- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
-----------------------------------------------------
(Mark one)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the Quarterly period ended
June 30, 1997
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) 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 No X
Indicate the number of shares outstanding of each of the registrant's classes of
stock as of the latest practicable date.
Class Outstanding at January 15, 1998
Common Stock, $.01 par value 6,562,280
- -------------------------------------------------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements commence on Page F-1.
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, 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 74% 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 TEA BUNNIES (Registered Trademark) and
ZOO BORNS (Registered Trademark). Additionally, KVI entered into an agreement to
retain the services of key management personnel from DCI.
In February 1996, the Company acquired substantially all the assets of
Smart Style Industries, Inc. and Affiliates (collectively "SSI"). The Company
operates these assets through its wholly-owned subsidiaries, Smart Style
Acquisition Corp., Lions Acquisition Corp. and Lions Holding Corp. (collectively
"SSA"). SSA is a manufacturer and marketer of childrens apparel. The Company's
line of recycled apparel products will be combined with SSA's business
operations.
In connection with the SSI acquisition, SSA also acquired a license to
use the H.W. Carter & Sons, Inc.'s ("H.W. Carter") Watch the Wear (Registered
Trademark) label.
On September 9, 1996, KVI entered into a license agreement with Sandbox
Entertainment, Inc. with respect to Pillow People (Trademark) stuffed toy and
doll products.
In April 1997, SSA ceased its apparel manufacturing operations and
laid-off all employees at its Gastonia, GA location involved in the
manufacturing process.
2
<PAGE>
On April 30, 1997, SSA sold its Cutecumber (Registered Trademark) line
to Snake Creek Manufacturing Co., Inc., for cash and a future royalty, the
proceeds all of which were made payable to Heller Financial, Inc., ("Heller") in
accordance with SSA's financing agreement with Heller.
Effective April 30, 1997, the management agreement between DCI and KVI
was terminated. KVI has not generated any revenue since April 30, 1997, and
there can be no assurance that KVI will be successful in generating revenues in
the future.
On May 2, 1997, the owner of the H.W. Carter Watch the Wear (Registered
Trademark) label terminated SSA's rights to the license.
On May 15, 1997, SSA's secured lender, Heller Financial, Inc.,
foreclosed on substantially all of the assets of the apparel subsidiaries.
Effective June 6, 1997, the subsidiaries filed for protection under Chapter 11
of the Bankruptcy Code. SSA is in the process of actively seeking the return of
preference payments made ninety days prior to the bankruptcy. Proceeds will be
used for secured creditors and any remaining balance will be distributed to
priority creditors. Subsequently, in December 1997, at the Bankruptcy court's
recommendation, the subsidiaries changed their bankruptcy status to Chapter 7.
On July 15, 1997, the license for KVI's rights to market TEA BUNNIES
(Registered Trademark) was terminated by the licensor.
On October 8, 1997, KVI voluntarily filed for protection from its
creditors under Chapter 7 of the United States Bankruptcy Court in the District
of New Jersey.
The following discussion and analysis should be read in conjunction
with the Company's Form 10-K for the year ended December 31, 1996.
Results of Operations
Three months ended June 30, 1997 and 1996
The Company had net sales of $1,828,355 for the three months ended June
30, 1997 as compared to $2,427,722 for the three months ended June 30, 1996. The
apparel segment recorded sales of $1,188,812 and $1,162,849 for the quarter
ended June 30, 1997 and 1996, respectively, and operating losses were $664,136
and $571,544 for the three months ended June 30, 1997 and 1996, respectively.
The toy segment recorded sales of $639,543 and $1,264,873 for the three months
ended June 30, 1997 and 1996, respectively, and had operating losses of
$1,893,301 and $907,954 for the three months ended June 30, 1997 and 1996,
respectively. The decrease in toy segment sales can be attributed to the fact
that KVI, the toy segment, did not generate any sales after April 30, 1997.
Gross margin for the Company was $(470,374) for the three months ended
June 30, 1997 as compared to $907,980 for the three months ended June 30, 1996.
The apparel segment had a gross margin of $(428,076) for the second quarter of
1997 as compared to $10,569 for the same period in 1996. The decrease in apparel
gross margin in the second quarter of 1997 can be attributed to significantly
increased costs and lower sales volume. The toy segment which had a gross margin
of $(42,298) for the three months ended June 30, 1997 as compared to $897,411
3
<PAGE>
for the three months ended June 30, 1996 due to the fact that the toy segment
did not generate any sales after April 30, 1997.
The Company had a net loss of $2,564,300 for the second quarter of 1997
as compared to a net loss of $1,590,715 for the same period in 1996.
Six Months ended June 30, 1997 and 1996
The Company had net sales of $10,028,287 for the six months ended June
30, 1997 as compared to $4,536,213 for the six months ended June 30, 1996. The
apparel segment recorded sales of $7,155,771 and $2,184,224 for the six months
June 30, 1997 and 1996, respectively, and operating losses were $1,311,187 and
$798,337 for the six months ended June 30, 1997 and 1996, respectively. The toy
segment recorded sales of $2,872,516 and $2,351,989 for the six months ended
June 30, 1997 and 1996, respectively, and had operating losses of $3,962,811 and
$1,097,669 for the six months ended June 30, 1997 and 1996, respectively.
Gross margin for the Company was $1,124,055 for the six months ended June
30, 1997 as compared to $1,638,326 for the six months ended June 30, 1996. The
apparel segment had a gross margin of $1,372,518 as compared to $443,829 for the
same period in 1996. The decrease in apparel gross margin in the first quarter
of 1997 can be attributed to significantly increased sales volume due to the
Company's purchase of SSA in February 1996. The toy segment which had a gross
margin of $(248,463) for the three months ended June 30, 1997 as compared to
$1,194,497 the three months ended June 30, 1996 due to the fact that the toy
segment did not generate any sales after April 30, 1997.
The Company had a net loss of $5,502,072 for the second quarter of 1997
as compared to a net loss of $2,294,778 for the same period in 1996.
Financial Position, Liquidity and Capital Resources
The Company had a working capital deficit of approximately $9,827,084 at
June 30, 1997 and $4,618,401 at December 31, 1997. The increase in working
capital deficit is attributable to the Company's bankruptcy status; assets were
foreclosed upon by the Company's secured creditor and all debt is in default and
thus classified as current liabilities.
Loans Payable
At March 31, 1997, the Company had loans payable and accrued interest
of approximately $148,000 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 rate of 12% per annum. The
notes are secured by 25,000 shares of Glasgal Communications, Inc. common stock
and all other marketable securities held by the Company. On May 29, 1997, the
noteholder foreclosed on the collateral and has since accepted the collateral as
full payment of the debt. At that date, the collateral had a market value of
approximately $100,000.
4
<PAGE>
Factoring Arrangements
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 SSA on July 2,
1996. In July 1996, SSA and EVO, entered into a financing agreement with Heller
Financial, Inc. ("Heller") 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 February 1996 between the SSA and First Factors, Inc. As part of
the agreement, Heller has indemnified First Factors, Inc. against all
outstanding over advances and uncollected accounts receivable.
In April 1996, KVI entered into a financing agreement with Heller
Financial, Inc. whereby KVI may take advance on uncollected accounts receivable
up to a limit of 90%. Interest accrues on monies advanced at the prime rate plus
2%. Additionally, a fee of 1% is due on amounts advanced. This facility is
guaranteed by the accounts receivable and domestic inventory of KVI and also by
the Company. Because of the bankruptcy proceedings with SSA, Heller advised KVI
that it would no longer make advances to KVI.
On May 15, 1997, Heller foreclosed on substantially all of the assets of
SSA. Effective, June 6, 1997, the subsidiaries filed for protection under
Chapter 11 of the Bankruptcy Code. SSA is in the process of actively seeking the
return of preference payments made ninety days prior to the bankruptcy. Proceeds
will be used for secured creditors and any remaining balance will be distributed
to priority creditors. Subsequently, in December 1997, at the Bankruptcy court's
recommendation, the subsidiaries changer their bankruptcy status to Chapter 7.
Mortgage Payable
In May 1996, SSA refinanced the existing mortgage on its production and
warehouse facility located in Gastonia, North Carolina with Branch Bank & Trust
Co. ("BB&T") 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 July 29, 1997, BB&T foreclosed on the property due to SSA's
inability to meet the mortgage payments.
Cash Flow
The Company currently has no cash flows from operations.
Net cash provided by operating activities for 1997 was $298,189 which
was comprised of a decrease in inventories of $398,991, an increase in accounts
payable of $5,117,658, an increase in payroll taxes payable of $401,408 and a
decrease in due from agent of $318,000 offset by a net loss of $5,502,072.
Additionally, the Company used $734,481 of net borrowings from factor during the
three months ended June 30, 1997.
The Company's statement of cash flows for the quarter ended June 30, 1997
reflects cash used in operations of $2,171,000, which is a result of the net
loss of $2,294,778, an increase in inventories of $2,350,351, and an increase in
5
<PAGE>
accounts receivable of $347,516 offset by a loss on sales of securities of
$289,559. Net cash used in investing activities was $1,422,085, which consists
primarily of the purchase of SSA. Cash flows from financing activities consisted
of loan proceeds of $445,254 and proceeds from additional financing of
$2,023,399, offset by a repayment to a related party of $550,000.
Inflation
The Company has not been materially affected by the impact of
inflation.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
SSA's secured lender, Heller Financial, Inc., has foreclosed on
substantially all of the assets of the apparel subsidiaries. Effective, June 6,
1997, the subsidiaries filed for protection under Chapter 11 of the Bankruptcy
Code. SSA is in the process of actively seeking the return of preference
payments made ninety days prior to the bankruptcy. Proceeds will be used for
secured creditors and any remaining balance will be distributed to priority
creditors. Subsequently, in December 1997, at the Bankruptcy court's
recommendation, the subsidiaries changed their bankruptcy status to Chapter 7.
On October 8, 1997, KVI voluntarily filed for protection from its
creditors under Chapter 7 of the United States Bankruptcy Court in the District
of New Jersey.
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 of Form 8-K
(a) None.
(b) None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, 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
Chief Executive Officer,
President and Chief Financial
Officer
Dated: January 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below as of January 15, 1998 by the following persons on
behalf of Registrant and in the capacities indicated.
/s/ Michael Nafash Dated: January 15, 1998
- ------------------
Michael Nafash, Director, CEO, CFO and
President
<PAGE>
<TABLE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
--------------- ----------------
ASSETS 1997 1996
--------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 5,992 $ 222,284
Due from agent ................................. -- 318,000
Investments in available-for-sale securities ... -- 7,173
Accounts receivable ............................ 229,941 358,142
Due from factor ................................ 92,121 257,687
Inventories (Note 3) ........................... 128,505 5,246,163
Prepaid expenses and other current assets ...... 43,785 207,659
------------ ------------
500,344 6,617,108
PROPERTY, PLANT AND EQUIPMENT, net (Note 4) ...... 271,660 504,087
OTHER ASSETS ...................................... 0 50,693
------------ ------------
$ 772,004 $ 7,171,888
============ ============
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to factor (Note 5) ........................ $ 403,940 $ 1,138,421
Payroll taxes payable ......................... 1,337,067 935,659
Accounts payable .............................. 6,003,679 5,604,688
Accrued expenses .............................. 890,966 1,721,246
Bridge notes payable (Note 6) ................. 850,000 850,000
Loans payable (Note 7) ........................ -- 143,719
Long-term debt in default ..................... 841,776 841,776
------------ ------------
10,327,428 11,235,509
------------ ------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized; 6,562,280 issued and outstanding
outstanding at December 31, 1996 ........... 65,623 65,623
Common stock, no par value, 50,000,000 shares
authorized; 3,599,553 issued and outstanding
at June 30, 1997, stated at ................ -- --
Preferred stock; authorized 5,000,000 shares;
-0- issued and outstanding ................. -- --
Additional paid-in capital .................... 9,469,585 9,469,585
Deficit ....................................... (19,086,682) (13,584,610)
Unrealized holding loss on securities ......... -- (10,269)
available-for-sale
Treasury stock ................................ (3,950) (3,950)
------------ ------------
(9,555,424) (4,063,621)
------------ ------------
$ 772,004 $ 7,171,888
============ ============
</TABLE>
See notes to financial statements
F-1
<PAGE>
<TABLE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Six Months Ended
June 30 , June 30 ,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES .............................. $ 1,828,355 $ 2,427,722 $ 10,028,287 $ 4,536,213
COST OF SALES ......................... 2,298,729 1,519,742 8,904,232 2,897,887
------------ ------------ ------------ ------------
GROSS PROFIT .......................... (470,374) 907,980 1,124,055 1,638,326
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Selling, general and administrative 1,945,285 1,255,996 5,321,495 2,091,397
Advertising and promotion ......... 141,778 1,088,059 1,076,558 1,356,089
Amortization ...................... -- 43,423 -- 86,846
------------ ------------ ------------ ------------
2,087,063 2,387,478 6,398,053 3,534,332
------------ ------------ ------------ ------------
OPERATING LOSS ........................ (2,557,437) (1,479,498) (5,273,998) (1,896,006)
------------ ------------ ------------ ------------
OTHER:
Loss on sale of securities ........ -- 41,545 -- 289,559
Interest expense .................. 133,664 69,672 355,350 109,213
Interest income ................... (524) -- (999) --
------------ ------------ ------------ ------------
133,140 111,217 354,351 398,772
------------ ------------ ------------ ------------
Net Loss before Extraordinary Item .... (2,690,577) (1,590,715) (5,628,349) (2,294,778)
Extraordinary Item - Extinguishment
of Debt ........................... 126,277 -- 126,277 --
------------ ------------ ------------ ------------
NET LOSS .............................. (2,564,300) (1,590,715) (5,502,072) (2,294,778)
============ ============ ============ ============
NET LOSS PER SHARE
Net Loss before Extraordinary Item $ (.41) $ (.31) $ (.85) $ (.51)
Extraordinary Item .02 0.00 .02 0.00
------------ ------------ ------------ ------------
Net Loss $ (.39) $ (.31) $ (.83) $ (.51)
============ ============ ============ ============
Weighted average number of common
share outstanding ................. 6,562,280 5,194,142 6,652,280 4,522,603
============ ============ ============ ============
</TABLE>
See notes to financial statements
F-2
<PAGE>
<TABLE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Unrealized
Common Shares Loss on
---------------------------------------------- Additional Available
Common, Common, Common, Paid-in for-Sale Treasury
$10 Par No Par $.01 Par Amount Capital Deficit Securities Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1994 1,000 0 0 $ 10,000 $ 865,000 ($ 341,538) ($ 70,394) $-- $ 463,068
Issuance of stock
to parent ...... 850 -- -- 8,500 1,916,500 -- -- -- 1,925,000
Surrender
of stock ....... (200) -- -- (2,000) 2,000 -- -- -- 0
Capital
contribution ... -- -- -- -- 300,000 -- -- -- 300,000
Merger with
Gold Securities,
Inc ............ (1,650) 3,550,053 -- 3,300,535 (3,083,500) -- -- -- 217,035
Issuance of stock
in connection
with asset
acquisition .... -- 49,500 -- 75,000 -- -- -- -- 75,000
Change in
unrealized
holding loss
on available-
for-sale
securities ..... -- -- -- -- -- -- (552,562) -- (552,562)
Net Loss ........ -- -- -- -- -- (1,602,952) -- -- (1,602,952)
------ ----------- ---------- ----------- ----------- ------------ --------- ------- ------------
Balance,
December 31,
1995 0 3,599,553 0 3,392,035 0 (1,944,490) (622,956) 0 824,589
(Unaudited)
Adjustments for
reverse split .. -- 6,236 -- -- -- -- -- -- 0
Merger to affect
change of state of
incorporation .. -- (3,605,789) 3,605,789 (3,355,977) 3,355,977 -- -- -- 0
Issuance of stock
in connection
with asset
acquisition .... -- -- 845,000 8,450 1,194,550 -- -- -- 1,203,000
Issuance of common
shares for
payment of
accrued bonuses -- -- 125,000 1,250 111,250 -- -- -- 112,500
Issuance of
securities
in private
placements
for cash, net .. -- -- 1,832,500 18,325 4,559,348 -- -- -- 4,577,673
Issuance of
securities
in conversion
with debentures -- -- 153,991 1,540 248,460 -- -- -- 250,000
Change in
unrealized
holding loss
on available-
for-sale
securities ..... -- -- -- -- -- -- 612,687 -- 612,687
Repurchase of
shares ......... -- -- -- -- -- -- -- (3,950) (3,950)
Net loss ........ -- -- -- -- -- (11,640,120) -- -- (11,640,120)
------ ----------- ---------- ----------- ----------- ------------ --------- ------- ------------
Balance,
December 31,
1996 0 0 6,562,280 $ 65,623 $ 9,469,585 ($13,584,610) ($ 10,269) ($3,950) ($ 4,063,621)
Change in
unrealized
holding loss
on available-
for-sale
securities ..... -- -- -- -- -- -- 10,269 -- 10,269
Net loss ........ -- -- -- -- -- (5,502,072) -- -- (5,502,072)
------ ----------- ---------- ----------- ----------- ------------ --------- ------- ------------
Balance,
June 30, 1997 0 $ 0 $6,562,280 $ 65,623 $ 9,469,585 ($19,086,682) $ 0 ($3,950) ($ 9,555,424)
====== =========== ========== =========== =========== ============ ========= ======= ============
</TABLE>
See notes to financial statements
F-3
<PAGE>
<TABLE>
F-3
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Six Months Ended
June 30,
-----------------------------------------------
1997 1996
-------------- ---------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. ($5,502,072) ($2,294,778)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on foreclosed debt ........................... (126,277) --
Depreciation and amortization ..................... 12,427 108,158
Loss on sale of securities ........................ -- 289,559
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ......................... 128,201 (347,516)
Prepaid expenses and other .................. 163,874 (17,945)
Due from agent .............................. 318,000 --
Due from factor ............................. 165,566 --
Inventory ................................... 5,117,658 (2,350,351)
Other assets ................................ 50,693 (66,193)
Increase (decrease) in liabilities:
Accounts payable ............................ 398,991 241,364
Accrued expenses ............................ (830,280) --
Payroll taxes payable ....................... 401,408 --
----------- -----------
Total adjustments ................................. 5,800,261 (2,142,924)
----------- -----------
Net cash provided by (used in) operating activities 298,189 (4,437,702)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for businesses acquired, net of
cash acquired and including other cash
payments associated with the acquisition ............. -- (1,625,000)
Additions to property, plant and equipment ............... -- (480,148)
Decrease in due from broker .............................. -- 280,851
Proceeds from sales of securities ........................ -- 344,283
Decrease in note receivable - officer .................... -- 15,000
Investment in available-for-sale securities .............. -- 42,929
Sale of foreclosed assets ................................ 220,000 --
----------- -----------
Net cash provided by (used in)
investing activities .......................... 220,000 (1,422,085)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from factor ............................... (734,481) --
Proceeds from debt borrowings ............................ -- --
Repayment to related party ............................... -- (550,000)
Net proceeds from additional financing ................... -- 2,023,399
Sale of private placements ............................... -- 4,452,540
----------- -----------
Net cash (used in) provided by financing activities (734,481) 5,925,939
----------- -----------
Net (decrease) increase in cash .............................. (216,292) 66,152
Cash and cash equivalents at beginning of period ............. 222,284 11,508
----------- -----------
Cash and cash equivalents at end of period ................... $ 5,992 $ 77,660
=========== ===========
</TABLE>
See notes to financial statements
F - 4
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERLY PERIOD ENDED JUNE 30, 1997
(Unaudited)
1. Nature of Operations
Evolutions, Inc. (the "Company" or "Evolutions") was formed on January 21,
1994 and is engaged in the manufacturing and marketing of apparel and the
marketing of a line of toy animals.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany balances and
transactions have been eliminated.
In April 1997, SSA ceased its apparel manufacturing operations at it
Gastonia, GA location and laid off all employees involved in the manufacturing
process.
On April 30, 1997, SSA sold its Cutecumber (registered Trademark) line
to Snake Creek Manufacturing Co., Inc., for cash and a future royalty, all of
the proceeds which were made payable to Heller in accordance with SSA's
financing agreement with Heller.
Effective April 30, 1997, the management agreement between DCI and KVI
terminated. KVI has not generated any revenue since April 30, 1997 and there can
be no assurance that KVI will be successful in generating revenues in the
future.
On May 2, 1997, the owner of the H.W. Carter Watch the Wear (Registered
Trademark) label terminated SSA's rights to the license.
On May 15, 1997, the apparel subsidiaries' secured lender, Heller
Financial, Inc., foreclosed on substantially all of the assets of the apparel
subsidiaries. Effective June 6, 1997, the apparel subsidiaries filed for
protection under Chapter 11 of the Bankruptcy Code. (see Note 5). Subsequently,
in December 1997, at the Bankruptcy court's recommendation, the subsidiaries
changed their bankruptcy status to Chapter 7.
On July 15, 1997, the license for KVI's rights to market TEA BUNNIES
(Trademark) were foreclosed on by the licensor.
On October 8, 1997, KVI voluntarily filed for protection from its
creditors under Chapter 7 of the United States Bankruptcy Court in the District
of New Jersey.
F - 5
<PAGE>
2. Interim Reporting
The balance sheet as of June 30, 1997 and December 31, 1996 , the
statements of operations and the statement of cash flows for the three and six
months ended June 30, 1997 and 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 June 30, 1997 and December 31,
1996 and for all periods presented have been made.
Certain information and footnote disclosure 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 financial statements of Evolutions, Inc. and
subsidiaries for the year ended December 31, 1996. The results of operations for
the six months ended June 30, 1997 are not necessarily indicative of the
operating results for the full year.
The consolidated financial statements for the year ended December 31,
1996 are unaudited and have been prepared in accordance with generally accepted
accounting principles. Due to the Company's financial position, the Company did
not have the monies necessary to have Holtz Rubenstein & Co., LLP, independent
public accountants for the past fiscal year, complete the audit.
3. Inventories
Inventories consist of the following:
June 30, 1997 December 31, 1996
------------- ------------------
Raw Materials ............... $ -0- $1,170,968
Work-in-process ............. -0- 1,036,570
Finished goods .............. 128,505 3,038,625
---------- ----------
$ 128,505 $5,246,163
========== ==========
4. Property, Plant and Equipment
Included in property, plant and equipment is a building SSA used as its
manufacturing facility. On July 29, 1997, the building was foreclosed on by
SSA's lender. The building's valued was determined by an independent appraiser.
Additionally, the machinery and equipment included in property, plant
and equipment relates to SSA's business activities. The machinery and equipment
are valued at $220,000. On May 15, 1997, these assets were foreclosed upon by
SSA's secured lender and were subsequently auctioned for approximately $220,000.
F - 6
<PAGE>
5. Due to Factor
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 SSA on July 2,
1996. In July 1996, SSA and EVO, entered into a financing agreement with Heller
Financial, Inc. ("Heller") 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 February 1996 between the SSA and First Factors, Inc. As part of
the agreement, Heller has indemnified First Factors, Inc. against all
outstanding over advances and uncollected accounts receivable.
In April 1996, KVI entered into a financing agreement with Heller
whereby KVI may take advances on uncollected accounts receivable up to a limit
of 90%. Interest accrues on monies advanced at the prime rate plus 2%.
Additionally, a fee of 1% is due on amounts advanced. This facility is
guaranteed by the accounts receivable and domestic inventory of KVI and also by
the Company. Because of the bankruptcy proceedings with SSA, Heller advised KVI
that it would no longer make advances to KVI.
On May 15, 1997, Heller foreclosed on substantially all of the assets
of SSA. Effective, June 6, 1997, the subsidiaries filed for protection under
Chapter 11 of the Bankruptcy Code. SSA is in the process of actively seeking the
return of preference payments made ninety days prior to the bankruptcy. Proceeds
will be used for secured creditors and any remaining balance will be distributed
to priority creditors.
6. Loans Payable
At March 31, 1997, the Company had loans payable and accrued interest
of approximately $148,000 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 rate of 12% per annum. The
notes are secured by 25,000 shares of Glasgal Communications Inc. common stock
and all other marketable securities held by the Company. On May 29, 1997, the
noteholder foreclosed on the collateral and has since accepted the collateral as
full payment of the debt. At that date, the collateral had a market value of
approximately $100,000.
7. Income Taxes
At March 31, 1996, the Company has a 100% valuation allowance against
the deferred income tax asset related to net operating loss carry forwards.
F - 7
<PAGE>
8. Industry Segments
The Company operates in two industry segments, apparel and toys.
Information concerning the Company's business segments as of June 30, 1997 and
1996 are as follows:
June 30,
1997 1996
Revenues
Apparel ......................... 7,155,771 2,184,224
Toys ............................ 2,872,516 2,351,989
Consolidated .................... 10,028,287 4,563,213
Operating Loss
Apparel ......................... 1,311,187 798,337
Toys ............................ 3,962,811 1,097,669
Consolidated .................... 5,273,998 1,896,006
Identifiable Assets
Apparel ......................... 267,912 8,103,760
Toys ............................ 504,092 1,316,625
Consolidated .................... 772,004 9,420,385
Depreciation and Amortization
Apparel ......................... 11,005 15,131
Toys ............................ 1,422 93,027
Consolidated .................... 12,427 108,158
Capital Expenditures
Apparel ......................... ---- 130,493
Toys ............................ ---- 349,655
Consolidated .................... ---- 480,148
KVI's line of toys is manufactured in Asia and sold to North American
retailers and distributors.
F - 8
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Jun-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 5,992
<SECURITIES> 0
<RECEIVABLES> 92,121
<ALLOWANCES> 0
<INVENTORY> 128,505
<CURRENT-ASSETS> 500,344
<PP&E> 284,087
<DEPRECIATION> 12,427
<TOTAL-ASSETS> 772,004
<CURRENT-LIABILITIES> 10,327,428
<BONDS> 0
0
0
<COMMON> 65,623
<OTHER-SE> (9,621,047)
<TOTAL-LIABILITY-AND-EQUITY> 772,004
<SALES> 10,028,287
<TOTAL-REVENUES> 10,028,287
<CGS> 8,904,232
<TOTAL-COSTS> 6,398,053
<OTHER-EXPENSES> (999)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 355,350
<INCOME-PRETAX> (5,628,349)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,628,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 126,277
<CHANGES> 0
<NET-INCOME> (5,502,072)
<EPS-PRIMARY> (.84)
<EPS-DILUTED> (.84)
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