- -------------------------------------------------------------------------------
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 March 31, 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.
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 March 31, 1997 and 1996
The Company had net sales of $8,199,932 for the three months ended
March 31, 1997 as compared to $2,108,491 for the three months ended March 31,
1996. The apparel segment recorded sales of $5,966,959 and $1,021,375 for the
quarters ended March 31, 1997 and 1996, respectively, and the operating losses
were $647,051 and $226,793 for the three months ended March 31, 1997 and 1996,
respectively. The quarter ending March 31, 1997 includes three full months of
apparel sales, whereas, the quarter ending March 31, 1996 includes sales from
February 28, 1996 (date of the SSA acquisition) through March 31, 1997. The
increase in net sales is primarily attributable to the Company's full quarter of
apparel operations in 1997. The toy segment recorded sales of $2,232,973 and
$1,087,116 for the three months ended March 31, 1997 and 1996, respectively, and
had operating losses of $2,069,510 and $189,715 for the three months ended March
31, 1997 and 1996, respectively. The increase in toy segment sales can be
attributed to increased volume in the first quarter of 1997 as compared to the
first quarter of 1996.
Gross margin for the Company was $1,594,429 for the three months ended
March 31, 1997 as compared to $730,346 for the three months ended March 31,
1996. The apparel
3
<PAGE>
segment had a gross margin of $1,800,594 for the first quarter of 1997 as
compared to $433,260 for the same period in 1996. The increase 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 $(206,165) for the three months ended March
31, 1997 as compared to $297,086 the three months ended March 31, 1996 due to
decreased sales volume.
During the first quarter of 1996, the Company sold the remaining
230,000 PureTec shares and recorded a loss of $248,014 on the sale. The Company
had received these shares from PureTec in March 1995 as a capital contribution.
The Company had a net loss of $2,937,772 for the first quarter of 1997
as compared to a net loss of $704,063 for the same period in 1996.
Financial Position, Liquidity and Capital Resources
The Company had a working capital deficit of approximately $7,493,764
at March 31, 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.
Bridge Notes
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
interest at the rate of 8% per annum. In addition, the Company 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 issuance. 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 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, 1997. The balance of the Bridge Notes
totaling $450,000 have been converted into Demand Notes. As of March 31, 1997,
the Company had $850,000 of original Bridge Notes outstanding. The Convertible
Notes and Demand Notes are currently in default.
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.
4
<PAGE>
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.
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
Subsequently, in December 1996, at the Bankruptcy court's recommendation, the
subsidiaries changed 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.
5
<PAGE>
Net cash provided by operating activities for 1997 was $345,538 which
was comprised of a decrease in inventories of $3,968,837, an increase in payroll
taxes payable of $370,551 and a decrease in due from agent of $318,000 offset by
a net loss of $2,937,772, a decrease in accounts payable of $959,011 and a
decrease in accrued expense of $821,097. Additionally, the Company used $552,518
of net borrowings from factor during the three months ended March 31, 1997.
The Company's statement of cash flows for the quarter ended March 31,
1996 reflects cash used in operations of $2,171,000, which is a result of the
net loss of $704,063, an increase in inventories $850,614 and an increase in
accounts receivable of $561,581, partially offset by a loss on sales of
securities of $248,013. Net cash used in investing activities was $1,342,542,
which consists primarily of the purchase of SSA. Cash flows from financing
activities consisted of loan proceeds of $4,197,333 offset by a repayment to a
related party of $450,000.
Inflation
The Company has not been materially affected by the impact of
inflation.
6
<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.
7
<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
8
<PAGE>
<TABLE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
--------------- ----------------
ASSETS 1997 1996
- ------ --------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 15,304 $ 222,284
Due from agent ................................. -- 318,000
Investments in available-for-sale securities ... 7,173 7,173
Accounts receivable ............................ 330,318 358,142
Due from factor ................................ 149,549 257,687
Inventories (Note 3) ........................... 1,277,326 5,246,163
Prepaid expenses and other current assets ...... -- 207,659
------------ ------------
1,779,670 6,617,108
PROPERTY, PLANT AND EQUIPMENT, net (Note 4) ...... 492,371 504,087
OTHER ASSETS ...................................... -- 50,693
------------ ------------
$ 2,272,041 $ 7,171,888
============ ============
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to factor (Note 5) ........................ $ 585,903 $ 1,138,421
Payroll taxes payable ......................... 1,306,210 935,659
Accounts payable .............................. 4,645,677 5,604,688
Accrued expenses .............................. 900,149 1,721,246
Bridge notes payable .......................... 850,000 850,000
Loans payable (Note 6) ........................ 143,719 143,719
Long-term debt in default ..................... 841,776 841,776
------------ ------------
9,273,434 11,235,509
------------ ------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized; 6,562,280 issued and outstanding
outstanding at March 31, 1997 .............. 65,623 65,623
Common stock, no par value, 50,000,000 shares
authorized; -0- issued and outstanding ..... -- --
Preferred stock; authorized 5,000,000 shares;
-0- issued and outstanding ................. -- --
Additional paid-in capital .................... 9,469,585 9,469,585
Deficit ....................................... (16,522,382) (13,584,610)
Unrealized holding loss on securities ......... (10,269) (10,269)
available-for-sale
Treasury stock ................................ (3,950) (3,950)
------------ ------------
(7,001,393) (4,063,621)
------------ ------------
$ 2,272,041 $ 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
March 31,
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES .............................. $ 8,199,932 $ 2,108,491
COST OF SALES ......................... 6,605,503 1,378,145
----------- -----------
GROSS PROFIT .......................... 1,594,429 730,346
----------- -----------
COSTS AND EXPENSES:
Selling, general and administrative 3,376,210 1,103,431
Advertising and promotion ......... 934,780 --
Amortization ...................... -- 43,423
----------- -----------
4,310,990 1,146,854
----------- -----------
OPERATING LOSS ........................ (2,716,561) (416,508)
----------- -----------
OTHER:
Loss on sale of securities ........ -- 248,014
Interest expense .................. 221,686 39,541
Interest income ................... (475) --
----------- -----------
221,211 287,555
----------- -----------
NET LOSS .............................. (2,937,772) (704,063)
=========== ===========
NET LOSS PER SHARE .................... $ (.45) $ (.18)
=========== ===========
Weighted average number of common
share outstanding ................. 6,562,280 3,851,065
=========== ===========
</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)
Net loss ....... -- -- -- -- -- (2,937,772) -- -- (2,937,772)
--------- -------- --------- ---------- ----------- ------------ ---------- ------- ------------
Balance,
March 31, 1997 0 0 6,562,280 $ 65,623 $ 9,469,585 ($16,522,382) ($ 10,269) ($3,950) ($ 7,001,393)
========= ======== ========= =========== =========== ============ ========== ====== =============
</TABLE>
See notes to financial statements
F-3
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
-----------------------------------------------
1997 1996
--------------------- ---------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................... ($2,937,772) ($ 704,063)
------------ -----------
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and amortization ........... 11,716 54,079
Loss on sale of securities .............. -- 248,013
Changes in operating assets and
liabilities:
(Increase) decrease in assets:
Accounts receivable ............... 27,824 (561,581)
Prepaid expenses and other ........ 207,659 (46,099)
Due from agent .................... 318,000 --
Due from factor ................... 108,138 --
Inventories ....................... 3,968,837 (850,614)
Other assets ...................... 50,693 (17,104)
Increase (decrease) in liabilities:
Accounts payable .................. (959,011) (293,631)
Accrued expenses .................. (821,097) --
Payroll taxes payable ............. 370,551 --
---------- -----------
Total adjustments ....................... 3,283,310 (1,466,937)
---------- -----------
Net cash provided by (used in)
operating activities .............................. 345,538 (2,171,000)
---------- ---------
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 ..... -- (219,129)
Decrease in due from broker .................... -- 280,851
Proceeds from sales of securities .............. -- 205,736
Decrease in note receivable - officer .......... -- 15,000
---------- ----------
Net cash used in investing activities ............ 0 (1,342,542)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from factor ..................... (552,518) --
Repayment to related party ..................... -- (450,000)
Net proceeds from additional financing ......... -- 4,197,333
----------- ----------
Net cash (used in) provided by
financing activities ................ (552,518) 3,747,333
----------- ----------
Net (decrease) increase in cash .................... (206,980) 233,791
Cash and cash equivalents at beginning of period ... 222,284 11,508
----------- ---------
Cash and cash equivalents at end of period ......... $ 15,304 $ 245,299
=========== ===========
See notes to financial statements
F-4
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERLY PERIOD ENDED MARCH 31, 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 licensor of TEA BUNNIES (Trademark) terminated
KVI's rights to the license.
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.
2. Interim Reporting
The balance sheet as of March 31, 1997 and December 31, 1996 , the
statements of operations and the statement of cash flows for the three months
ended March 31, 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 March 31, 1997 and December 31, 1996 and
for all periods presented have been made.
F - 5
<PAGE>
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 three months ended March 31, 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:
March 31, December 31,
1997 1996
------------- ----------
Raw Materials $ 308,615 $1,170,968
Work-in-process 273,194 1,036,570
Finished goods 695,516 3,038,625
----------- ------------
$1,277,326 $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 (see
Note 12) by SSA's secured lender and were subsequently auctioned for
approximately $220,000.
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
F - 6
<PAGE>
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 (see Note 12).
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.
8. Industry Segments
The Company operates in two industry segments, apparel and toys.
Information concerning the Company's business segments as of March 31, 1997 and
1996 are as follows:
F - 7
<PAGE>
March 31,
1997 1996
Revenues
Apparel ............ $5,966,959 $1,021,375
Toys ............... 2,232,973 1,087,116
Consolidated ....... 8,199,932 2,108,491
Operating Loss
Apparel ............ 647,051 226,793
Toys ............... 2,069,510 189,715
Consolidated ....... 2,716,561 416,508
Identifiable Assets
Apparel ............ 1,164,749 6,572,697
Toys ............... 1,107,292 1,649,802
Consolidated ....... 2,272,041 8,222,499
Depreciation and Amortization
Apparel ............ 11,005 10,656
Toys ............... 711 43,423
Consolidated ....... 11,716 54,079
Capital Expenditures
Apparel ............ -- 14,707
Toys ............... -- 204,422
Consolidated ....... -- 219,129
KVI's line of toys is manufactured in Asia and sold to North American
retailers and distributors.
F - 8
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-1-1997
<PERIOD-END> Mar-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 15,304
<SECURITIES> 0
<RECEIVABLES> 330,318
<ALLOWANCES> 0
<INVENTORY> 1,277,326
<CURRENT-ASSETS> 1,779,670
<PP&E> 504,087
<DEPRECIATION> 91,858
<TOTAL-ASSETS> 2,272,041
<CURRENT-LIABILITIES> 9,273,434
<BONDS> 0
0
0
<COMMON> 65,623
<OTHER-SE> (6,635,770)
<TOTAL-LIABILITY-AND-EQUITY> 2,272,041
<SALES> 8,199,932
<TOTAL-REVENUES> 8,199,932
<CGS> 6,605,503
<TOTAL-COSTS> 4,310,990
<OTHER-EXPENSES> (475)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221,686
<INCOME-PRETAX> (2,937,772)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,937,772)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,937,772)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
