- -------------------------------------------------------------------------------
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 September 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.)
266 Harristown Road, Glen Rock, New Jersey 07452
(Address of principal executive offices and zip code)
(201) 493-9595
(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 October 25, 1996, there were 6,371,389 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-10.
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 Trademark) 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 Trademark) 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.
1
<PAGE>
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 consummated a reverse 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.
The Company's business is highly seasonal. The traditional peak periods of
the Company's constituent businesses, toys and apparel, are during the fall,
winter and spring holiday seasons. The Company primarily ships toys from July
through March and apparel from August through March. These have been the trends
in the past and management foresees no reason why these trends will not continue
into the foreseeable future.
Three months ended September 30, 1996 and 1995
The Company had net revenues of $7,748,605 for the three months ended
September 30, 1996 and $43,705 for the three months ended September 30, 1995.
Net income for the current three month period is $282,409, or $0.04 per share,
as compared to a net loss of $80,479, or $0.15 per share for the corresponding
three month period of a year ago. The results are impacted by the loss on the
sale of its PureTec stock of $229,918, or $.03 per share, for the three months
ended September 30, 1996. The increase in net revenues and net income is
attributable to the Company's acquisitions of the toy and apparel businesses and
the Company's efforts to expand its apparel lines. The three month period ending
September includes the start of the peak seasons for both of the Company's
businesses.
Nine months ended September 30, 1996 and 1995
The Company had net revenues of $12,284,818 for the nine months ended
September 30, 1996 and $309,910 for the nine months ended September 30, 1995.
The increase in net revenues is attributable to the Company's acquisitions of
the toy and apparel businesses. The net loss for the current nine month period
is $2,012,369, or $0.39 per share, as compared to a net loss of $168,787 or
$0.46 per share for the corresponding nine month period of a year ago. The
increased losses for the current nine month period as compared to the same
period of a year ago are the results of expenditures by the Company for
advertising and promotion, the increased selling, general and administrative
costs associated with the acquisition of the toy and apparel businesses and the
losses incurred on the sale of its PureTec stock.
Liquidity and Capital Resources
The Company had working capital of $1,783,936 at September 30, 1996, as
compared to a working capital deficit of $502,010 at December 31, 1995. The
increase is attributable to the Company's acquisition of the toy and apparel
businesses which were achieved through the financing arrangements 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 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
2
<PAGE>
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 Notes 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 Notes and used those proceeds to repay some of the expiring
Bridge Notes. As of September 30, 1996, the Company had $850,000 of Bridge Notes
outstanding.
In October 1996, $100,000 of Bridge Notes were converted into the private
placement, as fully described below, and, in addition, the Company converted
$400,000 of Bridge Notes into a Convertible Note bearing interest at 8%. The
terms allow the holder to convert the Convertible Note into the private
placement until the due date on April 22, 997. The balance of the Bridge Notes
totaling $350,000 have been converted into Demand Notes.
In March 1996, the Company offered 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 the Company's Common Stock, and one Stock
Purchase Warrant to acquire one share of the Company's Common Stock at an
exercise price of $3.50. The Stock Purchase Warrants will expire five years from
the date of issue. As of October 29, 1996, the Company had sold a total of
475,750 Units in this offering for total proceeds of $2,378,750. Of the funds
received, $1,900,000 are from the conversion of Bridge Notes into the private
placement and the balance are direct investments into the private placement. 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 commenced a second private placement of its
securities. The placement consists 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 October 29, 1996, the Company had sold a total of
440,000 Units in this offering for total proceeds of $2,200,000. Of the funds
received, $100,000 had been used for the repayment of Bridge Notes, and the
balance has been used for working capital. At present this offering has not been
completed, and there can be no assurances that the maximum number of Units
offered will be sold.
At September 30, 1996, the Company had loans payable of approximately
$120,000 consisting of secured notes to relatives and affiliates of Michael
Nafash, CEO, President and a Chairman of the Company. The notes are due on
demand and bear interest at 12% per annum. The notes are secured by shares of
PureTec common stock and other marketable securities 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%. This facility 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 over advance 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 invoices assigned. The facility can be canceled by either party on sixty days
written notice. This facility is collateralized by the accounts receivable and
finished goods inventory of SSA and EVO and guaranteed by the Company. This
facility supersedes the facility entered into in
3
<PAGE>
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 invoices assigned. This facility is secured
by the accounts receivable and domestic inventory of KVI and also guaranteed by
the Company.
In May 1996, the Company refinanced the existing mortgage on its production
and warehouse facility located in Gastonia, North Carolina with Branch Bank &
Trust Co. The $750,000 loan bears interest at the prime rate plus 1.5% payable
monthly. The term is for 35 months, with principal payments of $4,166.67 due
monthly beginning June 1, 1996, and a balloon payment at May 1, 1999 of
$604,166.55. The loan is collateralized by the property and guaranteed by the
Company.
On August 15, 1996, the Company issued convertible debentures in a
principal amount of $250,000. The debentures carry an interest rate of 3.0% and
are due on December 31, 1996. These debentures are convertible, on or after
September 24, 1996, into Common Stock at a rate equal to 67% of the average bid
and ask price on the date of conversion. The funds raised through this financing
was exclusively used for the repayment of the Bridge Notes. On September 29,
1996, $50,000 of the proceeds was converted into 21,322 shares of the Company's
Common Stock.
Net cash used in operations for the nine months ended September 30, 1996
was $4,539,291, which primarily reflects the net loss incurred by the Company
and the increase in inventory, partially offset by the increase in accounts
payable as the Company moves into its peak season for both its businesses. The
increased loss for the current nine month period as compared to the same period
of a year ago is primarily the result of advertising and promotion costs,
selling, general and administrative costs related to the acquisitions of the toy
and apparel businesses and the losses incurred on the sale of the Company's
PureTec stock. Cash used by investing activities totaled $1,563,124, and
consists primarily of payments for the Smart Style acquisition. Cash provided by
financing activities of $6,556,695 consists primarily of loan proceeds and the
proceeds from private placements which is offset by repayments of notes to
related parties.
Net cash used in operations for the nine months ended September 30, 1995 was
$177,071 and consisted primarily of the Company's net loss for the period. Cash
used by investing activities was $1,112,856 which was comprised primarily of the
note receivable. Cash provided by financing activities was $1,271,000 and
consisted primarily of the loan from related party.
While the management of the Company believes it has the necessary working
capital to operate the businesses until April 1997 when the $400,000 in
principal amount of convertible notes comes due, no arrangement for continued
financing other than the completion of the private placements is in place. It is
anticipated that a portion 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 commitments 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, occur during the fall,
winter and spring 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.
4
<PAGE>
Inflation
The Company has not been materially affected by the impact of inflation.
5
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
----------- ------------
(unaudited) (Derived from
audited financial
statements)
----------- ------------
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 465,788 $ 11,508
Due from broker 0 280,851
Investments in available-for-sale
securities 184,715 762,119
Accounts receivable, net 980,408 183,689
Due from factor 431,176 0
Inventory 6,694,339 0
Note receivable - related party 0 15,000
Prepaid expenses 101,764 0
----------- ------------
8,858,190 1,253,167
PROPERTY AND EQUIPMENT, net 2,325,585 89,147
GOODWILL, net of accumulated amortization
of $52,806 and $11,359 respectively. 1,294,815 261,262
LICENSES, net of accumulated amortization
of $158,631 and $48,810 respectively. 966,369 976,190
OTHER ASSETS 38,693 0
----------- ------------
TOTAL ASSETS $ 13,483,652 $ 2,579,766
=========== ============
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
----------- ------------
(unaudited) (Derived from
audited financial
statements)
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 4,532,342 $ 833,177
Accrued expenses 482,113 0
Accrued compensation 0 112,500
Convertible debentures 200,000 0
Loans payable 1,859,799 809,500
----------- ------------
TOTAL CURRENT LIABILITIES 7,074,254 1,755,177
LONG TERM DEBT 1,256,077 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;
6,360,389 shares issued at
September 30, 1996. 63,604 0
Additional paid-in capital 9,075,971 0
Deficit (3,956,862) (1,944,490)
Less: Treasury stock (3,950) 0
Unrealized holding loss on securities
available-for-sale (25,442) (622,956)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 5,153,321 824,589
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 13,483,652 $ 2,579,766
=========== ============
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
------------ ------------ ------------ ------------
REVENUES $12,284,818 $ 309,910 $ 7,748,605 $ 43,705
COST OF SALES 8,000,717 229,822 5,102,830 46,140
--------- --------- --------- ---------
GROSS PROFIT (LOSS) 4,284,101 80,088 2,645,775 (2,435)
COSTS AND EXPENSES:
Selling, general
and administrative 3,382,703 188,301 1,291,306 49,023
Advertising &
Promotion 1,928,086 0 571,997 0
Amortization expense 151,268 0 64,422 0
--------- --------- --------- ---------
5,462,057 188,301 1,927,725 49,023
--------- --------- --------- ---------
OPERATING(LOSS)INCOME (1,177,956) (108,213) 718,050 (51,458)
OTHER EXPENSES(INCOME)
Interest expense 314,939 37,794 205,726 21,227
Loss on sale of
securities 519,477 49,697 229,918 7,794
Interest income 0 (26,917) 0 0
-------- ---------- -------- ---------
834,416 60,574 435,644 29,021
-------- ---------- -------- --------
NET (LOSS) INCOME $ (2,012,372) $ (168,787) $ 282,406 $ (80,479)
============ ========== ========= =========
NET (LOSS) INCOME
PER SHARE $ (0.39) $ (0.46) $ 0.04 $ (0.15)
============= ========== ========= =========
Weighted average
number of shares
of common stock
outstanding 5,125,601 369,017 6,318,489 522,757
========= ========== ========= =========
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
COMMON SHARES
-----------------------------------------
Common, Common, Common
$ 10 Par No Par $.01 par Amount
-------- --------- --------- --------
Balance,
December 31, 1994 1,000 - - $10,000
Issuance of stock to
parent 850 - - 8,500
Surrender of stock (200) - - (2,000)
Capital contribution - - - -
Merger with Gold
SecuritieS, Inc. (1,650) 3,550,053 - 3,300,535
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 - 7,641 - -
Merger with Evolution's,
Inc.a Delaware Company - (3,607,200) 3,607,200 (3,355,977)
Issuance of common shares
in connection with
acquisitions - - 845,000 8,450
Issuance of common shares
in payment of accrued
bonuses - - 125,000 1,250
Private placements - - 1,764,500 17,545
Convertible Debentures - - 21,322 213
Misc. adjustments - - - 88
available-for-sale
securities - - - -
Repurchase of shares - - (2,633) -
Net loss - - - -
------------------------------------------------------
Balance,
September 30, 1996 - - 6,360,389 63,604
======================================================
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
UNREALIZED LOSS
ADDITIONAL ON AVAILABLE- TOTAL
PAID-IN TREASURY FOR-SALE STOCKHOLDERS'
CAPITAL (DEFICIT) STOCK SECURITIES EQUITY
--------------------------------------------------------
Balance,
December 31, 1994 865,000 (341,538) - (70,394) 463,068
Issuance of stock
to parent 1,916,500 - - - 1,925,000
Surrender of stock 2,000 - - - -
Capital contribution 300,000 - - - 300,000
Merger with Gold
Securities, Inc. (3,083,500) - - - 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 3,355,977 - - - -
Issuance of common
shares in connection
with acqusition 1,166,550 - - - 1,175,000
Issuance of common
shares in payment
of accrued bonuses 111,250 - - - 112,500
Private placements 4,392,495 - - - 4,410,040
Convertible Debentures 49,787 - - - 50,000
Misc. adjustments (88) - - - -
Change in unrealized
loss on available-
for-sale securties - - - 597,514 597,514
Repurchase of shares - - (3,950) - (3,950)
Net loss - (2,012,372) - - (2,012,372)
--------------------------------------------------------
Balance,
September 30, 1996 9,075,971 (3,956,862) (3,950) (25,442) 5,153,321
========================================================
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS NINE MONTHS
SEPTEMBER 30 SEPTEMBER 30
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,012,372) $ (168,787)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 257,952 3,146
Loss on sale of securities 519,477 49,697
Changes in noncash current
assets and liabilities, net
of effects of businesses
acquired and noncash transactions:
(Increase) decrease in assets:
Accounts receivable (796,719) (21,077)
Due from contractor 0 (1,331)
Due from factor (431,176) 0
Inventory (5,106,167) (50,000)
Prepaid expenses (101,764) (3,000)
(Decrease) Increase in liabilities
Accounts payable 2,761,865 14,281
Accrued expenses 369,613 0
----------- ----------
Total adjustments (2,526,919) (8,284)
----------- ---------
Net cash (used in) operating
activities (4,539,291) (177,071)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (735,579) (5,965)
Payments for businesses acquired,
net of cash acquired and
including other cash payments
associated with the acquisitions (1,625,000) 0
Decrease in due from broker 280,851 0
Increase in goodwill 0 (75,000)
Purchase of license (100,000) 0
Investments in available-for-sale-
securities 42,929 0
Proceeds from available-for-sale
securities 628,818 97,148
Purchases of available-for-sale
securities 0 (4,000)
Decrease in note receivable - officer 15,000 0
Increase in notes receivable 0 (1,146,000)
Increase in cash from acquisitions 0 20,011
Increase in other assets (66,193) 950
---------- ----------
Net cash (used in)investing
activities $(1,559,174) $(1,112,856)
----------- ---------
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS NINE MONTHS
SEPTEMBER 30 SEPTEMBER 30
1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in loans payable $ 0 $ 175,000
Loans from related parties 0 796,000
Repayment to related parties (665,781) 0
Proceeds from additional
financing, net of repayments 2,449,936 0
Issuance of convertible
debentures, net of conversions 200,000 0
Purchase of treasury stock (3,950) 0
Proceeds from issuance of stock 0 300,000
Sale of Private Placements 4,572,540 0
-------- ---------
Net cash provided by financing
activities 6,552,745 1,271,000
-------- ---------
Net increase (decrease) in cash 454,280 (18,927)
Cash and cash equivalents at beginning
of period 11,508 22,713
------- ---------
Cash and cash equivalents at end of period $ 465,788 $ 3,786
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 272,254 $ 0
Income taxes 0 0
Non cash investing and financing activities:
Conversion of notes payable
to common stock 1,800,000 0
Shares issued for business acquired 1,175,000 0
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SEPTEMBER 30 1996
1. The balance sheet as of September 30, 1996 and the
statements of operations and statements of cash flows for
the nine months and three months ended September 30, 1996
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 September 30, 1996 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 nine
months and three months ended September 30, 1996 are not
necessarily indicative of the operating results for the
full year.
2. Inventories consist of the following:
-------------------------------------
<TABLE>
<CAPTION>
Sept. 30, 1996 Dec.31, 1995
----------------- ----------------
<S> <C> <C>
Raw Materials $ 1,623,523 $ -
Work-in-process 2,159,796 -
Finished goods 2,911,020 -
----------------- ----------------
$ 6,694,339 $ -
================= ================
</TABLE>
The inventory is valued using the gross profit method.
3. Income Taxes:
---------------------------------------
At September 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, apparel and
toys. Information concerning the Company's business
segments for the nine months ended September 30, 1996 is as
follows:
Apparel Toys Corporate Consolidated
-----------------------------------------------
Revenues $6,000,354 $6,284,464 $0 $12,284,818
Operating loss $338,946 $641,285 $197,725 $1,177,956
Identifiable assets $8,296,200 $3,286,131 $1,901,321 $13,483,652
Depreciation and
amortization $67,966 $59,718 $130,268 $257,952
Capital expenditures $159,111 $576,468 $0 $735,579
The Company's line of toy animals is manufactured in Asia
and sold primarily to North American retailers and
distributors.
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SEPTEMBER 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 Notes 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 Notes and used those proceeds to repay some
of the expiring Bridge Notes. As of September 30, 1996, the
Company had $850,000 of Bridge Notes outstanding.
In October 1996, $100,000 of Bridge Notes were converted
into the private placement (see note 7) and, in addition,
the Company converted $400,000 of Bridge Notes into a
Convertible Note. The terms allow the holder to convert the
Note into the private placement until the due date of the
Note on April 22, 1997, the note bears interest at 8% per
annum. The balance of the Bridge Notes totaling $350,000
have been converted into Demand Notes bearing interest at
8% per annum.
EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SEPTEMBER 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 the Company's common stock and one stock
purchase warrant to purchase one share of the Company's
common stock at an exercise price of $3.50. The stock
purchase warrants will expire five years from the date of
issue. As of October 29, 1996, the Company had received
$2,378,750 of proceeds. Of the funds received, $1,900,000
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. The stock purchase warrants will expire five years
from the date of issue. As of October 29, 1996, the Company
had received $2,200,000 of proceeds. 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, SSA and EVO Manufacturing, Inc. (EVO)
entered into a financing agreement with Heller Financial,
Inc, whereby SSA may take advances on both subsidiarie's
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 invoices assigned. The facility can
be canceled by either party on sixty days written notice.
This facility is collateralized by the accounts receivable
and 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.
EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SEPTEMBER 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 monies advanced at the prime rate plus
2%. Additionally, a fee of 1% is due on invoices assigned.
This facility is collateralized by the accounts receivable
and domestic inventory of KVI and also guaranteed by the
Company.
In May 1996, the Company refinanced the existing mortgage
on its production and warehouse facility 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 principal payments of $4,166.67 due monthly
and a balloon payment due on May 1, 1999 of $604,166.55.
The loan is collateralized by the facility and guaranteed
by the Company.
9 Convertible Debenture
----------------------------------------
On August 15, 1996, the Company issued convertible
debentures in a principal amount of $250,000. The
debentures carry an interest rate of 3.0% and are due on
December 31, 1996. The debentures are convertible, on or
after September 24, 1996, into Common Stock at a rate equal
to 67% of the average bid and ask price on the date of
conversion. The funds raised through this financing was
exclusively used for the repayment of Bridge Notes. On
September 29, 1996, $50,000 of the proceeds was converted
into 21,322 shares of the Company's Common Stock.
<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. (a)Exhibits and (b)Reports on Form 8-K
(a) None.
(b) None.
7
<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: October 31, 1996
8
<PAGE>
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