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
May 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 July 12, 2002 was 10,889,225.
SPORTING MAGIC, INC.
TABLE OF CONTENTS
Part I--Financial Information
Item 1. Financial Information................................................1
Condensed Consolidated Balance Sheet as of May 31, 2002...........1
Condensed Consolidated Statements of Operations for
the three and six months ended May 31, 2001 and 2002........2
Condensed Consolidated Statements of Cash Flows for the six
months ended May 31, 2001 and 2002..........................3
Notes to Condensed Consolidated Financial Statements..............4
Item 2. Management's Discussion and Analysis or Plan of Operation............7
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K....................................10
Item 1. Financial Information
SPORTING MAGIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
At May 31, 2002
---------------
(unaudited)
Assets
Current Assets:
Cash ......................................................... $ 91,914
Restricted investment ........................................ 277,848
Accounts receivable, net ..................................... 2,679,898
Inventories .................................................. 2,857,824
Prepaid expenses ............................................. 671,320
Deferred taxes ............................................... 179,485
Other assets ................................................. 208,450
Total current assets .............................. 6,966,739
Property, plant and equipment, net .............................. 1,774,517
----------
Total Assets ...................................... $8,741,256
==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ............................................. $ 303,896
Accrued expenses and other current liabilities ............... 486,534
Short-term debt and current maturities ....................... 5,376,529
----------
Total current liabilities ......................... 6,166,959
Long-term debt, less current maturities ...................... 1,051,249
----------
Total liabilities ................................. 7,218,208
Commitments and contingencies ................................ --
Stockholders' equity ......................................... 1,523,048
----------
Total Liabilities and Stockholders' Equity ........ $8,741,256
==========
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 May 31,
2001 2002
----------- -----------
(unaudited) (unaudited)
Net sales ...................................... $ 1,878,441 $ 2,177,383
Cost of sales .................................. 1,412,630 1,630,085
----------- -----------
Gross profit ................................... 465,811 547,298
General administrative and selling expenses .... 323,403 462,376
----------- -----------
Operating income ............................... 142,408 84,922
Other expense .................................. (98,888) (78,623)
----------- -----------
Income before provision for income taxes ....... 43,520 6,299
Provision for income taxes ..................... -- 7,013
----------- -----------
Net income (loss) .............................. 43,520 (714)
=========== ===========
Net income per share, basic and diluted ........ $ 0.01 $ (0.0001)
=========== ===========
Weighted average shares outstanding ............ 6,000,000 9,489,225
=========== ===========
Six Months Ended May 31,
---------------------------
2001 2002
----------- -----------
(unaudited) (unaudited)
Net sales ........................................ $ 3,103,066 $ 4,160,427
Cost of sales .................................... 2,292,217 3,118,630
----------- -----------
Gross profit ..................................... 810,849 1,041,797
General administrative and selling expenses ...... 642,920 1,308,131
----------- -----------
Operating income ................................. 167,929 (266,334)
Other expense .................................... (163,421) (133,378)
----------- -----------
Income (loss) before benefit from income taxes ... 4,508 (399,712)
Benefit from income taxes ........................ -- (179,485)
----------- -----------
Net income (loss) ................................ 4,508 (220,227)
=========== ===========
Net income per share, basic and diluted .......... $ 0.001 $ (0.03)
=========== ===========
Weighted average shares outstanding .............. 6,000,000 8,300,588
=========== ===========
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
Six Months Ended May 31,
---------------------------
2001 2002
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) ........................................ $ 4,508 $ (220,227)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ............................ 73,665 79,775
Bad debt Expense ......................................... 43,628 22,300
Deferred taxes ........................................... -- (179,485)
Changes in operating assets and liabilities:
Accounts receivable .................................. (905,466) 316,860
Inventories .......................................... (361,453) 196,274
Prepaid expenses ..................................... (27,769) (232,780)
Other assets ......................................... (13,749) 23,304
Accounts payable ..................................... 449,685 (1,200,791)
Accrued expenses and other liabilities ............... (29,168) 59,899
----------- -----------
Total adjustments .............................. (770,627) (914,644)
----------- -----------
Net cash used in operating activities ......................... (766,119) (1,134,871)
----------- -----------
Cash flows used from investing activities:
Purchases of property, plant and equipment ............... (68,072) (83,414)
----------- -----------
Cash flows from financing activities:
Proceeds from loans and notes payable, bank ................ 744,993 4,976,400
Repayments of long terms debt, loans and
notes payable, bank....................................... -- (3,896,517)
Cash Overdraft ............................................. 8,205 --
Issuance of common stock ..................................... -- 125,104
----------- -----------
Net cash provided by financing activities ..................... 753,198 1,204,987
----------- -----------
Net decrease in cash .......................................... (80,993) (13,298)
Cash, beginning of period ..................................... 80,993 105,212
----------- -----------
Cash, end of period ........................................... $ -- $ 91,914
=========== ===========
Supplemental Information:
Cash paid during the period for interest ...................... $ 188,422 $ 158,157
=========== ===========
Cash paid during the period from income taxes ................. $ -- $ --
=========== ===========
For the six months ended May 31, 2001 and 2002, the Company purchased equipment
under capital lease obligations of approximately $36,027 and $107,296,
respectively.
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 (the "Company"), acquired
all the issued and outstanding common equity of Next, Inc., a Delaware
corporation ("Next") engaged in the design, development, marketing and
distribution of branded promotional products and imprinted sportswear (the
"Exchange"). As the Company 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 May 31, 2002, and its results of operations and cash
flows for the three and six months ended May 31, 2001 and 2002.
Operating results for the six months ended May 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 CONCENTRATION
Sales to three customers were $1,680,972 (40.46%), $984,000 (23.7%) (CMJ
Ventures, Inc -see Note 8, Subsequent Events) and $762,000 (18.3%) and
$1,196,509 (38.56%) $208,895 (6.73%), and $0 for the six months ended May 31,
2002 and 2001, respectively. At May 31, 2002 accounts receivable from such
customers were $997,081, $955,611 and $0, respectively. The current largest
customer has been operating as a debtor in possession under Chapter 11 of the
United States Bankruptcy Code since January 2002. This Company has an additional
receivable from this customer of $715,901, 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.
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
4
or net realizable value. Inventories as of May 31, 2002 consisted of the
following:
Raw materials........... $ 2,657,368
Work in process......... 110,794
Finished goods.......... 89,662
---------
$ 2,857,824
=========
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 May 31, 2001.
The Company adopted the straight line method for its tax depreciation from an
accelerated method, which was used by its predecessor prior to the Exchange. The
effect of such adoption, if any, will be reported over a four year period for
tax purposes. Management believes that this method will not result in a material
adverse effect on the Company's operating results or tax liability in the
current or future periods. The ultimate realization of deferred tax assets is
dependent upon the attainment of forecasted results of operations. Management
has taken these and other factors in 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 May 31, 2002 are as follows:
Deferred tax asset and (liabilities):
Accounts Receivable......................... $ 132,643
Net operating loss carryforwards............ 230,442
Adoption of tax depreciation method......... (183,600)
-----------
Net deferred tax asset...................... $ 179,485
===========
5. SHORT TERM AND LONG TERM DEBT
Short-term and long-term debt at May 31, 2002 consisted of the following:
Short Term Long Term
---------------- -------------
Revolving credit facility............. $ 3,405,329 $ --
Notes payable......................... 1,300,000 --
Line of credit........................ 492,670 --
Notes payable......................... 105,947 948,730
Capital lease obligations............. 72,583 102,519
---------------- -------------
Total........................... $ 5,376,529 $ 1,051,249
================ =============
All of the Company's debt is collateralized by various assets and guaranteed by
its principal stockholders. During the three months ended May 31, 2002, the
Company satisfied approximately $500,000 of maturing short-term notes and
acquired a new bank line of credit for approximately $750,000 with a maturity
date of October 2002 and interest payable at 7% annually.
5
6. STOCKHOLDERS' EQUITY
Stockholders' Equity is comprised of the following:
At May 31, 2002
-------------------
(unaudited)
Common stock, $.001 par value; 25,000,000
shares authorized, 9,489,225 shares issued
and outstanding..................................... $ 9,490
Subscriptions receivable............................... (200,000)
Additional paid in capital............................. 565,483
Retained earnings...................................... 1,148,075
-------------------
Total stockholders' equity............................. $ 1,523,048
===================
During the quarter ended February 28, 2002, the Company entered into a
subscription agreement ("Subscription Agreement") with RAE & Company ("RAE"), a
financial consulting firm whose sole stockholder serves as the Company's Chief
Financial Officer. Pursuant to this subscription agreement, RAE committed to
purchase 750,000 shares of the Company's common stock for $350,000, of which
$125,000 was paid on February 1, 2002. The Subscription Agreement was amended on
May 1, 2002 to reduce the aggregate purchase price of the stock to $325,000 and
to extend the payment due date of the remaining $200,000 to June 20, 2002
("Subscription Receivable"). The Subscription Receivable, which is an asset to
the Company, is reflected as an asset and as a reduction of stockholders equity
in the accompanying Balance Sheet.
Following the acquisition of Next pursuant to the Exchange, 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.
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 six month periods ended May 31, 2001 and 2002 were
calculated on the basis of the weighted average number of common shares
outstanding during such three and six month periods, divided by the income
available to common stockholders. 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. SUBSEQUENT EVENTS
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. The results
of operations of CMJ will be included in the condensed consolidated financial
statements of the Company commencing June 1, 2002. (see Note 2-Customer
Concentration).
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 will be eliminated in the condensed consolidated statement of
operations subsequent to the acquisition date All historical, pro forma, and
other financial information will be presented upon the Company's filing of Form
8 K/A in accordance with SEC time requirements.
6
NON-COMPETE AGREEMENT
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.
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 Form 8-K and 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,
historically, a large portion of the Company's sales have traditionally occurred
in the months of May through November.
To offset this seasonal pattern of sales associated with the
Company's current list of customers and distribution base, 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,
7
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.
FUTURE ACQUISITIONS
The Company is actively engaged in discussions with various other
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 six months
ended May 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 Month Periods Ended Six Months Ended
May 31, May 31,
------------------------- --------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales ................................. $ 1,878,441 $ 2,177,383 $ 3,103,066 $ 4,160,427
Cost of sales ......................... 1,412,630 1,630,085 2,292,217 3,118,630
----------- ----------- ----------- -----------
Gross profit .......................... 465,811 547,298 810,849 1,041,797
----------- ----------- ----------- -----------
Operating and Other Expenses:
General and administrative ......... 240,202 290,836 475,220 675,551
Royalty and commission expense ..... 83,201 65,472 167,700 220,512
Corporate cost ..................... -- 106,068 -- 412,068
Interest expense ................... 98,888 84,348 188,422 158,187
Other income ....................... -- (5,725) (25,001) (24,809)
----------- ----------- ----------- -----------
Total operating and other expense 422,291 540,999 806,341 1,441,509
----------- ----------- ----------- -----------
Income (loss) before income taxes ..... 43,520 6,299 4,508 (399,712)
Provision (Benefit) of income taxes ... -- 7,013 -- (179,485)
----------- ----------- ----------- -----------
Net income (loss) ..................... $ 43,520 $ (714) $ 4,508 $ (220,227)
=========== =========== =========== ===========
SALES
Net Sales increased 15.9% to $2,177,383 for the three months ended
May 31, 2002 from $1,878,441 for the three months ended May 31, 2001. Net sales
also increased 34.1% to $4,160,427 for the six months ended May 31, 2002 from
$3,103,066 for the six months ended May 31, 2002. This growth in sales is
primarily attributable to increased orders from two of the Company's existing
customers. Management believes that future sales growth will primarily be
generated through the continued diversification and expansion of the Company's
customer base and product offerings.
COST OF SALES
Cost of sales was 74.9% of the Company's net sales for the three
months ended May 31, 2002 compared to 75.2% for the three months ended May 31,
2001. This reduction in cost resulted chiefly from a reduction in the prices
paid by the Company for raw materials. Cost of sales was 75% of the Company's
net sales for the six months ended May 31, 2002 compared to 74% for the six
8
months ended May 31, 2001. This increase in cost of sales was primarily
attributable to the higher labor costs associated with the large number of short
manufacturing runs that occurred in 2002.
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 $76,446 for the six months ended May 31, 2002
compared to $70,644 for the six months ended May 31, 2001.
OPERATING AND OTHER EXPENSES
General and administrative expenses were $290,836 (13.4% of net
sales) for the three months ended May 31, 2002 compared to $240,202 for the
three months ended May 31, 2001. General and administrative expenses were
$675,551 for the six months ended May 31, 2002 (16.2% of net sales) compared to
$475,220 for the six months ended May 31, 2001 (15.3% of net sales). 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 $65,472 or 3% of net sales for
the three months ended May 31, 2002 compared to $83,201 or 4.4% of net sales for
the six months ended May 31, 2001. Year-to-date royalty and commission expenses
as of May 31, 2002 were $220,512 or 5.3% of net sales compared to $167,700 or
5.4% of net sales for the same period in 2001.
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 six months ended May 31, 2002 were $106,068 and $412,068, 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 $84,348 for the three months ended May 31, 2002 compared to
$98,888 for the three months ended May 31, 2002. Year-to-date expense was
$158,187 as of May 31, 2002 compared to $188,422 during the same period in 2001.
The primary reason for this 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 May 31,
2002 was $7,013, 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 May 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 $179,485, 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 related to accounts
receivable and adoption of tax depreciation method.
FINANCIAL POSITION, CAPITAL RESOURCES, AND LIQUIDITY - MAY 31, 2002 AND NOVEMBER
30, 2001:
At May 31, 2002 working capital was $799,780 a decrease of $861,927
from working capital at November 30, 2001 of $1,661,707. This decrease in
working capital was primarily due to the conversion of $792,670 in long-term
debt to short term debt.
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
9
notes issued by First Federal Bank. The AmSouth credit facility has a maximum
limitation of $3,700,000, of which $3,405,329 has been drawn upon the Company.
This credit facility matures on July 31, 2002 and is governed by various
financial covenants. The First Federal Bank Promissory Notes consist of one
principal sum of $792,670 due May 2003 and another principal sum of $750,000 due
October 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 July 31, 2002 or default on any
of its promissory notes, 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 on its long-term debt, working capital and
capital expenditures. Cash used in operations for the six months ended May 31,
2002 was $1,134,871 as compared to $766,119 for the six months ended May 31,
2001. The increase in cash used stemmed primarily from increased working capital
expenses.
Cash used for investing activities was $83,414 for the six months
ended May 31, 2002 compared to $68,072 for the six months ended May 31, 2001.
The Company's investing activities during these periods was primarily the
purchase of new equipment.
Net cash provided by financing activities was $1,204,987 for the six
months ended May 31, 2002 compared to $744,993 provided during for the three
months ended May 31, 2001. This net increase of $459,994 related to proceeds
from bank loans that were offset by debt repayment.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
The Company filed a Current report on Form 8-K on April 30, 2002
under Item 5 - Other Events and Regulation FD Disclosure. The Company also filed
a Current Report on Form 8-K on June 17, 2002 under Item 2 - Acquisition or
Disposition of Assets and Item 7 - Financial Statements and Exhibits.
10
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.
July 11, 2002 By: /s/ Dan Cooke
---------------------------------------
Dan Cooke
Chairman
By: /s/ Charles Thompson
---------------------------------------
Charles Thompson
Chief Financial Officer
11