES ----------------------------- YEARS ENDED MARCH 31, ----------------------------- 1999 1998 1997 ------ ------ -----
Net sales 100.0 % 100.0 % 100.0 % Cost of sales 57.6 57.5 56.6 ------ ------ ------ Gross profit 42.4 42.5 43.4 Selling, general and administrative expenses 43.0 41.5 37.9 Unusual operating expenses -- 2.0 -- Charge for store closings -- -- 0.9 Depreciation and amortization 2.7 3.0 2.9 Interest expense, net 4.5 4.8 5.7 Reorganization items 6.6 6.8 -- ------ ------ ------ Loss before income taxes (14.4) (15.6) (4.0) Income tax benefit -- 4.9 1.4 ------ ------ ------ Loss before extraordinary items (14.4) (10.7) (2.6) Extraordinary items -- (0.7) (0.2) ------ ------ ------ Net loss (14.4) (11.4) (2.8) ====== ====== ====== Comparable store sales decrease (1) (0.1)% (6.4)% (1.3)% ======= ====== ====== - ---------- (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 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 $337.2 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, Levitz incurred unusual operating expenses of $1.3 million under the provisions of an employment agreement due to the termination of an officer. 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. 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 $39.0 million or 4.8% 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 $21.9 million and $12.6 million was not recorded on certain pre-petition debt for Fiscal 1999 and 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):
1999 1998 ------ ------
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 ===== =====
Store closing charges include the write-down of assets to their net realizable value, severance pay and continuing expenses.
During Fiscal 1998, Levitz 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 $93.0 million or 11.4% of net sales for Fiscal 1998.
COMPARISON OF OPERATIONS FOR FISCAL 1998 TO FISCAL 1997
Net sales for Fiscal 1998 decreased to $812.9 million or 13.7% from $941.9 million for Fiscal 1997. Comparable store sales for Fiscal 1998 declined 6.4% from Fiscal 1997. Levitz has attempted to address the decrease in comparable store sales declines by (i) changing its merchandise lineup, (ii) making a concerted effort to liquidate older, discontinued merchandise, (iii) shifting its focus in advertising expenditures by media outlet to those deemed most effective, and (iv) closing certain underperforming stores to enable it to focus efforts and resources on key markets. In addition to the comparable store sales decline experienced during Fiscal 1998, the Company closed 24 under-performing stores.
Gross profit for Fiscal 1998 was $345.4 million, or 42.5% of net sales, as compared to $408.3 million, or 43.4% of net sales, for fiscal 1997. The decrease in gross profit percentage of net sales is attributable to the increase in items sold at lower margins that were deleted from the merchandise assortment.
Selling, general and administrative (SG&A) expenses decreased by $19.7 million or 5.5% to $337.2 million in Fiscal 1998 from $357.0 million in Fiscal 1997. The dollar decrease in SG&A expenses is primarily attributable to the reduction in costs attributable to the disposal of 24 stores during 1998.
During Fiscal 1998, Levitz incurred unusual operating expenses of $1.3 million under the provisions of an employment agreement due to the termination of an officer. 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. 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 $24.1 million in Fiscal 1998 from $27.0 million in Fiscal 1997. The decrease is primarily attributable to the retirement of depreciable assets related to closed stores and the writeoff of all goodwill.
Interest expense for Fiscal 1998 decreased to $39.0 million or 4.8% of net sales from $54.1 million or 5.7% of net sales for Fiscal 1997. 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. Contractual interest expense of $12.6 million was not recorded on certain prepetition debt for the period from September 5, 1997 through March 31, 1998.
During Fiscal 1998, Levitz recorded reorganization related expenses of $55.5 million which included $33.6 million for 24 store closings, $15.0 million for the acceleration of goodwill amortization and $6.9 million for professional services provided to Levitz and the Creditors' Committee. In Fiscal 1997, Levitz closed five satellite stores which resulted in a pre-tax charge for store closings of $8.3 million. The charge includes the reduction of the carrying value of the store assets to their estimated fair value net of selling expenses as well as reserves for future rental payments under operating lease agreements.
During Fiscal 1998 and 1997, Levitz incurred after-tax extraordinary losses of $5.8 million and $2.0 million respectively due to the write-off of deferred financing fees related to the previous bank credit agreements.
As a result of the aforementioned factors, net loss was $93.0 million or 11.4% of net sales for Fiscal 1998 as compared to $26.5 million or 2.8% of net sales for Fiscal 1997.
SEASONALITY AND INFLATION
Management does not believe that seasonal variation has a significant impact on its business. Levitz has generally been able to pass along any price increases relating to inflation. Accordingly, the effect of inflation, if any, on Levitz's results of operations has been minor.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
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 1999, cash flow used in operating activities before changes in operating assets and liabilities was $47.0 million. Cash used in operating activities for the months of June 1998 and December 1998 was $22.0 million or 47.1% of the total cash used. Both months were affected by the recording of cash reserves for store closings of $12.6 million. This was favorably offset by corresponding increase in cash provided by the change in operating assets and liabilities.
Cash flows provided by changes in operating assets and liabilities was $45.9 million for Fiscal 1999. Changes in operating assets and liabilities were favorably impacted by the decrease in inventory of $46.1 million and reduction in receivables of $3.6 million primarily due to the closing of forty-two stores. The increase of accrued expenses of $10.8 million also favorably impacted operating assets and liabilities. This was due primarily to the change in payment terms for promotional discount fees under the Merchant Agreement with Household as compared to the GECC Agreement. This was offset by reductions in other accrued expenses and liabilities associated with store closings. Changes in operating assets and liabilities were unfavorably impacted by reductions of $14.9 million in trade payables and other current assets, also due primarily to the store closings.
Net cash used in financing activities amounted to $14.1 million in Fiscal 1999, and includes net repayments under the DIP Facilities of $4.2 million, principal payments on long-term debt and capital lease obligations of $2.3 million and a decrease in the cash overdraft position of $7.6 million which is reflective of the decrease in inventory levels and the timing of payments. Net cash used in financing activities amounted to $19.4 million in Fiscal 1998 and included net repayments under the credit facilities of $1.4 million, principal payments on long-term debt and capital lease obligations of $11.7 million, a decrease in cash overdraft position of $3.1 million and payment of deferred financing fees for the DIP Facility of $3.2 million.
Cash provided by investing activities for Fiscal 1999 includes the proceeds from the sale of eight previously closed stores. Proceeds in Fiscal 1998 include asset sales of the JMS stores, the Company's Boca Raton headquarters, and other closed facilities. All of these proceeds were applied as repayments to the DIP Facilities as required by the agreement.
Levitz's capital expenditures (other than for capitalized leases) totaled approximately $7.8 million, $14.1 million and $11.0 million during Fiscal 1999, 1998 and 1997, respectively. Capital expenditures during Fiscal 1999 were for existing store improvements and equipment and the opening of one new store in May 1999. Management plans to spend approximately $7.0 million for capital expenditures in Fiscal 2000 of which approximately $2.9 million is for maintenance of existing facilities. Levitz expects to relocate one additional store in Fiscal 2000.
Debt
LFI, Levitz and substantially all of its subsidiaries, as debtors-in-possession, are parties to a Postpetition Credit Agreement dated as of September 5, 1997 (the "DIP Facility") with BT Commercial Corporation ("BTCC") as agent. The DIP Facility was approved by the Court and included an initial commitment of $260.0 million that was comprised of revolving notes of $223.6 million and a term note of $36.4 million. Letter of Credit obligations under the revolver portion of the DIP Facility are limited to $25.0 million. The DIP Facility is intended to provide Levitz with the cash and liquidity to conduct its operations and pay for merchandise shipments at normal levels during the course of the Chapter 11 proceedings.
In September 1998, the DIP Facility was amended to include, among other things, a new term loan in the principal amount of $22.0 million under a second term note. The proceeds from the second term note were used to pay down the revolver portion of the DIP Facility.
In December 1998, the Company obtained a waiver to the DIP Facility eliminating the minimum EBITDA requirements through March 31, 1999.
In March 1999, the DIP Facility was amended to include, among other things:
(1) The availability of an additional $10.0 million loan ("Overadvance Term Loan") from a third party which would be drawn if the borrowing base availability declined to $12.0 million. If drawn, the proceeds from the Overadvance Term Loan would be used to reduce borrowings under the revolver portion of the DIP Facility. (2) Set minimum EBITDA requirements for April 1999 and restrict capital expenditures through May 1999. (3) Extend the DIP Facility expiration date to June 7, 1999.
In May 1999, the DIP Facility was amended to include, among other things:
(1) An extension of the DIP Facility expiration date to December 31, 1999. (2) A consent to the repayment of the term notes from the net proceeds of the Sale-Leaseback Transaction. (3) The establishment of the fixed asset sublimit under the borrowing base calculation at $36.0 million, which is reduced by scheduled reductions upon disposition of specific properties and for the total elimination of the fixed asset sublimit by September 1, 1999. (4) A reduction in the total commitment under the DIP Facility to $125.0 million. (5) Minimum EBITDA requirements for June and September 1999.
The May 1999 amendment was subject to the closing of the Sale-Leaseback Transaction described in Note 18 to the consolidated financial statements. On June 8, 1999, when the Sale-Leaseback Transaction was closed, the term notes of $58.4 million that accrued interest at sixteen percent were paid in full.
On July 7, 1999, when the Bulk Sale Transaction was closed, net proceeds of $18.1 million were used to pay down the revolver portion of the DIP Facility. As a result of the transaction, the fixed asset sublimit was reduced to approximately $17.1 million by the amount of the net proceeds. After the closing of the Bulk Sale Transaction on July 7, 1999, the total outstanding borrowings under the DIP Facility were approximately $74.6 million and the excess availability was approximately $18.2 million. See Note 18 to the consolidated financial statements for a description of the Bulk Sale Transaction.
The Company is in negotiations with its lenders to amend the DIP Facility to include, among other things, a reduction in the EBITDA requirements for June and September 1999 and the extension of the fixed asset sublimit expiration date to September 30, 1999. No assurances can be given that such amendment will be successfully negotiated.
Levitz is aggressively marketing for sale additional properties. At the current time there are fourteen properties under agreement of sale, letters of intent or other types of offers estimated to be $34.3 million of gross proceeds. No assurances can be given that a sufficient number of these transactions will close prior to the expiration of the fixed asset sublimit on September 30, 1999. Based on facts and circumstances at that time, Levitz may have to request an extension of the fixed asset sublimit expiration date or obtain additional financing. No assurances can be given that an extension of the expiration date would be granted or that additional financing could be obtained.
Loans made under the revolving notes bear interest, at Levitz's option, at a rate equal to either Bankers Trust Company'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 have been deferred and were amortized over the original life of the DIP Facility.
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 July 7, 1999 would be approximately $0.7 million assuming other variables remained constant.
The maximum borrowings, excluding the term commitments, under the DIP Facility are limited to 85% of eligible accounts receivable, 75% of eligible inventory (as defined in the DIP Facility) and a fixed asset sublimit which is permanently reduced as the proceeds from the sale of fixed assets and leasehold interests are received. Qualification of accounts receivable and inventory items as "eligible" is subject to unilateral change at the discretion of the lenders.
The DIP Facility is secured by substantially all of the assets of Levitz and its subsidiaries and a perfected pledge of stock of all Levitz's subsidiaries. The DIP Facility contains restrictive covenants including, among other things, the maintenance of minimum earnings before interest, taxes, depreciation and amortization as defined (EBITDA), limitations on the incurrence of additional indebtedness, liens, contingent obligations, sales of assets, and a prohibition on paying dividends. The lenders under the DIP Facility have a super-priority administrative expense claim against the estate of the Debtors.
In connection with the Plan of Reorganization, Levitz expects to obtain a post-confirmation financing commitment before December 31, 1999, which would be an asset based revolving credit facility having substantially the same advance rate as the DIP Facility. Levitz will seek a commitment in an amount sufficient to execute the Plan of Reorganization. There can be no assurances given that such a commitment will be obtained.
All mortgages have been classified as current due to the Sale-Leaseback Transaction and Bulk Sale Transaction as described in Note 18 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.
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 $6.1 million at March 31, 1999, 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, 1999, Household's portfolio balance was $549.8 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 $13.2 million, $7.9 million and $12.8 million, respectively for the years ended March 31, 1999, 1998 and 1997. The decrease in recorded income for the period ended March 31, 1998 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.
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. 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
The Company believes that cash on hand, amounts available under the DIP Facility, as amended, and funds from operations will enable the Company to meet its current liquidity and capital expenditures requirements.
On July 7 1999, the Debtors filed a "Disclosure Statement" and a "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 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 Levitz 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 Levitz 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 25% 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 "Reorganized Levitz". (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.
In connection with the Plan of Reorganization, Levitz expects to obtain a post-confirmation financing commitment before December 31, 1999, which would be an asset based revolving credit facility having substantially the same advance rate as the DIP Facility. Levitz will seek a commitment in an amount sufficient to execute the Plan of Reorganization. There can be no assurances given that such a commitment will be obtained.
Although the Plan of Reorganization provides for the Debtors' emergence from bankruptcy, there can be no assurances given that the Plan will be confirmed by the Court, or that such Plan will be consummated.
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.
YEAR 2000
Levitz recognizes the need to ensure its operations will not be adversely impacted by Year 2000 technology failures. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk.
During Fiscal 1998, management established a team to oversee the Company's Year 2000 date conversion project. The project is composed of the following stages: 1) assessment of the problem; 2) prioritization of systems; 3) remediation activities; and 4) compliance testing. A plan of corrective action using both internal and external resources to enhance or replace the system for Year 2000 compliance has been implemented. Internal resources consist of permanent employees of the Company's Information Systems department, whereas external resources are composed of contract programming personnel that are directed by the Company's management.
The majority of the financial and operating systems have been completed through remediation and are in the compliance testing stage.
Since the project's beginning in Fiscal 1998, the Company has incurred approximately $1.4 million in expenses, excluding in-house salaries, wages and benefits, for hardware and software and $0.2 million for maintenance and development of operational systems to alleviate potential Year 2000 problems. The remaining expenditures are expected to be approximately $0.6 million. Purchased hardware, software and the costs of implementation are capitalized and amortized over their useful lives while other costs of remediation associated with the Year 2000 project are being expensed as incurred.
The remaining cost of the Company's Year 2000 project and the dates on which the Company plans to complete the Year 2000 compliance program are based on management's current estimates, which are derived utilizing numerous assumptions. Such assumptions include, but are not limited to, the continued availability of certain resources and the readiness of third-parties through their own remediation plans. These assumptions are inherently uncertain and actual events could differ significantly from those anticipated.
The Company is also communicating with vendors, financial institutions and others with which it does business to coordinate Year 2000 conversion. There can be no assurance, however, that the systems of these other companies will be converted in a timely manner, or that any such failure to convert by another company would not have an adverse effect on the Company's systems and operations. Management believes the Year 2000 compliance issue is being addressed properly by the Company to prevent any material adverse operational or financial impacts. However, if such enhancements are not completed in a timely manner, the Year 2000 issue may have a material adverse impact on the operations of the Company. The Company is currently assessing the consequences of its Year 2000 project not being completed on schedule or its remediation efforts not being successful. Management is developing contingency plans to mitigate the effects of problems experienced by the Company, key vendors or service providers related to the Year 2000. Contingency plans may include the purchase of additional levels of inventory as a precaution based on the Company's expected needs. Management expects to complete its Year 2000 contingency planning during the second quarter of Fiscal 2000.
INCOME TAXES
Levitz has a Federal cumulative net operating loss ("NOL") carry-forward of $163.4 million as of March 31, 1999. Levitz has recorded a full valuation allowance against the NOL for the fiscal year ended March 31, 1999. In prior years, Levitz had recorded a deferred tax asset (benefit) for its cumulative NOL as of the fiscal year ended March 31, 1998. Levitz has always provided a full valuation allowance against state net operating losses. The cumulative NOL net benefit at March 31, 1999 was $24.7 million. The Sale-Leaseback Transaction and Bulk Sale Transaction as described in Note 18 to the consolidated financial statements are estimated to utilize approximately $15.9 million of the cumulative NOL net benefit. The remaining cumulative NOL net benefit of $8.8 million is supported by deferred tax credits that are projected to turn during the carry-forward periods. Levitz 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 Levitz emerges from bankruptcy.
1999 1998 1997 ---- ----- ----- Effective Tax Rate -- 31.1% 35.5%
The effective tax benefit decreased from 35.5% in Fiscal 1997 to 31.1% in Fiscal 1998 due to permanent differences arising from the write-off of goodwill and for non-deductible expenses.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----
Report of Independent Public Accountants................................. 28
Consolidated Balance Sheets.............................................. 29
Consolidated Statements of Operations.................................... 30
Consolidated Statements of Stockholder's Deficit......................... 31
Consolidated Statements of Cash Flows.................................... 32
Notes to Consolidated Financial Statements............................... 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Levitz Furniture Corporation:
We have audited the accompanying consolidated balance sheets of Levitz Furniture Corporation (a Florida corporation) and subsidiaries, debtor-in-possession (the "Company") as of March 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended March 31, 1999. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Levitz Furniture Corporation and subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles.
As discussed in Note 1, on September 5, 1997 the Company filed a voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy Code. 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.
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.
ARTHUR ANDERSEN LLP
Philadelphia, Pa. July 8, 1999
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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, Levitz, as debtor and debtor-in-possession, has continued to manage and operate its assets and businesses pending the confirmation of a reorganization plan or plans and subject to the supervision and orders of the Court. Because Levitz is operating as debtor-in-possession under Chapter 11 of the Bankruptcy Code, the existing directors and officers of Levitz continue to manage the operations of Levitz 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 July 7 1999, the Debtors filed a "Disclosure Statement" and a "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 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 Levitz 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 Levitz and such creditor shall have agreed in writing.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
(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 25% 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 "Reorganized Levitz". (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.
Although the Plan of Reorganization provides for the Debtors' emergence from bankruptcy, there can be no assurances given that the Plan will be confirmed by the Court, or that such Plan will be consummated.
The exclusivity period to prepare a plan of reorganization will expire on September 30, 1999. After the expiration of the exclusivity period, creditors will have the right to propose alternative plans of reorganization.
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 Levitz'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.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
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. Levitz has notified all known claimants subject to the August 10, 1998 bar date of their need to file a proof of claim with the Court. A bar date is the date by which claims against Levitz 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, 1999, the Debtors had rejected leases for 17 store locations, reached agreement with the landlord on one store location to terminate without liability and assumed and assigned leases on three 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 24, 1999. 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, 1999. 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 Incorporated (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 Levitz and its wholly-owned subsidiaries. All material inter-company accounts and transactions are eliminated in consolidation.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
REVENUE RECOGNITION POLICY
Levitz 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.
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 which 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 $8.8 million and $11.9 million lower than first-in, first-out (FIFO) costs at March 31, 1999 and 1998, respectively. See additional discussion in Note 7 to the consolidated financial statements.
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.
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 $32.5 million and $17.8 million at March 31, 1999 and 1998, respectively and is classified in other assets.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
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 $9.1 million and $12.3 million as of March 31, 1999 and 1998, respectively.
LONG-LIVED ASSETS
In Fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). This statement requires recognition of impairment losses for long-lived assets whenever events or changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future undiscounted cash flows associated with such assets. The measurement of the impairment losses to be recognized is based on the difference between the fair values and the carrying amounts of the assets. SFAS No. 121 also requires any long-lived assets held for sale be reported at the lower of carrying amount or the fair value less selling cost. The adoption of this statement resulted in a $2.4 million charge during Fiscal 1997.
GOODWILL
Goodwill was written-off during the fiscal year ended March 31, 1998 due to the sale of substantially all the assets of John M. Smyth Company (JMS) on January 9, 1998 and the impaired financial condition of LFI. JMS was a wholly-owned subsidiary of Levitz. Prior to the write-off, goodwill was being amortized on a straight-line basis over forty years.
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 year ended March 31, 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.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
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, 1999, 1998 and 1997 was $93.4 million, $108.1 million and $102.1 million, respectively. Advertising expenditures include promotional financing fees of $28.4 million, $27.2 million and $28.3 million for fiscal years ended March 31, 1999, 1998 and 1997, 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 Levitz's experience.
STOCK-BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which provides for a fair value based method of accounting for grants of equity instruments to employees or suppliers in return for goods or services. As permitted under SFAS No. 123, the Company has elected to continue to account for compensation costs under the provisions prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Levitz has not made any grants of equity instruments to employees or suppliers.
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.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
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, 1998 and 1997. 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, $23.9 million and $25.0 million for the fiscal years ended March 31, 1999, 1998 and 1997, respectively.
Certain other amounts in prior years' consolidated financial statements have been reclassified to conform to the current year's presentation.
3. CONSOLIDATED STATEMENTS OF CASH FLOWS:
Supplemental disclosures of cash flow information (dollars in thousands):
1999 1998 1997 -------- -------- -------- Cash paid/(received) during the year for: Interest $ 26,152 $ 37,853 $ 49,678 Income tax (refunds), net 36 (2,417) (6,985) Non-cash activities: Capital contributions -- -- 600
4. DEBT:
Outstanding balances under debt arrangements are as follows (dollars in thousands):
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
LFI, Levitz and substantially all of its subsidiaries, as debtors-in-possession, are parties to a Postpetition Credit Agreement dated as of September 5, 1997 (the "DIP Facility") with BT Commercial Corporation ("BTCC") as agent. The DIP Facility was approved by the Court and included an initial commitment of $260.0 million that was comprised of revolving notes of $223.6 million and a term note of $36.4 million. Letter of Credit obligations under the revolver portion of the DIP Facility are limited to $25.0 million. The DIP Facility is intended to provide Levitz with the cash and liquidity to conduct its operations and pay for merchandise shipments at normal levels during the course of the Chapter 11 proceedings.
In September 1998, the DIP Facility was amended to include, among other things, a new term loan in the principal amount of $22.0 million under a second term note. The proceeds from the second term note were used to pay down the revolver portion of the DIP Facility.
In December 1998, the Company obtained a waiver to the DIP Facility eliminating the minimum EBITDA requirements through March 31, 1999.
In March 1999, the DIP Facility was amended to include, among other things:
(1) The availability of an additional $10.0 million loan ("Overadvance Term Loan") from a third party which would be drawn if the borrowing base availability declined to $12.0 million. If drawn, the proceeds from the Overadvance Term Loan would be used to reduce borrowings under the revolver portion of the DIP Facility. (2) Set minimum EBITDA requirements for April 1999 and restrict capital expenditures through May 1999. (3) Extend the DIP Facility expiration date to June 7, 1999.
In May 1999, the DIP Facility was amended to include, among other things:
(1) An extension of the DIP Facility expiration date to December 31, 1999. (2) A consent to the repayment of the term notes from the net proceeds of the Sale-Leaseback Transaction. (3) The establishment of the fixed asset sublimit under the borrowing base calculation at $36.0 million, which is reduced by scheduled reductions upon disposition of specific properties and for the total elimination of the fixed asset sublimit by September 1, 1999. (4) A reduction in the total commitment under the DIP Facility to $125.0 million. (5) Minimum EBITDA requirements for June and September 1999.
The May 1999 amendment was subject to the closing of the Sale-Leaseback Transaction described in Note 18 to the consolidated financial statements. On June 8, 1999, when the Sale-Leaseback Transaction was closed, the term notes of $58.4 million that accrued interest at sixteen percent were paid in full.
On July 7, 1999, when the Bulk Sale Transaction was closed, net proceeds of $18.1 million were used to pay down the revolver portion of the DIP Facility. As a result of the transaction, the fixed asset sublimit was reduced to approximately $17.1 million by the amount of the net
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
proceeds. After the closing of the Bulk Sale Transaction on July 7, 1999, the total outstanding borrowings under the DIP Facility were approximately $74.6 million and the excess availability was approximately $18.2 million. See Note 18 to the consolidated financial statements for a description of the Bulk Sale Transaction.
The Company is in negotiations with its lenders to amend the DIP Facility to include, among other things, a reduction in the EBITDA requirements for June and September 1999 and the extension of the fixed asset sublimit expiration date to September 30, 1999. No assurances can be given that such amendment will be successfully negotiated.
Levitz is aggressively marketing for sale additional properties. At the current time there are fourteen properties under agreement of sale, letters of intent or other types of offers estimated to be $34.3 million of gross proceeds. No assurances can be given that a sufficient number of these transactions will close prior to the expiration of the fixed asset sublimit on September 30, 1999. Based on facts and circumstances at that time, Levitz may have to request an extension of the fixed asset sublimit expiration date or obtain additional financing. No assurances can be given that an extension of the expiration date would be granted or that additional financing could be obtained.
Loans made under the revolving notes bear interest, at Levitz's option, at a rate equal to either Bankers Trust Company'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 have been deferred and were amortized over the original life of the DIP Facility.
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 borrowing at July 7, 1999 would be approximately $0.7 million assuming other variables remained constant.
The maximum borrowings, excluding the term commitments, under the DIP Facility are limited to 85% of eligible accounts receivable, 75% of eligible inventory (as defined in the DIP Facility) and a fixed asset sublimit which is permanently reduced as the proceeds from the sale of fixed assets and leasehold interests are received. Qualification of accounts receivable and inventory items as "eligible" is subject to unilateral change at the discretion of the lenders.
The DIP Facility is secured by substantially all of the assets of Levitz and its subsidiaries and a perfected pledge of stock of all Levitz's subsidiaries. The DIP Facility contains restrictive covenants including, among other things, the maintenance of minimum earnings before interest, taxes, depreciation and amortization as defined (EBITDA), limitations on the incurrence of additional indebtedness, liens, contingent obligations, sales of assets, and a prohibition on paying dividends. The lenders under the DIP Facility have a super-priority administrative expense claim against the estate of the Debtors.
In connection with the Plan of Reorganization, Levitz expects to obtain a post-confirmation financing commitment before December 31, 1999, which
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
would be an asset based revolving credit facility having substantially the same advance rate as the DIP Facility. Levitz will seek a commitment in an amount sufficient to execute the Plan of Reorganization. There can be no assurances given that such a commitment will be obtained.
All mortgages have been classified as current due to the Sale-Leaseback Transaction and Bulk Sale Transaction as described in Note 18 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.
5. 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 arise from the rejection of additional real estate leases and executory contracts by the Debtors.
MARCH 31, (DOLLARS IN LIABILITIES SUBJECT TO COMPROMISE THOUSANDS) ---------- Accounts payable, trade $ 38,520 Accrued expenses 15,204 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 20,054 Executive retirement and employment agreements 16,144 General liability claims 736 Reserve for previous store closings 1,353 Common area maintenance 262 Real estate taxes 2,414 Personal property taxes 554 -------- $292,609 ========
(1) Includes accrued interest at September 4, 1997.
As a result of the Chapter 11 filing, no principal or interest payments will be made on most pre-petition debt without Court approval or until
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
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 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 $21.9 million and $12.6 million was not recorded on certain pre-petition debt for the fiscal year ended March 31, 1999 and for the period from September 5, 1997 through March 31, 1998.
6. REORGANIZATION ITEMS:
During Fiscal 1999 and 1998 the Company initiated a series of actions under its reorganization proceedings to improve its performance, which included store closures and dispositions, and incurred professional fees in connection with the Bankruptcy proceedings. These reorganization items aggregated, after-tax, $43.0 million or $42,982 per share and $38.2 million or $38,248 per share, for the fiscal years ended March 31, 1999 and 1998, respectively.
In Fiscal 1999, Levitz 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. At March 31, 1999 approximately $5.3 million of these reserves remained which provides for the estimated continuing expenses of the facilities until they are sold.
During Fiscal 1999, Levitz 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, 1999 approximately $0.2 million of this closing reserve remained.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
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, 1999 approximately $0.1 million of this closing reserve remained.
Net sales and operating income (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, the twenty-four stores closed or disposed of during Fiscal 1998 and the five stores closed during Fiscal 1997 (see Note 8) were (in 000's):
1999 1998 1997 --------- --------- ---------
Net sales $ 138,257 $ 299,073 $ 389,232
Operating income (loss) (2,879) (24,044) 10,239
Professional fees include accounting, legal and consulting services provided to Levitz and the Creditors' Committee which, subject to Court approval, are required to be paid by Levitz while it is in Chapter 11. Fees accrued for these services totaled $6.6 million and $6.9 million in Fiscal 1999 and 1998, respectively.
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 net loss by $5.0 million or $4,973 per share.
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. The charges increased net loss by $6.1 million or $6,156 per share.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
8. STORE CLOSING AND RESTRUCTURING EXPENSE:
In the fiscal year ended March 31, 1997, management developed a plan to close five stores. The stores were closed on October 31, 1996. The plan resulted in a pre-tax charge for store closings of $8.3 million. The charge includes the reduction of the carrying value of the store assets to their estimated realizable value net of selling expenses as well as reserves for future rental payments under operating lease agreements. Included in the store closing charge is a $2.4 million charge from the adoption of SFAS No. 121 effective April 1, 1996 for one of the closed stores. The charge increased net loss by $5.4 million or $5,352 per share.
9. EXTRAORDINARY ITEMS:
On September 5, 1997, Levitz incurred a before-tax extraordinary loss of $8.4 million on the write-off of deferred financing fees related to the termination of the previous credit facilities. The after-tax loss was $5.8 million or $5,805 per share. In the period ended December 31, 1996, Levitz incurred a before-tax extraordinary loss of $3.1 million on the write-off of deferred financing fees related to the termination of the previous bank credit agreement, the after-tax loss was $2.0 million or $2,002 per share.
10. LEASING ARRANGEMENTS:
Levitz leases its facilities generally under non-cancelable leases for original terms ranging from 10 to 40 years. Most leases contain renewal options and some include options to purchase the properties.
The following is an analysis of property under capital leases by major classes (dollars in thousands):
1999 1998 -------- -------- Land, buildings and improvements $ 60,913 $177,192 Equipment -- 1,152 -------- -------- 60,913 178,344 Less- Accumulated amortization 27,610 85,623 -------- -------- $ 33,303 $ 92,721 ======== ========
Amortization expense relating to property under capital leases for the years ended March 31, 1999, 1998 and 1997 was $6.0 million, $8.3 million and $9.5 million, respectively.
Minimum annual rentals on continuing stores at March 31, 1999 (net of sublease income to be received) for the five years subsequent to March 31, 1999 and in the aggregate are as follows (dollars in thousands):
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
CAPITAL OPERATING YEAR LEASES (1) LEASES (2) - ---- --------- ----------
2000 $ 4,212 $ 24,430 2001 4,095 25,156 2002 4,007 24,240 2003 4,007 23,435 2004 4,007 21,307 Thereafter 72,075 248,720 ------- -------- Total minimum lease payments 92,403 $367,288 ======== Less - Amount representing interest 62,417 ------- Present value of net minimum payments under capital leases 29,986 Less - Current portion of continuing leases 618 ------- $29,368 =======
(1) Minimum annual rentals for capital leases have been reduced for those leases included in the Sale-Leaseback Transaction described in Note 18 to the consolidated financial statements. Capital leases included in the Sale-Leaseback Transactions were determined to be treated as operating leases in accordance with SFAS No. 13, "Accounting for Leases". Consequently, the total capital lease obligations of $9.1 million for those leases has been classified as current liabilities at March 31, 1999 as this obligation will be retired upon closing of the Sale-Leaseback Transaction and the future minimum annual rentals for those leases are included with operating leases.
(2) Minimum annual rentals of operating leases include rentals for those capital leases included in the Sale-Leaseback Transaction and the Unitary Lease Agreement as described in Note 18 to the consolidated financial statements. The minimum annual rentals for the Unitary Lease Agreement are as follows (dollars in thousands):
OPERATING YEAR LEASES ---------- --------
2000 $ 5,889 2001 7,235 2002 7,235 2003 7,235 2004 7,235 Thereafter 118,386 -------- $153,215 ========
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
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):
1999 1998 1997 -------- -------- --------
Rent expense $ 18,630 $ 23,835 $ 24,567 Sublease income (810) (519) (888) -------- -------- -------- Rent expense, net $ 17,820 $ 23,316 $ 23,679 ======== ======== ========
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.
11. 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 $6.1 million at March 31, 1999, 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.
At March 31, 1999, Household's portfolio balance was $549.8 million. The portfolio balance includes Levitz customer purchases through Household as well as customer accounts sold to Household by GECC. Levitz recorded income from both the Merchant Agreement and the GECC Agreement of $13.2 million, $7.9 million and $12.8 million, respectively for the years ended March 31, 1999, 1998 and 1997.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
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. 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.
Included in the consolidated balance sheets for the years ended March 31, are (dollars in thousands):
1999 1998 --------------------- --------------------- ASSET LIABILITY ASSET LIABILITY ------- --------- ------- ---------
Net receivable/ payable (1) $2,964 $ -- $ -- $ 859 Merchant risk reserve (2) 6,117 -- -- Credit loss reserve -- 2,328 -- Promotional discount accrual (3) -- 21,460 -- 3,127
------ ------- ----- ------ Total $9,081 $23,788 $ -- $3,986 ====== ======= ===== ======
(1) The net receivable/payable represents amounts due from or owed to Household on the settlement of portfolio earnings from the previous month and customer accounts that were submitted to Household for purchase. In Fiscal 1998, the amount was due to GECC. (2) 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.
In addition to the above, Levitz has funded a credit loss reserve of $33.9 million through the monthly settlement of portfolio earnings as of March 31, 1999 which is not on the consolidated balance sheets.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
12. INCOME TAXES:
Levitz has a Federal cumulative net operating loss ("NOL") carry-forward of $163.4 as of the fiscal year ended March 31, 1999. Levitz has recorded a full valuation allowance against the NOL for the fiscal year ended March 31, 1999. In prior years, Levitz had recorded a deferred tax asset (benefit) for its cumulative NOL as of the fiscal year ended March 31, 1998. Levitz has always provided a full valuation allowance against state net operating losses. The cumulative NOL net benefit at March 31, 1999 was $24.7 million. The Sale-Leaseback Transaction and Bulk Sale Transaction as described in Note 18 to the consolidated financial statements are estimated to utilize approximately $15.9 million of the cumulative NOL net benefit. The remaining cumulative NOL net benefit of $8.8 million is supported by deferred tax credits that are projected to turn during the carry-forward periods. Levitz 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 Levitz emerges from bankruptcy. Federal NOL carry-forwards are available through Fiscal 2019.
The benefit for income taxes was allocated as follows (dollars in thousands):
1999 1998 1997 ------ -------- --------
Loss before extraordinary items $ -- $(39,437) $(13,454) Extraordinary items -- (2,630) (1,090) ------ -------- -------- $ -- $(42,067) $(14,544) ====== ======== ========
The components of the benefit for income taxes applicable to loss before extraordinary items is (dollars in thousands):
1999 1998 1997 -------- -------- --------
Current: Federal $ -- $ -- $ (1,245) State 52 57 13 -------- -------- -------- 52 57 (1,232) -------- -------- -------- Deferred: Federal -- (35,209) (10,565) State (52) (4,285) (1,657) -------- -------- -------- (52) (39,494) (12,222) -------- -------- -------- $ -- $(39,437) $(13,454) ======== ======== ========
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
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):
1999 1998 1997 -------- -------- -------- Computed income tax benefit at Federal statutory rate $(33,045) $(43,045) $(12,849) State and local income tax benefit, net of federal income tax (5,714) (5,541) (3,764) Permanent differences 2,924 6,797 182 Federal valuation allowance 31,388 1,072 -- State valuation allowance 6,296 2,793 2,679 Other (1,849) (1,513) 298 -------- -------- -------- $ -- $(39,437) $(13,454) ======== ======== ========
Components of the deferred income tax assets and liabilities are (dollars in thousands):
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
Levitz files a consolidated Federal income tax return and certain state returns with LFI. Levitz records its share of the consolidated Federal and state income tax provision or benefit by multiplying its separate taxable income or loss for the year by the corporate income tax rates applicable to such year. A tax benefit is recorded only if realized on a consolidated basis. Substantially all income taxes payable are payable to LFI under the tax-sharing arrangement and are included in payable to parent in the consolidated balance sheets.
13. 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 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.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
The table below reconciles the funded status of the plans with the amounts recognized in the consolidated balance sheets (dollars in thousands):
(1) Included in settlements above for Fiscal 1999 are obligations related to inactive employees which are included in liabilities subject to compromise.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
The tables below list the weighted average assumptions and the components of periodic (benefit) costs (dollars in thousands):
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 30% of the first 6% beginning January 1, 1999 and 20% of the first 6% beginning January 1, 1998 and 1997 subject to certain limitations. Such matching contributions of $0.6 million, $0.8 million and $0.9 million were made by Levitz for the years ended March 31, 1999, 1998 and 1997, respectively.
14. ACCRUED EXPENSES AND OTHER LIABILITIES (DOLLARS IN THOUSANDS):
1999 1998 ------- -------
Payroll $ 9,394 $12,510 Payroll and sales taxes 4,843 4,547 Real estate taxes 3,238 2,809 Interest 2,615 1,687 Promotional discount accrual 21,460 3,127 Workers Compensation 6,708 7,663 Other 25,721 23,504 ------- ------- $73,979 $55,847 ======= =======
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
15. 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 seven 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 Levitz as of March 31, 1999, in the opinion of Management such actions as currently known would not have a material effect on the financial position of Levitz.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of Levitz's unaudited quarterly results of operations for the years ended March 31, 1998 and 1997:
(1) See Note 1 to consolidated financial statements. (2) See Note 5, 6 and 7 to consolidated financial statements. (3) See Note 9 to consolidated financial statements. (4) See Note 7 to consolidated financial statements.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts and fair values of Levitz's financial instruments at March 31, 1999 and 1998, were as follows (dollars in thousands):
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
The carrying amounts of cash and cash equivalents 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.
18. SUBSEQUENT EVENTS:
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 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. As part of the Contract of Sale, the purchaser escrowed an additional $1.0 million to be paid to Levitz on January 1, 2000 subject to Levitz's emergence from bankruptcy by December 31, 1999. 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.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999
The cash effect for the first twelve month period as the result of the Sale-Leaseback Transaction is approximately (dollars in thousands):
Decrease in interest on term notes $ 9,337 Decrease in mortgage payments 1,196 Increase in rent payments (7,235) -------
Total cash effect $ 3,298 =======
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.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART IV
ITEM 14.
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 27.
FINANCIAL STATEMENT SCHEDULES
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
SCHEDULES
All schedules have been omitted because the required information is shown in the Consolidated Financial Statements or Notes thereto or they are not applicable.
(b) REPORTS ON FORM 8-K
On February 17, 1999 the registrant filed a Report on Form 8-K reporting under Item 5. Other Events disclosing a letter to its vendors concerning the status of the registrant's Chapter 11 Bankruptcy Proceeding.
On July 2, 1999 the registrant filed a Report on Form 8-K reporting under Item 5. Other Events disclosing the sale of eleven owned parcels of real property and leasehold interests on twelve leased properties and the execution of a Unitary Lease to lease the properties back ("Sale-Leaseback Transaction"). The Sale-Leaseback Transaction was consummated on June 8, 1999.
(c) EXHIBITS
See Page 60 for Index to Exhibits.
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 12, 1999 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.
INDEX TO EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
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(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 Corporation'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 Corporation's quarterly report on Form 10-Q for the quarter ended December 31, 1996. (7) Incorporated by reference from Levitz Furniture Corporation's Annual Report on Form 10-K for the year ended March 31, 1997. (8) Incorporated by reference from Levitz Furniture Corporation'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 Corporation's quarterly report on Form 10-Q for the quarter ended September 30, 1997. (11) Incorporated by reference from Levitz Furniture Corporation's quarterly report on Form 10-Q for the quarter ended December 31, 1997. (12) Incorporated by reference from Levitz Furniture Corporation's Annual Report on Form 10-K for the year ended March 31, 1998. (13) Incorporated by reference from Levitz Furniture Corporation's quarterly report on Form 10-Q for the quarter ended September 30, 1998. (14) Incorporated by reference from Levitz Furniture Corporation'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.
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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. 21.01 Wholly Owned Subsidiaries of Levitz Furniture Corporation. 27 Financial Data Schedule.