<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1996
/ / Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to __________
Commission File Number 0-27788
EVOLUTIONS, INC.
(exact name of registrant as specified in its charter)
DELAWARE 22-3420712
(State of Incorporation) (I.R.S. Employer Identification No.)
65 Railroad Avenue, Ridgefield, New Jersey 07657
(Address of principal executive offices and zip code)
(201) 941-6550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
As of July 16, 1996, there were 6,191,065 shares* of Common Stock outstanding.
* Reflects the 0.033-for-1 stock split of February 1996
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
See pages F-1 through F-9.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Evolutions, Inc., a Delaware corporation (the "Company") merged with Gold
Securities Corporation ("Gold"), an Idaho corporation, in February 1996 for
the purpose of changing the state of incorporation from Idaho to Delaware. The
Company trades publicly on the NASDAQ electronic bulletin board under the
symbol "EVOI" and prior to the merger traded on the NASDAQ electronic bulletin
board under the symbol "GLDS." Gold was incorporated in 1922 under the name of
Kaniksu Mining Company ("Kaniksu"). In 1981, Kaniksu merged with Gold
Securities Corporation, and adopted that company's name. In July of 1995, Gold
entered into a reverse merger with EVO Manufacturing, Inc., a company
incorporated in the State of New Jersey ("EVO"). The majority owner of EVO,
PureTec Corporation ("PureTec"), a publicly held specialty plastics and
plastics recycling company, retained ownership of 75% of the outstanding
common stock of the Company after completion of the July 1995 reverse merger.
EVO was the only operating subsidiary of the combined companies at the time of
the July 1995 merger. For accounting purposes, the transaction was treated as
the acquisition of Gold by EVO. As a result, the Company's financial
statements consist of the results of operations of EVO since its inception in
1994. In February 1996, the Company effected a 0.033-for-1 reverse stock
split. All share amounts reflect this split.
On September 27, 1995, Kidsview, Inc. ("KVI"), a wholly owned subsidiary
of the Company, purchased certain assets of Direct Connect International Inc.
("DCI") consisting primarily of a licensed line of toy animals marketed under
the trade names ZOO BORNS and TEA BUNNIES.
In February 1996, the Company acquired substantially all of the assets of
Smart Style Industries, Inc. and affiliates (collectively "SSI") in exchange
for $1,125,000 cash, a thirty-day promissory note in the amount of $500,000,
$1,000,000 in notes payable in quarterly installments with Common Stock of the
Company valued at $1,000,000, the assumption of approximately $1,200,000 of
liabilities, and warrants to purchase an additional 100,000 shares of Company
stock. An additional $1,000,000 will be payable in stock if certain operating
results are achieved over the next five years. The Company operates these
assets through its wholly owned subsidiaries, Smart Style Acquisition Corp.
("SSA"), Lions Acquisition Corp. and Lions Holding Corp. (collectively
"Lions").
SSA manufactures a varied line of apparel for many age groups and is a
major manufacturer of children's raincoats and trench coats. SSA also
manufactures men's and boy's pants, shirts, jeans and outerwear. The Wee
Willie(Registered) line of SSA includes pants, shirts, vests and jackets for
infants, toddlers, sizes 4 to 7 and sizes 8 to 14. In conjunction with this
acquisition, the Company has also acquired a license to use the H.W. Carter &
Sons' Watch the Wear(Registered) label. This label has been in existence since
1859 and the line includes men's and women's work pants, jackets, shirts,
overalls and jean related items. The license agreement provides for a 3%
royalty on all sales of the Carter label to be paid to H.W. Carter & Sons,
Inc., with a minimum annual payment of $100,000. The initial term of the
agreement is for three years with thirty-three options to renew for additional
three year periods held by the Company. Carter label sales have constituted
approximately 10% of SSI sales.
2
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Results of Operations
The following discussion and analysis should be read in conjunction with
the Financial Statements and notes thereto appearing elsewhere herein. In July
1995, Gold and EVO-NJ consummated a reverse merger. For accounting purposes,
the transaction was treated as the acquisition of Gold by EVO-NJ. As a result,
the Company's financial statements consist of the results of operations of
EVO-NJ since its inception in 1994.
The Company's business is highly seasonal. The traditional peak periods
of the Company's constituent businesses, toys and apparel, are during the fall
and winter holiday seasons. The Company's businesses historically have
incurred losses during the period reported herein.
Three months ended June 30, 1996 and 1995
The Company had net revenues of $2,427,722 for the three months ended
June 30, 1996 and $146,642 for the three months ended June 30, 1995. The
increase in net revenues is attributable to the Company's acquisitions of the
toy lines and apparel business. Net losses for the current three month period
are $1,590,715, or $0.31 per share, as compared to net losses of $276, or $-0-
per share for the corresponding three-month period of a year ago. The
increased losses for the current three month period as compared to the same
period of a year ago are primarily the result of the expenditure by the
Company of $1,088,059 in advertising and promotion costs compared to $-0-
during 1995. This expenditure has been made in anticipation of the Company's
expected peak sales periods of the fall and winter holiday seasons.
Six months ended June 30, 1996 and 1995
The Company had net revenues of $4,536,213 for the six months ended June
30, 1996 and $244,584 for the six months ended June 30, 1995. The increase in
net revenues is attributable to the Company's acquisitions of the toy lines
and apparel business. Net losses for the current six month period are
$2,294,778, or $0.51 per share, as compared to net losses of $43,614 or $0.02
per share for the corresponding six-month period of a year ago. The increased
losses for the current six month period as compared to the same period of a
year ago are primarily the result of the expenditure by the Company of
$1,356,089 in advertising and promotion costs compared to $-0- during 1995.
This expenditure has been made in anticipation of the Company's expected peak
sales periods of the fall and winter holiday seasons.
Liquidity and Capital Resources
The Company had working capital of $968,634 at June 30, 1996, as compared
to a working capital deficit of $502,010 at December 31, 1995. The increase is
attributable to the cash received as proceeds of the private placements made
by the Company, as described below. In 1995 the Company obtained most of its
working capital from its parent company, PureTec. During 1995, PureTec
contributed to the Company securities and cash with a total value of
$2,225,000 in exchange for 2,659,312 shares of Common Stock of the Company, as
adjusted for the 0.033-for-1 stock split.
In February and March of 1996, the Company borrowed an aggregate of
$3,000,000 from various outside sources (the "Bridge Lenders"). In exchange
the Company has issued to the Bridge Lenders notes (the "Bridge Notes") for
the face amount of the loans due May through August 1996. The Bridge
3
<PAGE>
Notes accrue interest at the rate of 8% per annum. In addition, the Company
has issued to the Bridge Lenders warrants to purchase a total of 3,700,000
shares of the Company's Common Stock. The exercise price of the warrants
is $3.50 per share of stock purchased, and expire five years from the
date of issue. In May 1996, the Company borrowed an additional $100,000 on
terms identical to the original Bridge Lenders and used those proceeds to
repay some of the expiring Bridge Notes. In June 1996, the Company borrowed an
additional $50,000 on terms identical to the original Bridge Lenders and used
those proceeds to repay some of the expiring Bridge Notes. The remaining
Bridge Notes are payable in August 1996.
In March 1996, the Company offered a maximum of 500,000 Units, each
consisting of two shares of the Company's Common Stock, and one Stock Purchase
Warrant to acquire one share of the Company's Common Stock in exchange for
$3.50, at a purchase price of $5.00 per Unit. The Stock Purchase Warrants will
expire five years from the date of issue. As of July 10, 1996, the Company had
sold a total of 450,750 Units in this offering for total proceeds of
$2,253,750. At present this offering has not been completed, and there can be
no assurances that the maximum number of Units offered will be sold.
In May 1996, the Company offered a maximum of 600,000 Units, each
consisting of two shares of the Company's Common Stock, and one Stock Purchase
Warrant to acquire one share of the Company's Common Stock in exchange for
$3.50, at a purchase price of $5.00 per Unit. The Stock Purchase Warrants will
expire five years from the date of issue. As of July 10, 1996, the Company had
sold a total of 440,000 Units in this offering for total proceeds of
$2,200,000. At present this offering has not been completed, and there can be
no assurances that the maximum number of Units offered will be sold.
As of July 10, 1996, Bridge Lenders have agreed to use $1,800,000 of
their loans toward the purchase of the Units in the private placement, as
described above. The Company intends to use a portion of the proceeds of the
placements to pay off the balance of the $1,200,000 in Bridge Notes and has
contributed the remaining proceeds to working capital. There can be no
assurances that the placements will be completed in their entirety.
At June 30, 1996, the Company had loans payable of approximately $260,000
consisting of secured notes to relatives and affiliates of Michael Nafash,
CEO, President and a Director of the Company. The notes are due on demand and
bear interest at the annual rate of 12%. The notes are secured by shares of
PureTec common stock held by the Company.
In February 1996, SSA entered into a financing agreement with First
Factors Corporation whereby SSA may take advances on their uncollected
accounts receivable up to a limit of 90%. SSA may overadvance on this facility
by up to $500,000. Interest accrues at the prime rate plus 1.0%. At June 30,
1996 there was approximately $275,000 outstanding on the overadvance provision
of the financing agreement. This financing agreement was terminated by the
Company on July 2, 1996.
In July 1996, the Company's apparel subsidiaries, SSA and EVO, entered
into a financing agreement with Heller Financial, Inc. whereby SSA may take
advances on both subsidiaries' uncollected accounts receivable up to a limit
of 90%. SSA may overadvance on this facility by up to $1,000,000. Interest
accrues at the prime rate plus 1%. Additionally, a fee of 0.75% is due on
amounts advanced. The facility can be canceled by either party on sixty days
written notice. This facility is collateralized by the accounts receivable of
SSA and EVO and guaranteed by the Company. This facility supersedes the
4
<PAGE>
facility entered into in February 1996 between the Company and First Factors,
Inc. As part of the agreement, Heller Financial has indemnified First
Factors against all outstanding overadvances and uncollected accounts
receivable.
In April 1996, KVI entered into a financing agreement with Heller
Financial, Inc. whereby KVI may take advances on uncollected accounts
receivable up to a limit of 85%. Interest accrues on monies advanced at the
prime rate plus 2%. Additionally, a fee of 1% is due on amounts advanced. This
facility is secured by the accounts receivable and domestic inventory of KVI
and also guaranteed by the Company and PureTec.
In May 1996, Lions refinanced the existing mortgage on its production and
warehouse facility located in Gastonia, North Carolina with Branch Bank &
Trust Co. The new loan is for $750,000 with interest accruing at the prime
rate plus 1.5% payable monthly plus a monthly principal payment of $4,167. On
May 1, 1999 there is a balloon payment due of $604,167. At June 30, 1996,
there was $745,833 due on this mortgage.
Net cash used in operations for the six months ended June 30, 1996 was
$4,328,580, which primarily reflects the net losses incurred by the Company as
well as the increase in inventory associated with the Smart Style acquisition
as well as the expanded scope of operations of the Company. The increased
losses for the current six month periods as compared to the same period of a
year ago are primarily the result of the expenditure by the Company of
$1,356,089 in advertising and promotion costs compared to $-0- during 1995.
This expenditure has been made in anticipation of the Company's expected peak
sales periods of the fall and winter holiday seasons. Cash used by investing
activities totaled $1,531,207, consisting primarily of payments for the Smart
Style assets acquired. Cash flows from financing activities, consisting of
loan proceeds and the proceeds from private placements, less repayment of
notes to related parties, totaled $5,925,939.
Net cash used in operations for the six months ended June 30, 1995 was
$89,159. Cash provided by investing activities was $10,075. Cash provided by
financing activities was $56,660.
The Company's statement of cash flows for the three months ended June 30,
1996 reflects cash used in operations of $2,174,685 which is principally the
result of the net losses incurred by the Company, the increase in inventory
associated with the Smart Style acquisition, as well as the expanded scope of
operations of the Company. The increased losses for the current three month
period as compared to the same period of a year ago is primarily the result of
the expenditure by the Company of $1,088,059 in advertising and promotion
costs compared to $-0- during 1995. This expenditure has been made in
anticipation of the Company's expected peak sales periods of the fall and
winter holiday seasons. Cash used in investing activities was $171,561 which
is primarily due to an increase in property and equipment and other assets,
net of proceeds of the sale of securities owned by the Company. Cash from
financing activities totaled $2,178,607, consisting of the proceeds from
private placements, net of repayments of existing notes.
Net cash used in operations for the three months ended June 30, 1995 was
$31,214. Cash provided by financing activities was $15,660.
While the management of the Company believes it has the necessary working
capital to operate the businesses until August 1996 when the $1.1 million in
notes issued to the Bridge Lenders comes due, no arrangement for continued
financing other than the completion of the private placements is in place.
5
<PAGE>
It is anticipated that a portion of the proceeds of the private placements
will be used to repay indebtedness. The Company will require additional
working capital in order to continue to operate and expand its businesses.
Such additional funding may come from other public or private financial
sources, bank financing or combinations thereof. The Company has no current
arrangements with respect to any such funding.
The Company's cash flow is highly seasonal. The traditional peak periods
of the Company's constituent businesses, toys and apparel, are during the fall
and winter holiday seasons. The current cash flows recorded by the Company are
consistent with the historical trends of the Company's newly acquired toy and
apparel businesses.
Inflation
The Company has not been materially affected by the impact of inflation.
6
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no known legal proceedings that would have a material effect
upon the operations of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) None.
(b) On May 9, 1996, the Company filed a Report on Form 8-K/A related to
the SSI acquisitions that included (i) complete audited financial statements
for SSI for the fiscal years ended December 31, 1995 and 1994, and (ii) pro
forma financial information for the Company and subsidiaries as of December
31, 1995.
7
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
----------- ------------
(unaudited) (Derived from
audited
financial
statements)
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 77,660 $ 11,508
Due from broker 0 280,851
Investments in available-for-sale
securities 451,692 762,119
Accounts receivable, net 531,205 183,689
Inventory 3,938,523 0
Note receivable - related party 0 15,000
Prepaid expenses 17,945 0
----------- ------------
5,017,025 1,253,167
PROPERTY AND EQUIPMENT, net 2,111,560 89,147
GOODWILL, net of accumulated amortization
of $24,990 and $11,359 respectively. 1,322,631 261,262
LICENSES, net of accumulated amortization
of $122,024 and $48,810 respectively. 902,976 976,190
OTHER ASSETS 66,193 0
----------- ------------
TOTAL ASSETS $ 9,420,385 $ 2,579,766
=========== ============
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
----------- ------------
(unaudited) (Derived from
audited
financial
statements)
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,124,899 $ 833,177
Accrued compensation 0 112,500
Loans payable 1,923,492 809,500
------------- ------------
TOTAL CURRENT LIABILITIES 4,048,391 1,755,177
LONG TERM DEBT 891,629 0
STOCKHOLDERS' EQUITY
Common stock, no par value
50,000,000 shares authorized;
3,599,553 shares issued at
December 31, 1995, stated at 0 3,392,035
Common stock, $.01 par value
50,000,000 shares authorized;
6,312,290 shares issued at
June 30, 1996. 63,123 0
Additional paid-in capital 8,956,452 0
Deficit (4,239,268) (1,944,490)
Unrealized holding loss on
securities available-for-sale (299,942) (622,956)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 4,480,365 824,589
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 9,420,385 $ 2,579,766
============= ============
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
JUNE 30 JUNE 30 JUNE 30 JUNE 30
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 4,536,213 $ 244,584 $ 2,427,722 $ 146,642
COSTS AND EXPENSES:
Cost of sales 2,897,887 165,514 1,519,742 86,922
Selling, general and administrative 2,091,397 105,949 1,255,996 43,261
Advertising & Promotion 1,356,089 0 1,088,059 0
Amortization expense 86,846 0 43,423 0
----------- ----------- ----------- -----------
6,432,219 271,463 3,907,220 130,183
----------- ----------- ----------- -----------
OPERATING LOSS (1,896,006) (26,879) (1,479,498) 16,459
OTHER
Interest expense 109,213 0 69,672 0
Loss on sale of securities of parent 289,559 16,735 41,545 16,735
----------- ----------- ----------- -----------
398,772 16,735 111,217 16,735
----------- ----------- ----------- -----------
NET LOSS $(2,294,778) $ (43,614) $(1,590,715) $ (276)
=========== =========== =========== ===========
NET LOSS PER SHARE $ (0.51) $ (0.02) $ (0.31) $ (0.00)
=========== =========== =========== ===========
Weighted average number of shares of common
stock outstanding 4,522,603 2,603,806 5,194,142 3,262,089
=========== =========== =========== ===========
</TABLE>
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
JUNE 30 JUNE 30 JUNE 30 JUNE 30
1996 1995 1996 1995
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,294,778) $ (43,614) $ (1,590,715) $ (276)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 108,158 0 54,079 0
Loss on sale of securities 289,559 0 41,545 0
Changes in noncash current assets and
liabilities, net of effects of businesses
acquired and noncash transactions:
(Increase) decrease in assets:
Accounts receivable (347,516) (42,951) 214,065 (14,050)
Inventory (2,350,351) (50,000) (1,499,737) (50,000)
Prepaid expenses (17,945) (3,434) 28,154 (3,434)
(Decrease) Increase in liabilities
Accounts payable and accrued expenses 241,364 50,840 534,995 36,546
------------ ---------- ------------ -----------
Total adjustments (2,076,731) (45,545) (626,899) (30,938)
------------ ---------- ------------ -----------
Net cash used in operating activities (4,371,509) (89,159) (2,217,614) (31,214)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (480,148) (5,964) (261,019) 0
Payments for businesses acquired, net of cash
acquired and including other cash
payments associated with the acquisitions (1,625,000) 0 0 0
Decrease in due from broker 280,851 0 0 0
Investments in available-for-
sale securities 42,929 0 42,929 0
Proceeds from available-for-sale securities 344,283 16,989 138,547 0
Decrease in note receivable - officer 15,000 0 0 0
Increase in other assets (66,193) (950) (49,089) 0
------------ ---------- ------------ -----------
Net cash (used in) provided by investing
activities (1,488,278) 10,075 (128,632) 0
------------ ---------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment to related party (550,000) 0 (100,000) 0
Proceeds from additional financing,
net of repayments 2,023,399 56,660 (373,933) 15,660
Sale of Private Placements 4,452,540 0 2,652,540 0
------------ ---------- ------------ -----------
Net cash provided by financing activities 5,925,939 56,660 2,178,607 15,660
------------ ---------- ------------ -----------
Net increase (decrease) in cash 66,152 (22,424) (167,639) (15,554)
Cash and cash equivalents at beginning
of period 11,508 22,713 245,299 15,843
------------ ---------- ------------ -----------
Cash and cash equivalents at end of period $ 77,660 $ 289 $ 77,660 $ 289
============ ========== ============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest 109,213 0 69,672 0
Income taxes 0 0 0 0
Non cash investing and financing activities:
Conversion of notes payable to common stock 1,800,000 0 0 0
Shares issued for business acquired 1,175,000 0 0 0
</TABLE>
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
COMMON SHARES
---------------------------------------------------- ADDITIONAL
Common, Common, Common PAID-IN
$ 10 Par No Par $.01 par Amount CAPITAL
-------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,000 -- -- $ 10,000 $ 865,000
Issuance of stock to parent 850 -- -- 8,500 1,916,500
Surrender of stock (200) -- -- (2,000) 2,000
Capital contribution -- -- -- -- 300,000
Merger with Gold Securities, Inc. (1,650) 3,550,053 -- 3,300,535 (3,083,500)
Issuance of stock in connection
with asset acquisition -- 49,500 -- 75,000 --
Unrealized holding loss on
available-for-sale securities -- -- -- -- --
Net loss -- -- -- -- --
-------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 -- 3,599,553 -- 3,392,035 --
Adjustment for reverse split 6,231
Merger with Evolution's, Inc.
a Delaware Company -- (3,605,790) 3,605,790 (3,355,977) 3,355,977
Issuance of common shares
in connection with acquisitions -- -- 845,000 8,450 1,166,550
Issuance of common shares
in payment of accrued bonuses 125,000 1,250 111,250
Private placements -- -- 1,736,500 17,365 4,322,675
Change in unrealized loss on
available-for-sale securities
Net loss -- -- -- -- --
-------- ----------- ----------- ----------- -----------
Balance, June 30, 1996 -- -- 6,312,290 $ 63,123 $ 8,956,452
======== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
LOSS ON
AVAILABLE-FOR- TOTAL
SALE STOCKHOLDERS'
(DEFICIT) SECURITIES EQUITY
--------- ---------- ------
<S> <C> <C> <C>
Balance, December 31, 1994 $ (341,538) $ (70,394) $ 463,068
Issuance of stock to parent -- -- 1,925,000
Surrender of stock -- -- --
Capital contribution -- -- 300,000
Merger with Gold Securities, Inc. -- -- 217,035
Issuance of stock in connection
with asset acquisition -- -- 75,000
Unrealized holding loss on
available-for-sale securities -- (552,562) (552,562)
Net loss (1,602,952) -- (1,602,952)
----------- ----------- -----------
Balance, December 31, 1995 (1,944,490) (622,956) 824,589
Adjustment for reverse split
Merger with Evolution's, Inc.
a Delaware Company -- -- --
Issuance of common shares
in connection with acquisitions -- -- 1,175,000
Issuance of common shares
in payment of accrued bonuses 112,500
Private placements -- -- 4,340,040
Change in unrealized loss on
available-for-sale securities 323,014 323,014
Net loss (2,294,778) -- (2,294,778)
----------- ----------- -----------
Balance, June 30, 1996 $(4,239,268) $ (299,942) $ 4,480,365
=========== =========== ===========
</TABLE>
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
JUNE 30 1996
1. The balance sheet as of June 30, 1996 and the statements of operations and
statements of cash flows for the six months and three months ended June
30, 1996 and June 30, 1995 have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only
normally recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at June 30, 1996 and June
30, 1995 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the audited financial
statements of Evolutions, Inc. and subsidiaries for the year ended
December 31, 1995. The results of operations for the six months and three
months ended June 30, 1996 and June 30, 1995 are not necessarily
indicative of the operating results for the full year.
2. Inventories consist of the following:
June 30, 1996 Dec.31, 1995
Raw Materials $ 500,000 $ -
Work-in-process 1,000,000 -
Finished goods 2,438,523 -
----------- -----------
$ 3,938,523 $ -
=========== ===========
The inventory is valued using the gross profit method.
3. Income Taxes:
At June 30, 1996, the Company has a 100% valuation allowance against the
deferred income tax asset related to net operating loss carryforwards
($1,915,000).
4. Industry Segments:
The company operates in two industry segments, clothing and toys.
Information concerning the Company's business segments for the six months
ended June 30, 1996 is as follows:
Clothing Toys Corporate Consolidated
---------------------------------------------------
Revenues $2,184,224 $2,351,989 $0 $4,536,213
Operating loss $ 559,318 $1,097,669 $239,019 $1,896,006
Identifiable assets $5,297,886 $1,316,625 $2,805,874 $9,420,385
Depreciation and
amortization $15,131 $93,027 $0 $108,158
Capital expenditures $51,569 $349,655 $0 $401,224
The Company's line of toy animals is manufactured in Asia.
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
JUNE 30 1996
5. Business Acquisitions:
On February 26, 1996, the Company acquired certain assets of Smart Style
Industries, Inc. and Affiliates (the "Seller"), a North Carolina-based
clothing manufacturer. Consideration consisted of (i) $1,125,000 cash,
(ii) a $500,000 30 day promissory note, (iii) the assumption of
liabilities approximating $1,200,000, and (iv) a $1,000,000 promissory
note, bearing interest at 10% per annum beginning on August 1, 1996.
Principal under the $1,000,000 note is payable in shares of the Company's
common stock in four quarterly installments commencing August 1, 1996.
The Company also issued warrants to purchase 100,000 shares of common
stock. In addition, the Seller is entitled to an additional $1,000,000 in
common stock over a period of five years, if certain earnings tests are
met.
In connection with the purchase, the Company entered into a license
agreement for the rights to use certain trademarks.
In addition, the Company entered into a five year employment agreement
with an officer of the Seller which provides for minimum annual salary of
$150,000. The employee was also issued 20,000 shares of common stock.
6. Bridge Financing:
In February and March 1996, the Company borrowed an aggregate of
$3,000,000 from various outside sources (the "Bridge Lenders"). In
exchange the Company issued to the Bridge Lenders notes (the "Bridge
Notes") for the face amount of the loans due May through August 1996. The
Bridge notes accrue interest at the rate of 8% per annum. In addition,
the Company has issued to the Bridge Lenders warrants to purchase a total
of 3,700,000 shares of the Company's Common Stock. The exercise price of
the warrants is $3.50 per share of stock purchased, and expire five years
from the date of issue. In May 1996, the Company borrowed an additional
$100,000 on terms identical to the original Bridge Lenders and used those
proceeds to repay some of the expiring Bridge Notes. In June, the Company
borrowed an additional $50,000 on terms identical to the original Bridge
Lenders and used those proceeds to repay some of the expiring Bridge
Notes. The remaining Bridge Notes are payable in August 1996.
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
JUNE 30 1996
7. Private Placement:
In March 1996, the Company commenced a private placement of its
securities. The placement consists of 500,000 Units at a purchase price
of $5.00 per Unit. Each Unit consists of two shares of common stock and
one warrant to purchase a share of common stock at an exercise price of
$3.50. As of July 10, 1996, the Company had received $2,253,750 of funds.
Of the funds received, $1,800,000 are from conversions of Bridge Notes
into the private placement and the balance are direct investments into the
private placement.
In May 1996, the Company commenced a second private placement of its
securities. The placement consists of 600,000 Units at a purchase price
of $5.00 per Unit. Each Unit consists of two shares of common stock and
one warrant to purchase a share of common stock at an exercise price of
$3.50. As of July 10, 1996, the Company had received $2,200,000 of funds.
Of the funds received, $100,000 had been used for the repayment of Bridge
Notes, and the balance has been used for working capital.
8. Financing Activities:
In February 1996, the Company's apparel subsidiary, Smart Style
Acquisition Corp., (SSA) entered into a financing agreement with First
Factors Corporation. This facility was terminated on July 2, 1996.
In July 1996, the Company's apparel subsidiaries, Smart Style Acquisition
Corp., (SSA) and EVO Manufacturing, Inc. (EVO) entered into a financing
agreement with Heller Financial, Inc, whereby SSA may take advances on
both subsidiaries uncollected accounts receivable up to a limit of 90%.
SSA may overadvance on this facility by up to $1,000,000. Interest accrues
at the prime rate plus 1%. Additionally, a fee of 0.75% is due on amounts
advanced. The facility can be canceled by either party on 60 days written
notice. This facility is collateralized by the accounts receivable of SSA
and EVO, the finished goods inventory of SSA and EVO and guaranteed by the
Company. This facility supersedes the facility entered into in February,
1996 between the company and First Factors, Inc. As part of the
agreement, Heller Financial, Inc. has indemnified First Factors against
all outstanding overadvances and uncollected accounts receivable.
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
JUNE 30 1996
8. Financing Activities - cont'd:
In April 1996, the Company's toy subsidiary, Kidsview, Inc. (KVI) entered
into a financing agreement with Heller Financial, Inc. whereby KVI may
take advances on uncollected accounts receivable up to a limit of 85%.
Interest accrues on moneys advanced at the prime rate plus 2%.
Additionally, a fee of 1% is due on amounts advanced. This facility is
collateralized by the accounts receivable and domestic inventory of KVI
and also guaranteed by the Company and PureTec Corporation.
On May 1, 1996, the Company refinanced the existing mortgage on its
manufacturing plant in Gastonia, North Carolina. The $750,000 loan bears
interest at the Bank's Prime Rate plus 1.5%, payable monthly. The term is
for 35 months, with a principal payment of $4,166.67 due monthly beginning
June 1, 1996, and a balloon at May 1, 1999 of $604,166.55. The loan is
collateralized by the property and guaranteed by the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
EVOLUTIONS, INC.
/s/ Michael Nafash
-----------------------------------
By: Michael Nafash
President and Chief Financial Officer
Date: July 22, 1996
8
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