U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended 9/30/98
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|_| Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________ to ______________
Commission file number 811-3584
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Levcor International, Inc.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 06-0842701
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1071 Avenue of the Americas, New York, NY 10018
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(Address of Principal Executive Offices)
(203) 264-7428
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(Issuer's Telephone Number, Including Area Code)
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(Former name, Former Address and Former Fiscal year, if Changes Since
Last Report)
Check whether the issuer; (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of November 12, 1998, 1,764,299 shares of the issuer's common stock,
par value $.56 per share, were outstanding.
Transitional Small Business Disclosure Format(check one):
Yes |_| No |X|
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LEVCOR INTERNATIONAL, INC.
INDEX
Part I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Balance Sheet as of September 30, 1998 (Unaudited) 1
Statements of Operations for the
Nine Months Ended September 30, 1998 and
September 30, 1997 (Unaudited) 2
Statements of Operations for the
Three Months Ended September 30, 1998 and
September 30, 1997 (Unaudited) 3
Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and
September 30, 1997 (Unaudited) 4
Notes to Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 6
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit 10 12
Exhibit 27 24
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LEVCOR INTERNATIONAL, INC.
BALANCE SHEET
September 30, 1998
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalent $ 32,485
Accounts receivable 17,109
Due from factor 385,838
Inventories 1,570,471
Prepaid expenses 13,598
-----------
Total current assets 2,019,501
PLANT AND EQUIPMENT, net of accumulated
Depreciation of $4,589 16,960
OIL AND GAS PROPERTIES (using full cost
method), net of accumulated depletion
and depreciation of $877,146 18,670
INTANGIBLE ASSETS, net of accumulated
Amortization of $2,607 12,368
-----------
$ 2,067,499
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,200,345
Current maturities of long-term debt 282,800
-----------
Total current liabilities 2,483,145
LONG TERM DEBT, less current maturities 282,800
DUE TO OFFICER 1,045,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock - par value $.56 per share; authorized
15,000,000 shares, outstanding 1,764,299 shares 987,242
Capital in excess of par value 4,998,280
Accumulated deficit (7,728,968)
-----------
(1,743,446)
-----------
$ 2,067,499
===========
The accompanying notes are an integral part of this statement.
1
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LEVCOR INTERNATIONAL, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Nine Months Ended September 30 1998 1997
----------- -----------
Woven Fabrics Division sales $ 8,227,546 $ 1,587,516
Less: cost of sales 7,347,014 1,404,768
----------- -----------
Gross profit - Woven Fabrics Division 880,532 182,748
Oil and gas sales 24,229 32,362
Less: cost of sales 26,046 28,308
----------- -----------
Gross profit (loss) - Oil and Gas (1,817) 4,054
----------- -----------
Total Gross Profits 878,715 186,802
----------- -----------
Selling expenses: Woven Fabrics Division
Salaries, benefits and payroll taxes 624,813 63,563
Commissions 103,130 32,315
Other selling expenses 153,224 70,670
----------- -----------
Total selling expenses 881,167 166,548
General and administrative expenses
Salaries, benefits and payroll taxes 41,909 40,985
Accounting and administrative fees 43,942 43,606
Audit fees 16,000 16,000
Directors' fees and expenses (5,000) 3,750
Factor's fees 64,082 19,179
Insurance 10,556 9,724
Interest expense 216,605 114,263
Legal fees 14,990 11,729
Transfer agent fees 3,158 3,150
Shareholders communications 22,262 --
Other business taxes 2,287 2,949
Other expenses 44,122 10,252
----------- -----------
Total general and administrative
expenses 474,913 275,587
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Total expense 1,356,080 442,135
----------- -----------
Net (loss) (477,365) (255,333)
Accumulated deficit - beginning of year (7,251,603) (6,900,333)
----------- -----------
Accumulated deficit - end of quarter $(7,728,968) $(7,155,666)
=========== ===========
Average number of shares outstanding 1,751,399 1,730,999
Net(loss) per common share $ (0.27) $ (0.15)
=========== ===========
The accompanying notes are an integral part of this statement.
2
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LEVCOR INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended September 30 1998 1997
----------- -----------
Woven Fabrics Division sales $ 1,084,192 $ 385,940
Less: cost of sales 1,053,348 400,984
----------- -----------
Gross profit (loss) - Woven Fabrics Division 30,844 (15,044)
Oil and gas sales 7,111 9,079
Less: cost of sales 9,289 7,799
----------- -----------
Gross profit (loss) - Oil and Gas (2,178) 1,280
----------- -----------
Total Gross Profits (Loss) 28,666 (13,764)
----------- -----------
Selling expenses: Woven Fabrics Division
Salaries, benefits and payroll taxes 206,760 22,018
Commissions 24,548 11,861
Other selling expenses 32,959 36,656
----------- -----------
Total selling expenses 264,267 70,535
General and administrative expenses
Salaries, benefits and payroll taxes 13,980 13,791
Accounting and administrative fees 14,642 14,377
Audit fees -- --
Directors' fees and expenses 1,250 1,250
Factor's fees 12,354 1,179
Insurance 4,027 2,524
Interest expense 74,830 27,637
Legal fees 7,427 2,500
Transfer agent fees 1,050 1,050
Shareholders communications 7,802 --
Other business taxes 7 106
Other expenses 18,695 3,578
----------- -----------
Total general and administrative
expenses 156,064 67,992
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Total expense 420,331 138,527
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Net (loss) (391,665) (152,291)
Accumulated deficit - beginning of quarter (7,337,303) (7,003,375)
----------- -----------
Accumulated deficit - end of quarter $(7,728,968) $(7,155,666)
=========== ===========
Average number of shares outstanding 1,764,299 1,733,499
Net (loss) per common share $ (0.22) $ (0.09)
=========== ===========
The accompanying notes are an integral part of this statement.
3
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LEVCOR INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended September 30 1998 1997
--------- ---------
Cash flows from operating activities $(477,365) $(255,333)
Net (loss)
Adjustments to reconcile (net loss) to net
cash (used in) operating activities
Depletion and depreciation 11,406 10,055
Services paid in common stock 5,000 5,000
Changes in operating assets and liabilities,
net of assets acquired
Accounts receivable (7,456) 617
Due from factor 141,354 131,329
Inventories 456,117 84,035
Prepaid expenses (6,138) 6,068
Accounts payable and accrued expenses (224,887) 15,810
--------- ---------
Net cash (used in) operating activities (101,969) (2,419)
--------- ---------
Cash flows from investing activities
Purchase of property and equipment and
intangible assets (7,351) --
--------- ---------
Net cash (used in) investing activities (7,351) --
--------- ---------
Cash flows from financing activities
Advances from shareholder 375,000 300,000
Exercise of stock options 7,562 --
Payment of long term debt (282,800) (282,800)
--------- ---------
Net cash provided by financing activities 99,762 17,200
--------- ---------
NET INCREASE / (DECREASE) IN CASH
AND CASH EQUIVALENTS (9,558) 14,781
Cash and cash equivalents at beginning of year 42,043 4,904
--------- ---------
Cash and cash equivalents at end of quarter $ 32,485 $ 19,685
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 216,605 $ 114,263
The accompanying notes are an integral part of this statement.
4
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LEVCOR INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
NOTE 1. The accompanying financial statements of Levcor International, Inc.
(the "Company") have been prepared in accordance with the
instructions to Form 10-QSB and do not include all of the
information and footnote disclosures required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation have been
included. Operating results for the nine months ended September 30,
1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. These statements
should be read in conjunction with the financial statements and
related notes included in the Company's annual report on Form 10-KSB
for the year ended December 31, 1997.
NOTE 2. New Accounting Pronouncement
Earnings (Loss) Per Share
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," which
requires public companies to present basic earnings per share and,
if applicable, diluted earnings per share. All comparative periods
must be restated as of December 31, 1997 in accordance with SFAS No.
128.
The computation of basic profit/(loss) per share of common stock is
based upon the weighted average number of common shares outstanding
during the period, plus (in periods in which they have a dilutive
effect) the effect of common shares contingently issuable upon
exercise of stock options. Diluted earnings per share are considered
equal to basic earnings per share for all years presented as the
effect of other potentially dilutive securities would be
antidilutive.
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130 ("SFAS
No. 130"), "Reporting Comprehensive Income," which is effective for
the Company's year ending December 31, 1998. The statement addresses
the reporting and displaying of comprehensive income and its
components. Earnings per share will only be reported for net income
and not for comprehensive income and its components. Adoption of
SFAS No. 130 related to disclosure within the financial statements
and is not expected to have a material effect on the Company's
financial statements.
5
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Segment Information
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131"), "Disclosure About Segments of an
Enterprise and Related Information," which is effective for the
Company's year ending December 31, 1998. SFAS No. 131 changes the
way public companies report information about segments of their
business in their financial statements and requires them to report
selected segment information in their quarterly reports. Adoption of
SFAS No. 131 relates to disclosure within the financial statements
and is not expected to have a material effect on the Company's
financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Results of Operations:
Nine months ended September 30, 1998 as compared to nine months ended
September 30, 1997.
The Company's gross profits for the nine months ended September 30, 1998
were $878,715, an increase of $691,913, or 370%, from $186,802 for the same
period in 1997. Such increase was attributable to the net of (i) an increase of
$697,784 in sales, less the cost of goods sold, from the Woven Fabrics Division
in the first nine months of 1998 compared to the same period in 1997, and (ii) a
decrease of $5,871 in sales, less the cost of goods sold, from oil and gas
operations in the first nine months of 1998 compared to the same period in 1997.
The Company's expenses for the first nine months of 1998 were $1,356,080,
an increase of $913,945, or 207%, from $442,135 in the same period in 1997. Such
increase was due to an increase in (i) selling expenses of the Woven Fabrics
Division in the first nine months of 1998 of $714,619, or 429%, compared to the
same period in 1997, and (ii) general and administrative expenses in the first
nine months of 1998 of $199,326, or an increase of 72%, compared to the same
period in 1997.
As a result of the foregoing, the Company reflected a net loss of $477,365
in the first nine months of 1998 compared to a net loss of $255,333 for the same
period in 1997.
Three months ended September 30, 1998 as compared to three months ended
September 30, 1997.
The Company's gross profits for the three months ended September 30, 1998
were $28,666, an increase of $42,430 from the gross loss of $13,764 for the same
period in 1997. Such increase was attributable to the net of (i) an increase of
$45,888 in sales, less the cost of goods sold, from the Woven Fabrics Division
in the third quarter of 1998 compared to the same period in 1997, and (ii) a
decrease of $3,458 in sales, less the cost of goods sold, from oil and gas
operations in the third quarter of 1998 compared to the same period in 1997.
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The Company's expenses for the third quarter of 1998 were $420,331, an
increase of $281,804, or 203%, from $138,527 in the same period in 1997. Such
increase was due to an increase in (i) selling expenses of the Woven Fabrics
Division in the third quarter of 1998 of $193,732, or 275%, compared to the same
period in 1997, and (ii) general and administrative expenses in the third
quarter of 1998 of $88,072, or an increase of 130%, compared to the same period
in 1997.
As a result of the foregoing, the Company reflected a net loss of $391,665
in the third three months of 1998 compared to a net loss of $152,291 for the
same period in 1997.
Liquidity and Capital Resources
The primary source of the Company's working capital during 1997 and 1998
was derived from proceeds from the sale of woven fabrics produced by the
Company's Woven Fabrics Division and, to a lesser extent, from proceeds from the
sale of oil and gas from the Company's ownership interest in oil and gas wells.
The Company's unrestricted cash and cash equivalents at September 30, 1998 was
$32,485, a decrease of $9,558 from $42,043 at December 31, 1997.
In connection with the operation of the Woven Fabrics Division, the
Company entered into a Discount Factoring Agreement with Congress Talcott
Corporation ("Congress Talcott") as of November 14, 1997 (the "Congress Talcott
Factoring Agreement"). Pursuant to the terms of the Congress Talcott Factoring
Agreement, the Company, among other things: (i) had agreed to (a) assign to
Congress Talcott its interest in all receivables derived from the sale of woven
fabrics produced by the Woven Fabrics Division, and (b) pay Congress Talcott a
commission of 0.6% of the gross amount on such receivables, with a minimum
commission of $4,000 for each and every month of the term thereof; and (ii) was
entitled to (a) request advances up to 90% of the net purchase price of the
receivables, and (b) pay interest on such advances at the rate of 0.5% above
CoreStates Bank, N.A.'s prime rate for the term thereof. The Congress Talcott
Factoring Agreement expired on its terms on November 14, 1998, pursuant to
notice of non-renewal given by the Company on September 11, 1998.
The Company entered into a Factoring Agreement with The CIT
Group/Commercial Services, Inc. ("CIT Group") on September 17, 1998 (the "CIT
Group Factoring Agreement"). Pursuant to the terms of the CIT Group Factoring
Agreement, the Company, among other things: (i) has agreed to (a) assign to CIT
Group its interest in all accounts receivable arising from the sale of inventory
or rendition of services (the "Accounts"), including those under any trade
names, through any divisions and through any selling agent, and (b) pay CIT
Group a factoring fee of (1) 0.6% of the gross face amount of the Accounts, with
a minimum commission of $3 per invoice and $48,000 per annum, (2) an additional
1/4 of 1% of the gross face amount of each Account for each 30-day period or
part thereof by which the longest terms of sale applicable to such Account
exceed 90 days, and (3) an additional 1% of the gross face amount of all
Accounts arising from sales to customers located outside the United States; and
(ii) may (a) request advances (which advances shall be made at the CIT Group's
sole discretion) on the net purchase price of the Accounts, and (b) pay interest
on such advances at the rate of 0.5% above The Chase Manhattan Bank's prime rate
for the term thereof. The CIT Group Factoring Agreement remains effective until
termination by either party. CIT Group may terminate the CIT Group Factoring
Agreement (i) at any time, upon 60 days' prior written notice or (ii)
immediately without prior
7
<PAGE>
written notice, upon the occurrence of an Event of Default (as such term is
defined in the CIT Group Factoring Agreement). The Company may terminate the CIT
Group Factoring Agreement on any September 30th, upon 60 days' prior written
notice.
In connection with the purchase in 1996 of the woven fabric inventory from
Andrex Industries Corp. ("Andrex"), the Company issued a promissory note to
Andrex which bears interest at the rate of 6% per annum, pursuant to which the
Company, commencing on May 1, 1996 and continuing through May 1, 2000, is
required to make five annual debt payments of $282,800 to Andrex. In order to
meet the $282,800 debt payments that were due on May 1, 1996, May 1, 1997 and
May 1, 1998, Robert A. Levinson, the Chief Executive Officer of the Company,
made loans to the Company on such dates of $370,000, $300,000 and $50,000,
respectively, which loans bear interest at a rate of 6% per annum. No repayment
date has yet been set for these loans. Mr. Levinson has also agreed to continue
to personally support the Company's cash requirements to enable it to meet its
current obligations through December 31, 1998; in this regard, Mr. Levinson made
loans to the Company in the third quarter of 1998 in an aggregate amount of
$325,000, which loans bear interest at a rate of 6% per annum. No repayment date
has yet been set for these loans. The Company also plans to continue to
aggressively market and sell its woven fabric products. Although there can be no
assurances that these measures will be successful, the Company believes that its
current operations and the financial arrangements described above will provide
sufficient liquidity to fund the Company's operations for 1998.
Seasonality
The Company's Woven Fabrics Division business is seasonal and typically
realizes higher revenues and operating income in the first and fourth calendar
quarters, which, considering the standard lead time required by the fashion
industry to manufacture apparel, would correspond respectively to the autumn and
spring retail selling seasons.
Year 2000 Issue
Computer programmers and other designers of equipment that use
microprocessors have long abbreviated dates by eliminating the first two digits
of the year. The "Year 2000 Issue" stems from the concern that as the year 2000
approaches, many computer and equipment systems may be unable to distinguish
those years which begin with the numerals "20" from those years which begin with
the numerals "19," and, as a result, may not accurately process certain
date-based information. This inaccuracy could cause a variety of significant
operational problems for businesses.
The Company has completed a comprehensive review of its computer and
equipment systems to identify the systems that could be affected by the Year
2000 Issue. The Company is utilizing both internal and external resources to
modify or replace the affected portions of these systems and to test the new and
modified systems for Year 2000 compliance. The Company expects that its internal
Year 2000 compliance plan will be fully implemented by December 1998. The
Company estimates that its past and future expenditures to ensure that its
computer and equipment systems are fully Year 2000 compliant will not exceed
$10,000.
8
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Although the Company's Year 2000 compliance plan has not been fully
implemented, the Company does not believe that the Year 2000 Issue will pose
operational problems for its internal computer and equipment systems or have a
material adverse effect on the Company's results of operation, liquidity or
financial condition. There can be no assurances given in this regard, however;
if the Company's Year 2000 compliance plan is not fully implemented in a timely
manner, or if the systems do not operate as expected, then the Year 2000 Issue
could have a material adverse effect on the Company's results of operation,
liquidity or financial condition.
The Company has determined that its computer and equipment systems do not
interface with the computer and equipment systems of any of its major suppliers,
customers or financial institutions. However, the Company recognizes that the
Year 2000 Issue is relevant to all parties with which it has business relations,
including its suppliers, customers and financial institutions, as well as
businesses such as utility and telecommunications companies, and is considering
contacting its major suppliers, customers and financial institutions in order to
determine whether the Year 2000 Issue will impact the ability of those companies
to transact business with the Company in the Year 2000 and beyond. There can be
no assurances that the Company's principal suppliers, customers or financial
institutions will achieve Year 2000 compliance in a timely manner. The inability
of the Company's principal suppliers, customers or financial institutions to
become Year 2000 compliant in a timely manner could have a material adverse
effect on the Company's results of operation, liquidity or financial condition.
At present, the Company does not have a contingency plan in place to
specifically cover the Year 2000 Issue. The Company will closely monitor the
progress of its Year 2000 compliance plan, and will develop a Year 2000
contingency plan if and when it appears substantially likely that the Company or
any of its major suppliers, customers or financial institutions will not achieve
Year 2000 compliance in a timely manner.
9
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PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8 - K.
(a) The following exhibits are included herein:
Exhibit 10 - Factoring Agreement, dated September 17, 1998, between the Company
and The CIT Group/Commercial Services, Inc.
Exhibit 27 - Financial Data Schedule (Article 5), included for Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) purposes only. This Schedule contains
summary financial information extracted from the balance sheets and statements
of operations and deficit as of and for the three months ended September 30,
1998, and is qualified in its entirety by reference to such financial
statements.
No reports on Form 8-K were filed during the quarter for which this report is
being filed.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEVCOR INTERNATIONAL, INC.
Date November 16, 1998 /s/ Rudolph E. Bremser
------------------------ -------------------------------------
Rudolph E. Bremser
Treasurer and
Chief Financial Officer
[Letterhead of CIT Group]
9/17, 1998
LEVCOR INTERNATIONAL, INC.
1071 Avenue of the Americas
New York, NY 10018
FACTORING AGREEMENT
Ladies and Gentlemen:
We are pleased to confirm the terms and conditions that will govern our
funds in use accounting, notification factoring arrangement with advances (the
"Agreement").
1. SALE OF ACCOUNTS
You sell and assign to us, and we purchase as absolute owner, all accounts
receivable arising from your sales of inventory or rendition of services,
including those under any trade names, through any divisions and through any
selling agent (collectively, the "Accounts" and individually, an "Account").
2. CREDIT APPROVAL
2.1 Requests for credit approval for all of your orders must be submitted
to our Credit Department via computer by either: (a) On-Line Terminal Access, or
(b) Electronic Batch Transmission. If you are unable to submit orders via
computer, then orders can be submitted over the phone, by fax or in writing. All
credit decisions by our Credit Department (including approvals, declines and
holds) will be sent to you daily by a Credit Decisions Report, which constitutes
the official record of our credit decisions. Credit approvals will be effective
only if shipment is made or services are rendered within thirty (30) days from
the completion date specified in our credit approval. Credit approval of any
Account may be withdrawn by us any time before delivery is made or services are
rendered.
<PAGE>
2
2.2 We assume the Credit Risk on each Account approved in the Credit
Decision Report. "Credit Risk" means the customer's failure to pay the Account
in full when due on its longest maturity solely because of its financial
inability to pay. If there is any change in the amount, terms, shipping date or
delivery date for any shipment of goods or rendition of services (other than
accepting returns and granting allowances as provided in section 8 below), you
must submit a change of terms request to us, and, if such pertains to a Factor
Risk Account, then we shall advise you of our decision either to retain the
Credit Risk or to withdraw the credit approval. Accounts on which we bear the
Credit Risk are referred to collectively as "Factor Risk Accounts", and
individually as a "Factor Risk Account". Accounts on which you bear some or all
of the risk as to credit are referred to collectively as "Client Risk Accounts",
and individually as a "Client Risk Account".
2.3 We shall have no liability to you or to any person, firm or entity for
declining, withholding or withdrawing credit approval on any order. If we
decline to credit approve an order and furnish to you any information regarding
the credit standing of that customer, such information is confidential and you
agree not to reveal same to the customer, your sales agent or any third party.
You agree that we have no obligation to perform, in any respect, any contracts
relating to any Accounts.
3. INVOICING
You agree to place a notice (in form and content acceptable to us) on each
invoice and invoice equivalent that the Account is sold, assigned and payable
only to us, and to take all necessary steps so that payments and remittance
information are directed to us. All invoices, or their equivalents, will be
promptly mailed or otherwise transmitted by you to your customers at your
expense. You will provide us with copies of all invoices (or the equivalent
thereof if the invoices were sent electronically), confirmation of the sale of
the Accounts to us and proof of shipment or delivery, all as we may reasonably
request. If you fail to provide us with copies of such invoices (or equivalents)
or such proofs when requested by us, we will not bear any Credit Risk as to
those Accounts.
4. REPRESENTATIONS AND WARRANTIES
4.1 You represent and warrant that: each Account is based upon a bona fide
sale and delivery of inventory or rendition of services made by you in the
ordinary course of business; the inventory being sold and the Accounts created
are your exclusive property and are not, and will not be, subject to any lien,
consignment arrangement, encumbrance or security interest other than in our
favor; all amounts are due in United States Dollars; all original invoices bear
notice of the sale and assignment to us; any taxes or fees relating to your
Accounts or inventory are solely your responsibility; and none of the Accounts
factored with us hereunder represent sales to any subsidiary, affiliate or
parent company. You also warrant and represent that: your customers have
accepted the goods or services and owe and are obligated to pay the full amounts
stated in the invoices according to their
<PAGE>
3
terms, without dispute, claim, offset, defense, deduction, rejection,
recoupment, counterclaim or contra account, other than as to returns and
allowances as provided in section 8 below (the foregoing being referred to in
this Agreement as "Customer Claims").
4.2 You further represent and warrant that: you are a duly organized and
validly existing business organization qualified to do business in all states
where required; the most recent financial statements provided by you to us
accurately reflect your financial condition as of that date and there has been
no material adverse change in your financial condition since the date of those
financial statements. You agree to furnish us with such information concerning
your business affairs and financial condition as we may reasonably request from
time to time. You will furnish to us as soon as possible, but not later than one
hundred twenty (120) days after the close of each of your fiscal years, your
financial statements as of the end of such year, audited by a firm of
independent, certified public accountants, selected by you and acceptable to us.
4.3 You agree that you will promptly notify us of any change in your:
name, location of your chief executive office, place(s) of business, use of
trade names and divisions, and legal or business structure. Further, you agree
that you will promptly notify us of any change in control of the ownership of
your business organization, and of significant law suits or proceedings against
you.
5. PURCHASE OF ACCOUNTS
We shall purchase the Accounts for the gross amount of the respective
invoices, less: factoring fees or charges, trade and cash discounts allowable
to, or taken by, your customers, credits, cash on account and allowances
("Purchase Price"). Our purchase of the Accounts will be reflected on the
Statement of Account (defined in section 10 below), which we shall render to
you, which will also reflect all credits and discounts made available to your
customers.
6. ADVANCES
At your request, and in our sole discretion, we may advance funds to you
on Factor Risk Accounts, prior to the collection of the Accounts. We have the
right, at any time and from time to time, to hold any reserves we deem
reasonably necessary as security for the payment and performance of any and all
of your Obligations (defined in section 12 below). All amounts you owe us,
including all advances to you and any debit balance in your Client Position
Account (defined in section 10 below), and any Obligations, are payable on
demand and may be charged to your account at any time.
<PAGE>
4
7. PAYMENT OF ACCOUNTS
7.1 All payments received by us on the Accounts will be promptly applied
to your account with us after crediting your customer's account. In exchange for
such application, we shall charge your account monthly with the cost of three
(3) additional business days on all such payments at the rate charged by us in
section 14.1 below on debit balances. No checks, drafts or other instruments
received by us will constitute final payment of an Account unless and until such
items have actually been collected.
7.2 The amount of the Purchase Price of any Factor Risk Account which
remains unpaid will be deemed collected and will be credited to your account as
of the earlier of the following dates:
(a) the date of the Account's longest maturity if a proceeding or
petition is filed by or against the customer under any state or
federal bankruptcy or insolvency law, or if a receiver or trustee is
appointed for the customer; or
(b) the last day of the third month following the Account's longest
maturity date if such Account remains unpaid as of said date without
the occurrence of any of the events specified in clause (a) above.
If any Factor Risk Account credited to you was not paid for any reason other
than Credit Risk, we shall reverse the credit and charge your account
accordingly, and such Account is then deemed to be a Client Risk Account.
8. CUSTOMER CLAIMS AND CHARGE BACKS
8.1 You must notify us promptly of any matter affecting the value,
enforceability or collectibility of any Account and of all Customer Claims. You
agree to promptly issue credit memoranda or otherwise adjust the customer's
account upon accepting returns or granting allowances. For full invoice credit
memoranda, you agree to send duplicate copies thereof to us and to confirm their
assignment to us. You may continue to do so until we have advised you that all
such credits or allowances on Factor Risk Accounts require our prior written
approval. We shall cooperate with you in the adjustment of Customer Claims, but
we retain the right to adjust Customer Claims on Factor Risk Accounts directly
with customers, upon such terms as we in our sole discretion may deem advisable.
8.2 We may at any time charge back to your account the amount of: (a) any
Factor Risk Account which is not paid in full when due for any reason other than
Credit Risk; (b) any Factor Risk Account which is not paid in full when due
because of an act of God, civil
<PAGE>
5
strife, or war; (c) anticipation (interest) deducted by a customer on any
Account; (d) Customer Claims; (e) any Client Risk Account which is not paid in
full when due; and (f) any Account for which there is a breach of any
representation or warranty. A charge back does not constitute a reassignment of
an Account.
8.3 We may at any time charge to your account the amount of: (a) payments
we receive on Client Risk Accounts which we are required at any time to turnover
or return (including preference claims); (b) all remittance expenses (including
incoming wire charges, currency conversion fees and stop payment fees), other
than stop payment fees on Factor Risk Accounts; (c) expenses, collection agency
fees and attorneys' fees incurred by us in collecting or attempting to collect
any Client Risk Account or any Obligation (defined in section 12 below); and (d)
our fees for handling collections on Client Risk Accounts which you have
requested us to process, as provided in the Guide (see section 18.2 below).
9. HANDLING AND COLLECTING ACCOUNTS; RETURNED GOODS
9.1 As owners of the Factor Risk Accounts, we have the right to: (a) bring
suit, or otherwise enforce collection, in your name or ours; (b) modify the
terms of payment, (c) settle, compromise or release, in whole or in part, any
amounts owing, and (d) issue credits in your name or ours. To the extent
applicable, you waive any and all claims and defenses based on suretyship. If
moneys are due and owing from a customer for both Factor Risk Accounts and
Client Risk Accounts, you agree that any payments or recoveries received on such
Accounts may be applied first to any Factor Risk Accounts. Once you have granted
or issued a discount, credit or allowance on any Account, you have no further
interest therein. Any checks, cash, notes or other documents or instruments,
proceeds or property received with respect to the Accounts must be held by you
in trust for us, separate from your own property, and immediately turned over to
us with proper endorsements. We may endorse your name or ours on any such check,
draft, instrument or document.
9.2 As owners and assignees of the Accounts and all proceeds thereof, upon
our written notice, you will, at your expense, set aside, mark with our name and
hold in trust for us, any and all returned, rejected, reclaimed or repossessed
inventory ("Returned Goods"). Further, upon such notice, you agree promptly: to
notify us of all Returned Goods and, at our request, either to deliver same to
us, or to pay us the invoice price thereof, or to sell the same for our account.
<PAGE>
6
10. STATEMENT OF ACCOUNT
After the end of each month, we shall send you certain reports reflecting
Accounts purchased, advances made, fees and charges and all other financial
transactions between us during that month ("Reports"). The Reports sent to you
each month include a Statement of Account reflecting transactions in three
sections: Accounts Receivable, Client Position Account and Funds In Use. The
Reports shall be deemed correct and binding upon you and shall constitute an
account stated between us unless we receive your written statement of exceptions
within thirty (30) days after same are mailed to you.
11. GRANT OF SECURITY INTEREST
11.1 You hereby assign and grant to us a continuing security interest in
all of your right, title and interest in and to all of your now existing and
future: (a) accounts receivable (including Accounts), instruments, documents,
chattel paper, general intangibles, and any other obligations owing to you; (b)
unpaid seller's rights (including rescission, repossession, replevin,
reclamation and stoppage in transit); (c) rights to any inventory represented by
the foregoing, including Returned Goods; (d) reserves and credit balances
arising hereunder; (e) guarantees or collateral for the foregoing (including
rights under any letters of credit or other credit enhancements in your favor);
(f) insurance policies, proceeds or rights relating to the foregoing; (g)
federal, state and local income tax refunds; (h) cash and non-cash proceeds of
the foregoing; and (i) Books and Records (defined in section 13 below)
evidencing or pertaining to the foregoing.
11.2 You agree to comply with all applicable laws to perfect our security
interest in collateral pledged to us hereunder, and to execute financing
statements and other documents as we may require to effectuate the foregoing and
to implement this Agreement. To the extent permitted by applicable law, you
authorize us to sign your name, or to file financing statements or continuations
without your signature, all in order to create, perfect or maintain our security
interest in the collateral.
12. OBLIGATIONS SECURED
The security interest granted hereunder and any lien or security interest
that we now or hereafter have in any of your other assets, collateral or
property, secure the payment and performance of all of your now existing and
future indebtedness and obligations to us, whether absolute or contingent,
whether arising under this Agreement or any other agreement or arrangement
between us, by operation of law or otherwise ("Obligations"). Obligations also
includes ledger debt (which means indebtedness for goods and services
<PAGE>
7
purchased by you from any party whose accounts receivable are factored or
financed by us), and indebtedness arising under any guaranty, credit enhancement
or other credit support granted by you in our favor. Any reserves or balances to
your credit and any other assets, collateral or property of yours in our
possession constitutes security for any and all Obligations.
13. BOOKS AND RECORDS AND EXAMINATIONS
13.1 You agree to maintain such Books and Records concerning the Accounts
as we may reasonably request and to reflect our ownership of the Accounts
therein. "Books and Records" means your accounting and financial records
(whether paper, computer or electronic), data, tapes, discs, or other media, and
all programs, files, records and procedure manuals relating thereto, wherever
located.
13.2 Upon our reasonable request, you agree to make your Books and Records
available to us for examination and to permit us to make copies or extracts
thereof. Also, you agree to permit us to visit your premises during your
business hours and to conduct such examinations as we deem reasonably necessary.
To cover our costs and expenses of any such examinations, we shall charge you a
fee for each day, or part thereof, during which such examination is conducted,
plus any out-of-pocket costs and expenses incurred by us, as provided in the
Guide (see section 18.2 below).
14. INTEREST
14.1 Interest is charged as of the last day of each month based on the
daily debit balances in your Funds In Use account for that month, at a rate
equal to the sum of one-half of one percent (0.5%) plus the Chase Prime Rate
(defined below). The Chase Prime Rate is the per annum rate of interest publicly
announced by The Chase Manhattan Bank (or its successor) in New York, New York
from time to time as its prime rate, and is not intended to be the lowest rate
of interest charged by The Chase Manhattan Bank to its borrowers. Any change in
the rate of interest hereunder due to a change in the Chase Prime Rate will take
effect as of the first of the month following such change in the Chase Prime
Rate. All interest is calculated on a 360 day year.
14.2 In no event will interest charged hereunder exceed the highest lawful
rate. In the event, however, that we do receive interest in excess of the
highest lawful rate, you agree that your sole remedy would be to seek repayment
of such excess, and you irrevocably waive any and all other rights and remedies
which may be available to you under law or in equity.
<PAGE>
8
15. FACTORING FEES AND OTHER CHARGES
15.1 For our services hereunder, you will pay us a factoring fee or charge
of six-tenths of one percent (0.6%) of the gross face amount of all Accounts
factored with us, but in no event less than $3.00 per invoice. In addition, you
will pay a fee of one-quarter of one percent (1/4 of 1%) of the gross face
amount of each Account for each thirty (30) day period or part thereof by which
the longest terms of sale applicable to such Account exceed ninety (90) days
(whether as originally stated or as a result of a change of terms requested by
you or the customer). For Accounts arising from sales to customers located
outside the fifty states of the United States of America, you will pay us an
additional factoring fee of one percent (1%) of the gross face amount of all
such Accounts. All factoring fees or charges are due and charged to your account
upon our purchase of the underlying Account. Commencing ___________________, if
the actual factoring fees or charges paid to us by you during any year or part
thereof ("Period"), is less than $48,000.00 ("Minimum Factoring Fees"), we shall
charge your account as of the end of such Period with an amount equal to the
difference between the actual factoring fees or charges paid during such Period
and said Minimum Factoring Fees.
15.2 You agree to pay all costs and expenses incurred by us in connection
with the preparation, execution, administration and enforcement of this
Agreement, including all reasonable fees and expenses attributable to the
services of our attorneys (whether in-house or outside), search fees and public
record filing fees. Furthermore, you agree to pay to us our fees (as more fully
set forth in the Guide, see section 18.2 below) including fees for: (a) special
reports prepared by us at your request; (b) wire transfers; (c) handling change
of terms requests relating to Accounts; and (d) your usage of our on-line
computer services. Beginning on the first of the month six months from the date
hereof, you also agree to pay us our fees for: (i) [intentionally deleted]; (ii)
crediting your account with proceeds of non-factored invoices received by us;
and (iii) charge backs or invoices factored with us that were paid directly to
you. All such fees will be charged to your account when incurred. Our fees may
be changed by us from time to time upon notice to you; however, any failure to
give you such notice does not constitute a breach of this Agreement and does not
impair our ability to institute any such change.
15.3 Any tax or fee of any governmental authority imposed on or arising
from any transactions between us, any sales made by you, or any inventory
relating to such sales is your sole responsibility (other than income and
franchise taxes imposed on us which are not related to any specific transaction
between us). If we are required to withhold or pay
<PAGE>
9
any such tax or fee, or any interest or penalties thereon, you hereby indemnify
and hold us harmless therefor and we shall charge your account with the full
amount thereof.
16. TERMINATION
16.1 You may terminate this Agreement only as of an Anniversary Date and
then only by giving us at least sixty (60) days prior written notice of
termination. "Anniversary Date" means the last day of the month occurring one
year from the date hereof, and the same date in each year thereafter. In the
event that this Agreement is terminated by you prior to an Anniversary Date, we
shall be entitled to the unpaid portion of the Minimum Factoring Fees, if any,
for such Period, as provided in section 15.1 above, as of the effective date of
termination. Except as otherwise provided, we may terminate this Agreement at
any time by giving you at least sixty (60) days prior written notice of
termination. However, we may terminate this Agreement immediately, without prior
notice to you, upon the occurrence of an Event of Default (defined in section
17.1 below).
16.2 This Agreement remains effective between us until terminated as
herein provided. Unless sooner demanded, all Obligations will become immediately
due and payable upon any termination of this Agreement.
16.3 All of our rights, liens and security interests hereunder continue
and remain in full force and effect after any termination of this Agreement and
pending a final accounting, we may withhold any balances in your account unless
we are supplied with an indemnity satisfactory to us to cover all Obligations.
You agree to continue to assign accounts receivable to us and to remit to us all
collections on accounts receivable, until all Obligations have been paid in full
or we have been supplied with an indemnity satisfactory to us to cover all
Obligations.
17. EVENTS OF DEFAULT AND REMEDIES UPON DEFAULT
17.1 It is an "Event of Default" under this Agreement if: (a) your
business ceases or a meeting of your creditors is called; (b) any bankruptcy,
insolvency, arrangement, reorganization, receivership or similar proceeding is
commenced by or against you under any federal or state law; (c) you breach any
representation, warranty or covenant contained in this Agreement; or (d) you
fail to pay any Obligation when due.
17.2 After the occurrence of an Event of Default which is not waived by
us, we may terminate this Agreement without notice to you. We shall then have
immediate access to, and may remove from any premises where same may be located,
any and all Books and Records as may pertain to the Accounts, Returned Goods and
any other collateral
<PAGE>
10
hereunder. Furthermore, as may be necessary to administer and enforce our rights
in the Accounts, Returned Goods and any other collateral hereunder, or to
facilitate the collection or realization thereof, we have your permission to:
(a) use (at your expense) your personnel, supplies, equipment, computers and
space, at your place of business or elsewhere; and (b) notify postal authorities
to change the address for delivery of your mail to such address as we may
designate and to receive and open your mail. We agree to turn over to you or
your representative all mail not related to the aforesaid purposes.
17.3 After the occurrence of an Event of Default which is not waived by
us, with respect to any other property or collateral in which we have a security
interest, we shall have all of the rights and remedies of a secured party under
Article 9 of the Uniform Commercial Code. If notice of intended disposition of
any such property or collateral is required by law, it is agreed that five (5)
days notice constitutes reasonable notice. The net cash proceeds resulting from
the exercise of any of the foregoing rights, after deducting all charges, costs
and expenses (including reasonable attorneys' fees) will be applied by us to the
payment or satisfaction of the Obligations, whether due or to become due, in
such order as we may elect. You remain liable to us for any deficiencies. With
respect to Factor Risk Accounts and Returned Goods relating thereto, you hereby
confirm that we are the owners thereof, and that our rights of ownership permit
us to deal with this property as owner and you confirm that you have no interest
therein.
18. MISCELLANEOUS PROVISIONS
18.1 This Agreement, and all attendant documentation, as the same may be
amended from time to time, constitutes the entire agreement between us with
regard to the subject matter hereof, and supersedes any prior agreements or
understandings. This Agreement can be changed only by a writing signed by both
of us. Our failure or delay in exercising any right hereunder will not
constitute a waiver thereof or bar us from exercising any of our rights at any
time. The validity, interpretation and enforcement of this Agreement is governed
by the laws of the State of New York, excluding the conflict laws of such State.
18.2 The Client Service Guide, as supplemented and amended from time to
time (the "Guide") has been furnished to you or is being furnished to you
concurrently with the signing of this Agreement, and by your signature below you
acknowledge receipt thereof. The Guide provides information on credit approval
processes, accounting procedures and fees. The procedures for Electronic Batch
Transmission are covered in supplemental instructions to the Guide. From time to
time, we may provide you with amendments, additions, modifications, revisions or
supplements to the Guide, which will be operative for transactions between us.
All information and exhibits contained in the Guide, on any screen accessed by
you, and on any print-outs, reports, statements or notices received by you are,
and will be, our exclusive property and are not to be disclosed to, or used by,
anyone other than you, your employees or your professional advisors, in whole or
in part, unless we have consented in writing.
<PAGE>
11
18.3 This Agreement binds and benefits each of us and our respective
successors and assigns, provided, however, that you may not assign this
Agreement or your rights hereunder without our prior written consent.
18.4 Section headings are for convenience only and are not controlling.
The use of "including" means "including without limitation".
18.5 If any provision of this Agreement is contrary to, prohibited by, or
deemed invalid under applicable laws or regulations, such provision will be
inapplicable and deemed omitted to such extent, but the remainder will not be
invalidated thereby and will be given effect so far as possible.
18.6 You shall take all action reasonably necessary to assure that your
computer-based systems are able to effectively process date-sensitive data
functions. You represent and warrant that the "Year 2000" problem (that is, the
inability of certain computer applications to recognize and properly perform
date-sensitive functions involving certain dates on or about or subsequent to
December 31, 1999) will not result in a material adverse effect on your
business, assets or operations. You reasonably anticipate that all computer
applications which are material to your business will, on a timely basis, be
able to properly perform date-sensitive functions for all dates on and after
January 1, 2000. Upon our request from time to time, you shall provide to us
assurances that your computer systems and software are or will be Year 2000
compliant on a timely basis, all in form and substance reasonably satisfactory
to us.
[Remainder of this page intentionally left blank]
<PAGE>
19. JURY TRIAL WAIVER
To the extent permitted by applicable law, we each hereby waive any right
to a trial by jury in any action or proceeding arising directly or indirectly
out of this Agreement, or any other agreement or transaction between us or to
which we are parties.
If the foregoing is in accordance with your understanding, please so
indicate by signing and returning to us the original and one copy of this
Agreement. This Agreement will take effect as of the date set forth above but
only after being accepted below by one of our officers in New York, after which
we shall forward a fully executed copy to you for your files.
Very truly yours,
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By /s/ Justin M. Coffey
--------------------------------------
Name: Justin M. Coffey
Title: Vice President
Read and Agreed to:
LEVCOR INTERNATIONAL, INC.
By /s/ Robert A. Levinson
------------------------
Name:
Title: Chairman/Pres.
Accepted at: New York, New York
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By /s/ Patrick Rohan
--------------------------------------
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-QSB
for the Quarterly Period Ended September 30, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 32,485
<SECURITIES> 0
<RECEIVABLES> 402,947
<ALLOWANCES> 0
<INVENTORY> 1,570,471
<CURRENT-ASSETS> 2,019,501
<PP&E> 932,340
<DEPRECIATION> (884,342)
<TOTAL-ASSETS> 2,067,499
<CURRENT-LIABILITIES> 2,483,145
<BONDS> 1,327,800
0
0
<COMMON> 987,242
<OTHER-SE> (2,730,688)
<TOTAL-LIABILITY-AND-EQUITY> 2,067,499
<SALES> 8,251,775
<TOTAL-REVENUES> 878,715
<CGS> 7,373,060
<TOTAL-COSTS> 8,512,535
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 216,605
<INCOME-PRETAX> (477,365)
<INCOME-TAX> 0
<INCOME-CONTINUING> (477,365)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (477,365)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
