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 August 31, 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 October 15, 2002 was 10,999,225.
SPORTING MAGIC, INC.
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Information..............................................................................................1
Condensed Consolidated Balance Sheet as of August 31, 2002......................................................1
Condensed Consolidated Statements of Operations for the three and nine months ended
August 31, 2001 and 2002..................................................................................2
Condensed Consolidated Statements of Cash Flows for the nine months ended
August 31, 2001 and 2002.................................................................................3
Notes to Condensed Consolidated Financial Statements............................................................4
Item 2. Management's Discussion and Analysis or Plan of Operation..........................................................8
Part II - Other Information
Item 4. Submission of Matters To a Vote of Security Holders...............................................................11
Item 6. Exhibits and Reports on Form 8-K..................................................................................12
ii
Item 1. Financial Information
SPORTING MAGIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
At August 31,
2002
-------------
(unaudited)
Assets
Current Assets:
Cash ........................................................ $ 151,845
Restricted investment ....................................... 277,848
Accounts receivable, net .................................... 3,151,652
Inventories ................................................. 3,931,357
Prepaid expenses ............................................ 740,171
Deferred taxes .............................................. 169,767
Other current assets ........................................ 44,532
-----------
Total current assets ............................. 8,467,172
Property, plant and equipment, net ............................. 1,871,455
Goodwill ....................................................... 976,029
Other intangible assets, net ................................... 332,309
-----------
Total Assets ..................................... $11,646,965
===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ............................................ $ 1,796,659
Accrued expenses and other current liabilities .............. 646,826
Short-term debt and current maturities ...................... 4,925,936
-----------
Total current liabilities ........................ 7,369,421
Long-term debt, less current maturities ..................... 1,843,024
-----------
Total liabilities ................................ 9,212,445
Commitments and contingencies ............................... --
Stockholders' equity ........................................ 2,434,520
-----------
Total Liabilities and Stockholders' Equity ....... $11,646,965
===========
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 Months Ended August 31,
-----------------------------
2001 2002
------------- -------------
(unaudited) (unaudited)
Net sales ...................................... $ 2,608,499 $ 3,819,229
Cost of sales .................................. 1,894,876 2,481,735
------------ ------------
Gross profit ................................... 713,623 1,337,494
General administrative and selling expenses .... 514,429 1,152,031
------------ ------------
Operating income ............................... 199,194 185,463
Other expense .................................. (86,491) (113,023)
------------ ------------
Income before provision for income taxes ....... 112,703 72,440
Provision for income taxes ..................... -- 9,718
------------ ------------
Net income ..................................... 112,703 62,722
============ ============
Net income per share, basic and diluted ........ $ 0.02 $ 0.01
============ ============
Weighted average shares outstanding ............ 6,000,000 10,999,225
============ ============
Nine Months Ended August 31,
----------------------------
2001 2002
------------ -----------
(unaudited) (unaudited)
Net sales ........................................ $ 5,711,565 $ 7,979,656
Cost of sales .................................... 4,187,093 5,600,365
----------- -----------
Gross profit ..................................... 1,524,472 2,379,291
General administrative and selling expenses ...... 1,157,349 2,460,162
----------- -----------
Operating income ................................. 367,123 (80,871)
Other expense .................................... (249,912) (246,401)
----------- -----------
Income (loss) before benefit from income taxes ... 117,211 (327,272)
Benefit from income taxes ........................ -- (169,767)
----------- -----------
Net income (loss) ................................ 117,211 (157,505)
=========== ===========
Net income per share, basic and diluted .......... $ 0.02 $ (0.02)
=========== ===========
Weighted average shares outstanding .............. 6,000,000 9,206,791
=========== ===========
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
Nine months ended August 31,
----------------------------
2001 2002
------------ -------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) ......................................... $ 117,211 $ (157,505)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization ............................. 127,377 229,638
Bad debt expense .......................................... 87,256 69,324
Deferred taxes ............................................ -- (169,767)
Changes in operating assets and liabilities:
Accounts receivable ................................... (1,172,196) 388,506
Inventories ........................................... (311,920) (667,023)
Prepaid expenses ...................................... 8,207 (420,879)
Other assets .......................................... (13,749) (40,534)
Accounts payable ...................................... 413,517 (756,825)
Accrued expenses and other liabilities ................ 68,040 376,876
----------- -----------
Total adjustments ............................... (793,468) (990,684)
----------- -----------
Net cash used in operating activities .......................... (676,257) (1,148,189)
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment ................ (83,739) (195,545)
Cash paid for acquisition costs ........................... -- (366,180)
Cash received from acquisition ............................ -- 80,846
----------- -----------
Net cash used in investing activities ..................... (83,739) (480,879)
----------- -----------
Cash flows from financing activities:
Proceeds from loans and notes payable, bank ................ 715,724 7,629,790
Repayments of long terms debt, loans and notes payable, bank -- (6,288,051)
Due from stockholder ....................................... 8,859
Issuance of common stock ................................... -- 325,103
----------- -----------
Net cash provided by financing activities ...................... 715,724 1,675,701
----------- -----------
Net increase (decrease) in cash ................................ (44,272) 46,633
Cash, beginning of period ...................................... 80,993 105,212
----------- -----------
Cash, end of period ............................................ $ 36,721 $ 151,845
=========== ===========
Supplemental Information:
Cash paid during the period for interest ....................... $ 252,987 $ 246,008
=========== ===========
Cash paid during the period for income taxes ................... $ -- $ --
=========== ===========
Noncash Investing and Financing Activities:
Purchase of equipment through capital leases ................... $ 55,960 $ 142,183
Equity securities issued in connection with the acquisition of
CMJ Ventures, Inc. ......................................... -- $ 606,200
The accompanying notes to the condensed consolidated financial statements are an
integral part of these statements.
3
SPORTING MAGIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations of Company
Pursuant to the terms and conditions of a stock exchange consummated on February
1, 2002, Sporting Magic, Inc., a Delaware corporation ("SPMA"), acquired all the
issued and outstanding common equity of Next, Inc., a Delaware corporation
("Next" or the "Company") engaged in the design, development, marketing and
distribution of branded promotional products and imprinted sportswear (the
"Exchange"). Since SPMA did not have any meaningful operations prior to the
consummation of the Exchange, the Exchange was treated as a recapitalization of
Next, and accounted for on a historical cost basis for all periods presented.
Moreover, the financial statements set forth in this report for all periods
prior to February 1, 2002 are the financial statements of Next. For further
information on the Exchange, please see the Current Report on Form 8-K filed by
the Company with the Securities and Exchange Commission on February 19, 2002,
and as amended by the Current Report on Form 8-K/A filed by the Company on April
8, 2002 (collectively, the "Form 8-K").
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, the instructions to Form 10-QSB and Item 310 of Regulation
S-B. Accordingly, these financial statements do not include all the information
and footnotes required by generally accepted accounting principles for annual
financial statements. In addition, certain comparative figures presented have
been reclassified to conform the prior year's data to the Company's current
financial statements. In the opinion of management, the accompanying condensed
consolidated financial statements contain all the adjustments necessary
(consisting only of normal recurring accruals) to fairly present the financial
position of the Company at August 31, 2002, and its results of operations and
cash flows for the three and nine months ended August 31, 2001 and 2002.
Operating results for the nine months ended August 31, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ending
November 30, 2002.
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.
Customer Base
Historically, the Company's customer base has been comprised primarily of
national and regional mass merchandise and specialty retailers. However, with
the acquisition of CMJ Ventures Inc. ("CMJ"), which sells to over five hundred
specialty retailers, and the introduction of additional major product lines and
distribution channels, such as its Motor Sports Division, which sells to a
dealer network of over nine hundred customers, the Company is actively expanding
its customer base. For instance, during the nine months ended August 31, 2002,
the Company acquired four new mass merchant retail customers and generated
approximately 90.5% of its sales from ten customers and new distribution
channels compared to three customers for the same period last year. As a result
of the this effort, the Company has lessened its dependence on one of its
largest customers, which has been operating as a debtor in possession under
Chapter 11 of the United States Bankruptcy Code since January 2002. During the
nine months ended August 31, 2002, sales to this customer were $2,868,151 (35.9%
of sales) compared to $2,792,659 (48.9% of sales) for same period last year.
During the three months ended August 31, 2002, sales to this customer were
$1,402,109 (36.7% of sales) compared to $1,596,152 (61.2% of sales) for the same
period last year. While the Company expects that the dependency on this customer
will continue to decrease in future periods, there can be no assurance that the
Company's efforts will be successful. At August 31, 2002, accounts receivable
from such customer was $1,385,461, all of which is within its terms and of which
$710,000 has been collected to date. The Company has an additional net
4
receivable from this customer of $382,901, which resulted from sales prior to
its debtor in possession filing. The Company's management believes that its
credit risk exposure, based on current information available on the financial
strength of its customers and previously recorded reserves, is limited. Such
estimate could change in the future.
New Pronouncements
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets";
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections"; SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" and SFAS No.141, "Business
Combinations," all became effective for the Company during 2002. The provisions
and interpretations of these pronouncements, that are applicable to the Company,
had no material effect on the Company's financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets" became effective for the
Company during 2002. SFAS 142 requires, among other things, the discontinuance
of goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairment of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
provisions of these interpretations that are applicable to the Company were
implemented on a prospective basis as of January 1, 2002, which had no material
effect on the Company's financial statements.
3. Inventories
Inventory is valued at the lower of cost or market. Cost is determined by the
first-in, first-out method, and market represents the lower of replacement cost
or net realizable value. Inventories as of August 31, 2002 consisted of the
following:
Raw materials........... $ 3,382,574
Work in process......... 218,645
Finished goods.......... 330,138
----------------------
$ 3,931,357
======================
4. Deferred and Income Taxes
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 expenses 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.
Next had previously elected to be treated as an "S" corporation under the
Internal Revenue Code and relevant state statutes. As a result of the Exchange
(See Note 1), the taxable status of Next as an S corporation was terminated as
of December 1, 2001. Accordingly, no provision or liability for federal or state
income taxes has been included in the accompanying condensed consolidated
financial statements for the period from December 1, 2000 through August 31,
2001.
The ultimate realization of deferred tax assets is dependent upon the attainment
of forecasted results of operations. Management has taken these and other
factors into consideration in recording the deferred tax estimate. The tax
effects of temporary differences that give rise to significant portions of the
deferred tax asset and liabilities at August 31, 2002 are as follows:
5
Deferred tax asset and (liabilities):
Accounts receivable.................... $ 142,296
Net operating loss carryforwards....... 211,071
Adoption of tax depreciation method.... (183,600)
------------
Net deferred tax asset................. $ 169,767
============
5. Short Term and Long Term Debt
Short-term and long-term debt at August 31, 2002 consisted of the following:
Short Term Long Term
---------- ---------
Revolving credit facility $3,678,622 $ --
Notes payable ........... 1,021,444 --
Notes payable ........... 155,512 1,731,849
Capital lease obligations 70,358 111,175
---------- ----------
Total ............. $4,925,936 $1,843,024
========== ==========
All of the Company's debt is collateralized by various assets and guaranteed by
certain of its principal stockholders. The Company extended the maturity date of
two notes aggregating to $795,711 from May 3, 2003 to December 1, 2003.
6. Stockholders' Equity
Stockholders' Equity is comprised of the following:
At August 31,
2002
-------------
(unaudited)
Common stock, $.001 par value; 25,000,000 shares
authorized, 10,999,225 shares issued and outstanding $ 11,000
Additional paid in capital ............................. 1,267,973
Retained earnings ...................................... 1,210,797
Unearned compensation .................................. (55,250)
-----------
Total stockholders' equity ............................. $ 2,434,520
===========
RAE & Company ("RAE"), a financial consulting firm whose sole stockholder is
the Company's Chief Financial Officer, purchased 750,000 shares of the Company's
common stock for $325,000.
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. 503,000 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 and are being amortized over a
two year period.
On June 21, 2002, the Company amended the non-compete agreement it had entered
into with its former President in connection with the Exchange (see Note 1).
Under the terms of the revised agreement, the non-compete period was extended to
five years; the cash consideration was reduced by $225,000; the Company issued
an additional 110,000 shares of common stock; and the former President
surrendered all of his preferred stock in Next.
6
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
EPS for the three month and nine month periods ended August 31, 2001 and 2002
were calculated on the basis of the weighted average number of common shares
outstanding during such three and nine month periods, divided by the income
available to common stockholders. Outstanding stock options have not been
considered in the computation of diluted earnings per share amounts since the
effect of their inclusion would not be material. The effect of the
recapitalization of Next (See Note 1) has been given retroactive application in
the EPS calculation. The common stock issued and outstanding with respect to the
pre-Exchange Sporting Magic, Inc., and other shares issued, has been included
since the effective date of the Exchange.
8. Recent Developments
Acquisition of CMJ Ventures, Inc.
Effective June 1, 2002, the Company acquired all the issued and outstanding
equity capital of CMJ Ventures, Inc., a Florida corporation ("CMJ"), in a like
stock exchange for 1,400,000 shares of the Company's common stock ("CMJ
Acquisition"). The results of operations of CMJ are included in the condensed
consolidated financial statements of the Company commencing June 1, 2002. The
Company has provided certain services and sold merchandise to CMJ prior to the
effective date of the CMJ acquisition. All intercompany sales and transactions
have been eliminated in the condensed consolidated statements since the date of
the acquisition.
The acquisition was accounted for as a purchase, and accordingly, assets and
liabilities were valued in terms of their current condition as at the
acquisition date. Intangible assets recorded pursuant to the acquisition
valuation are subject to adjustment, if necessary, over a twelve month period
from the acquisition date. For further information on the CMJ Acquisition,
historical, pro forma, and other financial information, including but not
limited to the purchase price allocation, please see the Current Report on Form
8-K filed by the Company with the Securities and Exchange Commission on June 17,
2002, and as amended by the Current Report on Form 8-K/A filed by the Company on
August 15, 2002. The following pro-forma condensed combined statement of
operations has been prepared as if the acquisition of CMJ was consummated as of
the beginning of each of the periods presented herein. The pro-forma results of
operations are not necessarily indicative of the combined results that would
have been achieved had the acquisition occurred at the beginning of the period,
nor is it necessarily indicative of the results of operations that may occur in
the future:
Pro-Forma Statement of Operations
Nine Months Ended August 31,
-------------------------------
2001 2002
------------- ----------------
(unaudited) (unaudited)
Net sales .................................... $ 7,003,722 $ 8,350,728
Expenses ..................................... 6,766,528 8,588,844
------------ ------------
Net income (loss) ............................ 237,194 (238,116)
============ ============
Net income (loss) per share, basic and diluted $ 0.03 $ (0.02)
============ ============
Weighted average shares outstanding .......... 7,400,000 10,136,727
============ ============
7
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 any 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 report, and in other documents the Company has filed with the
Securities and Exchange Commission.
The discussion and analysis below should be read in conjunction with
the unaudited condensed consolidated interim financial statements and the notes
thereto included elsewhere in this report.
Background Information
The Company designs, develops, markets and distributes branded
promotional products and imprinted sportswear throughout the United States
primarily under licensing agreements.
Plan of Operations
The Company's major current customers, prior to its acquisitions and
other expansion programs, have been comprised primarily of national and
specialty retail chains. These customers have highly seasonal business cycles
with peak revenues in the second half of the calendar year. Therefore, large
portions of the Company's sales have traditionally occurred in the months of May
through November.
To offset this seasonal pattern of sales, the Company has
implemented the following:
o A strategic sales and marketing plan focused on the diversification
and expansion of the Company's retail customer base, along with an
expansion of the products offered by the Company. For instance, the
Company has recently acquired the license to manufacture and
distribute products bearing various "motor sports" logos and
trademarks that it intends to sell to existing customers while at
the same time attracting new ones.
o An aggressive acquisition program that targets companies servicing
other segments of the promotional products and imprinted sportswear
industry not currently serviced by the Company, especially the
corporate segment. Such strategic acquisition targets will enable
the Company to more effectively utilize its marketing and sales
expertise, acquire the ability to cross distribute its branded
products and licenses throughout a wider distribution base, lessen
its dependency on retail customers and reduce overall operating
costs by merging its services and distribution facilities.
Recent Developments
As discussed above, effective June 1, 2002, the Company acquired all
of the issued and outstanding equity capital of CMJ in a like stock exchange.
CMJ, a sales and marketing company, distributes products primarily under its
license programs, the American Biker(R) line, which specializes in motorcycle
merchandizing, and the Rag Tops Sportswear(R) line, a premier line in the gift
and souvenir markets. Additionally, CMJ operates a promotional products division
that services major corporate clients and national retailers. CMJ's customers,
distribution network and licenses diversify, complement, and bolster the
Company's existing customer and distribution bases. The Company expects that
future sales and earnings will continue to show strong growth. The Company
further expects that the operations of CMJ will be integrated into the Company's
operations within a reasonable time period without incurring significant
expenses or other costs.
8
Future Acquisitions
The Company is actively engaged in discussions with various
acquisition candidates and expects to grow through the combination of
complimentary businesses. Management believes that additional acquisitions by
the Company will allow it to diversify its customer and distribution base;
lessen its dependence on current large customers and enhance stockholder value.
Although the Company's management believes that these acquisitions will be
completed in the near future, there are no definitive agreements with respect to
any such acquisitions and there can be no assurances that they will be
accomplished in the near term 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 and nine months
ended August 31, 2001 and 2002. These statements should be read in conjunction
with the audited financial statements of Next as filed in the Form 8-K.
Three Months Ended Nine Months Ended
August 31, August 31,
--------------------------- --------------------------
2001 2002 2001 2002
------------ ----------- ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales................................................. $ 2,608,499 $ 3,819,229 $ 5,711,565 $ 7,979,656
Cost of sales ............................................. 1,894,876 2,481,735 4,187,093 5,600,365
----------- ----------- ----------- -----------
Gross profit .............................................. 713,623 1,337,494 1,524,472 2,379,291
----------- ----------- ----------- -----------
Operating and Other Expenses:
General and administrative ............................. 325,416 489,159 800,636 1,164,710
Royalty and commission expense ......................... 189,013 398,934 356,713 619,446
Corporate cost ......................................... -- 291,185 -- 703,253
Interest expense ....................................... 103,029 96,775 291,451 254,962
Other income ........................................... (16,538) (10,999) (41,539) (35,808)
----------- ----------- ----------- -----------
Total operating and other expense ................... 600,920 1,265,054 1,407,261 2,706,563
----------- ----------- ----------- -----------
Income (loss) before income taxes ......................... 112,703 72,440 117,211 (327,272)
Provision (Benefit) of income taxes ....................... -- 9,718 -- (169,767)
----------- ----------- ----------- -----------
Net income (loss).......................................... $ 112,703 $ 62,722 $ 117,211 $ (157,505)
=========== =========== =========== ===========
Net Sales
Net sales increased 46.4% to $3,819,229 (three months ended August
31, 2002) from $2,608,499 (three months ended August 31, 2001). Net sales
increased 39.71% to $7,979,656 (nine months ended August 31, 2002) from
$5,711,565 (nine months ended August 31, 2001). This growth in sales is
primarily attributable to increased sales to the Company's four largest existing
customers supplemented by two new mass merchant accounts recently acquired.
Additionally, the Company has expanded its product line sales at two of its
large specialty retail customers. Management believes that future sales growth
will continue primarily through the diversification and expansion of the
Company's customer base and its expanded product offerings.
Cost of Sales
Cost of sales was 65.0% of the Company's net sales for the three
months ended August 31, 2002 compared to 72.6% for the three months ended August
31, 2001. This reduction in cost resulted chiefly from a reduction in the prices
paid by the Company for raw materials combined with the favorable product mix of
sales. Cost of sales was 70.2% of the Company's net sales for the nine months
ended August 31, 2002 compared to 73.3% for the nine months ended August 31,
2001. The decrease in cost of sales was primarily attributable to the favorable
sales product mix.
9
Expenses included in cost of sales were primarily raw materials,
labor, shipping supplies, and the depreciation of both the Company's principal
manufacturing facility in Indiana and its equipment. Depreciation amounts
included in the cost of sales were $145,541 for the nine months ended August 31,
2002 compared to $97,727 for the nine months ended August 31, 2001.
Operating and Other Expenses
General and administrative expenses were $489,159 (12.8% of net
sales) for the three months ended August 31, 2002 compared to $325,416 (12.5% of
sales) for the three months ended August 31, 2001. General and administrative
expenses were $1,164,710 (14.6% of net sales) for the nine months ended August
31, 2002 compared to $800,636 (14.0% of net sales) for the nine months ended
August 31, 2001. This increase in expenses primarily resulted from the addition
of new sales and licensing personnel to further expand and diversify the
Company's existing customer base.
Royalty and commission expenses were $398,934 (10.45% of net sales)
for the three months ended August 31, 2002 compared to $189,013 (7.25% of net
sales) for the three months ended August 31, 2001. Year-to-date royalty and
commission expense as of August 31, 2002 was $619,446 (7.8% of net sales)
compared to $356,713 (6.3% of net sales) for the same period in 2001. The
increase in expense was directly related to sales increase and sales mix with
higher royalty expense percentages.
To effectively implement its growth and acquisition plan, along with
enabling the Company to meet its expanded public reporting requirements, the
Company has recently hired a number of new full time personnel and retained the
services of additional legal, accounting and investment professionals. While
these actions have resulted in significant costs during the current period, the
Company believes that such costs are necessary for the Company to implement its
strategic plan of future growth and diversification. Total expenses incurred by
the Company for such internal and outside professional services for the three
and nine months ended August 31, 2002 were $291,185 and $703,253, respectively.
The Company had no similar costs during the same period in the prior year.
Interest expense relates to the Company's short and long-term debt.
Interest expense was $96,775 for the three months ended August 31, 2002 compared
to $103,029 for the three months ended August 31, 2001. Year-to-date expense was
$254,962 as of August 31, 2002 compared to $291,451 during the same period in
2001. The primary reason for the reduced interest expense was a reduction in the
rates charged on the Company's debt.
Other income is comprised primarily of a grant from a local
municipality where the Company operates its manufacturing and distribution
facility.
The provision for income taxes for the three months ended August 31,
2002 was $9,718, whereas no income tax provision was recorded during the same
period in the prior year (see Note 4). The income tax provision during the three
months ended August 31, 2002 was attributable to a decrease in deferred tax
assets recorded in the first quarter. Year-to-date, the Company has recognized a
tax benefit of $169,767, which is attributable to the recognition of deferred
tax assets arising from the Company's year-to-date net operating loss adjusted
for by book and income tax recognition temporary differences.
Financial Position, Capital Resources, and Liquidity - August 31, 2002 and
November 30, 2001:
At August 31, 2002 working capital was $1,097,751, representing a
decrease of $563,956 from working capital at November 30, 2001 of $1,661,707.
This decrease in working capital was primarily due to the seasonal increase in
working capital debt of $2,031,702, offset by the conversion of $792,670 in
short-term debt to long-term debt.
10
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 promissory
notes issued by First Federal Bank. The AmSouth credit facility has a maximum
limitation of $3,700,000, of which $3,678,622 has been drawn upon by the Company
as of August 31, 2002. This credit facility matures on October 31, 2002 and is
governed by various financial covenants. The First Federal Bank Promissory Notes
consist of one principal sum of $795,711 due December 1, 2003 and another
principal sum of $750,000 due December 5, 2002.
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 maturity or default on any of its
promissory notes, it would 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 on its long-term debt, working capital and
capital expenditures. Cash used in operations for the nine months ended August
31, 2002 was $1,148,189 as compared to $676,257 for the nine months ended August
31, 2001. The increase in cash used stemmed primarily from increased working
capital expenses.
Cash used for investing activities was $480,879 for the nine months
ended August 31, 2002 compared to $83,739 for the nine months ended August 31,
2001. The Company's investing activities during these periods was primarily the
purchase of new equipment.
Net cash provided by financing activities was $1,675,701 for the
nine months ended August 31, 2002 compared to $715,724 for the nine months ended
August 31, 2001. This net increase of $959,977 related to proceeds from bank
loans that were offset by debt and repayment of debt.
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Stockholders was held on August 15, 2002.
Votes were cast with respect to the election of six directors of the Board of
Directors to serve until the 2002 Annual Meeting of Stockholders as follows:
Number of Shares of Common
Number of Shares of Common Stock as to which Authority to Vote
Nominees Stock Voted in Favor was Withheld
-------- -------------------- ------------
Dan F. Cooke 9,500,023 484
William B. Hensley, III 9,500,023 484
Sean M. Garber 9,500,023 484
Ronald J. Metz 9,500,023 484
G. Michael Cross 9,500,023 484
Salvatore Geraci 9,500,023 484
11
At the Annual Meeting, the stockholders also approved the following:
1. An amendment to the Company's Certificate of Incorporation by a
vote of 9,161,258 shares in favor, 503 shares against, with the
holders of 50 shares abstaining. This amendment: (i) authorized
the board of directors to change the name of the Company from
Sporting Magic, Inc. to Next Inc. (ii) updated the provisions of
the Certificate of Incorporations to be consistent with Delaware
law (iii) increased the authorized common stock to 50,000,000 and
(iv) provided for the issuance of up to 10,000,000 shares of
"blank check" preferred stock;
2. Adoption of the 2002 Stock Option Plan by a vote of 9,160,199
shares in favor, 1,152 shares against, with the holders of 460
shares abstaining.; and
3. Ratification of the appointment of Marcum & Kliegman LLP as
the independent auditors for the fiscal year ending November 30,
2002 by a vote of 9,499,884 shares in favor, 417 shares against,
with the holders of 206 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certfication of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. 1350, Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Current report on Form 8-K on July 17, 2002
under Item 8 - Change in Fiscal Year. The Company also filed a Current Report on
Form 8-K/A on August 15, 2002 under Item 7 - Financial Statements and Exhibits.
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.
October 15, 2002 By: /s/ Dan Cooke
----------------------------
Dan Cooke
Chief Executive Officer
By: /s/ Charles Thompson
----------------------------
Charles Thompson
Chief Financial Officer and
Principal Accounting Officer
12
CERTIFICATIONS
I, Dan Cooke, Chairman of the Board and Chief Executive Officer of
Sporting Magic, Inc., certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of Sporting
Magic, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
(4) The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period during which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within ninety days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the Company's disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 15, 2002
/s/ Dan Cooke
--------------------------
Dan Cooke
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
13
I, Charles Thompson, Chief Financial Officer of Sporting Magic, Inc.,
certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of Sporting
Magic, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
(4) The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period during which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within ninety days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the Company's disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 15, 2002
/s/ Charles Thompson
--------------------------
Charles Thompson
Chief Financial Officer
(Principal Accounting Officer)
14