sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Quarterly Period
Ended February 28, 2002
OR
/ / Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-25247
SPORTING MAGIC, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 95-4675095
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7625 Hamilton Park Drive, Building #2, Suite 12
Chattanooga, Tennessee 37421
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (423) 296-8213
Traditional Small Business Disclosure Format (Check one): Yes /X/ No / /
The number of shares of Registrant's common stock, par value $.001
per share, issued and outstanding as of April 22, 2002 was 9,489,225.
SPORTING MAGIC, INC.
TABLE OF CONTENTS
Part I--Financial Information
Item 1. Financial Information...............................................1
Condensed Consolidated Balance Sheet as of February 28, 2002........1
Condensed Consolidated Statements of Operations for the
three months ended February 28, 2001 and 2002.................2
Condensed Consolidated Statements of Cash Flows
for the three months ended February 28, 2001 and 2002.........3
Notes to Condensed Consolidated Financial Statements................4
Item 2. Management's Discussion and Analysis or Plan of Operation...........6
Part II - Other Information
Item 2. Changes in Securities...............................................9
Item 6. Exhibits and Reports on Form 8-K....................................9
ii
Item 1. Financial Information
SPORTING MAGIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
At February 28,
2002
-----------------
(unaudited)
Assets
Current Assets:
Cash........................................................ $ 122,736
Restricted investment....................................... 277,848
Accounts receivable, net.................................... 1,328,832
Inventories................................................. 2,856,950
Prepaid expenses............................................ 441,250
Deferred taxes.............................................. 370,364
Other assets................................................ 341,864
---------------
Total current assets............................. 5,739,844
Property, plant and equipment, net............................. 1,713,674
---------------
Total Assets..................................... $ 7,453,518
===============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable............................................ $ 281,258
Accrued expenses and other current liabilities.............. 552,851
Short-term debt and current maturities...................... 3,056,117
---------------
Total current liabilities........................ 3,890,226
---------------
Deferred non-current federal tax liabilities................ 183,866
Long-term debt, less current maturities..................... 1,855,663
---------------
Total liabilities................................ 5,929,755
Commitments and contingencies.................................. --
Stockholders' equity........................................... 1,523,763
---------------
Total Liability and Stockholders' Equity......... $ 7,453,518
===============
The accompanying notes to the condensed consolidated financial statements are an
integral part of these statements.
1
SPORTING MAGIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Month Periods Ended
February 28,
-----------------------------------
2001 2002
--------------- ---------------
(unaudited) (unaudited)
Net sales................................................ $ 1,224,625 $ 1,983,044
Cost of sales............................................ 879,587 1,488,545
--------------- ---------------
Gross profit............................................. 345,038 494,499
General administrative and selling expenses.............. 319,517 845,755
--------------- ---------------
Operating income (loss).................................. 25,521 (351,256)
Other (expense).......................................... (64,533) (54,755)
--------------- ---------------
Loss before benefit from income taxes.................... (39,012) (406,011)
Benefit for income taxes................................. -- 186,498
--------------- ---------------
Net (loss)............................................... (39,012) (219,513)
=============== ===============
Net (loss) per share, basic and diluted.................. $ (0.01) $ (0.03)
=============== ===============
Weighted average shares outstanding...................... 6,000,000 7,085,536
=============== ===============
The accompanying notes to the condensed consolidated financial statements are an
integral part of these statements.
2
SPORTING MAGIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Month Periods Ended
February 28,
-----------------------------------
2001 2002
--------------- ---------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss........................................................... $ (39,012) $ (219,513)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization...................................... 33,588 84,695
Changes in assets and liabilities:
Accounts receivable............................................ (166,703) 1,690,226
Inventories.................................................... (281,790) 197,148
Prepaid expenses............................................... 189,755 (37,269)
Deferred taxes................................................. -- (186,498)
Other assets................................................... -- (106,281)
Accounts payable............................................... 267,079 (1,223,429)
Accrued expenses and other liabilities......................... 81,356 101,320
--------------- ---------------
Total adjustments........................................ 123,285 519,912
--------------- ---------------
Net cash provided by operating activities............................... 84,273 300,399
--------------- ---------------
Cash flows used from investing activities:
Purchases of property, plant and equipment......................... (14,985) (15,286)
--------------- ---------------
Net cash used in investing activities................................... (14,985) (15,286)
--------------- ---------------
Cash flows from financing activities:
Proceeds from loans and notes payable, bank.......................... 137,053 207,321
Repayments of long terms debt, loans and notes payable, bank......... (281,932) (599,910)
Issuance of capital stock............................................ -- 125,000
--------------- ---------------
Net cash used in financing activities................................... (144,879) (267,589)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents.................... (75,591) 17,524
Cash and cash equivalents, beginning of period.......................... 80,993 105,212
--------------- ---------------
Cash and cash equivalents, end of period................................ $ 5,402 $ 122,736
=============== ===============
Supplemental Information
Cash paid during the period for interest............................. $ 89,534 $ 73,839
=============== ===============
The accompanying notes to the condensed condsolidated financial statements are
an integral part of these statements.
For the three months ended February 28, 2001 and 2002, the Company purchased
equipment under capital lease obligations of approximately $36,027 and $63,770,
respectively.
3
SPORTING MAGIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations of Company
On February 1, 2002, the Company acquired all of the issued and outstanding
common stock of Next, Inc., a Delaware corporation ("Next"), in a like stock
exchange. On February 1, 2002, the Company also issued 1,209,411 shares of its
common stock to various individuals for certain services and sold 750,000 shares
to one individual for $350,000. Preferred shares of Next have been recorded at a
value of $804 and included in accrued expenses in these financial statments. For
accounting purposes, the acquisition of Next has been treated as a
recapitalization of Next, and has been accounted for on a historical cost basis
for all periods presented. The financial statements presented in this report for
periods prior to February 1, 2002 are those of Next. For further information on
the acquisition of Next, reference is made to the Current Report on Form 8-K
filed by the Company on February 19, 2002, and as amended Form 8-K/A filed with
the Securities and Exchange Commission on April 8, 2002 (the "Form 8-K"). A copy
of the Forms 8-K and 8-K/A are attached hereto as Exhibits 99.1 and 99.2.
The Company was incorporated on January 2, 1987 under the laws of the State of
Delaware. The Company, through its wholly owned subsidiary Next, is a sales and
marketing organization that designs, develops, markets and distributes branded
promotional products and imprinted sportswear, primarily under licensing
agreements.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements contained herein have been
prepared in accordance with generally accepted accounting principles for interim
financial statements, and with the instructions to Form 10-QSB and Item 310 of
Regulation SB, and accordingly do not include all the information and footnotes
required by generally accepted accounting principles for annual financial
statements. Certain comparative figures have been reclassified to conform the
prior year's data with current financial statements. These reclassifications
have had no effect on reported earnings. In the opinion of management, the
accompanying condensed consolidated financial statements contain all
adjustments, consisting only of normal recurring accruals considered necessary
to present fairly the financial position as at February 28, 2002, and the
results of operations and cash flows for the three months ended February 28,
2001 and 2002. Operating results for the three months ended February 28, 2002
are not necessarily indicative of the results that may be expected for the
fiscal year ending November 30, 2002 (See "Management's Discussion and Analysis
or Plan of Operation"). The balance sheet at November 30, 2001 has been derived
from the audited financial statements as of that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the audited financial statements and notes thereto included in the Form 8-K/A.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Concentration of Credit Risk
The Company has continued to sell units to a customer that has been operating
under the protection of Chapter 11 of the United States Bankruptcy Code since
January 2002. Sales to this customer were approximately $611,027 and $665,884
for the three months ended February 28, 2001 and 2002, respectively. The Company
believes that it has provided adequate allowances for doubtful accounts for this
customer to cover the uncollectible portion of its respective receivables
pre-reorganization. The Company believes that its credit risk exposure, based
upon the financial strength of its customers, including one other significant
customer which comprised 38% of the Company's sales for the three month period
ended February 28, 2002, other than as disclosed above, is limited. Such
estimate may change in the near future.
4
3. Inventories
Inventories consist of the following:
At February 28,
2002
-------------------
Raw materials................... $ 2,516,636
Work in process................. 95,384
Finished goods.................. 244,930
-------------------
$ 2,856,950
===================
4. Deferred taxes, Income Taxes and Other Assets
Income taxes have been computed in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). This
standard requires, among other things, recognition of future tax expense or
benefits, measured using enacted tax rates, attributable to taxable or
deductible temporary differences between financial statements and income tax
reporting bases of assets and liabilities. These temporary differences relate
principally to depreciation and the effects of accrual accounting for financial
reporting purposes versus cash basis accounting for tax reporting purposes.
The Company's predecessor, with the consent of its respective stockholders,
elected under the Internal Revenue Code, and similar state statutes, to be
treated as a "S" corporations. In lieu of corporate taxes, the stockholders were
taxed on their proportionate share of the Company's taxable income. Accordingly,
no provision or liability for federal and state income taxes for these
corporations has been included in the accompanying condensed consolidated
financial statements for the period December 1, 2000 to February 28, 2001. As a
result of the merger (See Note 1), the taxable status of the Company as an S
corporation was terminated as of December 1, 2001 and the Company got the
benefit of the federal and state income taxes on the taxable loss reported by
these entities for the period December 1, 2001 through February 28, 2002.
5. Short Term and Long Term Debt
Short-term and long-term debt at February 28, 2002 consists of the following:
Short Term Long Term
-------------- -------------
Revolving credit facility ................ $2,136,241 $ --
Notes payable ............................ 750,000 --
Line of credit ........................... -- 492,670
Notes payable ............................ 103,838 1,261,940
Capital lease obligations ................ 66,038 85,870
Other .................................... -- 15,183
Total ............................ $3,056,117 $1,855,663
========== ==========
All of the Company's debt is collateralized by various assets and is further
guaranteed by its principal stockholders. During the first quarter, several debt
instruments were restructured as follows: A bank note was extended one year.
Three bank notes were combined and extended fifteen years. A bank line and note
were extended until July 31, 2002, and another credit facility was extended
three months.
5
6. Stockholder's Equity
Stockholders' Equity is comprised of the following:
At November 30, At February 28,
2001 2002
--------------- --------------
(unaudited) (unaudited)
Common stock, $.001 par value; 25,000,000 shares
authorized, 9,489,225 shares issued and outstanding............................ $ 6,000 $ 9,490
Subscriptions receivable......................................................... -- (225,000)
Additional paid in capital....................................................... 111,352 590,483
Retained earnings................................................................ 1,368,303 1,148,790
--------------- -------------
Total stockholders' equity............................................... $ 1,486,355 $ 1,523,763
=============== =============
During the quarter ended February 28, 2002, the Company entered into an
agreement with an individual for management consulting services for a two-year
period through January 2004. The individual shall receive annual compensation
pursuant to the terms of the agreement and certain other benefits. In addition,
as part of this agreement, on February 1, 2002 this individual purchased 750,000
shares of common stock of the Company for $350,000. $125,000 of the purchase
price was paid on February 1, 2002 and the balance is due on May 1, 2002. Such
balance is reflected as a subscription receivable in the financial statements.
Following the acquisition of Next, the Company assumed the 2001 Next Stock
Option Plan (the "Next Plan") and all pre-existing options granted thereunder.
Pursuant to the terms of the Next Plan and the assumption agreement, any options
to acquire shares of Next's common stock previously granted under the plan shall
be replaced with options to acquire shares of the Company's common stock.
493,000 options have been granted under the Plan, with each option vesting on
the two year anniversary of the grant date. These options are subject to
forfeiture should the grantee fail to be employed by the Company on the vesting
date.
7. Earnings Per Share
The Company accounts for earnings per share ("EPS") in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS
128 requires the presentation of basic and fully diluted EPS. Basic and diluted
earnings per share for the three month periods ended February 28, 2001 and 2002
are calculated on the basis of the weighted average number of common shares
outstanding during such three month periods, divided by the income available to
common stockholders. The effect of the recapitalization of Next Inc. (See Note 1)
has been given retroactive application in the earnings per share calculation.
The common stock issued and outstanding with respect to the pre-merger Sporting
Magic, Inc., and other shares issued, have been included since the effective
date of the merger.
Item 2. Management's Discussion and Analysis or Plan of Operation
Certain statements contained in this Quarterly Report on Form
10-QSB, including, without limitation, statements containing the words
"believe," "anticipate," "estimate" "expect" and words of similar import,
constitute "forward-looking statements." You should not place undue reliance on
these forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks faced by the Company as described below and
elsewhere in this Quarterly Report, and in other documents the Company has filed
with the Securities and Exchange Commission.
The discussions and analysis below should be read in conjunction
with the Form 8-K and the Unaudited Condensed Consolidated Interim Financial
Statements and the Notes thereto included elsewhere in this report.
Background Information
Sporting Magic, Inc., through the acquisition of Next became a sales
and marketing organization that designs, develops, markets and distributes
licensed and branded products throughout the United States. The Company's
products are manufactured and distributed primarily under licensing agreements.
6
Seasonality
The Company's major customers are predominantly retailers and
national specialty chains with highly seasonal business cycles that generate a
substantial percentage of their annual revenues in the second half of the year.
Given this fact, a large portion of the Company's sales have traditionally
occurred in the months of May through November. The Company, however, is
actively seeking to expand the breadth and diversity of its customer base in
order to generate a more consistent revenue flow throughout the year. These
efforts to diminish the seasonality of the Company's business are focused on
attracting new, less seasonal customers, and through the acquisition of entities
that have a less seasonal customer base.
Future Acquisitions
The Company has been engaged in discussions with various acquisition
candidates over the last few months. The Company believes that if these
acquisitions are consummated, it will result in the following: substantial
growth of the Company's revenue base, and a diversified distribution and
customer base. The combination of the prospective acquisitions with the Company
will also allow the Company to maximize its profitability by eliminating
duplicative operating and administrative expenses. Although the Company's
management believes that these acquisitions will be completed in the near
future, there can be no assurances that any acquisitions will be finished in the
near future, or at all.
Results of Operations
The following table sets forth certain items in the Company's
condensed consolidated statement of operations for the three months ended
February 28, 2001 and 2002. These statements should be read in conjunction with
the audited statements of Next as filed in the Form 8-K.
Three Month Periods Ended
February 28,
----------------------------------
2001 2002
---------------- -------------
(unaudited) (unaudited)
Sales................................................................ $ 1,224,625 $ 1,983,044
Cost of sales........................................................ 879,587 1,488,545
Gross profit......................................................... 345,038 494,499
Operating Expenses:
General and administrative........................................ 235,185 315,417
Royalty and commission expenses................................... 84,332 166,146
Incremental infrastructure cost................................... -- 88,292
Professional Fees and expenses related to acquisitions............ -- 275,900
Interest expense.................................................. 89,534 73,839
Other income...................................................... (25,001) (19,084)
---------------- -------------
Total operating and other expense......................... 384,050 900,510
----------------
-------------
Loss before income taxes............................................. (39,012) (406,011)
Benefit of income taxes.............................................. -- 186,498
---------------- -------------
Net loss............................................................. $ (39,012) $ (219,513)
================ =============
Sales
Net sales for the three-month period ended February 28, 2002,
increased 61.9% to $1,983,044 compared to $1,224,625 for the same period last
year. This increase in sales was primarily the result of a one-time promotional
order in December 2001 in which the Company discounted its prices in order to
successfully attract a new customer. This promotional sale accounted for 38% of
the Company's sales during the three month period ended February 28,
7
2002. The Company, however, expects to continue business with this customer at
standard gross margins in the future.
Cost of Sales
Cost of Sales was 75.1% of net sales for the first quarter of 2002.
This figure is up 3.3% from the same quarter in the prior year primarily due the
December promotional sale.
Cost components are primarily raw materials, labor, shipping
supplies, and depreciation of the plant and equipment. Depreciation of the plant
and equipment is considered part of cost of sales and was $33,588 for the
quarter ended February 28, 2001 and $43,402 for the quarter ending February
28,2002.
Operating and other Expenses
o General and administrative expenses for the three months ended February
2002 was $315,417, compared to $235,185 for the three months ended
February 2001. This category of expenses was 15.9% of net sales for the
quarter ended February 28, 2002, compared to 19.2 % for the comparable
quarter in the prior period.
o Royalties and Commission expenses for the three months ended February were
$166,146 or 8.4% of sales. The expense associated with the comparative
quarter last year was $84,332 or 6.9% of sales. There is a direct
correlation with these expenses and our sales increase of $758,419 for the
comparable quarter.
o Incremental infrastructure expenses of $88,292 in 2002 relate to the
formation of the Chattanooga executive offices and related personnel cost.
o Professional fees and expenses related to the Company's acquisition of
Next was $275,900 as of February 2002, which are comprised of legal,
accounting and consulting fees.
o Interest expense relates to the Company's short term and long-term debt.
Interest expenses were lower during the first quarter primarily due to
reduced interest rates.
o Other Income is comprised of a grant from a local municipality.
Financial Position, Capital Resources, and Liquidity - February 28, 2002 and
November 30, 2001:
At February 28, 2002, working capital was $1,869,891, an increase of
$208,246 from working capital at November 30, 2001, of $1,661,707. The increase
was primarily due to a decrease in the Company's short term debt which was
partially offset by a decrease in receivables and inventory at quarter end which
was reflective of the seasonality of the Company's sales.
Liquidity and Capital Resources
The Company has historically financed its operations through a
combination of earnings and debt. The Company's principal sources of debt
financing are its revolving line of credit with AmSouth Bank and a promissory
note issued by First Federal Bank. The AmSouth credit facility has a maximum
limitation of $3,700,000, of which $2,136,241 has been drawn upon by the
Company. This credit facility matures on July 31, 2002 and is governed by
various financial covenants. The First Federal Bank Promissory Note, in
contrast, is for a principal amount of $792,670 and was restructured in the
first quarter of 2002 to extend its maturity date to May 2003.
The Company is presently in discussions with several lending
institutions that have indicated a desire to replace the Company's current
revolving credit facility. In addition, the Company believes that its
relationship with its existing banks is such that they would be willing to
extend their facilities beyond the due date if necessary. Should the Company
fail to secure a new credit facility following July 31, 2002 or default on its
promissory note, it could lead to a materially adverse affect on the Company's
liquidity and ability to finance operations.
The Company's principal use of cash is for operating expenses,
interest and principal payments with respect to long-term debt, working capital
and capital expenditures. Cash provided by operation for the three months ended
February 28th, 2002 was $300,399 compared to $84,273 for the same period in the
prior year. The increase in cash flow stemmed primarily from working capital
changes.
8
Cash used in investing activities was $15,286 for the three months
ended February 28,2002 compared to $14,985 for the corresponding period.
Investing activities are primarily the purchase of equipment.
Financing activities used cash of $267,589 in the first three months
of 2002 compared to $144,879 used during the first three months of 2001. The net
increase of $122,710 related primarily to debt repayment, offset by issuance of
capital stock and proceeds of bank loans.
PART II -- OTHER INFORMATION
Item 2. Changes in Securities
(c) Sale of unregistered securities.
The following unregistered securities were issued by the Company
during the quarter ended February 28, 2002:
Title of
Securities Number of
Date of Issuance Issued Securities Issued Consideration Received
----------------- ------ ----------------- ----------------------
February 1, 2002 Common Stock 6,000,000 6,000,000 shares of Common Stock of
Next, Inc., $.0001 par value per share
February 1, 2002 Common Stock 750,000 $350,000
February 1, 2002 Common Stock 450,000 Services rendered for the Company
February 1, 2002 Common Stock 759,411 Consulting services related to various
financing and acquisition projects
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 19, 2002.
99.2 Current Report on Form 8-K/A filed with the Securities
and Exchange Commission on April 8, 2002.
(b) Reports on Form 8-K
The Company filed a Current report on Form 8-K on February 19, 2002
under Item 1 - Change in Control of Registrant and Item 4 - Change in
Registrant's Certifying Accountant. The Company subsequently filed an amendment
to this Current Report on Form 8-K/A on April 8, 2002, disclosing the audited
consolidated financial statements of Next for the year ended November 30, 2001.
9
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SPORTING MAGIC, INC.
April 22, 2002 By: /s/ Dan Cooke
---------------------------------
Dan Cooke
President
10