SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14A--INFORMATION REQUIRED
IN PROXY STATEMENT
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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. 1)
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Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
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Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Materials Pursuant toss.240.14a-12
MARKET AMERICA, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, $.00001 par value per share
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2) Aggregate number of securities to which transaction applies:
3,708,350 shares of Common Stock
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth amount on which the
filing fee is calculated and state how it was determined):
The filing fee is determined based upon the product of 3,708,350
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shares of Common Stock and the merger consideration of $8.00 per
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share. In accordance with 14(g) of the Securities Exchange Act of
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1934, the filing fee was determined by calculating a fee of $92 per
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$1,000,000 of the amount calculated pursuant to the preceding
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sentence.
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4) Proposed maximum aggregate value of transaction: $29,666,800.00
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5) Total fee paid: $2,729.35
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|X| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No:
3) Filing Party:
4) Date Filed:
PRELIMINARY COPY
MARKET AMERICA, INC.
1302 Pleasant Ridge Road
Greensboro, North Carolina 27409
[Mail Date]
Dear Shareholder:
You are invited to attend a special meeting of the shareholders of Market
America, Inc., to be held at [Meeting Location] on [Meeting Date] at [Meeting
Time], local time.
At the special meeting you will be asked to consider and vote upon a proposal to
approve an Agreement and Plan of Merger providing for the merger of MA
Acquisition Sub Inc., a North Carolina corporation, into Market America. MA
Acquisition Sub is wholly owned by Miracle Marketing Inc., which, at the time of
the merger, will be owned by a group of Market America's directors, management
and certain other related parties (whom we refer to with Miracle Marketing as
the "Offering Group"), led by James H. Ridinger, Chairman, President and Chief
Executive Officer of Market America.
The purpose of the merger is to take Market America private, and, as a result of
the merger, each share of common stock of Market America outstanding prior to
the merger, other than shares held by the Offering Group, will be converted into
the right to receive $8.00 in cash. Based on the 3,708,350 shares to be
converted into cash in the proposed merger, and the $8.00 per share price, the
aggregate cash consideration for the merger would be approximately $29.7
million.
The Offering Group beneficially own approximately 82% of the outstanding Market
America shares, which they intend to vote in favor of the merger. HOWEVER, UNDER
THE TERMS OF THE MERGER AGREEMENT, THE MERGER MUST BE APPROVED BY A MAJORITY OF
THE OUTSTANDING MARKET AMERICA SHARES HELD BY PERSONS OTHER THAN THE OFFERING
GROUP. YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND HAS
DETERMINED THAT MERGER AND THE $8.00 CASH PAYMENT TO BE MADE IN RESPECT OF EACH
SHARE ARE FAIR TO, AND IN THE BEST INTERESTS OF, MARKET AMERICA AND ITS
SHAREHOLDERS, BUT THE BOARD OF DIRECTORS HAS DETERMINED, SINCE EACH MEMBER OF
THE BOARD OF DIRECTORS IS ALSO A MEMBER OF THE OFFERING GROUP AND CONSEQUENTLY
HAS INTERESTS IN THE MERGER DIFFERENT FROM THOSE OF UNAFFILIATED SHAREHOLDERS,
THAT IT SHOULD REFRAIN FROM RECOMMENDING THAT YOU VOTE FOR OR AGAINST THE
MERGER. INSTEAD, WE PROVIDE THE ENCLOSED PROXY STATEMENT FOR YOUR CONSIDERATION
AND URGE YOU TO EXERCISE YOUR RIGHT TO VOTE.
All of the members of the Board of Directors have certain conflicts of interest
with respect to the Merger. See "SPECIAL FACTORS--Conflicts of Interest" in the
enclosed Proxy Statement.
If the Merger is completed, shares held by dissenting shareholders may be
subject to appraisal in accordance with North Carolina law.
In the materials accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Proxy Statement relating to the actions to be taken
by shareholders of Market America at the special meeting and a proxy card. The
Proxy Statement more fully describes the proposed merger and includes
information about Market America and the Offering Group. You are urged to read
carefully the Proxy Statement and Notice and to consider the information
included therein. Market America and the members of the Offering Group have
filed a Schedule 13E-3 with the Securities and Exchange Commission. You are also
urged to read carefully the Schedule 13E-3 and to consider the information
therein carefully.
THE MERGER CANNOT BE COMPLETED WITHOUT THE FAVORABLE VOTE OF A MAJORITY OF THE
MARKET AMERICA SHARES HELD BY PERSONS OTHER THAN THE OFFERING GROUP.
ACCORDINGLY, IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE
SPECIAL MEETING. ALL SHAREHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN
PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE
SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE
PREVIOUSLY DELIVERED YOUR PROXY. YOUR FAILURE TO RETURN A PROPERLY SIGNED PROXY
CARD OR VOTE AT THE MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
MERGER.
Sincerely,
James H. Ridinger
Chairman, President and Chief Executive Officer
2
PRELIMINARY COPY
MARKET AMERICA, INC.
1302 PLEASANT RIDGE ROAD
GREENSBORO, NORTH CAROLINA 27409
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD [MEETING DATE]
Greensboro, NC
[Mail Date]
To the shareholders of Market America, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of Market
America, Inc., a North Carolina corporation, will be held at [Meeting Location]
on [Meeting Date] at [Meeting Time], local time, for the following purposes:
o To consider and act upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated March 27, 2002, among Market America, Miracle
Marketing Inc., a Delaware corporation ,and MA Acquisition Sub Inc., a
North Carolina corporation and wholly-owned subsidiary of Miracle
Marketing. Under the terms of the merger agreement, MA Acquisition will
be merged into Market America, the shareholders of Market America
(other than Miracle Marketing or its shareholders, whom we refer to
collectively as the "Offering Group") will receive cash consideration
of $8.00 per share, without interest; and shares of dissenting
shareholders may be subject to appraisal in accordance with North
Carolina law; and
o To transact such other business as may properly come before the special
meeting or any postponements or adjournments thereof.
Only shareholders of record at the close of business on [Record Date] are
entitled to notice of and to vote at the special meeting and any postponements
or adjournments thereof. A complete list of shareholders entitled to vote at the
special meeting will be available on written demand for examination at Market
America's principal offices located at 1302 Pleasant Ridge Road, Greensboro,
North Carolina 27409, during ordinary business hours, beginning two days from
the date of this notice and continuing through the special meeting, and will
also be available for inspection at the special meeting
To complete the merger we need the affirmative vote of the holders of (1) a
majority of the outstanding shares of the common stock of Market America and (2)
a majority of the outstanding shares of the common stock not held by the
Offering Group.
If the Merger is completed, shares held by dissenting shareholders may be
subject to appraisal in accordance with North Carolina law.
IMPORTANT
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER OF SHARES THAT YOU OWN.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE
ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED
STATES. YOU MAY REVOKE THIS PROXY BY GIVING WRITTEN NOTICE OF REVOCATION,
DELIVERING A LATER PROXY PRIOR TO THE SPECIAL MEETING OR BY ATTENDING THE
SPECIAL MEETING AND VOTING IN PERSON.
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME.
Sincerely,
James H. Ridinger
Chairman, President and Chief Executive Officer
2
PRELIMINARY COPY
MARKET AMERICA, INC.
1302 PLEASANT RIDGE ROAD
GREENSBORO, NORTH CAROLINA 27409
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PROXY STATEMENT
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SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [MEETING DATE]
This Proxy Statement is being furnished to the holders of shares of common stock
of Market America, Inc., a North Carolina corporation, in connection with the
solicitation of proxies by and on behalf of the Board of Directors of Market
America for use at the special meeting of shareholders of Market America to be
held at [Meeting Location], on [Meeting Date], at [Meeting Time], local time,
and at any postponements or adjournments thereof.
In addition to mailing copies of this Proxy Statement and the accompanying
Notice of Special Meeting of Shareholders to all shareholders of record on
[Record Date], Market America will request brokers, custodians, nominees and
other fiduciaries to forward copies of this material to persons for whom they
hold shares of Market America's stock in order that such shares may be voted.
Solicitation may also be made by Market America's officers and regular employees
personally or by telephone. In addition, Market America has retained Georgeson
Shareholder Communications, Inc. to assist in soliciting proxies.
At the special meeting, you will be asked to consider and vote upon a proposal
to approve and adopt the Agreement and Plan of Merger, dated March 27, 2002,
among Market America, Miracle Marketing Inc., a Delaware corporation, and MA
Acquisition Sub Inc., a North Carolina corporation and wholly-owned subsidiary
of Miracle Marketing. A copy of this merger agreement is attached to this Proxy
Statement as Annex A. Miracle Marketing, which is currently owned 100% by James
H. Ridinger, the Chairman, President and Chief Executive Officer of Market
America, will be owned as of the effective time of the merger by Mr. Ridinger,
Loren A. Ridinger, Director and Senior Vice President, Martin L. Weissman,
Director and Executive Vice President, Dennis J. Franks, Executive Vice
President, Marc Ashley, Vice President, Joseph V. Bolyard, Vice President, and
Andrew Weissman, Director of Field Development(collectively, with Miracle
Marketing, the "Offering Group"). As a result of their participation in the
Offering Group, all of the members of the Board of Directors have certain
conflicts of interest with respect to this merger and have interests in the
completion of the merger that are different from those of the unaffiliated
shareholders. See "SPECIAL FACTORS--Conflicts of Interest."
TO BE COMPLETED, THE MERGER MUST BE APPROVED BY THE HOLDERS OF (1) A MAJORITY OF
THE OUTSTANDING SHARES OF MARKET AMERICA STOCK AND (2) A MAJORITY OF THE
OUTSTANDING SHARES OF MARKET AMERICA STOCK NOT HELD BY THE OFFERING GROUP.
The purpose of the merger is to take market America private. The merger
agreement that you are being asked to consider provides for the merger of Sub
into Market America. At the effective time of the proposed merger:
o Market America will continue as the surviving corporation of the
merger, with Miracle Marketing its sole shareholder, and
o each share of Market America outstanding immediately prior to the
merger (other than shares owned by the Offering Group and shares as to
which appraisal rights are properly perfected and not withdrawn under
applicable North Carolina law) will be converted into the right to
receive $8.00 per share in cash, without interest.
Based on the 3,708,350 shares to be converted into cash in the proposed merger,
and the $8.00 per share price, the aggregate cash consideration for the merger
would be approximately $29.7 million.
See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT--Conversion and Cancellation of
Market America Stock" and "SPECIAL FACTORS--Appraisal Rights."
Any proxy may be revoked at any time before it is exercised. The casting of a
ballot at the Meeting by a shareholder who may have previously given a proxy
will have the effect of revoking that proxy.
The information contained in this Proxy Statement is qualified in its entirety
by the annexes hereto, each of which is important and should be carefully
reviewed in its entirety.
This Proxy Statement, the accompanying Notice of Special Meeting of Shareholders
and the accompanying proxy are first being mailed to shareholders of Market
America on or about [Mail Date].
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF SUCH TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
IT IS IMPORTANT THAT YOUR SHARES BE VOTED, AND IT IS IMPORTANT THAT PROXIES BE
RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
The date of this Proxy Statement is [Mail Date].
ii
TABLE OF CONTENTS
SUMMARY TERM SHEET..........................................................1
Special Meeting of the Shareholders...................................1
The Merger............................................................2
INTRODUCTION................................................................9
WHERE YOU CAN FIND MORE INFORMATION.........................................10
PARTIES TO THE MERGER.......................................................10
Market America........................................................10
Miracle Marketing.....................................................10
MA Acquisition Sub....................................................11
VOTING AND PROXIES..........................................................11
Date, Time and Place of Special Meeting...............................11
Record Date and Outstanding Shares....................................11
Voting Proxies........................................................11
Vote Required.........................................................12
Solicitation of Proxies; Expenses.....................................13
SPECIAL FACTORS.............................................................13
Background and Purposes for the Merger................................13
Fairness of the Merger................................................24
Purposes of the Merger for the Offering Group; Fairness of
the Merger..........................................................47
Conflicts of Interest.................................................48
Offering Group Agreement..............................................51
Certain Effects of the Merger.........................................52
Appraisal Rights......................................................54
Federal Income Tax Considerations.....................................57
Regulatory Approvals..................................................57
Shareholder Litigation................................................58
CERTAIN PROVISIONS OF THE MERGER AGREEMENT..................................58
Prior to the Effective Time of the Merger.............................58
Effective Time of the Merger..........................................58
Conversion and Cancellation of Market America Stock...................59
MA Acquisition Sub Stock..............................................59
Exchange Procedures...................................................59
Interim Operations of Market America; Conduct Pending Merger..........60
Alternative Proposals.................................................61
Indemnification.......................................................61
Conditions to the Merger..............................................62
iii
Termination...........................................................64
Amendment.............................................................64
FUNDING OF THE MERGER.......................................................65
Expenses of the Merger................................................65
CERTAIN INFORMATION CONCERNING MARKETING, SUB AND THE OFFERING GROUP........66
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS....................66
SELECTED FINANCIAL DATA.....................................................67
Audited and Unaudited Historical Financial Data.......................67
Pro Forma Financial Data..............................................68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...............................................................69
Cautionary Statement..................................................69
Overview..............................................................69
Results Of Operations.................................................70
Liquidity and Capital Resources.......................................75
The Business..........................................................76
Property..............................................................80
Legal Proceedings.....................................................81
MANAGEMENT OF MARKET AMERICA................................................81
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............86
INDEPENDENT PUBLIC ACCOUNTANTS..............................................87
OTHER MATTERS...............................................................87
2002 ANNUAL MEETING OF SHAREHOLDERS.........................................87
FINANCIAL STATEMENTS.......................................................F-1
Annex A: Agreement and Plan of Merger
Annex B: Appraisal Rights Provisions of Article 13 of the North Carolina
Business Corporation Act
iv
SUMMARY TERM SHEET
This summary term sheet presents the most material terms relating to the
Special Meeting of the Shareholders of Market America, Inc. ("Market America")
and the proposed merger that are more fully described in this Proxy Statement.
The following is intended as a summary of the most material terms contained in
this Proxy Statement, is not intended to be a complete statement of all material
features of the proposal to be voted on and is qualified in its entirety by the
more detailed information appearing elsewhere in this Proxy Statement. To
understand the merger and the transactions contemplated by this Proxy Statement,
you should carefully read this entire document, including the annexes and the
documents to which this summary refers you.
SPECIAL MEETING OF THE SHAREHOLDERS
When and where is the Special The Special Meeting will be held on
Meeting? [Meeting Date] at [Meeting Time], local
time, at [Meeting Location].
Who is entitled to this notice and You must have been a holder of record of
to vote at the Special Meeting? shares of Market America's stock at the
close of business on [Record Date] to be
entitled to this notice and to be allowed
to vote at the Special Meeting and at any
postponements or adjournments thereof.
What is the purpose of the Special The purpose of the Special Meeting is to
Meeting? consider and vote upon a proposal to take
Market America private by means of a merger
agreement, among Market America, Miracle
Marketing Inc. ("Miracle Marketing"), and
MA Acquisition Sub Inc. ("MA Acquisition
Sub.") This merger was proposed by a group
of Market America's managers and certain of
their family members, whom we refer to with
Market America as the "Offering Group." The
merger agreement provides that, when the
merger occurs, Market America will continue
as the surviving corporation and each share
of Market America's stock outstanding
immediately prior to the merger (other than
shares owned by the Offering Group and
shares as to which appraisal rights are
properly perfected and not withdrawn) will
be converted into the right to receive
$8.00 in cash, without interest.
How many shares are outstanding as At the close of business on [Record Date],
of the record date for the there were [19,420,000] shares of common
Special Meeting? stock outstanding, each with one vote.
1
What vote is required to approve The merger agreement is structured to
the proposed merger? require the approval of both a majority of
the outstanding shares of common stock of
Market America as well as a majority of the
outstanding shares other than shares
beneficially owned by the Offering Group.
The Offering Group consists of James H.
Ridinger, Loren A. Ridinger, Martin L.
Weissman, Dennis J. Franks, Marc Ashley,
Joseph V. Bolyard, and Andrew Weissman, who
beneficially own or control, collectively,
approximately 82% of the outstanding
eligible shares and who are directors
and/or officers of Market America or
immediate family members. As a result, at
least 1,738,176 of the eligible shares held
by shareholders not affiliated with the
Offering Group need to be voted in favor of
the merger. See "VOTING AND PROXIES--Vote
Required."
Do I have to attend the Special You can vote your shares without attending
Meeting in order to vote for or the Special Meeting. If you return your
against the proposed merger? proxy card, included with this Proxy
Statement, properly signed and dated, your
shares will be voted in accordance with
your instructions on the proxy card. If you
fail to attend the Special Meeting or send
a proxy card, or your broker fails to vote
on your behalf, your shares will not be
voted and will therefore be counted as if
you voted against the proposed merger. IF
YOU SEND IN YOUR PROXY CARD BUT DO NOT
SPECIFY YOUR CHOICE, YOUR SHARES
REPRESENTED BY THAT PROXY CARD WILL BE
VOTED IN FAVOR OF THE MERGER. See "VOTING
AND PROXIES."
THE MERGER
Who are the parties to the proposed Market America sells an assortment of
merger? consumer-oriented products and services
and operates through a network of
approximately 80,000 independent
distributors.
Market America's principal executive
offices are located at 1302 Pleasant Ridge
Road, Greensboro, North Carolina 27409. The
telephone number at that address is (336)
605-0040. Market America is a filing person
of the Schedule 13E-3. See "WHERE YOU CAN
FIND MORE INFORMATION" and "PARTIES TO THE
MERGER--Market America." Miracle Marketing
2
is a Delaware corporation owned 100% by Mr.
Ridinger. Miracle Marketing operates a
distribution network for Market America's
products. Mr. Ridinger and the other
members of the Offering Group will transfer
their shares of Market America to Miracle
Marketing in exchange for a proportional
number of Miracle Marketing shares, which
will allow such persons to continue
ownership of Market America through Miracle
Marketing following the Merger. As a result
of such transfers, at the time of the
merger, Miracle Marketing will be owned
95.7% by Mr. Ridinger, with the balance
owned by the other members of the Offering
Group.
Miracle Marketing's principal executive
offices are located at 2954 North Bay Road,
Miami Beach, Florida 33140. The telephone
number at that address is (305) 532-0834.
See "PARTIES TO THE MERGER--Miracle
Marketing."
MA Acquisition Sub, a wholly-owned
subsidiary of Miracle Marketing, was formed
by Miracle Marketing for the purpose of
effecting the proposed merger. MA
Acquisition Sub has no prior business or
operating history, and shall cease to exist
as a separate corporate entity upon the
consummation of the proposed merger. The
principal executive offices and telephone
number of MA Acquisition Sub are the same
as those of Miracle Marketing. See "PARTIES
TO THE MERGER--MA Acquisition Sub."
What would happen in the proposed Pursuant to the terms of the merger
merger? agreement, when the proposed merger
occurs, (i) Market America, will continue
as the surviving corporation in the merger,
as a wholly-owned subsidiary of Miracle
Marketing; and (ii) each share of Market
America's stock outstanding immediately
before the merger (other than shares owned
by the Offering Group and shares as to
which appraisal rights are properly
perfected and not withdrawn in accordance
with North Carolina law) will be converted
into the right to receive $8.00 in cash,
without interest. See "SPECIAL
FACTORS--Certain Effects of the Merger."
3
What is the background of the The proposed merger results from the
proposed merger between Miracle investigation by Mr. Ridinger and the
Marketing, MA Acquisition Sub and management of Market America of
Market America? alternatives for enhancing the value of
Market America stock. The Board of
Directors and Mr. Ridinger also engaged in
efforts to determine the fair value of
Market America's shares.
On October 17, 2001, Mr. Ridinger and his
wife, Loren A. Ridinger, who collectively
own approximately 78% of the outstanding
shares of Market America stock, made an
offer to cash out the public shareholders
of Market America at a price of $8.00 per
share. Following the October 17, 2001
meeting, the third member of the Board of
Directors, Mr. Weissman, joined the
Ridingers' offering group along with
certain other persons who are officers of
Market America or immediate family members.
After due consideration of this offer, the
Board of Directors determined that the
proposed merger was fair to, and in the
best interests of, the unaffiliated Market
America shareholders, and approved the
merger agreement subject to its approval by
the holders of the majority of the shares
not owned by the offering group. The Board
of Directors reaffirmed such determination
on May 20, 2002. See "SPECIAL
FACTORS--Background and Purposes of the
Merger."
Is there someone acting on behalf Market America's Board of Directors has
of the public shareholders in this structured the proposed merger to require
transaction? approval by a majority of outstanding
shares held by unaffiliated shareholders
(in addition to a majority of all
outstanding shares), to ensure direct
representation of the unaffiliated
shareholders' interests in the decision. No
independent committee of the Board of
Directors was appointed, because all of the
members of the Board of Directors are
members of the offering group. While the
Board of Directors engaged financial
analysts for the purpose of obtaining
advice as to the value of Market America,
it did not engage anyone as an independent
representative of the public shareholders
and did not request an independent opinion
as to the fairness of the merger. See
"SPECIAL FACTORS--Background and Purposes
of the Merger."
4
Are the proposed merger and the The Board of Directors and each member
$8 per share price fair to Market of the Offering Group believe that the
America's unaffiliated shareholders? proposed merger and the $8 per share price
are fair to and in the best interests of
the unaffiliated shareholders of Market
America. See "SPECIAL FACTORS--Fairness of
the Merger" and "SPECIAL FACTORS--Purposes
of the Merger for the Offering Group;
Fairness of the Merger."
How should I vote on the proposed The Board of Directors is refraining from
merger? recommending to shareholders that they
vote in favor or against the proposed
merger. Shareholders are urged to consider
all of the factors described in this Proxy
Statement, including the determination of
the Board of Directors that the proposed
merger and merger consideration are fair
to, and in the best interests of, Market
America's unaffiliated shareholders. In
reaching this conclusion, the Board of
Directors considered a number of factors
relating to the business and prospects of
Market America, the industry it serves, its
customers and the terms of the merger
agreement. For a more detailed discussion
of these matters, see "SPECIAL
FACTORS--Background and Purposes of the
Merger," "SPECIAL FACTORS--Fairness of the
Merger" and "SPECIAL FACTORS--Conflicts of
Interest."
If approved, when will the proposed The proposed merger will be effective
merger be effective? promptly following the Special Meeting of
shareholders at which the requisite
approvals are obtained.
Are there any conditions to the The respective obligations of the parties
completion of the proposed merger? to consummate the proposed merger are
subject to certain conditions, including,
among others, the approval of the merger
agreement by the affirmative vote of the
holders of a majority of the outstanding
shares of Market America's stock not
including the offering group. See "CERTAIN
PROVISIONS OF THE MERGER AGREEMENT--
Conditions to the Merger."
5
Are there any restrictions on the In the merger agreement, Market America
conduct of business by Market has agreed, among other things, that
America in connection with the Market America will conduct business only
proposed merger? in the ordinary and usual course. The
merger agreement does not restrict the
ability of the Board of Directors to
consider alternative proposals. See
"CERTAIN PROVISIONS OF THE MERGER
AGREEMENT--Interim Operations of Market
America; Conduct Pending Merger" and
"CERTAIN PROVISIONS OF THE MERGER
AGREEMENT--Alternative Proposals."
Can the merger of Market America The merger agreement may be terminated at
and MA Acquisition Sub be any time before the merger becomes
cancelled? effective, before or after the approval of
the merger agreement by the shareholders of
Market America, by mutual consent of the
parties or by any of Miracle Marketing, MA
Acquisition Sub or Market America if, among
other things, (i) the proposed merger has
not been consummated by July 31, 2002, or
(ii) a United States federal or state court
of competent jurisdiction issues an order,
judgment or decree (other than a temporary
restraining order) restraining, enjoining
or otherwise prohibiting the proposed
merger and such order, judgment or decree
has become final.
The merger agreement may be amended by
action taken by the respective Boards of
Directors of the parties. See "CERTAIN
PROVISIONS OF THE MERGER AGREEMENT--
Termination" and "CERTAIN PROVISIONS OF
THE MERGER AGREEMENT--Amendment."
6
Do any officers or directors of In considering the assessment of the Board
Market America have interests in of Directors that the proposed merger and
the proposed merger that are the $8.00 per share price are fair to, and
different from the interests of in the best interests of, the unaffiliated
the other shareholders? shareholders, shareholders should be aware
that all of Market America's directors have
interests in connection with the proposed
merger different from those of the
unaffiliated shareholders, since they are,
or will become prior to the time of the
merger, officers and/or directors and
substantial equity holders in Miracle
Marketing and, as a result, will be able to
continue participating in the equity
(including future profits, if any) of
Market America while the interests of the
unaffiliated shareholders will be
terminated and cashed out for $8 per share
if the Merger is completed. See "SPECIAL
FACTORS--Conflicts of Interest."
How would the expenses of the Funding of the proposed merger will
proposed merger be paid? require approximately $29.7 million to pay
the $8.00 per share of Market America stock
converted as a result of the proposed
merger and approximately $[__]to pay the
fees and expenses in connection with the
proposed merger. These funds are expected
to be provided from Market America's
available working capital and/or certain
committed commercial credit facilities. See
"FUNDING OF THE MERGER."
What would be the federal income In general, each shareholder, including
tax consequences of the proposed shareholders who exercise appraisal
merger? rights, will recognize gain or loss per
share equal to the difference between the
cash such shareholder received in the
merger and the shareholder's tax basis per
share. Such gain or loss generally will be
treated as capital gain or loss if a
shareholder's shares of Market America's
stock were held as capital assets at the
time of the Merger. THE FOREGOING TAX
DISCUSSION IS BASED UPON PRESENT LAW. YOU
SHOULD CAREFULLY REVIEW THE MORE DETAILED
DESCRIPTION CONTAINED IN "SPECIAL
FACTORS--FEDERAL INCOME TAX CONSIDERATIONS"
AND CONSULT YOUR OWN TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE PROPOSED
MERGER TO YOU.
7
What will happen if the proposed If the merger is completed, only the
merger is completed? members of the offering group (including
Mr. Ridinger and the other affiliated
shareholders), as shareholders of Miracle
Marketing as of the effective time of the
merger, will retain an interest in Market
America. All other Market America
shareholders will cease to have any
ownership interest in Market America and
will cease to participate in future
earnings and growth, if any, of Market
America. If the merger is completed, public
trading of the common stock of Market
America will cease, the registration of the
common stock under the Securities Exchange
Act of 1934 will be terminated and Market
America will cease filing reports with the
Securities and Exchange Commission. See
"SPECIAL FACTORS--Certain Effects of the
Merger."
What rights do I have if I oppose If you do not vote in favor of the
the proposed merger? proposed merger and you fully comply with
the applicable provisions of Article 13 of
the North Carolina Business Corporation
Act, you may have the right to require
Market America as the surviving corporation
of the merger to purchase your shares of
Market America stock for cash at the
appraised value of those shares as
determined in accordance with North
Carolina law. The appraised value may be
more or less than the $8.00 per share
provided for in the Merger Agreement. See
"SPECIAL FACTORS--Appraisal Rights" and
Annex B attached hereto.
At what prices did Market America's The closing bid and asked prices for
stock trade prior to the shares of Market America stock on the day
announcement of the proposal to before the October 17, 2001 announcement
take Market America private? of the proposed merger were $4.30 and
$4.45 respectively. See "MARKET FOR
COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS."
8
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation by
Market America, Inc., a North Carolina corporation ("Market America"), of
proxies to be voted at a Special Meeting of Shareholders of Market America to be
held on [Meeting Date] (the "Special Meeting"). This Proxy Statement is first
being mailed to shareholders of Market America on or about [Mail Date].
The purpose of the Special Meeting is to consider and vote upon a proposal
to approve an agreement and plan of merger (the "Merger Agreement") by and among
Market America, Miracle Marketing Inc., a Delaware corporation ("Miracle
Marketing"), and MA Acquisition Sub Inc., a North Carolina corporation and
wholly-owned subsidiary of Miracle Marketing ("MA Acquisition Sub"), pursuant to
which, among other things:
o MA Acquisition Sub will be merged with and into Market America (the
"Merger"), and Market America will continue as the surviving
corporation of the Merger (the "Surviving Corporation"),
o each share of the common stock, par value $.00001 per share, of Market
America (the "Market America Stock") outstanding immediately prior to
the Merger (other than shares owned by the Offering Group and shares as
to which appraisal rights are properly perfected and not withdrawn
under applicable North Carolina law) will be converted into the right
to receive $8.00 in cash, without interest (the "Merger
Consideration"); and
o Market America will be a wholly-owed subsidiary of Miracle Marketing.
All of the outstanding shares of Miracle Marketing are currently owned by
James H. Ridinger, the Chairman, President and Chief Executive Officer of Market
America, and will be owned as of the effective time of the Merger by Mr.
Ridinger, Loren A. Ridinger, Director and Senior Vice President, Martin L.
Weissman, Director and Executive Vice President, Dennis J. Franks, Executive
Vice President, Marc Ashley, Vice President, Joseph V. Bolyard, Vice President,
and Andrew Weissman, Director of Field Development (collectively referred to,
with Miracle Marketing, as the "Offering Group"), the "Offering Group"). The
members of the Offering Group will own shares of Miracle Marketing in proportion
to their relative ownership of Market America Stock. See "SPECIAL
FACTORS--Offering Group Agreement."
WHILE THE BOARD OF DIRECTORS OF MARKET AMERICA HAS DECIDED TO REFRAIN FROM
MAKING A RECOMMENDATION AS TO HOW SHAREHOLDERS SHOULD VOTE ON THE MERGER
AGREEMENT, THE BOARD OF DIRECTORS BELIEVES THAT THE MERGER AGREEMENT, THE MERGER
AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE REASONABLE, FAIR TO, AND IN THE
BEST INTERESTS OF, THE MARKET AMERICA SHAREHOLDERS WHO ARE NOT AFFILIATED WITH
MIRACLE MARKETING, MA ACQUISITION SUB OR THE OFFERING GROUP. See "SPECIAL
FACTORS--Fairness of the Merger." All of the members of the Board of Directors
are also members of the Offering Group. See "SPECIAL FACTORS--Purposes of the
Merger for the Offering Group; Fairness of the Merger," "SPECIAL
FACTORS--Offering Group Agreement" and "SPECIAL FACTORS--Conflicts of Interest."
9
WHERE YOU CAN FIND MORE INFORMATION
Market America files annual, quarterly and other reports and other
information with the Securities and Exchange Commission (the "SEC"). You can
read and copy any information filed by Market America with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
obtain additional information about the Public Reference Room by calling the SEC
at 1-800-SEC-0330.
In addition, the SEC maintains an Internet site (http://www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including Market
America.
Market America, Miracle Marketing, MA Acquisition Sub and the members of
the Offering Group have filed with the SEC a Rule 13e-3 Transaction Statement
(including any amendments thereto, the "Schedule 13E-3") under the Securities
Exchange Act of 1934 (the "Exchange Act") with respect to the Merger. This Proxy
Statement does not contain all of the information set forth in the Schedule
13E-3 and exhibits thereto, certain parts of which are omitted in accordance
with the rules and regulations of the SEC.
PARTIES TO THE MERGER
MARKET AMERICA
Market America is a marketing and distribution company. Market America
sells an assortment of consumer-oriented products and services, including
customized apparel, automotive lubricants, enzyme-activated cleaning and soil
conditioning products, biologically-activated hydrocarbon remediation products,
water filters, household cleaning products, gourmet coffee, flower arrangements,
dietary and nutritional supplements, jewelry, a full line of custom-blended
cosmetics, personal care products including skin, hair care and bath products,
personal development products and various marketing support materials. Market
America sells its products at wholesale exclusively to approximately 80,000
independent distributors who in turn sell these products and services at retail.
Market America`s business is part of a new distribution trend, the mass
customization of products and services. Mass customization refers to utilizing
information and technology to produce high volumes of customized or
differentiated products at an affordable cost to the end consumer. Market
America currently offers a customized gourmet food line.
Market America's principal executive offices and distribution center are
located at 1302 Pleasant Ridge Road, Greensboro, North Carolina 27409. The
telephone number at that address is (336) 605-0040.
MIRACLE MARKETING
Miracle Marketing Inc., a Delaware corporation incorporated in 2002, is
owned 100% by Mr. Ridinger. Miracle Marketing operates a distribution network
for Market America's products through its ownership of 15 of Market America
business development centers. Prior to March, 2002, these business development
10
centers were owned by Mr. Ridinger as unincorporated businesses. See "MANAGEMENT
OF MARKET AMERICA."
Through its business development centers, Miracle Marketing acts as an
independent contractor and distributor within the field sales organization of
Market America. Miracle Marketing earns commissions under the performance
compensation plan applicable to all of Market America's distributors. See
"MANAGEMENT OF MARKET AMERICA."
The principal executive offices of Miracle Marketing are located at 2954
North Bay Road, Miami, Florida 33120. The telephone number at that address is
(305) 532-0834.
MA ACQUISITION SUB
MA Acquisition Sub Inc., a North Carolina corporation and wholly-owned
subsidiary of Miracle Marketing was formed by Mr. Ridinger on January 25, 2002
to effect the Merger. MA Acquisition Sub has had no prior business or operating
history, and upon consummation of the Merger, MA Acquisition Sub will be merged
with and into Market America, and MA Acquisition Sub's separate corporate
existence will thereupon cease.
The principal executive offices and telephone number of MA Acquisition Sub
are the same as those listed above for Miracle Marketing.
VOTING AND PROXIES
DATE, TIME AND PLACE OF SPECIAL MEETING
The Special Meeting is scheduled to be held at [Meeting Time], local time,
on [Meeting Date], at [Meeting Location].
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of Market America Stock at the close of
business on [Record Date] (the "Record Date") are entitled to notice of, and may
vote at, the Special Meeting or at any adjournments or postponements thereof. As
of the Record Date, there were [19,420,000] shares of Market America Stock
outstanding.
VOTING PROXIES
Many of Market America's shareholders may be unable to attend the Special
Meeting. Therefore, Market America's Board of Directors is soliciting proxies so
that each shareholder has the opportunity to vote on the proposals to be
considered at the Special Meeting. When a proxy card is returned properly signed
and dated, the shares represented thereby will be voted in accordance with the
instructions on the proxy card. IF A SHAREHOLDER DOES NOT RETURN A SIGNED PROXY
CARD, HIS SHARES WILL NOT BE VOTED BY THE PROXIES. SHAREHOLDERS ARE URGED TO
MARK THE BOXES ON THE PROXY CARD TO INDICATE HOW THEIR SHARES ARE TO BE VOTED.
IF A SHAREHOLDER RETURNS A SIGNED PROXY CARD AND A CHOICE IS NOT SPECIFIED, THE
SHARES REPRESENTED BY THAT PROXY CARD WILL BE VOTED IN FAVOR OF THE MERGER AND
MAY BE VOTED IN THE PROXY HOLDER'S DISCRETION ON SUCH OTHER BUSINESS AS MAY
11
PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF.
See "VOTING AND PROXIES--Vote Required" and "OTHER MATTERS."
Shareholders of Market America who execute proxies retain the right to
revoke them at any time before they are voted. Any proxy given by a shareholder
may be revoked by:
o duly executing and delivering a later proxy prior to the exercise of
such proxy,
o giving notice of revocation in writing to the Secretary of Market
America, prior to the Special Meeting, at 1302 Pleasant Ridge Road,
Greensboro, NC 27409, or
o attending the Special Meeting and voting in person.
VOTE REQUIRED
A quorum for the transaction of business at the Special Meeting consists of
the holders of the majority of the outstanding shares of Market America Stock,
present in person or by proxy. Mr. Ridinger alone holds sufficient shares to
constitute a quorum. In the unlikely event that less than a majority of the
outstanding shares of Market America Stock as of the Record Date are present at
the Special Meeting, either in person or by proxy, a majority of the shares so
present may vote to adjourn the Special Meeting from time to time without
further notice, other than announcement at the Special Meeting, until a quorum
shall be present or represented.
Completion of the Merger and the transactions contemplated thereby requires
the affirmative vote of both:
o a majority of the outstanding shares of Market America Stock as of the
Record Date; and
o a majority of the outstanding shares of Market America Stock as of the
Record Date, excluding the Offering Group's shares.
The latter condition is often referred to as a "Majority of the Minority"
condition, and it has been imposed by the Board of Directors to promote fairness
to the unaffiliated shareholders. The Board of Directors has also engaged in an
analysis of the fairness of the Merger and the Merger Consideration to
unaffiliated shareholders and concluded that the Merger and Merger Consideration
are both substantively and procedurally fair to unaffiliated shareholders. See
"SPECIAL FACTORS--Fairness of the Merger."
The members of the Offering Group, holding in the aggregate 15,943,650
shares of Market America Stock, or approximately 82%, of the outstanding shares
of Market America Stock on the Record Date, intend to vote in favor of the
Merger, but while their votes will be counted for purposes of the first
condition, they will not count for purposes of the Majority of the Minority
condition. For purposes of achieving the Majority of the Minority condition,
1,738,176 shares not owned by the Offering Group will need to be voted in favor
of the Merger.
In determining whether the proposal regarding the adoption of the Merger
Agreement has received the requisite number of affirmative votes, abstentions
and broker non-votes will be counted and will have the same effect as a vote
against such proposal.
12
SOLICITATION OF PROXIES; EXPENSES
The cost of solicitation of proxies, including the cost of preparing and
mailing the Notice of the Special Meeting of Shareholders and this Proxy
Statement, will be borne by Market America. Solicitation will be made primarily
by mailing this Proxy Statement to all shareholders entitled to vote at the
Special Meeting. In addition, Market America will request brokers, custodians,
nominees and other fiduciaries to forward copies of such materials to persons
for whom they hold shares of Market America Stock in order that such shares may
be voted. Proxies may be solicited by officers and regular employees, personally
or by telephone, but at no compensation in addition to their regular
compensation as employees. Market America may also reimburse brokers,
custodians, nominees and other fiduciaries holding shares in their names for
third parties, for the cost of forwarding this Proxy Statement to and obtaining
proxies from third parties. In addition, Market America has retained Georgeson
Shareholder Communications, Inc. to assist it in soliciting proxies, for which
it will pay a fee of $30,000 plus disbursements.
SPECIAL FACTORS
BACKGROUND AND PURPOSES FOR THE MERGER
In the course of 2000, Mr. Ridinger was approached from time to time by
unaffiliated shareholders regarding steps that might be taken to enhance
shareholder value. These shareholders' concerns brought to Mr. Ridinger's
attention the view that the stock market was not valuing well-run, profitable
companies with market capitalization of under $250 million (referred to
sometimes as "small-cap companies") on the same basis as the rest of the stock
market, except in select sectors. Such unaffiliated shareholders urged that
Market America consider measures they hoped would enhance value for
shareholders, such as establishing a stock buy-back program, paying a regular
dividend or engaging in a going private transaction.
In response to these discussions Mr. Ridinger began to review Market
America's options to enhance shareholder value and increase shareholder
liquidity. Mr. Ridinger was concerned that the market's consistent
undervaluation of Market America Stock not only disappointed Market America's
shareholders but also made it difficult for Market America to attract and
adequately incentivize and reward the best managerial personnel. In Mr.
Ridinger's view, the market's tendency to undervalue companies like Market
America made it impossible for Market America to use equity compensation or
option plans effectively. For Market America's workforce, Mr. Ridinger observed,
the market's underappreciation of the company could have a demoralizing and
destabilizing effect.
For several months before proposing a particular action to the Board of
Directors, Mr. Ridinger considered several alternatives to a going private
transaction, including seeking a greater market following of Market America
Stock, instituting a stock buyback program, and paying regular dividends, in
order to better understand such alternatives. Mr. Ridinger concluded as follows:
o Mr. Ridinger concluded that the prospects for better performance of
Market America Stock were not good. Mr. Ridinger believed that small
investors' capital was being diverted from existing small-cap companies
to companies launching public offerings of shares that such investors
expected to go up astronomically. Based on his own observations, Mr.
13
Ridinger believed that existing small cap companies such as Market
America, especially with relatively small public float and limited
liquidity and trading volume, were not followed by analysts and were
viewed as inappropriate investments for most institutional investors;
o Mr. Ridinger concluded that a limited stock buyback program could raise
the market price of the Market America Stock in the short-term but
would be of little strategic value, as this measure would only
exacerbate the problems of limited float and liquidity and ultimately
make public investment in Market America even less attractive by
reducing the number of shares available in the market for trading; and
o Mr. Ridinger also considered whether payment of regular dividends,
another shareholder suggestion, could alleviate the market's
undervaluation of Market America. Mr. Ridinger felt that the cash
currently on hand was essential for anticipated investments and as a
cushion for weathering downturns. He also felt that such cash was an
important marketing tool, as it gave potential distributors more
confidence in the strength of the business than they would otherwise
have. In considering whether future earnings, over and above the amount
needed for this marketing purpose, should be paid out as dividends, Mr.
Ridinger also determined that Market America's payment of dividends
under current US tax law would be highly inefficient, resulting in
double taxation of Market America's earnings, first at the corporate
level and then at the shareholder level.
Mr. Ridinger came to believe that Market America would fare better as a
private company, for several reasons:
o As a private company Market America could better attract key personnel,
because potential candidates would not be deterred by Market America's
sluggish stock price relative to that of potential employers that
offered opportunities for substantial stock appreciation;
o As a closely held company, Market America could be structured for tax
purposes in such a way as to permit the efficient use of dividends in
connection with equity compensation plans. Achieving a more
tax-efficient structure could be possible if the shareholders were
reduced in number and restricted to natural persons, thus permitting
Market America to elect to be operated as an "S corporation";
o As a private company, Market America would not need to make certain
filings with the SEC, so that compensation arrangements with executives
would not be subject to public disclosure and scrutiny.
Mr. Ridinger, as Market America's founder had made considerable personal
efforts in building Market America's business and was not inclined to sell his
own shares of Market America Stock or relinquish control of such business. Mr.
Ridinger also doubted that a sale of Market America to a third party would
enhance shareholder value (including for his own 78% ownership interest) for the
following reasons:
14
o Any such sale would likely involve stock rather than cash
consideration, subjecting Market America shareholders to the fate of
another, larger company. Mr. Ridinger believed that Market America's
shareholders could better make investment decisions for themselves by
purchasing shares directly in whatever enterprise they preferred
instead of being forced into such ownership through an acquisition. In
addition, Mr. Ridinger noted that stock received as consideration in
such a third-party sale is often subject to a lock-up period during
which the principal shareholders, like Mr. Ridinger, would be unable to
make public sales of such stock. Mr. Ridinger believed this sort of
purchase consideration was likely especially because it could be used
by an acquirer as a means of ensuring that Mr. Ridinger would continue
in his office. As a result of the non-cash consideration likely to be
paid in such a transaction, Market America's shareholders, including
Mr. Ridinger, would be dependent upon the success of another, unknown
company for an extended period of time.
o Putting a company up for auction (for cash or stock) to third parties
can also be detrimental to the company's business. Mr. Ridinger
believed that for Market America, the process would create a sense of
instability among Market America's distributors, potentially leading
them to discontinue their current support of Market America and place
their efforts in promoting the sale of competitors' products. At the
same time, the process could be demoralizing to Market America's
workforce.
o The success of Market America was widely attributed to Mr. Ridinger's
personal efforts in developing Market America's distributor network,
and therefore Mr. Ridinger believed that Market America's future
success was likely to be viewed by potential acquirers as dependent
upon Mr. Ridinger's own stewardship. Consequently, Mr. Ridinger
believed any third party acquirer willing to pay Market America's
shareholders an adequate price for their shares (whether in cash or
stock) would require a long-term commitment by Mr. Ridinger to continue
in an executive role at Market America. While Mr. Ridinger had no
present desire to retire from Market America, he did not wish be bound
by contract to a stranger to Market America who might acquire it. Mr.
Ridinger feared that the acquisition of Market America by a more
diversified company could hinder his ability to effectively direct and
promote Market America's business, considering that the management of a
potential acquirer would likely have less knowledge of Market America's
business than Mr. Ridinger but would still wish to exert control over
him, which could have an adverse effect on the continued development of
Market America's business.
Mr. Ridinger felt that permitting the liquidation or dissolution of Market
America would be a disservice to its shareholders, since he believed that Market
America was a viable going concern. In addition, while distribution of Market
America's cash and equivalents as of October 31, 2001 would itself result in a
cash payment to shareholders of approximately $3.72 per share, (cash and
equivalents at January 31, 2002 was approximately $3.99 per share), taxable as
ordinary income, Mr. Ridinger felt that given the viability of Market America's
business and the necessity of retaining such cash on hand as a marketing tool,
such action would be irresponsible.
15
As a result, Mr. Ridinger concluded that the best chance for improving
conditions for all of Market America's shareholders would be provided by Market
America's going private through a cash buyout.
In early 2001, Mr. Ridinger discussed the conditions and alternatives
described above with Loren A. Ridinger, and Martin L. Weissman, who were the
other members of the Board of Directors. Ms. Ridinger and Mr. Weissman
acknowledged similar concerns about the lack of liquidity and the undervaluation
of Market America Stock and their effect on their ability to successfully manage
the company. While neither Ms. Ridinger nor Mr. Weissman expressed an opinion as
to the advisability of the types of transactions that Mr. Ridinger was
considering, both agreed that the Board of Directors should further investigate
Market America's value.
The Board of Directors engaged Burnham Securities Inc., ("Burnham") on May
14, 2001, to provide the Board of Directors with an evaluation of Market
America, with the understanding that Mr. Ridinger was considering proposing a
transaction in which he and other affiliates might acquire all of the
outstanding public shares of Market America Stock. Burnham is a nationally
recognized investment banking firm and, as part of its investment banking
activities, is regularly engaged in the valuation of businesses and their
securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. Three firms were interviewed and the Board of Directors selected
Burnham as a financial advisor on the basis of its experience and expertise in
going-private transactions as well as cost. Prior to this engagement, Burnham
had never provided advisory or financing services to Market America nor received
any fees from Market America or any affiliate.
As compensation for the Burnham evaluation of Market America, Market
America agreed to pay Burnham a base amount of $50,000, with $30,000 payable at
the start of the engagement and an additional $20,000 payable upon its
presentation to the Board of Directors of a valuation report. Under the terms of
the engagement letter, if an opinion as to the fairness of a particular price to
be paid in a buyout transaction was requested on or before August 31, 2001,
(subsequently amended to October 31, 2001) Market America would pay Burnham an
additional $50,000 upon the delivery of such opinion, but if Market America
declined to request such an opinion, it would pay Burnham an additional $16,000
(subsequently amended to $25,000), and Burnham's engagement would terminate. As
of the date hereof, Market America has paid Burnham $75,000. Market America has
not requested that Burnham deliver an opinion as to the fairness of a particular
price. Market America also agreed to reimburse Burnham for its reasonable
out-of-pocket expenses, including the fees and expenses of its legal counsel,
and agreed to indemnify Burnham against certain liabilities arising out of its
services. As of June [ ], 2002, Market America had reimbursed Burnham for
expenses totaling $[26,892].
Burnham was not retained to, nor did it, advise Market America with respect
to the fairness of the Merger Consideration specifically, alternatives to the
Merger or the Board of Director's underlying decision to proceed with or effect
the Merger. Furthermore, Burnham was not requested to, nor did it, solicit or
assist Market America in soliciting indications of interest from third parties
for all or part of Market America. Rather, Burnham undertook to present to the
Board of Directors a range of value within which Burnham believed a transaction
to sell or acquire Market America could be consummated between willing and
knowledgeable buyers and sellers.
16
In connection with the preparation of its valuation report, during May and
the first half of June, 2001, Burnham reviewed publicly available information on
Market America, including financial information for 1996 through Market
America's third fiscal quarter of 2001 as well as preliminary, unaudited
financial statements for the year ended April 30, 2001, and had discussions with
Mr. Ridinger and other Market America management concerning, among other things,
results of the fiscal year ended April 30, 2001 and the budget for the following
year, management's assumptions for successive fiscal years based on selected
operating scenarios and past and current operations and financial conditions.
Burnham also compared the financial performance, stock price, trading conditions
and market valuations of Market America and other publicly-traded companies, and
conducted other financial studies and analyses. During this period, Burnham
requested five-year financial projections from Market America but no such
projections existed and were not customarily prepared. As a result, Burnham
extrapolated five-year projections it needed to complete its analyses from
Market America's unaudited April 30, 2001 results and a discounted 2002 Market
America budget, without significant input from management. See "Fairness of the
Merger--Summary and Significance of the Burnham Report."
Burnham delivered to the Board of Directors its valuation study on June 18,
2001 (the "Burnham Report") at which time Burnham gave an initial presentation
which was essentially a summary of the analyses and results described under
"--Fairness of the Merger--Summary and Significance of Burnham Report," and the
Board of Directors received the report without engaging in analysis at that
time. The Burnham Report included discussion of several valuation methods, which
Burnham weighted according to Burnham's assessment of their relative importance.
The Burnham Report indicated that a transaction to sell or acquire Market
America could be consummated between willing and knowledgeable buyers and
sellers within a valuation range from $6.13 per share to $12.34 per share, with
a weighted average valuation of $9.03 per share. See "Fairness of the
Merger--Summary and Significance of the Burnham Report."
Following receipt of the Burnham Report, Mr. Ridinger directed that a
review of the Burnham Report be undertaken by an internal team, consisting of
Mr. Robert Core, certified public accountant, who advised the Board of Directors
with respect to accounting and financial issues associated with the Merger, Mr.
Richard D. Hall, Jr., Market America's General Counsel, who coordinated legal
matters relating to the Merger and later, along with Mr. Core, obtained a loan
commitment to finance the Merger (see "FINANCING OF THE MERGER"), as well as Mr.
Martin L. Weissman, a Board member and executive vice president of Market
America who was concerned with the potential impact of a transaction on Market
America's distributors and with shareholder relations. Mr. Core and Mr. Hall,
following discussions with Mr. Ridinger, raised certain questions with Burnham
regarding their report and asked Burnham to consider revising their report in
light of certain concerns (these concerns are discussed below). Burnham stated
that, in order to consider any revisions, it would need additional information
from Market America, including additional industry and peer company information
and management's own five-year financial projections. The time period for
Burnham's initial engagement was also extended.
Following further discussions with Burnham in July and August, 2001, the
internal team decided that Market America should prepare a detailed five-year
financial forecast which would be submitted to Burnham for consideration in its
valuation, in lieu of or as a supplement to the budget extrapolations prepared
by Burnham. In late August 2001, Market America engaged an independent financial
analyst, Ms. Allison Steinberg, to assist management in the preparation of such
17
financial projections and in a more detailed critique of the Burnham Report,
both in view of such forecast and general financial analysis principles. Ms.
Steinberg is a self-employed financial analyst with experience in valuations of
companies, having spent six years in the corporate finance department of a
regional investment bank, in which capacity she conducted valuations and
prepared fairness opinions, and having spent three and one-half years as an
independent consultant providing a range of financial consulting services
including corporate valuations. Prior to this engagement, Ms. Steinberg, like
Burnham, had no prior relationship or dealings with Market America and was
selected on the basis of business references. For her initial services, Market
America paid Ms. Steinberg $7,000, which fee was negotiated at the outset of the
engagement. As of June [__], 2002, Market America has paid Ms. Steinberg an
additional $[_____] and Ms. Steinberg has billed Market America an additional
$[____] for work in updating her analysis.
On or about September 7, 2001 the financial forecast developed by Market
America with Ms. Steinberg (the "Management Forecast") was delivered to Burnham
for review. See "Fairness of the Merger--Summary and Significance of the
Steinberg Critique." Market America did not prepare this or any forecast with a
view to public disclosure or compliance with published guidelines of the SEC or
the guidelines established by the American Institute of Certified Public
Accountants regarding projections. Market America's independent accountants did
not perform any procedures with respect to such forecast and assumed no
responsibility for it. Neither Market America, its Board of Directors, nor any
of Market America's officers, employees, advisors, agents or representatives
assumed any responsibility for the accuracy of any portion of this forecast.
Because forecasts of this type are based on a number of significant
uncertainties and contingencies, all of which are difficult to predict and most
of which are beyond Market America's control, Market America did not emphasize
the results of analyses utilizing the this Management Forecast in its assessment
of the fairness of the Merger Consideration, and cautions its shareholders
against placing undue reliance on the certainty of this or other forecasts
discussed in this proxy statement. See "SPECIAL FACTORS--Summary and
Significance of the Burnham Critique" and "Management Discussion and
Analysis--Cautionary Statement."
On September 10, 2001, a meeting was held in New York City with Mr. Core
and Mr. Hall, Ms. Steinberg and Burnham. At this meeting, Ms. Steinberg
presented her conclusions, which indicated a range of average per share value of
$4.18 to $11.93, with a weighted average value of $8.08, versus a weighted
average value of $9.03 calculated by Burnham. The Steinberg presentation at this
meeting was essentially a summary of the analyses and results described under
"--Fairness of the Merger--Summary and Significance of the Steinberg Critique."
Burnham was asked to consider the Management Forecast, current market and
economic conditions and the conclusions of Ms. Steinberg, and to narrow its
range of implied values for Market America. Extensive discussions ensued among
Burnham, Market America and Ms. Steinberg the material terms of which are
contained under --"Fairness of the Merger--Summary and Significance of the
Steinberg Critique."
On September 12, 2001, Mr. Core and Mr. Hall had further discussions with
Burnham and Ms. Steinberg regarding the per share value range. Initially,
Burnham reported that it had reviewed its analysis in the Burnham Report to
consider the potential impact on its valuation range of, among other things,
current market and economic conditions, Ms. Steinberg's critique and the
Management Forecast. It advised Market America that its review did not cause it
to believe that any material change to the valuation range in the Burnham Report
was warranted. Market America requested that Burnham provide a narrower range of
estimated per-share value. In response, Burnham indicated that a potential
narrowed range would be $9 to $10.50 per share, reflecting Burnham's view that
the upper end of its valuation range was more appropriate in light of Market
America's superior performance relative to its peer group. Burnham indicated
that its response was based on market conditions as they existed prior to
18
September 11, without taking into account any impact the events of September 11
might have on the stock and financial markets when they reopened. See "Fairness
of the Merger--Summary and Significance of the Burnham Report."
No further conversations took place during the market closures following
the events of September 11, and Market America did not request any further
valuation analyses from Burnham. However, on September 21, in informal
discussions with Market America's counsel, Burnham suggested that the drop in
stock market values following September 11 had likely reduced Burnham's
valuation by approximately 5% (effectively to the range of $8.55 to $9.98 per
share).
Burnham's valuation methods and conclusions were not entirely persuasive to
the Board of Directors, due in part to the Burnham Report's heavy reliance on
methodologies that used the trading price of a company's stock as an indication
of its value as well as Burnham's own five-year budget extrapolations. While the
Board of Directors, following Burnham's recommendation, considered Burnham's
analysis as a whole, they were not satisfied with certain methodologies utilized
by Burnham. Mr. Ridinger and the other members of the Board of Directors felt
that Burnham's Comparable Transactions Analysis, which estimated the value of
each share of Market America Stock at $7.18, was the most valid, primarily
because it effectively distinguished the value of a company as a going concern
from the price at which an inefficient market would value its illiquid stock and
therefore best approximated the actual valuation which would be arrived at in an
actual sale of an enterprise between knowledgeable parties. See "Fairness of the
Merger--Summary and Significance of the Burnham Report."
Mr. Ridinger felt that, despite Burnham's narrowing of its initial
conclusions, Burnham's valuation was excessive, primarily because the
methodologies favored by Burnham were too closely tied to stock trading prices
of companies with more public market liquidity than Market America, and because
such mathematical analyses failed to account for the contribution of individual
managers, such as himself, to the success and value of a company. For example,
Mr. Ridinger believed no third party would be willing to acquire Market America
at the prices within Burnham's narrowed range without assurances that current
management of Market America (particularly Mr. Ridinger) would remain. Mr.
Ridinger also felt that Burnham's narrowing approach (using the midpoints of
their results in each methodology as the bottom of the narrowed valuation
range), which he believed was an attempt to emphasize Market America's
performance relative to its peer group, was not justified, since the market
failed to recognize such superior performance in any case, and because he
believed Burnham had emphasized Market America's performance already in its
initial range by weighting certain methodologies and factors more heavily than
others. In his consideration of Burnham's narrowed value range, Mr. Ridinger
also factored in, among other things, that the economic climate following
September 11 created great doubt about the predictability of earnings factored
into the Management Forecast, and that Market America Stock continued to trade
in the ranges of $4.10 to $4.45 during August, September and the beginning of
October, 2001.
Market America did not engage Burnham to prepare, and Burnham did not
prepare, a fairness opinion with respect to its valuation ranges or the overall
transaction, nor was Burnham retained to negotiate the financial terms of the
Merger, including the Merger Consideration.
During the second week of September, Mr. Ridinger discussed with fellow
director Mr. Weissman his willingness to go forward with a going private
19
transaction with an offer price in the range of $7 - $8. Mr. Weissman had been
in regular contact with an investment manager in New York who claimed to have
ownership for his clients of 500,000 shares of Market America Stock, or 2.6%
(making him the owner of the largest Market America shareholdings known to
management outside the Offering Group). This investor had been advocating for
action to enhance value for the shareholders. Mr. Weissman, with the agreement
of the other members of the Board of Directors asked this investor how he would
view a going private transaction in which shareholders would receive $8 per
share in cash. While Mr. Weissman was unable to provide the investor with all of
the information he would later be provided in this proxy statement in accordance
with the proxy rules, the investor indicated in these discussions that he would
be favorably inclined toward an offer at such price. Based on such shareholder's
expressed interest in this transaction, Mr. Ridinger concluded that other
unaffiliated shareholders might also be interested in participating in a sale at
such price.
Mr. Weissman continued discussions with the investor to ascertain if he
would be willing to serve as an independent representative of the unaffiliated
shareholders in negotiating the terms and price of a going-private transaction
and in seeking a fairness opinion from an independently retained financial
advisor, but the investor declined to take on this responsibility. (On November
7, 2001, such investor advised Mr. Ridinger in writing "Please count on my
support of a transaction that I consider fair both to you and the shareholders."
However, on April 19, 2002, such investor notified the company that he was
withdrawing his support for the transaction at the $8 per share price. He stated
that he was disappointed by the delay in completing the transaction and
indicated that "certain dynamics" had changed, referring to Market America's
"very strong" operating results just announced for the prior period and the
recently announced sale of Herbalife International, Inc., which he believed
implied a higher valuation for Market America. The Offering Group did not seek
to regain such investor's support at that time. Prior to receipt of this
communication, Mr. Ridinger had already initiated an updated evaluation of the
fairness of the transaction to take into consideration the factors identified by
such investor.)
Following consideration of Mr. Weissman's conversations in September 2001
with the investor, Mr. Ridinger decided to launch the going-private transaction
at the $8.00 per share price. He arrived at his offering price by considering
how much he was willing to pay and confirming that such price would be fair, on
the basis of the considerations described in "--Fairness of the Merger." After
considering how to structure the transaction to ensure compliance with his
obligations as a director and controlling shareholder to Market America's
shareholders, Mr. Ridinger decided to condition the consummation of the
transaction on approval of the holders of the majority of the outstanding shares
of Market America Stock held by unaffiliated shareholders. Accordingly, Mr.
Ridinger formally delivered his original proposal for the Merger to the Board of
Directors at a special meeting called for that purpose on October 17, 2001. At
that time, Mr. Ridinger indicated that he was considering offering certain
members of Market America management the opportunity to retain an equity
interest in Market America following the Merger by becoming members of the
Offering Group.
At the October 17, 2001 meeting, Mr. Ridinger presented a proposal from
himself and Ms. Ridinger to acquire the public shares of Market America Stock
for $8.00 per share. Mr. Ridinger reviewed with the other members of the Board
of Directors the current conditions affecting Market America and its
shareholders and his reasons for wanting to complete the proposed transaction.
Mr. Ridinger reiterated his belief that the public market consistently
under-valued Market America and companies like it, and that such under-valuation
not only disappoints shareholders but also hinders Market America's development
of the executive management staff the company needs to expand its business. Mr.
Ridinger noted that there are theoretically advantages to being a
20
publicly-traded company, including stock value, stock liquidity, and use of
company stock to raise capital or make acquisitions. In Mr. Ridinger's opinion,
however, pricing trends and trading volume of the Market America Stock have not
allowed Market America to effectively take advantage of such benefits. Mr.
Ridinger indicated that he did not believe that there would be a significant
change in these conditions in the near or long term. He also indicated that
there was continued shareholder pressure on management to take steps that would
enhance value for Market America's shareholders. He indicated that he was not
willing to offer more than $8.00 per share.
Mr. Ridinger also observed that Market America's shareholders, particularly
the unaffiliated shareholders, receive little or no benefit from Market America
continuing to be publicly owned and traded. Mr. Ridinger stated that in the year
2001, no analysts covered Market America. Also, because Mr. Ridinger himself
owns approximately 77% of the outstanding Market America Stock, it was unlikely
that a sufficiently active trading market for the Market America Stock would
ever develop. In addition, typical transaction costs for the public sale of
Market America Stock significantly reduce the liquidity of the shares, since in
most cases these transaction costs represent a large percentage of the value of
their holdings at current stock pricing trends. The proposed Merger would allow
such shareholders to liquidate their holdings at a fair value without incurring
transaction costs.
Mr. Ridinger informed the Board of Directors that, based on Market
America's experience in prior years, Market America's direct costs, which
include the fees and expenses of independent auditors, SEC legal counsel,
printing, mailing, and other costs associated with SEC filings, are estimated at
approximately $130,000 annually.
Mr. Ridinger observed that another aspect of public registration is the
disclosure of proprietary information, such as executive compensation, material
contracts, acquisitions, growth strategies, and financial information regarding
overall operations. Ceasing registration of Market America Stock would increase
the confidentiality of such proprietary information, which Mr. Ridinger believed
could be analyzed by Market America's competitors to place Market America at a
competitive disadvantage.
Mr. Ridinger stated that in his view the $8.00 per share cash consideration
proposed in the Merger for the shareholders who are not part of the Offering
Group would be fair to such unaffiliated shareholders, on the basis of
considerations described under "--Fairness of the Merger."
Mr. Ridinger stated that it would not be productive to consider as an
alternative to the proposed going-private transaction the sale of Market America
to a third party, for two primary reasons. First, Mr. Ridinger, as founder of
Market America and its largest shareholder, was unwilling to sell his own shares
of Market America Stock to any unrelated party, for cash or stock, or otherwise
relinquish control of the business for which he had made considerable personal
efforts. Second, Mr. Ridinger believed that because the future success of Market
America would likely be viewed as dependent on his continued management, he did
not believe that a third party acquirer would offer an adequate price without
his commitment to remain. Mr. Ridinger believed that, even if he were willing to
manage the business under the management of an acquiring entity, such acquirer's
control or management style could conflict with his own, adversely affecting the
continued development of the business.
Finally, Mr. Ridinger told the Board of Directors, after considering the
conditions that minimize the advantages of public company status for all Market
America shareholders, the Offering Group wished to undertake this transaction in
order to achieve a tax-efficient structure for Market America following the
21
Merger, through an election to be operated as an "S corporation" under the
Internal Revenue Code. Such an election is not available to public companies or
any company with more than 75 shareholders or shareholders who are not natural
persons. A "sub-chapter S election" would permit Market America's earnings to be
attributed as income to the shareholders and taxed only to them on that basis.
As a result, earnings of Market America would no longer be taxed twice (as
corporate earnings and, then, when distributed, as dividend income to the
shareholders). Mr. Ridinger said he intended to cause Market America to be
managed with a view toward making periodic distributions to its shareholders.
Distributions could be made in connection with an equity compensation plan that
would efficiently incentivize and reward Market America's key employees. He said
that the Offering Group also hopes to benefit as continuing shareholders of
Market America from reductions in operating costs that may be achieved as a
result of Market America becoming a private company. Seeing no reason to believe
that the market would begin to recognize the company's true value as a public
company, and considering the benefits of liquidity at a fair price that this
transaction would provide to unaffiliated shareholders, Mr. Ridinger said that,
considering the time that could be required to complete the going-private
transaction, he saw no reason to delay the commencement of such going-private
transaction.
Following the October 17, 2001 meeting, the Ridingers considered whether it
was advisable for other members of management to be offered an opportunity to
join the Offering Group and continue to participate in the equity of Market
America after it is a private company. The Ridingers believed that key members
of Market America's management should be offered this opportunity in recognition
of their important contributions to Market America's success. At the invitation
of the Ridingers, Mr. Weissman decided to join the Offering Group to continue
his participation in the equity of Market America. In addition, following the
October 17, 2001 meeting, Mr. Ridinger engaged in discussions of the reasons for
the Merger described above and the fairness factors described under "--Fairness
of the Merger" with each of Dennis J. Franks (Executive Vice President of Market
America), Marc Ashley (Vice President), Joseph V. Bolyard (Vice President), and
Andrew Weissman (Director of Field Development) (Mr. Ashley is the brother of
Ms. Ridinger, and Andrew Weissman is the son of Martin L. Weissman). After
considering these factors over a period of two months, and determining that they
agreed with the reasons for and fairness to the unaffiliated shareholders of the
Merger, each of these individuals decided to join the Offering Group. See
"SPECIAL FACTORS - Offering Group Agreement."
On January 10, 2002, Mr. Ridinger called a meeting of the Board of
Directors to consider the Offering Group's proposal. Because all of the members
of the Board of Directors were members of the Offering Group, the Board of
Directors determined that it would refrain from making a recommendation to
Market America's unaffiliated shareholders. However, after reviewing the minutes
of the October 17, 2001 meeting and further considering the factors discussed
above the Board of Directors determined that the terms of the Merger were fair
to, and in the best interests of, shareholders of Market America, and that the
Merger and the Merger Consideration were fair, from a financial point of view,
to the unaffiliated shareholders of Market America.
The Board considered certain negative factors (as described under
"--Fairness of the Merger"), including that no fairness opinion had been
requested from an independent financial advisor and that no third-party bids had
been solicited, but felt that it had had sufficient input on valuation of Market
America derived from the Burnham Report and the critique of Ms. Steinberg, and
felt that given Mr. Ridinger's indication that he was unwilling to pay more than
$8.00 per share (and that in any case he was not willing to sell his shares of
Market
22
America or otherwise relinquish control), the shareholders should be given the
opportunity to decide on whether to approve the transaction through the
"Majority of the Minority" voting condition.
Accordingly, the Board of Directors approved the proposed Merger, subject
to the approval by holders of a majority of the outstanding shares of Market
America Stock in accordance with North Carolina law as well as approval by a
majority of the shares held by unaffiliated shareholders of Market America. The
Board of Directors also authorized the preparation of the Merger Agreement and
proxy materials for the Special Meeting of Shareholders, but did not set a date
for the Special Meeting of Shareholders, preferring to wait until it had
prepared appropriate solicitation materials and entered into the Merger
Agreement. Such tasks took more than two months
On March 27, 2002, Market America entered into the Merger Agreement with
Miracle Marketing and MA Acquisition Sub and filed a preliminary version of this
Proxy Statement with the SEC. During the SEC's review of such preliminary proxy
statement, the Board of Directors and the Offering Group began to consider how
recent improvements in Market America's financial performance could affect their
analysis of the fairness of the $8 per share. The Board of Directors noted that
the company had outperformed earnings expectations as indicated by a comparison
of the Management Forecast to Market America's financial statements for the
period ending January 31, 2002. As noted above, the Board of Directors also was
informed in late April of the withdrawal of support by a shareholder who had
previously supported the Merger and the $8 price; such shareholder believed that
the improved performance of Market America since the announcement in October,
2001 and the valuation implied by the announcement of the Herbalife transaction
warranted reconsideration of the $8 price.
On April 10, 2002, Herbalife International, Inc., a Market America peer
that was considered by Burnham, Steinberg and the Board of Directors in
connection with their Comparable Transactions and Market Multiples Analyses (see
"--Fairness of the Merger"), announced that it had entered into a merger
agreement pursuant to which its outstanding shares would be acquired for $19.50
per share. The Board of Directors decided to review their analysis on the basis
of the recently announced Herbalife transaction, as a further check on its
fairness determination.
Consequently, Market America requested that Ms. Steinberg update her
original analysis on the basis of Market America's recent performance as well as
the Herbalife transaction, as described below under "--Fairness of the Merger--
Summary and Significance of the Updated Analysis.
On May 20, 2002, the Board of Directors convened to consider such updated
analysis. The Board of Directors reviewed and discussed the factors set forth
under "--Fairness of the Merger" including in relation to Market America's
recent financial performance and other recent developments. Notwithstanding
earnings improvement, the Board of Directors concluded, as described in
"--Fairness of the Merger--Summary and Significance of the Updated Analysis"
that its analysis still supported a determination that the $8 per share Merger
Consideration was fair to unaffiliated shareholders. After confirming that each
member of the Offering Group concurred in such conclusion, the Board of
Directors directed the updating of the preliminary version of this proxy
statement to take into account such updated analysis and conclusions and filing
of an amendment to the preliminary proxy statement.
23
On [__________], 2002, the Board of Directors set [Meeting Date] as the
date of the Special Meeting of the Shareholders for consideration of the Merger,
with [Record Date] as the record date for determining the shareholders entitled
to notice of and to vote at such meeting.
FAIRNESS OF THE MERGER
The Board of Directors considered a number of factors in determining the
fairness of the Merger including both positive and negative factors as described
in this section. The Board of Directors noted that the $8.00 per share that
would be paid to unaffiliated shareholders in the Merger was approximately 78%
more than the highest price at which Market America Stock had traded in the
market for more than a year. The Board of Directors recognized the existence of
liquidity issues for the unaffiliated shareholders due to the lack of
significant trading volume in Market America Stock..
The Board of Directors believes that the Merger would provide a good
liquidity opportunity and a fair price for unaffiliated shareholders. The Board
of Directors believes that the $8.00 Merger Consideration is supported by the
most appropriate valuation method under the circumstances, comparison to
comparable transactions by similar companies. Moreover, the Merger Consideration
represents an 82% premium over $4.40, the last price at which a share of Market
America Stock traded immediately before the October 17 , 2001 announcement of
the Ridingers' proposal.
While the Board of Directors is not relying on definitive advice of an
investment bank or other financial adviser engaged to render an opinion with
respect to the fairness of the Merger Consideration to the unaffiliated
shareholders, the Board of Directors has taken into consideration the analysis
of Burnham, the critique thereof by Ms. Steinberg and the Management Forecasts
as well as updates to Ms. Steinberg's analysis and other factors described
herein in reaching the $8.00 per share price.
SUMMARY AND SIGNIFICANCE OF THE BURNHAM REPORT
----------------------------------------------
The full text of the Burnham Report will be made available for inspection
and copying at the principal executive offices of Market America during its
regular business hours by any interested shareholder upon its written request.
The following description of the Burnham Report is only a summary and
description of the Burnham Report and its influence on the Board of Directors'
finding that the Merger and Merger Consideration are fair to, and in the best
interests of, the unaffiliated shareholders. You may wish to read the full
report for a complete understanding of the report's assumptions, considerations
and limitations. The Board of Directors' analysis of the Burnham Report and
Burnham's conclusions was only part of the process engaged in by the Board of
Directors to assess the fairness of the Merger and the Merger Consideration.
The Burnham Report only provided a broad range of per share values for
Market America Stock based on limited information available to, and on market,
economic, and other conditions as they existed and could be evaluated by,
Burnham as of June 18, 2001. Neither the Burnham Report nor any other analysis
or advice to Market America by Burnham addresses in any way the merits of the
Board of Directors' decision to solicit your vote in this proxy statement or the
fairness of the Merger Consideration.
Burnham did not independently verify any of the information it obtained for
purposes of its report. Instead, Burnham assumed the accuracy and completeness
24
of all such information. Burnham did not make an independent inspection,
evaluation or appraisal of the assets or liabilities of Market America, nor did
anyone furnish Burnham with any such evaluation or appraisal.
In determining a per share valuation range of our Common Stock, Burnham
employed five generally recognized valuation methodologies which it believed
were most appropriate for developing its valuation estimate. After arriving at
valuation ranges using each of these methods, Burnham weighted each estimate
according to its relative importance from Burnham's perspective. The
determination of the most appropriate and relevant methods of financial analysis
and the weighting of those methods involve complex considerations and judgments
concerning a wide range of factors, all of which may not be fully described in
this summary.
Burnham has advised Market America that its analyses must be considered as
a whole and that selecting portions of its analyses, without considering all
factors and analyses, would create an incomplete view of the process underlying
Burnham's conclusions. While the Board of Directors gave consideration to all
aspects of Burnham's analysis, the Board of Directors concluded that in its view
certain aspects were more useful in determining the value of Market America than
others, as described below.
Burnham has advised Market America that no public company that Burnham
utilized in the Burnham Report as a comparison to Market America is identical to
Market America, and none of the comparable transactions utilized as a comparison
is identical to the Merger. In addition, the Burnham Report utilized estimates
and forecasts of future operating results that Burnham extrapolated from Market
America's 2002 budget without significant input from management. Both Burnham
and the Board of Directors agreed that analyses based on forecasts of future
results, particularly those not prepared by management, are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than the forecasts.
The Burnham Report concluded that the estimated value of a share of Common
Stock as of June 18, 2001, was within the range of $6.13 to $12.34, with a
weighted average valuation of $9.03 per share. The Board of Directors
specifically considered not only the conclusions of the Burnham Report, but also
the advantages and disadvantages of the various methodologies and assumptions
used by Burnham. These methodologies and conclusions, along with the
significance thereof to the Board of Directors' determination of the fairness of
the Merger Consideration, are summarized below:
COMPARABLE TRANSACTIONS ANALYSIS. This methodology started with a review of
a universe of 265 comparable transactions, over a two-year period, in the
household furnishings, personal care products, wellness/nutrition, food
retailers, leisure, educational, technology/telecommunications and
catalog/specialty distribution categories. Burnham selected seven transactions
involving companies it believed exhibit similar financial and operating
characteristics to Market America and sell to comparable customer bases. These
were acquisitions of (i) NatureSmart Inc., (ii) Life Science Technologies
Holdings L.P., (iii) VitaminShoppe.com Inc., (iv) Beauticontrol Cosmetics Inc.,
(v) Rexall Sundown Inc., (vi) Worldwide Sport Nutritional Supplements, and (vii)
Herbalife International Inc. (This Herbalife transaction, a management buyout,
was never completed, and a new transaction was announced in April, 2002. See
"--Summary and Significance of the Updated Analysis.") Of the seven transactions
considered in Burnham's analysis, two involved target companies that were
previously identified by Market America as peers (Beauticontrol and Herbalife),
two involved acquiring companies that were previously identified by Market
America as peers (Tupperware and American Marketing Systems), and two involved
25
companies being acquired by management (VitaminShoppe and Herbalife); others
involved third party acquirers. Burnham noted that that such companies, as
active participants in buying and selling companies, presumably would have paid
or received fair market value in their respective transactions. The Board of
Directors also considered, however, that, as noted by Burnham, some of the
companies that were executing acquisition or roll-up transactions may have been
able to pay a premium to do so. As a result, the Board of Directors considered
that this analysis could result in valuation calculations in excess of fair
value.
COMPARABLE TRANSACTIONS DATA SUMMARY:
DEAL REVENUE
ANNOUNCE/ BUYER SIZE LTM EBITDA DEAL TIC TIC / TIC /
CLOSE TARGET ($MM) ($MM) ($MM) TYPE ($MM) EBITDA REVENUE
5/11/01 NBTY Inc 28.00 59.00 NA Acquisition 28.00 NA 0.47
Whole Foods Market Inc.
NatureSmart Inc.
1/9/01 Advantage Marketing Systems 1.50 6.88 -1.78 Acquisition 1.50 NA 0.22
1/9/01 LifeScience Technologies Holdings
Inc.
12/19/00 Vitamin Shoppe Industries Inc. 7.28 30.18 -41.61 Acquisition 7.28 NA 0.68
1/12/01 VitaminShoppe.com Inc. MBO
9/13/00 Tupperware Corp. 50.62 64.24 -7.4 Acquisition 60.42 NA 0.94
10/18/00 Beauticontrol Cosmetics Inc.
5/1/00 Koninklijke Numico NV 1682.47 653.04 115.98 Acquisition 1796.47 15.49 2.75
5/26/00 Rexall Sundown Inc. TO
2/23/00 Rexall Sundown Inc 71.50 42.00 NA Acquisition 71.50 NA 1.70
3/23/00 Worldwide Sport Nutritional
Supplements
9/13/99 Private Group 210.78 1702.81 87.55 Acquisition 210.78 5.56 0.29
Herbalife International Inc MBO
Average 293.16 365.45 30.55 310.85 10.53 1.01
Burnham's analysis, summarized above, was based on the actual consideration
paid for a business or segment thereof comparable to Market America. Burnham
selected the ratio of total invested capital ("TIC" above) to revenues as a
basis for comparison since this ratio is generally accepted as meaningful in the
marketplace. According to the Burnham Report, total invested capital represents
the total amount of capital, including debt and equity, offered or invested in
the transaction. This market parameter ratio (or "multiple") was calculated for
each actual, comparable transaction, and then the calculations were averaged,
resulting in a composite multiple of 1.01. Burnham's application of this
multiple to Market America as of April 30, 2001 yielded a price of $7.18 per
share.
Burnham gave a 30% weighting to this analysis, reflecting its view that
recent multiples paid for comparable businesses in similar sectors are a more
accurate indicator of value than Discounted Cash Flow and Stock Buyback
Analyses. However, the Board of Directors found that this type of analysis,
which compared the prices paid by comparable companies in comparable industries
to the companies' operating statistics, was the most useful approach taken by
Burnham, and would have given this approach greater weight. The Board of
Directors noted that the companies included in Burnham's analysis using this
26
methodology are very similar to Market America. Market America agreed with the
Burnham Report's assumption that such companies, as active participants in
buying and selling, are likely to have received or paid fair value in their
respective transactions.
The Board of Directors also considered the valuation using this methodology
based on trailing twelve-month revenues as of October 31, 2001, which it
estimated at $7.64, which lent convincing support for its assessment that $8.00
per share is a fair price for the unaffiliated shareholders. (Applying this
methodology to trailing twelve-month revenues at January 31, 2002 yields a
valuation of approximately $ 7.92 per share, as shown below).
VALUE CALCULATIONS FROM COMPARABLE TRANSACTIONS:
YEAR ENDED QUARTER ENDED
---------- -------------
APRIL 30, 2001 OCTOBER 31, 2001 JANUARY 31, 2002
-------------- ---------------- ----------------
TRAILING TWELVE-MONTH $138,513.71 $146,853.10 $152,188.12
SALES (THOUSANDS)*
MULTIPLES USED:
--------------
TIC/Sales Multiple 1.01 1.01 1.01
MARKET VALUATIONS:
-----------------
TIC/Sales Multiple $139,503.09 $148,321.70 $153,710.00
------------------
(thousands)
Price Per Share $7.18 $7.64 $7.92
MARKET MULTIPLE ANALYSIS. This methodology is a standard valuation practice
utilized by some industry analysts to compare one company to its peers. Burnham
utilized market information from eight selected public companies that possess
business characteristics comparable to Market America, including sales levels,
growth prospects and overall profit margins. Five of the selected companies were
named as peers by Market America in its August 25, 2000 proxy statement:
Herbalife, Inc., Nu Skin Enterprises, Inc., Nature's Sunshine Products, Inc.,
Tupperware Corporation, and Reliv International, Inc. The three others were
Advantage Marketing Systems, Inc., Mannatech Inc., Usana Health Sciences Inc.
The following market valuation parameters were calculated: Price to Sales;
Enterprise Value to EBITDA; Price to Earnings; Price to Operating Cash Flow; and
Price to Book, on the basis of such companies closing prices as of June 14,
2001.
MULTIPLES CALCULATED:
Multiple Weight Assigned
PRICE / SALES MULTIPLE 0.49 9.44%
ENTERPRISE VALUE / EBITDA 5.17 18.52%
PRICE / EARNINGS 11.64 32.82%
PRICE/ OPERATING CASH FLOW 8.24 20.39%
PRICE / BOOK 1.77 18.82%
27
Burnham's review of Market America and its peers caused it to believe that
cash flow, EBITDA and earnings are more important drivers of value in this
segment than book value or revenues. Therefore, to emphasize the greater
significance Burnham attributed to these factors, when averaging the valuation
estimates, Burnham gave the estimates mathematical weightings reflecting the
percentage each estimate constituted of the sum of all such estimates (thus
emphasizing the higher estimates) resulting in a higher valuation. Using this
analysis, Burnham arrived at a valuation range of $3.48 to $12.09 per share for
Market America. Burnham calculated values for Market America on the basis of
Market America's April 30, 2001 year-end results, as shown below.
VALUATION CALCULATIONS:
Total Per Share
Value
(thousands)
PRICE / SALES MULTIPLE $67,542.98 $3.48
ENTERPRISE VALUE / EBITDA $132,511.65 $6.82
PRICE / EARNINGS $234,768.14 $12.09
PRICE/ OPERATING CASH FLOW $145,849.12 $7.51
PRICE / BOOK $134,658.25 $6.93
AVERAGE $143,066.03 $7.37
WEIGHTED AVERAGE $163,060.77 $8.40
In its analysis overall, Burnham gave the Market Multiple Analysis a
weighting of 40%, reflecting its belief that the public markets are more
efficient in valuing companies than Discounted Cash Flow and Stock Buyback
Analyses, as well as its view, derived from the Performance Ratio Analysis
discussed below, that Market America was outperforming its peer group in several
key areas. Although this was the favored valuation method of Burnham, the Board
of Directors felt that this analysis was not as reliable as the Comparable
Transactions Analysis, as the latter related to actual acquisition values
realized for companies similar to Market America, while the former related to
public market valuation of comparable companies in the absence of any pending
change of control transaction. Moreover, the Board of Directors believed that
multiples of stock prices are fundamentally inappropriate for valuing companies,
like Market America, whose stock is relatively illiquid and, consequently, not
priced efficiently by the stock market. As a result, the Board of Directors gave
little weight to the results of the Market Multiple Analysis.
PERFORMANCE RATIO ANALYSIS. This methodology analyzes financial ratios and
other performance statistics from selected companies to determine their use of
cash, return on assets and equity, operating margins, liquidity, and ability to
pay debt. Burnham calculated the following ratios: (i) current ratio, which is
current assets divided by current liabilities and attempts to measure ability to
pay off short term liabilities; (ii) quick ratio, which is current assets minus
inventory divided by current liabilities, which attempts to measure liquidity
and financial strength; (iii) pretax interest coverage ratio, which is earnings
before interest and taxes divided by interest expenses; (iv) gross margin, which
is net sales minus the cost of goods sold divided by net sales; (v) net income
margin, which is net income divided by net sales; (vi) operating margin, which
is operating income divided by net sales; (vii) return on equity, which is net
income divided by total average shareholders' equity; and (viii) return on
assets, which is net income divided by total average assets.
28
Burnham compared the performance ratios of Market America with those of
the peer group companies utilized in the Market Multiple Analysis, and found
that Market America's ratios were superior in most categories. Burnham
attributed Market America's superior performance specifically to the superior
skills of Market America's management.
PERFORMANCE RATIOS:
(CALCULATED FOR EACH COMPANY AS OF THE MOST RECENT REPORTING DATE AS OF JUNE 18, 2001)
3 Year 3 Year
Pretax 3 Year 3 Year 3 Year Average Average
Interest Average Average Average Net Gross
Current Coverage Return on Return on Operating Income Income
Company Name Ratio Quick Ratio Ratio Assets Equity Margin Margin Margin
------------ ----- ----------- ----- ------ ------ ------ ------ ------
Advantage Marketing Systems 2.9 2.1 NA 6.4 7.5 5.1 3.5 31.8
Inc.
Herbalife Int'l Inc 2.1 1.4 32.1 13.1 26.8 37.4 5.3 73.7
Mannatech Inc. 1.5 0.6 -129.3 18.8 161.5 21.1 2.4 42.3
Natures Sunshine Products 2.3 1.6 1397.0 18.5 25.9 54.7 6.4 82.6
Inc.
Nu Skin Enterprises, Inc. 2.4 1.5 NA 15.0 36.7 52.6 9.5 81.0
Reliv International Inc 1.0 0.5 -0.5 -0.9 -4.3 27.3 -0.2 59.3
Tupperware Corp. 1.3 0.8 5.7 9.0 50.4 12.1 6.9 65.2
Usana Health Sciences Inc. 1.0 0.3 3.7 17.4 29.4 9.0 4.7 33.5
Average 1.8 1.1 218.1 12.2 41.7 27.4 4.8 58.7
Market America, Inc 6.5 6.1 221.1 34.5 44.9 19.3 12.8 74.9
Burnham did not derive a value from, or weigh the results of, this
analysis. Instead, Burnham considered that the Performance Ratio Analysis gave
empirical support for the higher weighting it gave to the higher values
calculated with its Market Multiple Analysis. The Board of Directors felt that
such comparisons among the companies selected were not necessarily useful
considering their differing strategies, market capitalization and public float.
Furthermore, the Board of Directors believed that Market America's performance
was directly attributable to the management of Market America by James H.
Ridinger; as a result, it felt it would be unreasonable to conclude that Market
America could be sold to a third party at a multiple comparable to the peer
group companies if the acquirer could not be certain Mr. Ridinger would continue
to lead Market America. Consequently, the Board of Directors did not believe
that Burnham's decision to emphasize methodologies that result in higher
valuations was justified by the Performance Ratio Analysis.
DISCOUNTED CASH FLOW ANALYSIS. This methodology involves a review of Market
America's historical five-year financial results and five-year projections or
forecasts regarding future operations and the cash flows derived therefrom,
discounted to a present value in order to value the shares of Market America.
Burnham used a discount rate of 15.13%, derived from Market America's weighted
average cost of capital. Since Market America had not provided Burnham with
financial projections or significant growth rate guidance, Burnham developed its
own financial projections, summarized on the following page.
29
Projection Prepared by Burnham for Purposes of its Discounted Cash Flow
Analysis(1)
All data in thousands of $, except per share information
Slow Growth Case
----------------
Year ended April 30,
--------------------
2,002 2,003 2,004 2,005
------ ------ ------ ------
(Projected)
Sales 144,054,254 149,816,424 155,809,081 162,041,445
Yr-toYr % Change 4.0% 4.0% 4.0% 4.0%
NET REVENUES 144,054,254 149,816,424 155,809,081 162,041,445
Yr-toYr % Change 4.0% 4.0% 4.0% 4.0%
Cost of Sales 37,454,106 38,952,270 38,952,270 40,510,361
Gross Margin 74.0% 74.0% 75.0% 75.0%
GROSS PROFIT 106,600,148 110,864,154 116,856,811 121,531,083
Commissions 64,824,414 67,417,391 70,114,087 72,918,650
% of Revenues 45.0% 45.0% 45.0% 45.0%
Sales Tax 576,217 599,266 623,236 648,166
% of Revenues 0.4% 0.4% 0.4% 0.4%
Salaries 7,778,930 8,090,087 8,569,499 8,912,279
% of Revenues 5.4% 5.4% 5.5% 5.5%
Consulting 432,163 449,449 467,427 486,124
% of Revenues 0.3% 0.3% 0.3% 0.3%
Rents 1,440,543 1,498,164 1,558,091 1,620,414
% of Revenues 1.0% 1.0% 1.0% 1.0%
Depreciation &
Amortization 720,271.3 749,082.1 779,045.4 810,207.2
% of Revenues 0.5% 0.5% 0.5% 0.5%
Other 6,050,279 6,292,290 6,543,981 6,805,741
4.2% 4.2% 4.2% 4.2%
TOTAL EXPENSES 81,102,545 84,346,647 87,876,322 91,391,375
OPERATING INCOME (EBITDA) 25,497,603 26,517,507 28,980,489 30,139,709
% of Revenues 17.7% 17.7% 18.6% 18.6%
Interest Income 2,160,814 2,247,246 2,337,136 2,430,622
Interest (Expense) (144,054) (149,816) (155,809) (162,041)
Other Income (Expense) 864,326 898,899 934,854 972,249
PRETAX INCOME 27,658,417 28,764,753 31,317,625 32,570,330
% of Revenues 19.2% 19.2% 20.1% 20.1%
Taxes 10,233,614 10,642,959 11,587,521 12,051,022
Effective Tax Rate 37.0% 37.0% 37.0% 37.0%
NET INCOME 17,424,803 18,121,795 19,730,104 20,519,308
Net Margin (% of
Revenues) 12.1% 12.1% 12.7% 12.7%
Net Income Applicable
to Common Shareholders
EARNINGS PER SHARE
(BASIC) 0.90 0.93 1.02 1.06
% Change -13.6% 4.0% 8.9% 4.0%
EBIT 27,802.5 28,914.6 31,473.4 32,732.4
EBIT Growth Rate -5.0% 4.0% 8.9% 4.0%
- Interest Income from
Cash 2,160.8 2,247.2 2,337.1 2,430.6
EBIT without interest
income 25,641.7 26,667.3 29,136.3 30,301.8
EBIT (1-t) 16,154.2 16,800.4 18,355.9 19,090.1
Free Cash Flow to Firm $13,831.1 $16,189.6 $17,720.6 $18,429.5
PV OF FREE CASH FLOW $10,809.0 $10,989.5 $10,448.0 $9,438.1
- --------
(1)Burnham's five-year projections included projected data for the year ended
April 30, 2001 because Market America had not yet completed its audited
financial statements for such period; however, the estimates included by
Burnham for such year are substantially the same as the audited results for
such period. See "Financial Statements."
Projection Prepared by Burnham for Purposes of its Discounted Cash Flow
Analysis(1)
All data in thousands of $, except per share information
Base Growth Case
----------------
Year ended April 30,
--------------------
2,002 2,003 2,004 2,005
------ ------ ------ ------
(Projected)
Sales 155,135,351 173,751,593 187,651,720 202,663,858
Yr-toYr % Change 12.0% 12.0% 8.0% 8.0%
NET REVENUES 155,135,351 173,751,593 187,651,720 202,663,858
Yr-toYr % Change 12.0% 12.0% 8.0% 8.0%
Cost of Sales 40,335,191 45,175,414 46,912,930 50,665,964
Gross Margin 74.0% 74.0% 75.0% 75.0%
GROSS PROFIT 114,800,160 128,576,179 140,738,790 151,997,893
Commissions 69,810,908 78,188,217 84,443,274 91,198,736
% of Revenues 45.0% 45.0% 45.0% 45.0%
Sales Tax 620,541 695,006 750,607 810,655
% of Revenues 0.4% 0.4% 0.4% 0.4%
Salaries 8,377,309 9,382,586 10,320,845 11,146,512
% of Revenues 5.4% 5.4% 5.5% 5.5%
Consulting 465,406 521,255 562,955 607,992
% of Revenues 0.3% 0.3% 0.3% 0.3%
Rents 1,551,354 1,737,516 1,876,517 2,026,639
% of Revenues 1.0% 1.0% 1.0% 1.0%
Depreciation &
Amortization 775,676.8 868,758.0 938,258.6 1,013,319.3
% of Revenues 0.5% 0.5% 0.5% 0.5%
Other 6,515,685 7,297,567 7,881,372 8,511,882
4.2% 4.2% 4.2% 4.2%
TOTAL EXPENSES 87,341,202 97,822,147 105,835,570 114,302,416
OPERATING INCOME (EBITDA) 27,458,957 30,754,032 34,903,220 37,695,478
% of Revenues 17.7% 17.7% 18.6% 18.6%
Interest Income 2,327,030 2,606,274 2,814,776 3,039,958
Interest (Expense) (155,135) (173,752) (187,652) (202,664)
Other Income (Expense) 930,812 1,042,510 1,125,910 1,215,983
PRETAX INCOME 29,785,987 33,360,306 37,717,996 40,735,435
% of Revenues 19.2% 19.2% 20.1% 20.1%
Taxes 11,020,815 12,343,313 13,955,658 15,072,111
Effective Tax Rate 37.0% 37.0% 37.0% 37.0%
NET INCOME 18,765,172 21,016,993 23,762,337 25,663,324
Net Margin (% of
Revenues) 12.1% 12.1% 12.7% 12.7%
Net Income Applicable
to Common Shareholders
EARNINGS PER SHARE
(BASIC) 0.97 1.08 1.22 1.32
% Change -7.0% 12.0% 13.1% 8.0%
EBIT 29,941.1 33,534.1 37,905.6 40,938.1
EBIT Growth Rate 2.3% 12.0% 13.0% 8.0%
- Interest Income from
Cash 2,327.0 2,606.3 2,814.8 3,040.0
EBIT without interest
income 27,614.1 30,927.8 35,090.9 37,898.1
EBIT (1-t) 17,396.9 19,484.5 22,107.2 23,875.8
Free Cash Flow to Firm $15,461.6 $19,372.8 $21,676.3 $23,410.5
PV OF FREE CASH FLOW $12,083.2 $13,150.2 $12,780.3 $11,988.9
- --------
(1)Burnham's five-year projections included projected data for the year ended
April 30, 2001 because Market America had not yet completed its audited
financial statements for such period; however, the estimates included by
Burnham for such year are substantially the same as the audited results for
such period. See "Financial Statements."
Projection Prepared by Burnham for Purposes of its Discounted Cash Flow
Analysis(1)
All data in thousands of $, except per share information
Fast Growth Case
----------------
Year ended April 30,
--------------------
2,002 2,003 2,004 2,005
------ ------ ------ -----
(Projected)
Sales 166,216,447 199,459,737 239,351,684 287,222,021
20.0% 20.0% 20.0% 20.0%
NET REVENUES 166,216,447 199,459,737 239,351,684 287,222,021
Yr-toYr % Change 20.0 20.0% 20.0% 20.0%
Cost of Sales 43,216,276 51,859,532 59,837,921 71,805,505
Gross Margin 74.0% 74.0% 75.0% 75.0%
GROSS PROFIT 123,000,17 147,600,205 179,513,763 215,416,516
Commissions 74,797,401 89,756,881 107,708,258 129,249,909
% of Revenues 45.0% 45.0% 45.0% 45.0%
Sales Tax 664,866 797,839 957,407 1,148,888
% of Revenues 0.4% 0.4% 0.4% 0.4%
Salaries 8,975,688 10,770,826 13,164,343 15,797,211
% of Revenues 5.4% 5.4% 5.5% 5.5%
Consulting 498,649 598,379 718,055 861,666
% of Revenues 0.3% 0.3% 0.3% 0.3%
Rents 1,662,164 1,994,597 2,393,517 2,872,220
% of Revenues 1.0% 1.0% 1.0% 1.0%
Depreciation &
Amortization 4,986,493.4 5,983,792.1 7,180,550.5 8,616,660.6
% of Revenues 3.0% 3.0% 3.0% 3.0%
Other 6,981,091 8,377,309 10,052,771 12,063,325
4.2% 4.2% 4.2% 4.2%
TOTAL EXPENSES 93,579,860 112,295,832 134,994,350 161,993,220
OPERATING INCOME (EBITDA) 29,420,311 35,304,373 44,519,413 53,423,296
% of Revenues 17.7% 17.7% 18.6% 18.6%
Interest Income 2,493,247 2,991,896 3,590,275 4,308,330
Interest (Expense) (166,216) (199,460) (239,352) (287,222)
Other Income (Expense) 997,299 1,196,758 1,436,110 1,723,332
PRETAX INCOME 27,758,147 33,309,776 42,125,896 50,551,076
% of Revenues 16.7% 16.7% 17.6% 17.6%
Taxes 10,270,514 12,324,617 15,586,582 18,703,898
Effective Tax Rate 37.0% 37.0% 37.0% 37.0%
NET INCOME 17,487,632 20,985,159 26,539,315 31,847,178
Net Margin (% of
Revenues) 10.5% 10.5% 11.1% 11.1%
Net Income Applicable
to Common Shareholders
EARNINGS PER SHARE
(BASIC) 0.90 1.08 1.37 1.64
% Change -13.3% 20.0% 26.5% 20.0%
EBIT 27,924.4 33,509.2 42,365.2 50,838.3
EBIT Growth Rate -4.6% 20.0% 26.4% 20.0%
- Interest Income from
Cash 2,493.2 2,991.9 3,590.3 4,308.3
EBIT without interest
income 25,431.1 30,517.3 38,775.0 46,530.0
EBIT (1-t) 16,021.6 19,225.9 24,428.2 29,313.9
Free Cash Flow to Firm 16,967.4 20,888.1 26,422.8 31,707.4
PV OF FREE CASH FLOW $13,259.9 $14,178.8 $15,578.8 $16,237.9
- --------
(1)Burnham's five-year projections included projected data for the year ended
April 30, 2001 because Market America had not yet completed its audited
financial statements for such period; however, the estimates included by
Burnham for such year are substantially the same as the audited results for
such period. See "Financial Statements."
30
Burnham's projections of Market America's future cash flows distinguished
between cash flows from Market America's approximately $60 million in cash
assets at April 30, 2001, which have a constant value and no associated risk,
and free cash flows from the firm's other assets, which are susceptible to
assumptions about Market America's future growth. This distinction caused, among
other things, Burnham to adjust Market America's capital risk profile or "beta"
upward in calculating Market America's cost of capital in order to reduce the
potential effect of Market America's large cash balance on the valuation.
Burnham analyzed Market America's prospects under three growth scenarios: a base
case, with an assumed annual compounded growth rate of 9.9% (and a terminal
growth rate of 6%); a slow growth case, 4% (and terminal rate of 2%); and a high
growth case, 20% (and a terminal rate of 9%). Burnham then applied its growth
scenarios to Market America's unaudited April 30, 2001 results and 2002 budget,
which Burnham discounted due to actual 2001 results falling significantly short
of the 2001 budget, to produce a five-year free cash flow projection for Market
America. "Free cash flow from the firm" was defined by Burnham as earnings
before interest and taxes (without interest income) multiplied by one minus the
effective tax rate and adjusted for depreciation and amortization, capital
expenditures and changes in working capital that is available to creditors and
equity owners.
As shown in the projections appearing on the prior page, after calculating
free cash flow from the firm, Burnham added back Market America's cash balance
to arrive at a per share valuation. The Burnham Report concluded that the
Discounted Cash Flow Analysis provided a range of valuation of $9.84 to $20.27
per share, with the base case yielding a value of $13.22 per share.
Although Burnham believed that its projection and valuation methods were
conservative, Burnham gave this analysis a lower weighting (25%) than it gave to
the Comparable Transactions and Market Multiple Analyses because it was done
without the benefit of management projections or significant growth guidance,
and because Burnham believed this Discounted Cash Flow is a less reliable
methodology in any case. The Board of Directors noted that the Burnham Report
relied on Burnham's own projections (which were extrapolations from Market
America's projected 2002 budget) rather than the Management Forecast. The Board
also felt that given the uncertainties of the current economic environment and
the inherent unreliability of projections and forecasts generally, this
valuation method should not be relied upon, even if it were based on the
Management Forecast.
STOCK BUYBACK MULTIPLE ANALYSIS. This methodology is based on analysis of a
company's prior stock buybacks and seeks to reflect an aggregate price that a
sophisticated and knowledgeable seller would receive for Market America Stock
over a measurable period of time (as opposed to a single transaction, which
could be influenced by a specific event). Based on the dates and prices of three
recent stock buybacks by Market America (30,000 shares purchased in 2000 for
$2.00 per share, 100,000 shares purchased in 2000 for $3.09 per share, and
400,000 purchased in 2000 for $3.09 per share), Burnham determined the averages
of five multiples (Price to Sales; Enterprise Value to EBITDA; Price to
Earnings; Price to Operating Cash Flow; and Price to Book). The averages of the
multiples calculated with respect to each stock buyback are set forth below:
MULTIPLE/VALUATION CALCULATIONS:
Multiple Total Value Per Share Value
(millions)
PRICE / SALES 0.53 $73.2 $3.77
MULTIPLE
ENTERPRISE VALUE / 1.93 $48.3 $2.49
EBITDA
PRICE / 4.10 $82.6 $4.26
EARNINGS
PRICE/ OPERATING CASH 3.76 $66.5 $3.42
FLOW
PRICE / 1.43 $109.1 $5.62
BOOK
Average $81.2 $4.18
32
Burnham then applied each of these multiples to Market America's unaudited
April 30, 2001 year end financial information and averaged the results of
estimates reached for each multiple. The result was a valuation of $4.18 per
share.
Burnham gave a 5% weighting to this analysis. Market America had only
engaged in three separate buybacks during the 2000 fiscal year and the 2001
fiscal year to date, each from the same original shareholder of Market America
(not a member of the Offering Group) at prices ranging from $2 to $3.09 per
share. The Board of Directors agreed with Burnham that the prices paid in these
transactions were not the best indicators of Market America's value.
NARROWED VALUATION RANGE. In early September, at the request of Market
America, Burnham reviewed the per share valuation range in the Burnham Report in
light of the subsequently developed Management Forecast, current market and
economic conditions and Ms. Steinberg's critique. During the course of its
review Burnham specifically considered the impact of the Management Forecast and
a lower terminal value (4 x base case free cash flow) on the Discounted Cash
Flow Analysis. At the September 12, meeting Burnham advised Market America that
its review did not cause it to believe that any material change to the Burnham
Report's valuation range was warranted. Market America asked Burnham if it could
narrow the range of per share values in the Burnham Report. Burnham suggested
that an appropriate potential narrowed range would be $9 to $10.50 per share,
reflecting Burnham's view that Market America's superior performance relative to
its peer group implied that the upper end of its valuation range was more
appropriate. The Board of Directors disagreed with this approach to narrowing
the valuation range, because it felt that Burnham already reflected Market
America's superior performance in the application of its methodologies.
SUMMARY AND SIGNIFICANCE OF THE STEINBERG CRITIQUE
--------------------------------------------------
Ms. Steinberg was hired to help the Board of Directors evaluate the Burnham
Report. Ms. Steinberg was not engaged to provide and did not provide an
independent valuation of Market America or an analysis of the fairness of the
Merger Consideration specifically. Nevertheless, Ms. Steinberg's critique of the
Burnham Report was useful to the Board of Directors in its review of various
methodologies that may be used to determine the value of a company's shares. The
underlying spreadsheets developed by Ms. Steinberg in connection with her
critique will be made available for inspection and copying at the principal
executive officers of Market America during its regular business hours by any
interested shareholders upon written request. You may wish to read the full
analysis for a complete understanding of the assumptions, considerations and
limitations implicit in this analysis. The Board of Directors' consideration of
the analysis described in this section was only part of the process engaged in
by the Board of Directors to assess the fairness of the Merger and the Merger
Consideration.
Although Market America does not, as a matter of course, make public
forecasts or projections as to future financial results, to the extent the
analyses described below, such as Discounted Cash Flow Analysis, utilized
forward-looking information about Market America, Ms. Steinberg used the
Management Forecasts. The Management Forecasts were developed by Market America
management with the assistance of Ms. Steinberg in response to the Burnham
Report, which had relied on Burnham-developed extrapolations of Market America
information. The Board of Directors did not emphasize the results of such
forward-looking methodologies in reaching its conclusion that the Merger
Consideration is fair from a financial perspective to the unaffiliated
shareholders of Market America. A summary of Ms. Steinberg's analysis is set
forth below.
33
COMPARABLE TRANSACTIONS ANALYSIS. Ms. Steinberg noted that the companies
included in the Burnham analysis were similar to Market America, and further
agreed that such companies, as active participants in buying and selling, were
likely to have received or paid fair value in their respective transactions.
Based on such analysis, the Burnham Report concluded, and Ms. Steinberg
accepted, that utilizing this method of valuation would result in a value of
roughly $7.18 per share, as of April 30, 2001. Ms. Steinberg also calculated
this value as of July 31, 2001 and averaged the results for an average valuation
of $7.37.
MARKET MULTIPLE ANALYSIS. The results of this analysis led Ms. Steinberg to
price Market America Stock in the range of $2.78 per share to $11.42 per share,
with an average of $7.77 per share, based on market stock prices as of September
3, 2001. There were two primary differences between Ms. Steinberg's market
multiple analysis, presented below and that of Burnham.
MULTIPLES CALCULATED:
Median
Multiple
PRICE / SALES 0.4
MULTIPLE
ENTERPRISE VALUE / 5.2
EBITDA
PRICE / EARNINGS 10.3
PRICE/ EBITDA 5.1
PRICE / 1.6
BOOK
First, Ms. Steinberg chose to eliminate one of the comparable companies,
Advantage Marketing Systems, Inc., from the Market Multiple Analysis conducted
by Burnham because it had minimal revenues and profit margins when compared to
the rest of the comparable group and was thus trading at implied market
multiples that were significantly in excess of the rest of the group. In Ms.
Steinberg's opinion, these inflated market multiples were merely a result of
this company's small size and lack of earnings, and not indicative of the
market's belief that this company deserved a superior market valuation vis-a-vis
the rest of the group.
Second, Ms. Steinberg disagreed with Burnham's calculation of a weighted
average per share valuation from this analysis. Ms. Steinberg calculated a
straight average of the valuations resulting from the five multiples utilized by
Burnham (Price to Sales; Enterprise Value to EBITDA; Price to Earnings; Price to
Operating Cash Flow and Price to Book), and arrived at a value of $7.77 as
opposed to Burnham's "weighted" average value of $8.40. Burnham's weighted
average gave more emphasis to the higher values implied by the price to
earnings, Enterprise Value to EBITDA and price to cash flows multiples. Ms.
Steinberg felt that Burnham's greater weighting of these factors in its Market
Multiple Analysis was inappropriate and inconsistent given its sizable weighting
of its Comparable Transactions methodology, which it completed solely on the
basis of a multiple of revenues. Also, Ms. Steinberg questioned the usefulness
of the multiples generated from the companies used in this analysis, as most of
these companies were either much larger and more established than Market
America, or were so small that they had minimal earnings. Ms. Steinberg
considered Market America's financial data as of both April 30, 2001 and July
31, 2001 and averaged the values. Ms. Steinberg's results are presented below:
34
VALUATION
CALCULATIONS:
Total Per
Value Share
----- -----
(thousands)
PRICE / SALES $54,062.7 $2.78
MULTIPLE
ENTERPRISE VALUE / $213,067.8 $10.97
EBITDA
PRICE / $221,836.5 $11.42
EARNINGS
PRICE/ EBITDA $124,155.7 $6.39
PRICE / $141,709.2 $7.30
BOOK
AVERAGE $150,966.4 $7.77
The Board of Directors also considered that if Ms. Steinberg had
recalculated these multiples as of February 12, 2002, the average per share
valuation would have increased from $7.77 to $9.55, because of the changes in
the performance and multipliers calculated for the comparable companies used in
this analysis. In the Board of Directors' view, however, such changes among the
comparable companies' and the constant changes of multiples make the multiples
unreliable for valuation purposes. Moreover, the Board of Directors felt that
multiples calculated on the basis of a company's trading price were
fundamentally inappropriate for valuing companies like Market America, whose
share prices bear little relationship to company value as a result of the
relative illiquidity of the shares and Market America's very significant
dependence on one individual, Mr. Ridinger. Consequently, the Board of Directors
gave little weight to the results of the Market Multiple Analyses performed by
either Burnham or Ms. Steinberg.
PERFORMANCE RATIO ANALYSIS. Ms. Steinberg agreed with Burnham that this
analysis indicated that Market America was undervalued in the stock market based
upon its performance statistics vis-a-vis its universe of comparable companies,
but she did not believe that such performance statistics justified Burnham's
emphasis of one methodology (Market Multiple Analysis), which had produced
higher valuation results, over others. The Board of Directors agreed and also
questioned the usefulness of such comparisons when such analysis failed to
account for differences among such companies such as the relative importance of
particular company managers to a company's overall success.
35
DISCOUNTED CASH FLOW ANALYSIS. In conducting this analysis, Ms. Steinberg
utilized the Management Forecast, which assumed an annual growth rate of 6.9%. A
summary of this forecast (in the form of a projected income statement) is
presented below:
INCOME STATEMENT:
(THOUSANDS, EXCEPT PER SHARE NUMBERS)
INCOME STATEMENT:
(THOUSANDS, EXCEPT PER SHARE NUMBERS)
Year Ended April 30,
--------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
SALES $ 145,230,952 $ 154,316,105 $ 166,398,725 $ 179,402,537 $ 193,528,179
% GROWTH 4.8% 6.3% 7.8% 7.8% 7.9%
COST OF SALES 38,131,869 39,736,397 42,431,675 45,299,141 48,382,045
GROSS PROFIT 107,099,083 114,579,708 123,967,050 134,103,397 145,146,134
% MARGIN 73.7% 74.3% 74.5% 74.8% 75.0%
SELLING EXPENSES
Commissions 62,594,919 67,127,506 72,799,442 78,937,116 85,636,219
Sales tax - - - - -
GENERAL AND ADMIN.
Salaries 9,482,881
8,537,978 8,641,70 8,819,132 9,149,529
Consulting 233,057 385,790 415,997 448,506 483,820
Lease expense 1,548,225
1,180,388 1,234,529 1,331,190 1,435,220
Depreciation & amortization 2,012,991
1,218,549 1,412,991 1,612,991 1,812,991
Other 6,773,486
5,937,287 6,172,644 6,323,152 6,458,491
TOTAL GENERAL AND ADMIN. 20,301,404
17,107,259 17,847,657 18,502,462 19,304,739
INCOME FROM OPERATIONS 39,208,511
27,396,906 29,604,546 32,665,146 35,861,541
% MARGIN 18.9% 19.2% 19.6% 20.0% 20.3%
Interest income (expense) 6,034,162
2,570,444 3,301,761 4,101,634 5,015,782
Gain (loss) on sale of assets
300,000 324,064 349,437 376,745 406,409
Other income
605,039 632,696 682,235 735,550 793,466
PRE-TAX INCOME 46,442,547
30,872,388 33,863,067 37,798,452 41,989,620
% MARGIN 21.3% 21.9% 22.7% 23.4% 24.0%
Income taxes 17,415,955
11,544,026 12,698,650 14,174,420 15,746,107
NET INCOME $ 19,328,362 $ 21,164,417 $ 23,624,033 $ 26,243,512 $ 29,026,592
BASIC EARNINGS PER SHARE $ 1.00 $ 1.09 $ 1.22 $ 1.35 $ 1.49
Weighted average shares 19,420,000
19,420,000 19,420,000 19,420,000 19,420,000
SUPPLEMENTAL DATA:
EBITDA $ 28,615,454 $ 31,017,537 $ 34,278,137 $ 37,674,533 $ 41,221,502
% margin 19.7% 20.1% 20.6% 21.0% 21.3%
36
Ms. Steinberg agreed with Burnham's calculation of free cash flow, as well
as the discount rate it calculated as appropriate for Market America, but did
not agree with Burnham's calculation of a terminal value, which was based on a
multiple of 11.0x free cash flow (or 6.8x EBITDA). Ms. Steinberg conducted her
analysis using a terminal value equal to 5.1x trailing EBITDA (or 8.2x free cash
flow), due to her belief that this method resulted in a more realistic "take
out" value for a closely held company with a relatively small senior management
team, like Market America, at the end of fiscal 2006 (i.e., the price at which
Market America, as a whole, would likely be acquired). Ms. Steinberg's analysis
noted that a "take out" value of up to 8.0x last twelve months EBITDA would be
possible, although unlikely, since such a take out value was based on the
current per share market price of a Market America peer group comparable company
that had a much larger size, greater market dominance and presumably broader
management team than Market America. Ms. Steinberg felt that Burnham's terminal
multiple, which was derived using a form of the dividend growth model, was
highly theoretical, and did not represent a realistic terminal multiple for
Market America at the end of fiscal 2006. Using the terminal value of 5.1 x
EBITDA, Ms. Steinberg arrived at a base case of $12.23 per share, which was 8%
less than Burnham's base case calculation.
NET PRESENT VALUE ANALYSIS:
YEAR ENDED APRIL 30,
--------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
NET INCOME $ 19,328,362 $ 21,164,417 $ 23,624,033 $ 26,243,512 $ 29,026,592
$ 300,238,890 Terminal Value
$19,328,362 $21,164,417 $23,624,033 $26,243,512 $329,265,482
EBIT * (1-T) $ 17,719,077 $ 19,100,816 $ 21,060,511 $ 23,108,648 $ 25,255,241
DEPRECIATION 1,218,549 1,412,991 1,612,991 1,812,991 2,012,991
CAPITAL EXPENDITURES
(4,713,335) (1,000,000) (1,000,000) (1,000,000) (1,000,000)
CHANGE IN NON-CASH
WORKING CAPITAL 204,271 (501,832) 549,032 563,923 606,688
FREE CASH FLOW $ 14,428,561 $ 19,011,975 $ 22,222,535 $ 24,485,563 $ 26,874,921
$ 210,336,300 Terminal Value
$ 14,428,561 $ 19,011,975 $ 22,222,535 $ 24,485,563 $237,211,220
Ms. Steinberg further prepared a second discounted cash flow analysis
whereby she discounted net income, rather than free cash flow, to arrive at an
equity value for Market America. In this case, Ms. Steinberg utilized a terminal
value based on 10.3x trailing net income. Using that methodology, Ms. Steinberg
arrived at a base case value of $11.64 per share. In both discounted cash flow
analyses, Ms. Steinberg arrived at values less than the base case value of
$13.22 per share calculated by Burnham.
Because the Board of Directors did not believe that forecasts are very
reliable, given changes in economic conditions and other limitations with
forecasts in general, Market America did not emphasize the results of this
methodology in its final conclusions.
STOCK BUYBACK MULTIPLE ANALYSIS. Ms. Steinberg agreed with Burnham that, in
most situations, stock buybacks are a measurement of the fair market value of
outstanding shares as determined by those most intimate with overall operations
and future prospects, but that this should not be a significant factor in the
valuation of Market America.
37
VALUATION WEIGHTINGS. When analyzing the results from each of the five
valuation methodologies, Ms. Steinberg weighted the Market Multiple Analysis
slightly more (although she disagreed with Burnham's weighting of factors within
its Market Multiple Analysis), and the Discounted Cash Flow Analysis slightly
less, than Burnham. Ms. Steinberg did this based upon her belief that the
Discounted Cash Flow analysis was predicated upon a very large number of
financial and non-financial assumptions, and is thus less reliable as an
indicator of fair market values for comparable companies and transactions in
Market America's industry (versus the biotech or Internet industry, for example)
than the Market Multiple Analysis or the Comparable Transaction Analysis, both
of which are based on actual market valuations and trailing financial
performance. Similarly, the Board of Directors gave little weight overall to the
Market Multiple Analysis and Discounted Cash Flow Analysis, believing that
Comparable Transactions Analysis was most useful for approximating the actual
valuation of a company by motivated buyers and sellers in an arms length
transaction.
NARROWED VALUATION RANGE. Ms. Steinberg noted that, in arriving at its
narrowed valuation range of $9 to $10.50 per share, Burnham utilized the
approximate mid-point of the per share valuations it calculated from the five
methodologies as the low point of its final suggested valuation range, even
though it had already weighted the methodologies to reflect Market America's
performance strengths.
SUMMARY AND SIGNIFICANCE OF UPDATED ANALYSIS
As described under "Background and Purposes of the Merger," Ms. Steinberg
updated portions of her analysis in April 2002, because Mr. Ridinger wanted to
check the prior conclusions as to the fairness of the Merger Consideration
against more recent market developments and the financial results of Market
America and to consider the implications of the then recently announced
acquisition by merger of Herbalife International, Inc. The Board of Directors
believed that analyzing the Herbalife transaction would provide a better
indication of how similar companies would be valued in transactions between
informed and motivated buyers and sellers in an arms length transaction. You may
wish to read the full updated analysis for a complete understanding of the
assumptions, considerations and limitations implicit in this analysis. The Board
of Directors' consideration of this updated analysis was only part of the
process engaged in by the Board of Directors to assess the fairness of the
Merger and the Merger Consideration. The results of such updated analysis are
described below:
COMPARABLE TRANSACTIONS ANALYSIS. The Board of Directors requested that Ms.
Steinberg evaluate the recently announced Herbalife transaction in the context
of her Comparable Transactions Analysis. The transaction was considered
particularly useful for analysis of this kind, because a great deal of data is
available on the company and the transaction. The Board of Directors believed
that analysis of the recent Herbalife transaction provided the best available
information for checking the fairness of the Merger Consideration, since
Herbalife is a company in a similar business and the price per share in that
transaction represented an outcome reached by a motivated buyer and seller in an
arms length transaction. Unlike stock price analysis, the analysis of such a
transaction is useful for understanding how an efficient market would value a
company. The data for the Herbalife transaction used by Ms. Steinberg is
presented below:
HERBALIFE TRANSACTION DATA SUMMARY:
TTM TTM TTM BOOK
ANNOUNCE/ BUYER REVENUE EBITDA TIC NET INCOME VALUE DEAL
CLOSE TARGET ($MM) ($MM) ($MM) ($MM) ($MM) TYPE
4/11/02 Whitney & Co./ 1,020.0 86.8 685.0 42.6 260.9 Acquisition
Golden Gate Capital
Herbalife International
Inc.
38
First, Ms. Steinberg updated the original Comparable Transactions analysis
by replacing the multiples calculated on the basis of the original, uncompleted
Herbalife transaction with those calculated for the new transaction. As in
Burnham's analysis, Ms. Steinberg used only the multiple of sales for valuation
purposes, because it was the only multiple for which sufficient data points were
available for statistical validity. On this basis, Ms. Steinberg arrived at a
valuation of $8.32, based on Market America trailing twelve month data as of
January 31, 2002, as opposed to $7.88 using Burnham's original transactions
only, as shown below:
VALUE CALCULATIONS FROM UPDATED COMPARABLE
TRANSACTIONS ANALYSIS:
Year Ended TTM Ended
April 30, January 31,
2001 2002
---- ----
ANNUAL SALES $138,513.7 $152,188.1
(THOUSANDS)*
MULTIPLES USED:
TIC/Sales 1.06 1.06
Multiple
MARKET
VALUATIONS:
TIC/Sales Multiple $147,101.56 $161,623.79
-------------------
(thousands)
Price Per Share $7.57 $8.32
Then, Ms. Steinberg considered the implications of the Herbalife
transaction exclusively. Ms. Steinberg considered the Herbalife transaction to
be useful for such purpose since so much data was available; however, she
cautioned that significant differences, particularly the strength of the
Herbalife brand name and the significantly larger revenues generated by
Herbalife, existed between Market America and Herbalife, so that some discount
should be applied to the valuation calculated from the Herbalife transaction for
Market America. Without any such discount, Ms. Steinberg's analysis on the basis
of the recent Herbalife transaction exclusively resulted in the following
valuation calculations, for an average valuation of $11.96, based on Market
America data as of January 31, 2002, as shown below:
HERBALIFE ANALYSIS VALUATION
CALCULATIONS:
Multiple Total Value Per Share Value
-------- ----------- ---------------
(millions)
TIC / EBITDA MULTIPLE 7.89 $238.5 $12.28
TIC/ SALES MULTIPLE 0.67 $102.2 $5.26
TIC / NET 16.08 $348.7 $17.96
INCOME MULTIPLE
TIC / BOOK VALUE 2.63 $239.3 $12.32
MULTIPLE
AVERAGE $232.2 $11.96
The Board of Directors agreed that the Herbalife transaction was very
useful for valuation purposes because it is recent, the company is in a similar
business, and because adequate information is available on the company and
transaction. At the same time, the Board of Directors recognized that while
similar, Herbalife and Market America have significant differences that should
affect their valuations. For example, the Board of Directors concluded that
Herbalife's superior name justified a premium over what would be paid with name
39
recognition similar to that which existed for Market America. In addition, while
the Board of Directors noted that Market America could be seen as outperforming
Herbalife in certain respects on the basis of the ratios discussed in the
Performance Ratio Analysis, the Board of Directors attributed such performance
of Market America specifically to the skill of Market America's founder and
chief executive officer, James H. Ridinger, in the development of Market
America's business. The Board of Directors noted that Herbalife is currently
operating successfully without its founder, and the fact that there is
significant participation in the acquisition by an unrelated party that is
willing to risk acquiring the company without such founder. The Board of
Directors concluded that were Herbalife's founder so essential to the Herbalife
business as Mr. Ridinger is to Market America's business, such acquirer would
likely not have been willing to pay as high a price to acquire Herbalife. By the
same reasoning, a third party acquirer of Market America would likely expect a
discount without a guaranty of retaining Mr. Ridinger. The Board of Directors
also credited Herbalife's management organization, which is more extensive and
proven than that of Market America, with the company's sale at this price.
The Board of Directors noted that other significant non-mathematical
differences between Herbalife and Market America seem to justify a sale of
Herbalife at a premium relative to Market America. Herbalife is an older and
more established business, having had success as a direct sales company longer
and having proven it can be successful in the international market, with sales
organizations in many countries and a presence on six continents. Market
America, on the other hand, has not yet proven it can compete in international
markets. In addition, the Board of Directors concluded, a reasonable purchaser
would consider in its pricing of this transaction that unlike Market America,
Herbalife develops and manufactures some of the products it markets. As a
result, Herbalife is likely to be viewed as less vulnerable to supply
disruptions and competition, the Board of Directors concluded.
Finally, the Board of Directors considered that Herbalife successfully
survived a major conflict with the U.S. government in the mid 1980s, in which
the government had tried to put the company out of business by challenging the
validity of Herbalife's principal diet products. The ability of Herbalife to
fend off this attack proved the strength of Herbalife's field organization in
the face of adversity as well as customer loyalty. On the other hand, it is
unclear whether the field organization and customer base of Market America would
show comparable strength in the event of an aggressive attack on its products.
Taking into account all of these differences, The Board of Directors
concluded that even though Market America appeared to out-perform Herbalife on
the basis of certain performance ratios, a valuation of Market America based on
the Herbalife sale would have to be discounted by at least 35%. Applying this
discount to the price for Market America shares calculated on the basis of the
Herbalife transaction multiplier results in a valuation of $150,971,080, or
$7.77 per share. Taking into consideration that the valuation calculated on the
basis of the updated Burnham analysis, $8.32, should also be discounted to take
into account the discount needed as a result of differences between Herbalife
and Market America, the Board of Directors concluded that the Comparable
Transactions Analysis update supported the conclusion that the $8.00 per share
price is fair.
The Board of Directors also considered Ms. Steinberg's finding that the
announced price in the Herbalife transaction represented a premium over the most
recent trading prices of Herbalife prior to the announcement, of 26.7% with
respect to Class A shares and of 35.4% with respect to Class B shares. Applying
40
the average of these premiums to the last trading price of Market America prior
to the announcement of the Merger would result in a price of only $5.63.
MARKET MULTIPLE ANALYSIS. Starting with the same group of comparable
companies, the multiples were recalculated on the basis of the closing prices of
such companies stock as of April 12, 2002, at which time many of such stocks
were close to their 52-week highs. Because Reliv International, Inc.'s earnings
had diminished considerably, it was excluded from the updated calculation of the
Price/Earnings multiple. These calculations resulted in the following multiples,
which represent increases over the earlier analysis:
MULTIPLES CALCULATED:
Multiple
--------
PRICE / SALES 0.6
ENTERPRISE VALUE / 7.2
EBITDA
PRICE / EARNINGS 14.5
PRICE/ EBITDA 8.1
PRICE / 2.6
BOOK
Values were calculated for Market America on the basis of the average of
the results from application of the updated multiples to Market America's
January 30, 2002 results and to Market America's April 30, 2001 results:
VALUATION CALCULATIONS:
Total Per
Value Share
----- -----
(thousands)
PRICE / SALES $87,963.4 $4.53
MULTIPLE
ENTERPRISE VALUE / $272,288.1 $14.02
EBITDA
PRICE / $303,526.9 $15.63
EARNINGS
PRICE/ EBITDA $272,352.4 $11.71
PRICE / $217,683.9 $11.21
BOOK
AVERAGE $221,762.9 $11.42
Although the Board of Directors noted that the multiples increased as a
result of changes in the performance of the comparable companies and general
market conditions, the Board of Directors did not believe that the values
calculated on the basis of such multiples indicated that the Merger
Consideration required adjustment or was unfair. As the Board of Directors has
maintained throughout this valuation exercise since it began to consider the
various analyses (including Burnham's analysis, in which the Market Multiple
Analysis resulted in an average per share valuation for Market America below the
Merger Consideration), multiples calculated on the basis of a company's trading
price are, in the Board of Directors' judgment, fundamentally unsuitable for
valuing companies like Market America, whose share price bears little
relationship to company value as a result of the relative illiquidity of the
shares. Consequently, the Board of Directors gave no weight to the results of
the updated Market Multiple Analysis.
41
PERFORMANCE RATIO ANALYSIS. The Board of Directors did not request the
updating of this analysis. Since the Burnham analysis had only suggested that
Market America's performance was superior to that of its peers in certain
manners and had produced no specific valuations, the Board of Directors did not
believe it would be useful to update the Performance Ratio Analysis. While the
Board of Directors recognized that Market America was likely outperforming its
peers in certain ways (as measured by such ratios), the Board of Directors
nonetheless questioned the usefulness of such comparisons when such analysis
fails to account for differences among such companies such as the relative
importance of particular company managers to a company's overall success.
DISCOUNTED CASH FLOW ANALYSIS. Because the Board of Directors did not
believe that forecasts are very reliable, given changes in economic conditions
and other limitations with forecasts in general, Market America did not
emphasize the results of this methodology in its final conclusions and did not
request an update of the Management Forecast as part of this analysis. However,
the terminal values used in the discounted cash flow analysis were updated, as
they are derived from the results of the Market Multiple Analysis, which was
updated.
In this analysis, Ms. Steinberg employed a terminal value equal to 7.2x
trailing EBITDA, calculating $14.44 per share on this basis.
NET PRESENT VALUE ANALYSIS:
YEAR ENDED APRIL 30,
--------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
NET INCOME $ 19,328,362 $ 21,164,417 $ 23,624,033 $ 26,243,512 $ 29,026,592
$ 420,601,450 Terminal Value
$19,328,362 $21,164,417 $23,624,033 $26,243,512 $449,628,042
EBIT * (1-T) $ 17,719,077 $ 19,100,816 $ 21,060,511 $ 23,108,648 $ 25,255,241
DEPRECIATION 1,218,549 1,412,991 1,612,991 1,812,991 2,012,991
CAPITAL EXPENDITURES (4,713,335) (1,000,000) (1,000,000) (1,000,000) (1,000,000)
CHANGE IN NON-CASH
WORKING CAPITAL 204,271 (501,832) 549,032 563,923 606,688
FREE CASH FLOW $ 14,428,561 $ 19,011,975 $ 22,222,535 $ 24,485,563 $ 26,874,921
$ 297,035,326 Terminal Value
$ 14,428,561 $ 19,011,975 $ 22,222,535 $ 24,485,563 $323,910,246
Ms. Steinberg again prepared a second discounted cash flow analysis in
which she discounted net income, rather than free cash flow, to arrive at an
equity value for Market America. In this case, Ms. Steinberg employed a terminal
value based on 14.5x trailing net income. Using that methodology, Ms. Steinberg
arrived at a per share calculation of $14.70. This time, Ms. Steinberg arrived
in both discounted cash flow analyses at values slightly more than the base case
value of $13.22 per share calculated by Burnham in its original analysis as well
as her own earlier analysis.
As noted, the Board of Directors did not believe that forecasts are very
reliable, given changes in economic conditions and other limitations with
forecasts in general. Moreover, upon further reflection the Board of Directors
concluded that because the Management Forecast failed to capture how Market
America would be likely to perform without the continued management of Market
America, it was not an appropriate basis on which to predict economic returns
42
following a change of control and management of Market America. Thus, the values
implied by this analysis would need to be discounted significantly in any case
to take account of such factor. In addition, the Board of Directors noted that
because terminal values were calculated on the basis of the performance of other
companies in the Market Multiple Analysis, this analysis suffered from
limitations similar to those of the Market Multiple Analysis. Consequently, the
Board Directors gave little weight to the results of this analysis.
STOCK BUYBACK MULTIPLE ANALYSIS. The Board of Directors noted that no
additional stock buybacks had been completed. Consequently, no update of this
analysis was possible, and the Board of Directors continued to give no weight to
this analysis.
SUMMARY AND SIGNIFICANCE OF OTHER FACTORS
-----------------------------------------
The Board of Directors also considered several other valuation methods and
factors in determining that the Merger Consideration is fair to the unaffiliated
shareholders, a summary and the significance of which are described below:
o Historical market prices. In the year preceding the announcement of the
Merger, closing bid and ask prices for Market America Stock have ranged
from a low of $2.87 to a high of $5.00. The closing bid and ask prices
for Market America Stock on October 16, 2001, the date prior to the
announcement of the offer received by Market America from the
Ridingers, were $4.30 and $4.45 respectively. The $8 per share price
represents an 86% premium over the October 16 closing bid. In addition,
while the trading prices of Market America Stock increased following
the announcement of the Offering Group's proposal to a level closer to
$8, the Board of Directors recognized such trading resulted from the
announcement itself, as investors purchasing at such levels likely
hoped to receive the offered $8 per share as a result of the announced
transaction and consequently did not provide a basis for analyzing the
fairness of the Merger Consideration. See "Market for Common Equity."
The Board of Directors gave little weight to this factor because it
felt that, given the illiquidity of Market America Stock, neither
current not historical market pricing accurately reflected the current
value of Market America Stock due to the lack of float and low trading
activity.
o Net book value. Net book value was approximately $76.1 million at April
30, 2001 and $91.2 million as of January 31, 2002. This methodology
would result in book value per share of approximately $3.92 as of April
30, 2001 and $4.70 as of January 31, 2002, with the $8 per share price
representing a premium of 105% and 70% over such values, respectively.
The Board of Directors gave no weight to this factor, however, because
it determined that book value is not an appropriate measure for
establishing the fair value for the Merger Consideration as it is an
accounting methodology that is based on the historical cost of Market
America's assets rather than a reflection of actual current value.
o Going concern value - Going concern valuation involves an attempt to
establish the present value of future earnings of a company in the
context of what returns an investor could expect to receive on his or
her investment over a future period. Two key factors in using this
valuation methodology are establishing a reasonably accurate forecast
of earnings and identifying an appropriate discount rate to establish
the present value of such future earnings. (These kinds of analyses are
also implicit in methodologies like Market Multiple Analysis). The
43
Board of Directors felt that a going concern value could not be
established with reasonable accuracy, especially under current economic
conditions which make it too difficult to arrive at a reasonable
forecast of earnings, as discussed above in connection with the
Discounted Cash Flow Analysis. The Board of Directors concluded that
going concern value is therefore not a practical tool for determining
whether the Merger Consideration is fair.
o Liquidation value - The Board of Directors determined that the
usefulness of this method of valuation requires the existence of a
viable market for sale of Market America's assets. Although no
assessment of the liquidation value of Market America's other assets
was done, a distribution of the cash and equivalents would result in a
cash payment of $3.72 per share as of October 31, 2001 and $3.99 as of
January 31, 2002, with the $8 per share price representing a premium of
115% and 100% over such values, respectively. However, the Board of
Directors believed that having such cash on hand was an essential
marketing tool for Market America. The Board of Directors also
determined that there is no ready market for the sale of Market
America's other assets at an adequate price, since the continued
success of the business required the continued management of James H.
Ridinger, in the Board of Directors' view. Moreover, the Board of
Directors felt that Market America was likely far more valuable as a
going concern than liquidated. As a result, the Board of Directors
decided that liquidation value is an inappropriate consideration for
determining whether the Merger Consideration is fair to unaffiliated
shareholders.
o Other Offers and Other Transactions - The Board of Directors did not
solicit and is not aware of any firm offers to purchase Market America
that have been made during the past two years by any unaffiliated
person. Consequently, the Board of Directors did not consider this
factor in its deliberations of whether the Merger Consideration is fair
to the unaffiliated shareholders. In addition, Market America has not
engaged in a merger or consolidation with another company or in the
sale or other transfer of a substantial part of its assets in the last
two years, so the Board of Directors did not consider this factor in
establishing the fair value of the stock for the Merger Consideration.
Furthermore, there have not been any purchases of Market America Stock
that would enable the holder to exercise control of Market America.
Therefore, the Board of Directors did not use this factor to establish
the fair value of the Market America Stock.
PROCEDURAL CONSIDERATIONS
-------------------------
The Board of Directors believes that the result of the process engaged in
by the Board of Directors and the structure determined by the Offering Group for
the transaction is that the Merger is fair overall to the unaffiliated
shareholders, because the Merger would provide unaffiliated shareholders an
opportunity for liquidity and a fair price, as discussed above. However, the
Board of Directors, recognizing that none of the members of the Board of
Directors can be considered "independent" for purposes of this determination,
has also taken measures to ensure that the process by which the Merger will be
completed, if at all, is fair. Most importantly, the Board of Directors has
conditioned the completion of the Merger on approval of the Merger by holders of
a majority of the shares held by unaffiliated shareholders - a "Majority of the
Minority" requirement. This requirement gives the unaffiliated shareholders, as
a group, veto power over the Merger. At the same time, the protection of
44
individual unaffiliated shareholders is ensured, even if the unaffiliated
shareholders largely support the Merger, by the availability of the appraisal
remedy under North Carolina Law. (See "--Appraisal Rights").
The following constitute all of the material procedural factors relied upon
by the Board of Directors, in addition to their analysis of the financial
fairness of the Merger and Merger Consideration to Market America's unaffiliated
shareholders, in its determination of the overall fairness to unaffiliated
shareholders:
o Each of the members of the Board of Directors has been mindful of his
or her obligations to Market America and its shareholders in the
evaluation of the Merger, which evaluation has expressly included
deliberations as to the fairness of the Merger and the Merger
Consideration to Market America's unaffiliated shareholders. The Board
of Directors has intended to act and has acted, in connection with
these deliberations, in the best interests of the unaffiliated
shareholders.
o The Board of Directors engaged two independent analysts and gave due
consideration of the analysis provided thereby in the evaluation of the
fairness of the Merger to the unaffiliated shareholders from a
financial perspective. In addition, the Board of Directors conducted
additional analysis after the announcement of the Merger in order to
ensure that their determination of the fairness of the Merger and
Merger Consideration to unaffiliated shareholders was appropriate in
light of more recent market conditions and the financial performance of
Market America and other comparable companies.
o The Board of Directors considered numerous methods for valuing Market
America Stock, rather than just relying on current stock prices or book
value - common measures of the valuation of a company which would have
indicated significantly lower prices than the $8 per share, as
discussed above, in an attempt to ensure that the unaffiliated
shareholders receive fair value for their shares.
o The Board of Directors is disclosing, in this proxy statement, all of
the material factors considered in the determination of fairness, so
that unaffiliated shareholders can consider a variety of information,
and the Board of Directors is refraining from recommending to such
shareholders how to vote with respect to the Merger, the Merger
Agreement and the transactions contemplated thereby, thus encouraging a
thorough analysis by the unaffiliated shareholders.
o While the Merger could be completed under North Carolina law without a
single vote of any unaffiliated shareholder, the Board of Directors has
structured the transaction to require approval by shareholders holding
a majority of the outstanding unaffiliated shares, (i.e. excluding for
such purpose the votes of members of the Offering Group) thus giving
the unaffiliated shareholders veto power over the Merger.
o Unaffiliated shareholders who disagree with the proposed transaction,
and properly perfect and maintain appraisal rights under North Carolina
law, will have a right to obtain appraisal and receive the fair value
of their shares of Market America Stock, so that no one can be
compelled to take less than the fair value for their shares, even if
45
the transaction is approved by holders of a majority of shares of
Market America Stock not held by the Offering Group.
The Board of Directors also considered the following negative factors
relating to the procedural fairness of the Merger and the Merger Consideration
to unaffiliated shareholders:
o There is no independent committee of the Board of Directors who has
considered the fairness of the Merger and Merger Consideration to the
unaffiliated shareholders. Because there is no member of the Board of
Directors who is independent, the Board of Directors did not establish
an independent committee to represent the unaffiliated shareholders of
Market America. Instead, each Director is disclosing his or her
interests and intends to act in the best interests of the unaffiliated
shareholders. However, the Board of Directors considered that Section
55-8-31 of the NCBCA allows North Carolina corporations to engage in
transactions involving conflicted directors so long as the interests of
such directors are fully disclosed and the transactions are approved by
the unaffiliated shareholders, and concluded that their imposition of a
"Majority of the Minority" requirement was a reasonable protective
measure given the lack of independent directors to approve the
transaction.
o The Board of Directors did not engage an outsider to act as a
representative of the unaffiliated shareholders of Market America, or
hire an independent party to give an opinion with respect to the
fairness of the Merger Consideration. Again, however, the Board of
Directors believed that this factor was somewhat counteracted by the
Board of Director's consideration of various valuation methodologies
and the analysis of two financial analysts as well as the disclosures
required in the proxy process and the "Majority of the Minority"
requirement, which would essentially give the majority of the
unaffiliated shareholders an informed veto over the Merger and Merger
Consideration.
o The Board of Directors did not solicit any other bids for the purchase
of Market America. Although the Board of Directors did not solicit
other bids for the acquisition by Market America by an unrelated party,
the decision not to solicit such other bids was reasonable, due to Mr.
Ridinger's unwillingness, as a shareholder and founder of Market
America, to sell his shares at any price, and due to the Board of
Directors' belief that the future prospects of Market America are
dependent on the continued stewardship by Mr. Ridinger, which led the
Board of Directors to conclude that Market America would have to be
sold at a significant discount without a guaranty of Mr. Ridinger's
continued leadership. The Board of Directors also considered that
Market America has not received since the time of the announcement of
the Merger or at any time in the past three years any offers from third
parties concerning a potential acquisition of Market America.
o If the Merger is completed, unaffiliated shareholders will be cashed
out for $8 per share even if they did not support the Merger.
Consequently, the Board of Directors acknowledged as a negative factor
the fact that although the Merger is structured to prevent any
shareholder from being compelled to accept less than the fair value of
his or her shares of Market America Stock, the structure could result
in some unaffiliated shareholders being compelled to accept the fair
value of their shares despite a desire to continue to participate in
the equity of Market America as shareholders of Market America after
the effective time of the Merger. However, the Board of Directors
46
concluded that while certain unaffiliated shareholders might, against
their will, be denied the opportunity to participate in any future
growth or financial success of Market America, neither future growth
nor future success could be guaranteed for any equity holder in any
case. In addition the Board of Directors concluded that, given that the
fair value of the Market America Stock is meant to capture potential
future gains, such denial of continued participation would not make the
Merger unfair to unaffiliated shareholders that receive the Merger
Consideration.
o Several months have elapsed since the Board of Directors' initial
analysis and determination the Merger and the Merger Consideration are
fair to unaffiliated shareholders, which could indicate that certain
analyses or assumptions could be outdated. Nonetheless, the Board of
Directors have undertaken to update the analysis upon which they relied
initially to determine fairness and also gave further consideration to
the validity of various methodologies as recently as April, 2002.
Consequently, the Board of Directors believes that the Merger and
Merger Consideration are fair despite the time elapsed since the
announcement of the Merger and the initial analyses considered by the
Board of Directors.
As noted above, the Board of Directors believes that appropriate steps have
been taken to counterbalance the negative factors and ensure overall fairness.
The most important of these steps has been the imposition of the "Majority of
the Minority" vote requirement, which, coupled with this discussion of material
factors relating to the fairness of the Merger, permits unaffiliated
shareholders as a group to prevent the Merger if they view it as not fair. In
this Proxy Statement, the Board of Directors also alerts the unaffiliated
shareholders to the dissent and appraisal process under North Carolina law,
which may be available to individuals who dissent if the Merger is completed.
(See "--Appraisal").
Finally, the Board of Directors considered, in accordance with the NCBCA
whether it was appropriate for the Board of Directors to make a recommendation
to the shareholders as to the approval of the Merger. As all of the members of
the Board of Directors are members of the Offering Group, they effectively stand
on both sides of the proposed transaction and therefore have a conflict of
interest with respect to the response of Market America to the Offering Group's
proposal. For this reason, the Board of Directors decided to refrain from
advising the unaffiliated shareholders how to vote on the Proposal. The Board of
Directors believes the decision to refrain from making a recommendation to the
shareholders with respect to the Merger also enhances the procedural fairness of
the Merger to the unaffiliated shareholders, since it encourages unaffiliated
shareholders to consider thoroughly and independently how to vote.
PURPOSES OF THE MERGER FOR THE OFFERING GROUP; FAIRNESS OF THE MERGER
In light of the conditions discussed above, the Offering Group is
undertaking this transaction for the following reasons:
o Market America will be able to be operated as a "qualified subchapter S
subsidiary" following the Merger. Such operation requires operation of
Miracle Marketing as an "S corporation." S corporation operation, which
is not possible for companies with more than 75 shareholders, will
47
permit Miracle Marketing's and Market America's earnings to be taxed on
a flow-through basis to Miracle Marketing's shareholders as
individuals. As a result, earnings of Market America would no longer be
subject to being taxed twice (as corporate earnings and, when
distributed, as ordinary income to the shareholders). The Offering
Group intends to cause Market America to be managed with a view toward
making periodic distributions to its shareholders at least sufficient
to cover their resulting tax liabilities. See "--Offering Group
Agreement."
o Continuing equity participants in Market America expect to benefit from
Market America's improved ability to attract, develop and reward key
employees, as well as reductions in operating costs that may be
achieved as a result of Market America becoming a private company.
o Considering the persistent under-valuation of Market America as a
public company, with limited opportunities to enhance value for public
shareholders or provide liquidity, the Offering Group and Miracle
Marketing see no reason to delay the benefits to be achieved by them
through the consummation of this transaction.
The members of the Offering Group other than Mr. Ridinger, like Mr.
Ridinger, saw no reason to delay the Merger when the opportunity to participate
in the Merger was offered to such members. Mr. Ridinger, sole director and
principal shareholder of Miracle Marketing and a member of the Offering Group,
and each of Loren A. Ridinger and Martin L. Weissman, also members of the
Offering Group, participated in the discussions and deliberations summarized
under "--Background and Purposes of the Merger" and "--Fairness of the Merger"
aS the members of the Board of Directors of Market America and subsequently
discussed all of the factors discussed by the Board of Directors in assessing
the fairness of the Merger and the Merger Consideration with each of the members
of the Offering Group (see "--Fairness of the Merger"), including both
procedural and substantive factors. On the basis of such discussions and
deliberations, and for the reasons discussed under "--Fairness of the Merger"
(which analysis and conclusions of the Board of Directors each member of the
Offering Group specifically adopts) all of the members of the Offering Group
believe that the Merger and the Merger Consideration are fair to, and in the
best interests of, the unaffiliated shareholders of Market America.
CONFLICTS OF INTEREST
All of the members of the Board of Directors, as members of the Offering
Group, have interests in the proposed transaction that are different from those
of the unaffiliated shareholders. Mr. Ridinger is the sole shareholder and
director of Miracle Marketing. Ms. Ridinger and Martin L. Weissman expect to
become directors and officers of Miracle Marketing and, immediately prior to the
Merger, will have significant equity interests in Miracle Marketing. All three
members of the Board of Directors of Market America will continue in their
current positions with Market America following the Merger for the foreseeable
future and, unlike the unaffiliated shareholders of Market America, they (and
other members of the Offering Group) would continue to participate in the equity
of Market America after the effectiveness of the Merger through their equity
participation in Miracle Marketing. The table set forth in this section shows
the equity interests of the members of the Offering Group in Market America both
before and after the Merger, and other benefits to the Offering Group of their
continued ownership of Market America and employment arrangements following the
Merger are quantified to the extent practicable under "--Certain Effects of the
Merger."
48
As a result of such interests in the Merger, the Board of Directors is
refraining from recommending to the shareholders how they should vote with
respect to the Merger in order to ensure that the unaffiliated shareholders
determine for themselves, on the basis of all of the factors, whether to approve
the Merger. Also for this reason, the Board of Directors has decided to
condition the consummation of the Merger on a "Majority of the Minority" vote,
requiring the affirmative vote of majority of the outstanding shares of Market
America Stock entitled to vote on the Merger excluding the shares held by the
Offering Group.
In addition, all of the members of the Board of Directors will be entitled
as a result of the Merger to participate in new compensation programs expected
to be enacted by Miracle Marketing for Market America after the Merger. See
"--Certain Effects of the Merger."
49
The following table summarizes the equity interests of each member of the
Offering Group (including all of the Market America's directors and executive
officers) in Market America immediately prior to the Merger and immediately
following the Merger, based on the terms of the Merger Agreement and after
giving effect to the agreement among the Offering Group (See "--Offering Group
Agreement"):
Name Pre-Merger: Pre-Merger: Post-Merger:
- ---- ----------- ----------- ------------
Percentage of outstanding Percentage of outstanding Percentage of outstanding
-------------------------- -------------------------- -------------------------
shares of Miracle Marketing shares of Market America shares of Market America
--------------------------- ------------------------ ------------------------
James H. Ridinger 100% 77.5% 95.7%
(Chairman, President and Chief
Executive Officer) +
Loren A. Ridinger - 0.5% 0.7%
(Director and Senior Vice
President)+
Martin L. Weissman (Director and - 2.7%(1) 1.9%
Executive Vice President)+
Dennis J. Franks - 0.8% 1.0%
(Executive Vice President)+
Marc Ashley - 0.3% 0.3%
(Vice President)+
Joseph V. Bolyard - 0.1% 0.1%
(Vice President)
Andrew Weissman - 0.3% 0.3%
(Director of Field Development)
Miracle Marketing (Total Offering 100% 82.1% 100%
Group)
Unaffiliated shareholders - 17.9% -
(1) includes 232,000 shares, subject to the Martin L. Weissman IRA, T.D. Waterhouse, Custodian, that will be
cashed out in the Merger.
* denotes less than 0.1%.
+ denotes executive officer.
See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Miracle Marketing has agreed that after the effective time of the Merger
it will, and will cause the Surviving Corporation to, indemnify and hold
harmless all past and present officers and directors of Market America to the
full extent such persons may be indemnified by Market America pursuant to Market
America's Articles of Incorporation and Bylaws in effect on the date of the
Merger Agreement for acts and omissions occurring at or prior to the effective
time of the Merger. See "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT--Indemnification."
In addition, all of the members of the Board of Directors are parties to
certain agreements with Market America relating to distribution of Market
America products and services and other matters. See "MANAGEMENT OF MARKET
AMERICA."
50
OFFERING GROUP AGREEMENT
Miracle Marketing and certain individuals (namely, James H. Ridinger, Loren
A. Ridinger, Martin L. Weissman, Dennis J. Franks, Marc Ashley, Joseph V.
Bolyard, and Andrew Weissman (collectively, the "Offering Group")) are parties
to an agreement, pursuant to which the Offering Group have agreed to cooperate
to cause the Merger (the "Offering Group Agreement"). Under the Offering Group
Agreement, the members of the Offering Group have granted to Mr. Ridinger an
irrevocable proxy to vote their shares of Market America Stock in favor of the
Merger, have agreed to transfer their shares of Market America Stock (other than
232,000 shares subject to the Martin L. Weissman IRA, T.D. Waterhouse,
Custodian, which will be cashed out along with unaffiliated shares in the
Merger) to Miracle Marketing in exchange for an equal number of shares of
Miracle Marketing's common stock immediately prior to the Merger, and have
granted to Mr. Ridinger power of attorney to effect such transfer on their
behalf.
Mr. Ridinger intends to vote all of the shares of Market America Stock
covered by the Offering Group Agreement, 15,943,650 or 82% of the total
outstanding shares of Market America Stock, in favor of the Merger.
The Offering Group Agreement also restricts the transferability of shares
of Miracle Marketing following the Merger, with provisions for repurchases of
such shares by Miracle Marketing in the event of retirement of Offering Group
members from their employment with Market America and under certain other
circumstances.
On March 15, 2002, partly in consideration for such employees' execution of
the Offering Group Agreement, Market America entered into employment agreements
with each of Martin L. Weissman, Dennis J. Franks, Marc Ashley, Joseph V.
Bolyard and Andrew Weissman. These agreements are for an indeterminate term,
providing for employment under the terms thereof (including a base salary
subject to normal adjustments up or down as determined by the Board of Directors
from time to time, and eligibility for bonus programs available generally to
management employees) until termination arising from the employee's disability,
voluntary termination by the employee, or termination, with or without cause, by
Market America. The agreements contain noncompetition and confidentiality
clauses, as well as general standards of performance expected of such employees
and a more detailed description of duties (See "MANAGEMENT OF MARKET AMERICA.")
These employment agreements are independent of any independent distributorship
arrangements of such employees. [As the new employee agreements are mainly meant
to protect the company and the employee shareholders in the event of termination
(since such employees will hold shares that cannot be easily sold, these
employment agreements do not provide for significantly different terms of
employment but rather seek to memorialize current employment terms so as to
provide a basis for determining the appropriate basis for Market America's
repurchase of shares upon an employee's termination]. The salaries provided for
under the new employment agreement are the same as such employees' current
salaries: Martin L. Weissman, $134,495.92; Dennis J. Franks, $192,348.52; Marc
Ashley, $171,398.24; Joseph V. Bolyard, $127,859.16; Andrew Weissman,
$65,000.00.
51
CERTAIN EFFECTS OF THE MERGER
If the Merger is consummated, Market America's shareholders (other than
Miracle Marketing and those shareholders who have perfected and have not
withdrawn their right to seek appraisal of their shares under applicable North
Carolina law) will have the right to receive $8.00 in cash, without interest,
for each share of Market America Stock held immediately prior to the Merger. At
the effective time of the Merger, all outstanding shares of Market America
Stock, other than those shares owned by the Offering Group, will be canceled and
retired. As a result of the Merger, such shareholders will cease to have any
ownership interest in Market America and will cease to participate in future
earnings and growth, if any, of Market America. Moreover, if the Merger is
completed, the registration of Market America Stock under the Exchange Act will
be terminated. Since Market America will no longer be a reporting company under
the Exchange Act, it will not be subject to the periodic reporting obligations
of the Exchange Act or the short swing profit provisions of Section 16 of the
Exchange Act.
Among the benefits of the Merger to Market America and its affiliates is
that Market America will not be required to incur the expenses of filing
periodic reports under the Exchange Act, or to comply with other reporting
obligations under the Exchange Act. Market America's direct costs arising under
Section 16 obligations, which include the fees and expenses of independent
auditors, SEC legal counsel, printing, mailing, and other costs associated with
SEC filings, are estimated at approximately $130,000 annually. An additional
benefit to the members of the Offering Group is that future earnings and growth
of Market America will be for the benefit of Miracle Marketing and its
shareholders and not for the current public shareholders of Market America. The
detriments to Market America and Miracle Marketing and the Offering Group are
the lack of liquidity for the shares of Miracle Marketing following the Merger
and the payment by Market America of approximately $29.7 million to fund the
Merger Consideration.
A significant benefit of the Merger to Market America, Miracle Marketing
and the Offering Group is that Miracle Marketing will be operated as an "S
corporation," and, once the Merger occurs, Market America can be operated as a
"qualified subchapter S subsidiary," as such terms are defined under Section
1361 of the Internal Revenue Code. S corporation status, which is not available
to companies with more than 75 shareholders or any shareholders that are not
natural persons, will permit Market America's earnings to be taxed on a flow
through basis to Miracle Marketing's shareholders as individuals. As a result,
earnings of Market America will no longer be taxed twice (as corporate earnings
and, when distributed, as ordinary income to the shareholders). The Offering
Group have indicated that they would cause Market America to be managed with a
view toward making periodic distributions to its shareholders at least
sufficient to cover their resulting tax liabilities. (See "--Offering Group
Agreement.")
The benefit of the Merger to unaffiliated holders of Market America Stock
is the right to receive the Merger Consideration, which will permit such
shareholders to receive the fair value of their shares. The detriments are that
such shareholders will cease to participate in future earnings and growth, if
any, of Market America (although future earnings are not guaranteed) and that
the receipt of the Merger Consideration will be a taxable transaction for
federal income tax purposes. Each shareholder's gain or loss per share will be
equal to the difference between $8.00 and the shareholder's tax basis per share
in the Market America Stock. If a shareholder holds Market America Stock as a
capital asset, the gain or loss from the exchange will be a capital gain or
loss. The gain or loss will be long term if the shareholder's holding period is
more than one year. See "--Federal Income Tax Considerations."
52
No director or officer of Market America will be entitled to any payments
(except that Martin L. Weissman, as beneficial of 232,000 shares subject to the
Martin L. Weissman IRA Trust, will be entitled to receive the Merger
Consideration with respect to such shares) on account of the Merger. No "change
of control," termination, resignation or similar payments will be made to
directors, officers or employees.
The Merger Agreement provides that the current directors of Market America
will remain as the directors of Market America following the Merger until
otherwise replaced by Miracle Marketing. The current officers and managers of
Market America are expected to remain the officers and managers of Market
America following the Merger.
To induce key officers and managers of Market America to continue to serve
Market America after the Merger and to support the Merger, Mr. Ridinger has
agreed with certain employees of Market America who are members of the Offering
Group to establish a new compensation and bonus policy which would take effect
following the Merger. No provision has been made under this policy to extend
terms of employment of any such employees, but Mr. Ridinger and such employees
have agreed informally that, following the Merger:
o such employees' salaries will be determined on the basis of a certain
published salary guide and published comparables for the particular job
titles;
o salary reviews shall be conducted and promotions shall be determined by
a new executive compensation committee to consist of Richard D. Hall,
Jr., Market America's General Counsel, and Robert Core, who is also an
employee of Market America; and
o salaries may be increased on the basis of promotions and will be
adjusted as annually as appropriate to reflect inflation.
In connection with the new compensation program, James H. Ridinger, Loren
A. Ridinger, Marc Ashley, Joseph V. Bolyard, Martin L. Weissman, and Dennis J.
Franks (all of whom are members of the Offering Group) will be entitled to
participate in a separate bonus program after the Merger, providing for
substantial bonuses to be awarded to such employees on the basis of personal and
team performance, with a separate bonus pool to be allocated among employees
partially on the basis of such employees' assessments of each other and
partially in the discretion of Mr. Ridinger.
In addition, Mr. Ridinger has agreed with such employees that Miracle
Marketing will make distributions to all of its shareholders sufficient to cover
their resulting tax liabilities if Market America is operated as an S
corporation (or qualified subchapter S subsidiary) after the Merger and will
annually distribute all available cash in excess of $60 million, adjusted
annually for inflation, with such reserves deemed appropriate by Miracle
Marketing's board of directors.
Other than the new compensation policies to be enacted following the
Merger, as described above, it is currently anticipated that Market America will
be operated after the Merger in a manner substantially the same as prior to the
Merger, except that Market America will be operated as a private corporation.
53
Based on the Offering Group's aggregate percentage of ownership of
approximately 82% of the Market America Stock, their aggregate interest in
Market America's net book value was approximately $63.2 million at April 30,
2001 and $74.8 million at January 31, 2002. The Offering Group's aggregate
interest in Market America's net earnings was approximately $16.8 million for
the fiscal year ended April 30, 2001 and $12.4 million for the nine months ended
January 31, 2002.
Assuming the Merger had occurred on April 30, 2001 and January 31, 2002,
respectively, and that Miracle Marketing had owned all outstanding Market
America Stock as of such dates, Miracle Marketing's pro forma interest in Market
America's net book value at April 30, 2001 would have been $76.1 million at
April 30, 2001 and $91.2 million at January 31, 2002, and Miracle Marketing's
pro forma interest in Market America's net earnings would have been
approximately $20.2 million for the fiscal year ended April 30, 2001 and $15.1
million for the nine months ended January 31, 2002.
The interests in the book value and net earnings of Market America after
giving effect to the transactions discussed herein, assuming that each member of
the Offering Group retains all shares beneficially owned by him or her before
the Merger, are set forth for each member of the Offering Group and the Offering
Group as a whole in the table below:
Name Pro forma Interest in Net Interest in Net Interest in Net Interest in Year-to-
Percentage of Book Value, if Book Value, if Earnings, if Date Net Earnings, if
total shares Merger Occurred Merger Occurred at Merger Occurred Merger Occurred at
at April 30, 2001 January 31, 2002 at April 30, 2001 January 31, 2002
James H. Ridinger 95.7% $72,847,889 $87,258,195 $19,348,601 $14,432,553
Loren A. Ridinger 0.7% 491,378 588,579 130,511 $97,351
Martin L. Weissman 1.9% 1,453,064 1,740,499 385,938 $287,880
Dennis J. Franks 1.0% 726,532 870,250 192,969 $143,940
Marc Ashley 0.3% 242,177 290,083 64,323 $47,980
Joseph V. Bolyard 0.1% 96,871 116,033 25,729 $19,192
Andrew Weissman 0.3% 242,177 290,083 64,323 $47,980
=========================================================================================
Total Offering Group 100% $76,100,087 $91,153,723 $20,212,394 $15,076,875
Immediately prior to the effective time of the Merger, because it is
expected that the shares subject to the Martin L. Weissman IRA, T.D. Waterman,
Custodian, will be cashed out in the Merger, Miracle Marketing will own
approximately 80.9% percent of the equity interest in Market America.
APPRAISAL RIGHTS
Under North Carolina law, holders of Market America Stock who do not vote
in favor of the Merger and who comply with applicable notice requirements and
other procedures will have the right to dissent and to be paid cash for the
"fair value" of their shares ("Appraisal Rights" ). The "fair value" of the
Market America Stock as finally determined under such procedures may be more or
less than the $8.00 per share cash that will be paid in respect of shares held
by non-dissenting shareholders in the Merger. Failure to follow such procedures
precisely may result in loss of Appraisal Rights.
54
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO APPRAISAL RIGHTS UNDER ARTICLE 13 OF THE NORTH CAROLINA BUSINESS CORPORATION
ACT ("ARTICLE 13") AND IS QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF ARTICLE
13 WHICH IS REPRINTED IN ITS ENTIRETY AS ANNEX B TO THIS PROXY STATEMENT.
A record shareholder may assert Appraisal Rights as to fewer than all the
shares of Market America Stock registered in his name only if he dissents with
respect to all shares beneficially owned by any one person and notifies Market
America in writing of the name and address of each person on whose behalf he
asserts Appraisal Rights. The rights of a partial dissenter will be determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders. A beneficial owner may assert Appraisal
Rights as to shares of Market America Stock held on his behalf only if he: (a)
submits to Market America the record shareholder's written consent to the
dissent not later than the time the beneficial shareholder asserts Appraisal
Rights and (b) asserts Appraisal Rights with respect to all shares of which he
is the beneficial owner.
A holder of shares of Market America Stock wishing to exercise Appraisal
Rights must: (a) give to Market America, and Market America must actually
receive before the vote on the Merger is taken, written notice of the holder's
intent to demand payment for his shares if the Merger is consummated, and (b)
must not vote his shares in favor of the Merger. Such notice may be sent to
Market America at the following address: 1302 Pleasant Ridge Road, Greensboro,
North Carolina 27409, Attention: Corporate Secretary.
If the Merger Agreement is approved by holders of the requisite number of
outstanding shares of Market America Stock, Market America will, no later than
10 days following the consummation of the Merger, mail a written dissenters'
notice to all of its shareholders who gave the aforementioned notice of intent
to demand payment. Such dissenters' notice will: (a) state where the payment
demand must be sent and where and when certificates for shares must be
deposited; (b) supply a form for demanding payment; (c) set a date by which
Market America must receive the payment demand, which date may not be fewer than
30 nor more than 60 days after the date on which the dissenters' notice is sent;
and (d) be accompanied by a copy of Article 13.
To exercise his Appraisal Rights, a shareholder that was sent a dissenters'
notice must demand payment and deposit his share certificates in accordance with
the terms of the notice. A shareholder failing to do so will not be entitled to
payment for his shares under Article 13. A shareholder that demands payment and
deposits his share certificates in accordance with the terms of the notice will
retain all other rights of a shareholder until consummation of the Merger.
As soon as the Merger is completed, or within 30 days after Market
America's receipt of a payment demand by a shareholder made in compliance with
the above-described procedures, Market America will pay such shareholder the
amount Market America estimates to be the value of his shares, plus interest
accrued to the date of payment. Such payment will be accompanied by: (a) Market
America's balance sheet as of the fiscal year ended April 30, 2001, an income
statement and a statement of cash flows for that year and the latest available
interim financial statements; (b) an explanation of how Market America estimated
the fair value of the shares; (c) an explanation of how the interest was
calculated; (d) a statement of the dissenter's right to notify Market America of
his own estimate of the value of his shares and the amount of interest due if
(i) he believes the amount paid by Market America is less than the fair value of
his shares or that the interest due was incorrectly calculated, (ii) Market
55
America fails to make a payment within the time period described in the first
sentence of this paragraph, or (iii) Market America, having failed to consummate
the Merger, fails to return deposited share certificates within 60 days after
the date set for demanding payment; and (e) a copy of Article 13.
If (a) a dissenter believes that the amount paid by Market America is less
than the fair value of his shares, or that the interest due is incorrectly
calculated; (b) Market America fails to make payment within the time period set
forth in the first sentence of the immediately preceding paragraph; or (c)
Market America, having failed to consummate the Merger, fails to return
deposited stock certificates to a dissenter within 60 days after the date set
for demanding payment, then the dissenter may notify Market America in writing
of his own estimate of the fair value of his shares and amount of interest due
and demand payment of the amount in excess of Market America's payment to him.
Such notice and demand may be sent to Market America at the address set forth in
the second immediately preceding paragraph. A dissenter will waive his right to
demand payment as described in this paragraph, and will be deemed to have
withdrawn his dissent and demand for payment, unless he notifies Market America
of his demand in writing within 30 days after Market America (x) made payment
for his shares or (y) fails to take the actions described in clauses (b) and (c)
of this paragraph, as the case may be.
If a demand for payment as described above remains unsettled, a shareholder
may commence a proceeding within 60 days after the earlier of (i) the date of
Market America's payment to him as described in the second immediately preceding
paragraph, or (ii) the date of his payment demand as described in the
immediately preceding paragraph and file a complaint with the Superior Court
Division of the North Carolina Court of Justice to determine the fair value of
the shares and accrued interest. A dissenter who does not commence a proceeding
within this 60-day period will be deemed to have withdrawn his dissent and
demand for payment.
The court may, in its discretion, make all dissenters whose demands remain
unsettled parties to the proceeding as in an action against their shares and all
parties must be served with a copy of the complaint. The jurisdiction of the
Superior Court is plenary and exclusive. The court may appoint one or more
appraisers to receive evidence and recommend a decision on the question of fair
value. Parties to the proceeding are entitled to the same discovery rights as
parties in other civil proceedings. The proceeding will be tried as in other
civil actions; however, no party to any proceeding described herein will have
the right to trial by jury.
Each dissenter made a party to the proceeding by the court will be entitled
to judgment for the amount, if any, by which the court finds that the fair value
of his shares, plus interest, exceeds the amount paid by Market America. The
court may assess the costs of a proceeding described above, including the
compensation and expenses of appointed appraisers, as it finds equitable. With
respect to the fees and expenses of counsel and experts for the parties to the
proceeding, the court may assess such costs as it finds equitable:
o against Market America, and in favor of any or all dissenters, if it
finds that Market America did not substantially comply with the
above-described procedures or
o against either Market America or a dissenter or in favor of either or
any other party, if it finds that the party against whom such costs are
assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the Appraisal Rights provided under Article 13.
56
In addition, if the court finds that the services of counsel to any dissenter
were of substantial benefit to other dissenters and that the costs of such
services should not be assessed against Market America, the court may award to
such counsel reasonable fees to be paid out of the amounts owed to the
dissenters who were benefited.
THE PROVISIONS OF ARTICLE 13 ARE TECHNICAL IN NATURE AND COMPLEX.
SHAREHOLDERS DESIRING TO EXERCISE APPRAISAL RIGHTS AND TO OBTAIN A DETERMINATION
OF THE FAIR VALUE OF THEIR SHARES SHOULD CONSULT LEGAL COUNSEL, SINCE THE
FAILURE TO COMPLY STRICTLY WITH THE PROVISIONS OF ARTICLE 13 MAY RESULT IN A
WAIVER OR FORFEITURE OF THEIR APPRAISAL RIGHTS.
Shareholders' right to examine certain Market America's corporate records
is described in "WHERE YOU CAN FIND MORE INFORMATION."
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations relevant to the Merger that are generally applicable to holders
of Market America Stock. This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended, existing and
proposed Treasury Regulations thereunder and current administrative rulings and
court decisions, all of which are subject to change. Any such change, which may
or may not be retroactive, could alter the tax consequences to Market America's
shareholders as described herein.
The receipt by the shareholders of cash, in the Merger or through the
exercise of Appraisal Rights, for shares of Market America Stock will be a
taxable transaction for federal income tax purposes. Each shareholder's gain or
loss per share will be equal to the difference between $8.00 and the
shareholder's tax basis per share in the Market America Stock. If a shareholder
holds Market America Stock as a capital asset, the gain or loss from the
exchange will be a capital gain or loss. This gain or loss will be long term if
the shareholder's holding period is more than one year.
THE FOREGOING TAX DISCUSSION IS BASED UPON PRESENT LAW. EACH SHAREHOLDER
SHOULD CONSULT SUCH SHAREHOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER, INCLUDING THE APPLICATION AND
EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECT OF
CHANGES IN SUCH TAX LAWS. SPECIAL RULES WOULD APPLY TO ANY MARKET AMERICA STOCK
RECEIVED PURSUANT TO THE EXERCISE OF STOCK OPTIONS OR OTHERWISE AS COMPENSATION.
In addition, the Merger will have tax consequences for each member of the
Offering Group, as continuing shareholders, if Market America and its
post-merger parent, Miracle Marketing, elect "S corporation" status under the
Internal Revenue Code, as discussed under "--Background and Purposes of the
Merger" and "--Certain Effects of the Merger."
REGULATORY APPROVALS
Market America is not aware of any regulatory approvals that must be
obtained in order to consummate the Merger, including any regulatory approvals
from antitrust authorities.
57
SHAREHOLDER LITIGATION
As a result of the proposed Merger, Market America and its directors have
been named as defendants in a class action lawsuit filed in Superior Court in
Guilford County, State of North Carolina, on October 19, 2001. The plaintiff
purports to represent a class of all of the public shareholders of Market
America whose shares would be converted into the right to receive $8.00 in cash
per share in connection with the Merger. The complaint asserts that the $8.00
per share price to be paid to public shareholders in connection with the Merger
is inadequate. The complaint also alleges that the director defendants are
engaged in self-dealing and are not acting in good faith toward the plaintiff
and the other members of his class and that the directors have breached their
fiduciary duties to plaintiff and the other members of the class. The complaint
seeks an order certifying the class and remedies including injunctive relief
that would, if granted, prevent the completion of the merger, as well as costs
and certain unspecified monetary damages. On December 20, 2001, the defendants
filed their answer, generally denying the allegations of the complaint. There is
no order or injunction that prohibits the consummation of the transactions
contemplated by the Merger Agreement.
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The discussion in this Proxy Statement of the Merger and the description of
all the material terms of the Merger Agreement are subject to and qualified in
their entirety by reference to the Merger Agreement, a copy of which is attached
hereto as Annex A and is incorporated herein by reference, and to each of the
other annexes to this Proxy Statement.
PRIOR TO THE EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that after the approval of the Merger
Agreement by the shareholders of Market America and immediately prior to the
consummation of the Merger contemplated thereby, the members of the Offering
Group shall transfer to Miracle Marketing all of their shares of Market America
Stock.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that MA Acquisition Sub will be merged with
and into Market America and that following the Merger, the separate existence of
MA Acquisition Sub will cease and Market America will continue as the Surviving
Corporation. The "Effective Time" will be the time and date when the Articles of
Merger are accepted for filing by the Department of State of the State of North
Carolina and the Merger thereby becomes effective. The Merger Agreement provides
that the Effective Time of the Merger will be as soon as practicable after all
conditions to the Merger have been fulfilled or waived, which is anticipated to
be on or after the date of the Special Meeting. The Merger Agreement also
provides that:
o the Articles of Incorporation of Market America in effect immediately
prior to the Effective Time, as amended by the Articles of Merger,
shall be the Articles of Incorporation of the Surviving Corporation;
o the Bylaws of Market America in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation;
58
o the directors of Market America shall continue as the directors of the
Surviving Corporation;
o the officers of Market America shall continue as the officers of the
Surviving Corporation; and
o the Merger shall, from and after the Effective Time, have all the
effects provided by North Carolina law.
CONVERSION AND CANCELLATION OF MARKET AMERICA STOCK
Upon the consummation of the Merger, each outstanding share of Market
America Stock (other than shares owned by the Offering Group and shares as to
which appraisal rights are properly perfected and not withdrawn in accordance
with North Carolina law ("Dissenting Shares") will be converted into the right
to receive $8.00 in cash, without interest. At the Effective Time, all such
shares of Market America Stock will no longer be outstanding, will be canceled
and retired and shall cease to exist, and each certificate representing any
shares of Market America Stock will thereafter represent only the right to
receive the Merger Consideration, or the right, if any, to receive payment from
the Surviving Corporation of the "fair value" of such shares as determined in
accordance with Article 13 of the North Carolina Business Corporation Act. See
"SPECIAL FACTORS--Appraisal Rights." Each certificate theretofore representing
any shares of Market America Stock owned by the Offering Group shall thereafter
without any action on the part of the holder thereof, be deemed to represent the
same number of shares of the Surviving Corporation.
MA ACQUISITION SUB STOCK
At the Effective Time, each share of common stock of MA Acquisition Sub
outstanding immediately prior to the Effective Time shall cease to exist, and
each holder of a certificate representing any shares of MA Acquisition Sub shall
thereafter cease to have any rights with respect thereto.
EXCHANGE PROCEDURES
Prior to the Effective Time, Market America will appoint [__________] to
act as paying agent (the "Paying Agent") for the payment of the Merger
Consideration upon surrender of stock certificates.
Miracle Marketing is required to take all steps necessary to enable and
cause the Surviving Corporation to provide the Paying Agent with cash in amounts
necessary to pay the Merger Consideration, when and as such amounts are needed
by the Paying Agent.
As soon as reasonably practicable after the Effective Time, but in any
event within 20 days of such time, the Paying Agent will mail to each holder of
record of Market America Stock immediately prior to the Effective Time
(excluding any Dissenting Shares):
o a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the stock certificates shall
pass, only upon delivery of such stock certificates to the Paying Agent
and shall be in such form and have such other provisions as Miracle
Marketing shall reasonably specify); and
59
o instructions for the use thereof in effecting the surrender of the
stock certificates in exchange for the Merger Consideration.
Upon surrender of a stock certificate for cancellation to the Paying Agent
or to such other agent or agents as may be appointed by the Surviving
Corporation, together with such letter of transmittal, duly executed, and such
other documents as may reasonably be required by the Paying Agent, the holder of
such stock certificate will be entitled to receive an amount of cash equal to
$8.00 multiplied by the number of shares of Market America Stock represented by
such stock certificate. No interest will be paid or will accrue on the cash
payable upon the surrender of any stock certificate. If payment is to be made to
a person other than the person in whose name the stock certificate so
surrendered is registered, it will be a condition of payment that such stock
certificate be properly endorsed or otherwise in proper form of transfer and
that the person requesting such payment will pay any transfer or other taxes
required by reason of the transfer of such stock certificate or establish to the
satisfaction of the Surviving Corporation that such tax has been paid or is not
applicable. THE HOLDERS OF MARKET AMERICA STOCK SHOULD NOT SURRENDER STOCK
CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FROM THE PAYING AGENT.
Until surrendered as contemplated by the Merger Agreement, each stock
certificate (other than stock certificates representing Dissenting Shares) will
be deemed after the Effective Time to represent only the right to receive upon
such surrender the Merger Consideration for the number of shares of Market
America Stock theretofore represented by such stock certificate.
INTERIM OPERATIONS OF MARKET AMERICA; CONDUCT PENDING MERGER
From and after the date of the Merger Agreement until the Effective Time,
except as contemplated by any other provision of the Merger Agreement, unless
Miracle Marketing and MA Acquisition Sub have consented in writing thereto,
Market America has agreed:
o to conduct its operations according to its usual, regular and ordinary
course in substantially the same manner as theretofore conducted;
o to use its reasonable efforts to preserve intact its business
organization and goodwill, keep available the services of its officers
and employees and maintain satisfactory relationships with those
persons having business relationships with it;
o to refrain from amending its Articles of Incorporation or Bylaws or
comparable governing instruments;
o to refrain from making any tax election except consistent with past
practice or settling or compromising any material income tax liability;
o to refrain from settling or compromising any pending or threatened
suit, action or claim relating to the transactions contemplated by the
Merger Agreement; and
o to refrain from agreeing or otherwise committing to take any of the
foregoing actions or taking, or agreeing to take, any action which
would result in a failure of the condition to closing set forth in
Section 6.3(a) of the Merger Agreement.
60
ALTERNATIVE PROPOSALS
The Merger Agreement imposes no restrictions on Market America with respect
to any inquiries or proposals relating to a merger, acquisition, consolidation
or similar transaction involving, or any purchase of any equity securities of,
Market America or all or any significant portion of the assets of Market
America.
INDEMNIFICATION
The Merger Agreement provides that from and after the Effective Time,
Miracle Marketing will, and will cause the Surviving Corporation to, indemnify
and hold harmless all past and present officers and directors of Market America
(the "Indemnified Parties") to the full extent such persons may be indemnified
by Market America pursuant to Market America's Articles of Incorporation and
Bylaws as in effect as of the date of the Merger Agreement for acts and
omissions occurring at or prior to the Effective Time and will advance
reasonable litigation expenses incurred by such persons in connection with
defending any action arising out of such acts or omissions, provided that such
persons provide the requisite affirmations and undertakings, as required by
applicable law or set forth in Market America's Articles of Incorporation or
Bylaws as in effect prior to the Effective Time.
The Merger Agreement further provides that any Indemnified Party will
promptly notify Miracle Marketing and the Surviving Corporation of any claim,
action, suit, proceeding or investigation for which such party may seek
indemnification under such provision; provided, however, that the failure to
furnish any such notice shall not relieve Miracle Marketing or the Surviving
Corporation from any indemnification obligation under the Merger Agreement
except to the extent Miracle Marketing or the Surviving Corporation is
prejudiced thereby. In the event of any such claim, action, suit, proceeding, or
investigation,
o Miracle Marketing and the Surviving Corporation will have the right to
assume the defense thereof by counsel reasonably acceptable to the
Indemnified Parties, and the Surviving Corporation will not be liable
to such Indemnified Parties for any legal expenses of other counsel or
any other expenses subsequently incurred thereafter by such Indemnified
Parties in connection with the defense thereof, except that all
Indemnified Parties (as a group) will have the right to retain one
separate counsel, reasonably acceptable to such Indemnified Parties and
Miracle Marketing, at the expense of the indemnifying party if the
named parties to any such proceeding include both the Indemnified
Parties and the Surviving Corporation and the representation of such
parties by the same counsel would be inappropriate due to a conflict of
interest between them,
o the Indemnified Parties will cooperate in the defense of any such
matter, and
o Miracle Marketing and the Surviving Corporation will not be liable for
any settlement effected without their prior written consent.
61
CONDITIONS TO THE MERGER
Each party's respective obligation to effect the Merger is subject to the
fulfillment at or prior to the date of the closing of the transactions
contemplated by the Merger Agreement (the "Closing Date") of the following
conditions:
o the Merger Agreement and the transactions contemplated therein shall
have been approved, in the manner required by applicable law or
regulation, by the holders of a majority of all outstanding shares of
Market America, as well as by the holders of a majority of the
outstanding shares of Market America excluding shares held by the
Offering Group (the "Majority of the Minority" requirement imposed by
Market America's Board of Directors); and
o none of the parties to the Merger Agreement shall be subject to any
order or injunction of a court of competent jurisdiction that prohibits
the consummation of the transactions contemplated by the Merger
Agreement.
The obligations of Market America to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of each of the following
conditions, unless waived by Market America:
o Miracle Marketing and MA Acquisition Sub shall have performed in all
material respects its agreements contained in the Merger Agreement
required to be performed on or prior to the Closing Date, and the
representations and warranties of Miracle Marketing and MA Acquisition
Sub contained in the Merger Agreement and in any document delivered in
connection therewith shall be true and correct as of the Closing Date,
except
- for changes specifically permitted by the Merger Agreement or
otherwise accepted in writing by Market America,
- for non-performance or breaches which, separately or in the
aggregate, would not have a material adverse effect on the
business, assets, financial condition or results of operations of
Miracle Marketing and MA Acquisition Sub or on the ability of the
parties to consummate the transactions contemplated by the Merger
Agreement and
- that those representations and warranties which address matters
only as of a particular date shall remain true and correct, in all
material respects, as of such date, and
o there shall not have been any action taken, or any statute, rule,
regulation, order, judgment or decree proposed, enacted, promulgated,
entered, issued, or enforced by any foreign or United States federal,
state or local governmental entity, and there shall be no action, suit
or proceeding pending (with a reasonable likelihood of success), which
- makes the Merger Agreement, the Merger, or any of the other
transactions contemplated by the Merger Agreement illegal or
imposes or may impose material damages or penalties in connection
therewith, or
62
- otherwise prohibits, restricts, or delays consummation of the
Merger or any of the other transactions contemplated by the Merger
Agreement in any material respect.
The obligations of Miracle Marketing and MA Acquisition Sub to effect the
Merger shall be subject to the fulfillment at or prior to the Closing Date of
the following conditions, unless waived by Miracle Marketing and MA Acquisition
Sub:
o Market America shall have performed in all material respects its
agreements contained in the Merger Agreement required to be performed
on or prior to the Closing Date, and the representations and warranties
of Market America contained in the Merger Agreement and in any document
delivered in connection therewith shall be true and correct as of the
Closing Date, except
- for changes specifically permitted by the Merger Agreement or
otherwise accepted writing by Miracle Marketing and MA Acquisition
Sub,
- for non-performance or breaches which, separately or in the
aggregate, would not have a material adverse effect on the
business, assets, financial condition or results of operations of
Market America or on the ability of the parties to consummate the
transactions contemplated by the Merger Agreement and
- that those representations and warranties which address matters
only as of a particular date shall remain true and correct, in all
material respects, as of such date,
o from the date of the Merger Agreement through the Effective Time, there
shall not have occurred any change or effect, either individually or in
the aggregate, that is materially adverse to the business, assets,
financial condition, or results of operations of Market America,
o there shall not have been any action taken, or any statute, rule,
regulation, order, judgment or decree proposed, enacted, promulgated,
entered, issued, or enforced by any foreign or United States federal,
state or local governmental entity, and there shall be no action, suit
or proceeding pending (with a reasonable likelihood of success), which
- makes the Merger Agreement, the Merger, or any of the other
transactions contemplated by the Merger Agreement illegal or
imposes or may impose material damages or penalties in connection
therewith,
- requires the divestiture of a material portion of the business of
Miracle Marketing, MA Acquisition Sub, Market America or of the
Surviving Corporation taken as a whole,
- imposes material limitations on the ability of Miracle Marketing
effectively to exercise full rights of ownership of shares of
capital stock of the Surviving Corporation (including the right to
vote such shares on all matters properly presented to the
shareholders of the Surviving Corporation) or makes the holding by
Miracle Marketing of any such shares illegal or subject to any
materially burdensome requirement or condition,
63
- requires Miracle Marketing, Market America, the Surviving
Corporation or any of their respective material subsidiaries or
affiliates to cease or refrain from engaging in any material
business, or
- otherwise prohibits, restricts, or delays consummation of the
Merger or any of the other transactions contemplated by the Merger
Agreement in any material respect or increases or may increase in
any material respect the liabilities or obligations of Miracle
Marketing or the Surviving Corporation arising out of the Merger
Agreement, the Merger, or any of the other transactions
contemplated by the Merger Agreement, and
o not more than 5% of the outstanding shares of Market America Stock
entitled to vote at the Special Meeting shall have perfected appraisal
rights in respect of the Merger.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, before or after the approval of the Merger
Agreement by the shareholders of Market America, by the consent of each of
Miracle Marketing, MA Acquisition Sub and Market America. In addition, the
Merger Agreement may be terminated and the Merger may be abandoned by action of
the Board of Directors of either Miracle Marketing, MA Acquisition Sub or Market
America if
(i) the Merger shall not have been consummated by July 31, 2002 (the
"Termination Date"),
(ii) the approval of Market America's shareholders required by the Merger
Agreement shall not have been obtained at a meeting duly convened
therefor or at any adjournment thereof, or
(iii)a United States federal or state court of competent jurisdiction or
United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree
or ruling or taken any other action permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by the Merger
Agreement and such order, decree, ruling or other action shall have
become final and nonappealable;
provided, that the party seeking to terminate the Merger Agreement pursuant to
clause (iii) shall have used all reasonable efforts to remove such injunction,
order or decree; and provided, in the case of a termination pursuant to clause
(i), that the terminating party shall not have breached in any material respect
its obligations under the Merger Agreement in any manner that shall have
proximately contributed to the failure to consummate the Merger by the
Termination Date.
AMENDMENT
The Merger Agreement may be amended by the parties, by action taken by
their respective Boards of Directors, at any time before or after approval of
the Merger by the shareholders of Market America, but after any such shareholder
approval, no amendment may be made which by law requires the further approval of
shareholders unless such further approval is obtained.
64
FUNDING OF THE MERGER
Funding of the Merger will require approximately $29.7 million to pay the
Merger Consideration of $8.00 per share and $[__] to pay the fees and expenses
in connection with the Merger. These funds are expected to be provided from
Market America's working capital and or up to loans and lines of credit of up to
$20 Million in aggregate. Market America's working capital was approximately
$72.2 million as of January 31, 2002. Cash and cash equivalents were
approximately $75.1 million as of January 31, 2002.
Market America received a commercial loan commitment from First Union
National Bank on November 26, 2001, to provide a term loan up to $10 Million and
a line of credit of up to $10 Million, each to be used solely for the payment by
Market America of the Merger Consideration. The term loan would have a term of
30 months and would carry LIBOR-based interest, repayable by monthly payments of
accrued interest only for the first nine months and then by monthly payments of
principal and accrued interest. Under the terms of this facility, Market America
may hedge the loan's floating interest expense by entering into an interest rate
swap agreement, on terms to be agreed, at the closing of the loan. The line of
credit is available for 364 days, with repayment of accrued interest only (also
at a LIBOR-based rate) until maturity, at which time all remaining principal and
interest will be due. The line of credit is subject to an availability fee on
the unused portion of the available principal. Collateral for both facilities
consists of certificates of deposit equal to the total loaned amount. Market
America anticipates repaying the loan and line of credit when due from
working capital.
Under the commitment, the facilities will require maintenance of certain
ratio of Senior Funded Debt to EBITDA ratio, a certain level of liquidity, and
restrictions on dividends and prevent the Market America from engaging in a
transaction in which there is a change of control of Market America.
The commitment expires if the loans are not closed on or before June 1,
2002.
EXPENSES OF THE MERGER
The Merger Agreement provides that Market America (for itself and MA
Acquisition Sub) and Miracle Marketing will bear their respective expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby, whether or not the Merger is consummated. The total fees
and expenses of the Merger are expected to be approximately $[______], with the
respective obligations of Miracle Marketing and Market America as set forth on
the following table:
Miracle Marketing Market America
----------------- --------------
Financial advisory fees 0 [_______]
Legal fees 0 [_______]
Accounting fees [_______] [_______]
SEC filing fees 0 2,729
Printing and mailing 0 [_______]
Proxy Solicitation 0 [_______]
Miscellaneous $ $
------------- --------------
Total $ [_______] $ [_______]
65
CERTAIN INFORMATION CONCERNING MARKETING,
SUB AND THE OFFERING GROUP
Miracle Marketing is a Delaware corporation, which operates a distribution
network for Market America's products. James H. Ridinger is the sole Director
and President, Treasurer and Secretary of Miracle Marketing, as well as
Chairman, President and Chief Executive Officer of Market America. See "PARTIES
TO THE MERGER--Miracle Marketing."
MA Acquisition Sub, a wholly-owned subsidiary of Miracle Marketing, was
recently incorporated under the laws of the State of North Carolina for the
purpose of effecting the Merger. MA Acquisition Sub has not conducted any
business other than the transactions described herein. "PARTIES TO THE
MERGER--MA Acquisition Sub."
During the last five years, neither Miracle Marketing nor MA Acquisition
Sub nor any of their executive officers or directors has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors).
During the last five years, neither Miracle Marketing nor MA Acquisition Sub nor
any of their executive officers or directors has been a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction and as
a result of such proceeding was or is subject to a judgment, decree or final
order enjoining future violations of, or prohibiting or mandating activities
subject to, federal or state securities laws or finding any violation with
respect to such laws.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market America Stock is traded in the over-the-counter market. Market
America's ticker symbol on the over-the-counter bulletin board is MARK.OB.
Quotations are published through the OTC Bulletin Board. As of [Record Date],
there were [467] holders of record of the Market America Stock. The closing bid
and asked prices for Market America Stock on October 16, 2001, the date prior to
the announcement of the offer received by Market America from the Ridingers,
were $4.30 and $4.45 respectively.
The following table shows the actual reported range of high and low
quotations for the Market America Stock for the fiscal quarters indicated and as
of a recent date. These quotations were obtained from stockbrokers and represent
prices between dealers, do not include retail markups, markdowns or commissions
and may not necessarily represent actual transactions.
Quarter ended High Low
------------- ---- ---
July 31, 1999 $10 3-7/8
October 31, 1999 $6-7/8 $4-5/16
January 31, 2000 5-9/16 4-1/2
April 30, 2000 5 3-3/4
July 31, 2000 5-1/8 3-7/8
October 31, 2000 5 3-5/8
January 31, 2001 4-1/16 2-7/8
April 30, 2001 4-1/2 3-1/4
July 31, 2001 4-1/2 3-7/8
October 31, 2001
August 1 through 4-1/2 4-1/8
October 16, 2001 (the
date prior to the
announcement of
Offering Group
proposal)
October 16 through 7-3/4 4-5/16
October 31, 2001
January 31, 2002 7-13/16 7-5/16
April 30, 2002 7-7/8 7-1/2
66
Market America has never paid cash dividends on Market America Stock since
its inception. The Offering Group intends to cause Market America to be managed
with a view toward making periodic distributions to its shareholders at least
sufficient to cover their resulting tax liabilities if Market America is
operated as an S corporation (or qualified subchapter S subsidiary) after the
Merger and annually distributing all available cash in excess of $60 million,
adjusted annually for inflation, with such reserves deemed appropriate by
Miracle Marketing's board of directors. Market America's future dividend policy
will also depend on the earnings, capital requirements, financial condition and
other factors considered relevant by Market America's Board of Directors.
SELECTED FINANCIAL DATA
AUDITED AND UNAUDITED HISTORICAL FINANCIAL DATA
The following selected financial data should be read in conjunction with
Market America's financial statements and the notes thereto, including financial
statements and related notes attached hereto under "FINANCIAL STATEMENTS" and
the information provided under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The selected income statement
and balance sheet data as of the end of, and for, each of the years in the
five-year period ended April 30, 2001 are derived from the financial statements
of Market America included herein, which were audited by Dixon Odom PLLC. The
selected income statement data for the nine months ended January 31, 2002, 2001,
2000, 1999 and 1998 have been prepared on the same basis as the audited
financial statements included herein and, in the opinion of Market America,
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein. The results for
the nine months ended January 31, 2002 are not necessarily indicative of the
results to be achieved for the full fiscal year.
67
INCOME STATEMENT DATA:
Year Ended April 30,
--------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Audited)
Operating Revenues $138,513,706 $135,965,263 $110,347,824 $87,531,005 $66,281,671
Income from Operations 24,928,785 25,894,708 21,076,766 17,339,402 13,276,101
Income before Income Taxes 29,326,141 28,846,046 23,585,650 18,783,209 14,275,790
Net Income 20,212,394 17,790,922 14,191,025 10,840,540 8,471,221
Net Income Per Common Share 1.04 0.89 0.71 0.54 0.43
Nine Months Ended January 31,
-----------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Unaudited)
Operating Revenues $115,090,765 $101,416,349 $98,015,294 $80,711,996 $61,546,215
Income from Operations 22,538,926 18,127,507 18,435,700 16,022,496 11,836,360
Income before Income Taxes 24,463,763 21,109,664 20,684,313 17,811,390 12,754,654
Net Income 15,076,875 13,607,605 12,693,712 10,563,289 7,186,584
Net Income Per Common Share 0.78 0.70 0.64 0.53 0.36
BALANCE SHEET DATA:
As of April 30,
---------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Audited)
Working Capital $59,501,154 $43,858,428 $38,560,369 $24,496,643 $14,172,686
Inventories 3,296,701 2,430,734 1,852,487 1,468,321 1,244,586
Total Assets 92,433,090 69,765,464 48,998,497 33,584,430 21,691,428
Long-Term Debt 1,955,346 755,214 10,000 164,315 281,707
Shareholders' Equity 76,100,087 56,279,152 39,672,535 25,481,510 14,640,970
Return on Shareholders' Equity (1) 30.5% 37.1% 43.6% 54.0% 81.4%
As of January 31,
-----------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Unaudited)
Working Capital $72,194,138 $53,979,976 $40,943,753 $34,828,462 $21,148,031
Inventories 3,084,984 3,478,421 2,401,253 1,726,198 1,570,352
Total Assets 103,487,665 81,370,376 60,952,884 41,655,557 28,312,819
Long-Term Debt 1,880,667 1,975,096 0 40,000 191,742
Shareholders' Equity 91,153,723 81,370,376 52,293,472 36,044,799 21,827,554
Return on Shareholders' Equity (1) 18.0% 21.6% 27.6% 34.3% 39.4%
(1) Net Income divided by average shareholders' equity
PRO FORMA FINANCIAL DATA
Market America has not provided any pro forma data giving effect to the
Merger (other than the limited pro forma information given with respect to
equity interests of the Offering Group in Market America before and after the
Merger under "SPECIAL FACTORS--Conflicts of Interest.") Market America does not
believe other pro forma data is material to its unaffiliated shareholders in
evaluating the Merger Agreement and the Merger since:
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o the Merger Consideration is all cash; and
o if the Merger is completed, Market America Stock would cease to be
publicly traded and the holders of Market America Stock (other than
Miracle Marketing) would not retain or receive a continuing interest in
Market America's business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Market America's financial statements and the notes thereto, including financial
statements and related notes included herein, (See "FINANCIAL STATEMENTS"). All
references to fiscal years are references to Market America's fiscal year ended
April 30.
CAUTIONARY STATEMENT
Statements in this Proxy Statement and in other information provided from
time to time by Market America concerning Market America's business outlook for
future economic performance, anticipated profitability, revenues, expenses or
other financial items, together with other statements that are not historical
facts, are "forward-looking statements" as that term is defined under federal
securities laws. "Forward-looking statements" are subject to risks,
uncertainties and other factors, which could cause actual results to differ
materially from those stated in such statements. Such risks, uncertainties and
factors include, but are not limited to, Market America's competitive
environment, economic and other market conditions in which Market America
operates, cyclical and other fluctuations in operating results and matters
affecting business generally, as well as decreases in sales volume or number of
distributors, unfavorable regulatory action, loss of key personnel, loss of key
suppliers and general economic conditions.
OVERVIEW
The following table summarizes Market America's operating results for the
three most recent fiscal years. All dollar amounts are in millions of dollars,
except for the earnings per share data.
69
Fiscal Year Ended April 30, 2001 April 30, 2000 April 30, 1999
---------------------- ----------------------- -------------------------
Sales Revenue $ 138.5 100.0% $ 136.0 100.0% $ 110.3 100.0%
Cost of Sales 36.4 26.3% 34.0 25.0% 28.0 25.4%
---------------------- ----------------------- -------------------------
Gross Profit 102.1 73.8% 102.0 75.0% 82.3 74.6%
Selling Expenses:
Commissions 59.3 42.8% 60.6 44.6% 49.7 45.0%
General and Administrative
Expenses:
Salaries 8.5 6.1% 6.9 5.1% 5.1 4.6%
Professional fees 0.9 0.6% 1.2 0.9% 1.3 1.2%
Rent expense 1.2 0.9% 1.4 1.0% 1.0 0.9%
Insurance 0.8 0.6% 0.8 0.6% 0.6 0.5%
Other taxes and licenses 0.8 0.6% 0.6 0.4% 0.5 0.4%
Utilities 0.3 0.2% 0.4 0.3% 0.3 0.3%
Consulting 0.6 0.4% 0.8 0.6% 0.3 0.3%
Depreciation and
Amortization 0.9 0.6% 0.4 0.3% 0.2 0.2%
Repairs and maintenance 0.8 0.6% 0.6 0.4% 0.1 0.1%
Other operating expenses 3.1 2.2% 2.4 1.9% 2.1 1.9%
---------------------- ----------------------- -------------------------
Total General and
Administrative Expenses 17.9 12.9% 15.5 11.5% 11.5 10.4%
---------------------- ----------------------- -------------------------
Income From Operations 24.9 18.0% 25.9 19.0% 21.1 19.1%
Other Income (Expense) 4.4 3.2% 2.9 2.2% 2.5 2.3%
---------------------- ----------------------- -------------------------
Income before Income Taxes 29.3 21.2% 28.8 21.2% 23.6 21.4%
Income Taxes 9.1 6.6% 11.0 8.1% 9.4 8.5%
---------------------- ----------------------- -------------------------
Net Income $ 20.2 14.6% $17.8 13.1% $14.2 12.9%
---------------------- ----------------------- -------------------------
Earnings per common share $ 1.04 $0.89 $0.71
----------- ---------- -------------
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED JANUARY 31, 2002
---------------------------------------------------
Market America's sales continued to grow during the three and nine-month
periods ended January 31, 2002. Net sales increased 16.4% to $37.9 million from
$32.6 million for the quarter ended January 31, 2002 compared to the same period
in 2001. Net sales increased by 13.5% to $115.0 million from $101.4 million for
the nine-month period ended January 31, 2002 compared to the same period in
2001.
Commission expense was $16.3 million and $14.1 million for the three-month
periods ended January 31, 2002 and 2001, respectively. Commission expense was
$49.0 million and $44.5 million for the nine-month periods ended January 31,
2002 and 2001, respectively. Commissions, as a percentage of sales, were 43.1%
and 43.3% for the three-month periods ended January 31, 2002 and 2001,
respectively, and 42.6% and 43.9% for the nine-month periods ended January 31,
2002 and 2001, respectively. The commission payout as a percentage of business
volume earned through commissionable product sales has remained consistent
during both the three and nine-month periods ended January 31, 2002 when
compared to the same prior year periods.
General and administrative expenses were $5.2 million and $4.3 million for
the three-month periods ended January 31, 2002 and 2001, respectively, and $14.3
million and $12.2 million for the nine-month periods ended January 31, 2002 and
2001, respectively. As a percentage of sales, general and administrative
70
expenses were 13.8% and 13.3% for the three-month periods ended January 31, 2002
and 2001, respectively, and 12.4% and 12.0% for the nine-month periods ended
January 31, 2002 and 2001, respectively. For the three and nine-month periods
ended January 31, 2002 and 2001, other general and administrative expenses
included the following items:
Three-Months Nine-Months
Ended January 31, Ended January 31,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Insurance $ 298,797 $ 278,464 $ 809,417 $ 520,317
Legal and professional fees 307,931 233,346 707,624 557,436
Other taxes and licenses 384,525 137,406 798,111 472,525
Utilities 88,951 72,883 268,611 251,548
Repairs and maintenance 116,244 110,345 468,033 706,856
Other 849,768 988,589 2,555,266 2,339,662
--------------------------------------------------
$2,046,216 $1,821,033 $5,607,062 $4,848,344
==================================================
The increase in salary expense for the fiscal 2002 periods is primarily a
result of the timing of officer bonuses and an increase in the number of
employees in Market America's Information Technology departments due to the
expansion of Market America's internet presence over the past year.
Depreciation and amortization expense increased in the fiscal 2002 periods
due to the completion of the office and distribution facility in Greensboro,
North Carolina during July 2000, renovation completions of the office, meeting
and training center in Miami, Florida and the expansion of the training
facilities in Miami, Florida. The facility in North Carolina is being
depreciated over 33 years (ground lease term). The equipment and furnishings for
these facilities are being depreciated over 10 years. The new meeting and
training facility in Miami, Florida purchased during June 2001 will be
depreciated over the shorter of it's estimated useful life or the term of the
ground lease for the land upon which the facility sits. Market America has
estimated and recorded approximately $42,500 and $89,000 of depreciation expense
for this facility during the three and nine-month periods ended January 31,
2002, respectively.
Market America incurred larger consulting expenses during the fiscal 2001
periods due to renovations of the leased corporate facility in Miami, Florida.
Insurance expense increased during the fiscal 2002 periods due to higher
health care costs incurred and number of employees covered under Market
America's self-insured health insurance plan. The amount of expense incurred
under the plan can vary from year to year depending upon the health and number
of Company employees. Market America's health plan has a $50,000 annual stop
loss limit per employee and an annual aggregate stop loss limit of approximately
$889,000. Market America also incurred larger property insurance due to the
completion of Market America's office and distribution facility in Greensboro,
North Carolina during July 2000 and expansion of corporate facilities in Miami,
Florida.
Other taxes and licenses have increased as a result of Market America
recognizing approximately $125,000 more in property taxes during the three and
nine-month periods ended January 31, 2002 compared to same prior year periods.
During fiscal 2002, property tax bills were paid early in order to receive a
discount on the bills. Certain property taxes were included in the fourth
quarter of fiscal 2001. Market America also incurred approximately $80,000 more
71
in property taxes during the current year due to the expansion of corporate
facilities in Miami, Florida and the completion of the new office and
distribution facility in Greensboro, North Carolina during July 2000. Market
America has also incurred larger payroll taxes during the current year due to
the growth in the number of employees.
The primary result of the increase in legal and professional fees during
the current year is directly related to the proposed going private transaction.
See "FUNDING OF THE MERGER--Expenses of the Merger."
Repairs and maintenance costs were lower during the fiscal 2002 periods due
to larger expenditures associated with Market America's yacht and the Miami
training and office facility during the prior year.
Other operating expenses were 5.4% and 5.6% of sales for the three-month
periods ended January 31, 2002 and 2001, respectively. Other operating expenses
were 4.9% and 4.8% of sales for the nine-month periods ended January 31, 2002
and 2001, respectively.
The effective income tax rate for the prior year periods was lower due to
changes made during the prior year in Market America's multi-state allocation
methodology. These changes resulted in the amendment of state income tax returns
for fiscal years 1997, 1998 and 1999 during the prior year.
FISCAL YEAR ENDED APRIL 30, 2001
--------------------------------
Sales revenue increased for the eighth consecutive year. For the fiscal
years ended April 30, 2001, 2000 and 1999, sales were $138.5, million $136.0
million and $110.3 million, respectively. This represents a $25.7 million
(23.3%) sales growth from 1999 to 2000 and a $2.5 million (1.9%) sales growth
from 2000 to 2001.
In management's judgment, fiscal 2001 sales have not maintained historical
growth rates due primarily to the following:
o corporate sales and marketing personnel and field sales and
distribution managers focused their efforts on the development,
retooling, implementation and training on our new Internet
programs/products and a revised preferred customer program;
o operational challenges associated with the move into the new facility
in Greensboro, North Carolina;
o communication, training and implementation of procedural revisions to
the placement/submittal of distributor orders for commissionable
products; and
o general economic conditions that resulted in a slowdown of growth for
the direct sales industry as a whole. According to the Direct Selling
Association, multilevel direct sales companies with over $100 million
in retail sales experienced average sales growth during calendar 2000
of just 2.6%. This same group experienced average sales declines of
(3.3%) during the first calendar quarter of 2001, which largely
overlaps with Market America's fourth quarter.
72
With the above factors behind Market America, management was satisfied with
the 1.9% sales growth for the fiscal 2001 year. Management believes that
historical sales trends will return with an improvement in the general economy.
Management attributes the growth in sales during fiscal 2000 to growth in
the number of average orders per month and the average dollar amount per order.
Market America's focus on recruitment in fiscal 2000 resulted in a 10.3%
growth of distributors, which was largely responsible for a 10.4% increase in
the number of average orders per month during that year or approximately $11.2
million of additional sales revenue.
In addition, Market America's emphasis during fiscal 2000 on "One-to-One
marketing", which allows distributors to emphasize product sales to their
customers based on the customer's wants and needs, has created better
relationships between distributors and their customers resulting in an increased
average dollar amount per order during this time period. The average dollar
amount per sales order increased by 11.0%, which contributed approximately $13.2
million of additional sales revenue.
Cost of goods sold as a percentage of revenue was 26.3%, 25.0% and 25.4%
for fiscal years ending April 30, 2001, 2000 and 1999, respectively. The
increase in cost of goods sold as a percentage of sales from fiscal 2000 to 2001
was primarily due to larger shipping and labor costs as a result of backorder
problems with a few vendors. Market America has replaced these vendors as of the
end of fiscal 2001 without any detriment to the quality of products being sold.
Commissions as a percentage of sales were 42.8%, 44.6% and 45.0% for the
fiscal years ended April 30, 2001, 2000 and 1999, respectively. The decrease in
commission expense as a percentage of sales during fiscal 2001 may be attributed
to a change in the product mix of commissionable product purchased by
distributors. However, the commission payout as a percentage of business volume
earned through commissionable product sales has remained constant from fiscal
2000 to fiscal 2001.
Salary expense was $8.5 million in fiscal 2001, a 23.2% increase from $6.9
million in fiscal 2000. In fiscal 2000, salaries increased by 35.3% from $5.1
million in fiscal 1999. As a percentage of sales, salary expense was 6.2%, 5.1%
and 4.6% for fiscal years 2001, 2000 and 1999, respectively. The increase over
the past two fiscal years has been a result of a commitment by management to
improve human resources within Market America to better serve the needs of
Market America's distributors. The primary areas of improvement have been in
Market America's Management Information Systems and Internet departments. Market
America also paid approximately $1.9 and $1.7 million in bonuses for fiscal 2001
and 2000, respectively, which amounts are above historical levels.
Professional fees incurred during the fiscal years ended April 30, 2001,
2000 and 1999 were $864,509, $1,241,117 and $1,305,221 respectively. The
decrease in professional fees over the past two fiscal years was primarily due
to higher legal fees incurred in 1999 and 2000 in connection with court and
regulatory proceedings that concluded in early fiscal 2000. Management expects
the costs of professional fees to remain consistent with fiscal 2001 during
fiscal 2002.
Market America incurred rent expense of $1,193,551 $1,380,351 and $995,994
during the fiscal years ended April 30, 2001, 2000 and 1999, respectively. Rent
expense decreased during fiscal 2001 due to the termination of a yacht lease in
the fourth quarter of fiscal 2000. Rent expense increased in fiscal 2000 due to
the expansion of office, meeting and training facilities in Miami, Florida.
73
Market America expects rent expense to increase in fiscal 2002 compared to
fiscal 2001 due to a commitment to further expand the office, meeting and
training facilities in Miami, Florida.
Insurance expense was $755,513 in 2001, $844,534 in 2000 and $626,108 in
1999. The decrease in fiscal 2001 was a result of lower health care costs
incurred under Market America's self-insured health insurance plan. The amount
of expense incurred under the plan can vary from year to year depending upon the
health of Market America's employees. Market America's health plan does have a
$30,000 stop loss limit per employee and an aggregate stop loss limit of
approximately $652,029. The increase in insurance expense in fiscal 2000 from
the previous year was due to higher general liability and property insurance
resulting from the expanded corporate facilities in Miami, Florida. Management
expects insurance expense to increase in fiscal 2002 as a result of the planned
expansion of the corporate facilities in Miami, Florida.
Other taxes and licenses incurred by Market America during the fiscal years
ended April 30, 2001, 2000 and 1999 were $763,772, $624,634 and $458,155,
respectively. The primary cause of the increase over the past two fiscal years
is a result of Market America incurring larger payroll tax burdens due to 34%
growth in the number of employees over the same time period. Market America has
also incurred larger property taxes due to the expansion of corporate facilities
in both Greensboro, North Carolina and Miami, Florida over the past two fiscal
years. In fiscal 2001, Market America received refunds of prior years' state
franchise taxes of approximately $64,000 that helped offset the larger property
tax burdens. Management expects other taxes and licenses to increase in fiscal
2002 as a result of the planned expansion of the office, meeting and training
facilities in Miami, Florida.
Consulting expenses were $640,713, $819,128 and $266,154 for the fiscal
years ended April 30, 2001, 2000 and 1999 respectively. In fiscal 2001 and 2000,
Market America incurred consulting fees relating to renovations of the leased
corporate facility in Miami, Florida of approximately $472,000 and $424,000,
respectively. In fiscal 2000, Market America also incurred consulting fees due
to the expansion of its Internet site of approximately $214,000. Management
expects consulting expenses to decrease in fiscal 2002 due to the completion of
renovations to the leased corporate facility in Miami, Florida.
Market America has incurred total expenditures of approximately $14 million
on property and equipment during the past two fiscal years. As a result,
depreciation and amortization expense has increased from approximately $209,000
in fiscal 1999 to approximately $937,000 in fiscal 2001. The primary purchases
during the past two years have been the $4.6 million headquarters and
distribution center in Greensboro, North Carolina and a $3.6 million yacht. The
building in Greensboro is being depreciated over 33 years (ground lease term)
and the yacht over a 10-year period.
Repairs and maintenance expense has increased over the past two fiscal
years due to annual repairs made to the corporate yacht. Prior to June 1999,
Market America leased a much smaller yacht for distributor training events than
the yacht currently owned. Repairs and maintenance expense has also risen due to
the expansion of office, meeting and training space of the Miami, Florida
facilities.
Other operating expenses were $3,055,062, $2,410,943 and $2,084,741, for
the fiscal years ended April 30, 2001, 2000 and 1999, respectively. Other
operating expenses consist primarily of bad debts, office supplies, postage,
charitable donations, advertising, travel and other necessary business expenses.
74
The increase in other operating expenses during fiscal 2001 is partially
due to an additional $387,487 for the settlement of a previously reported
lawsuit brought against Market America by various former distributors. Market
America had previously accrued $400,000 towards the resolution of this matter.
Without this additional cost, other operating expenses would have been
approximately the same percentage of sales as the prior year.
Due to Market America's increased emphasis on distributor recruitment in
fiscal 2000, management presence at corporate events and meetings increased, as
well as at distributor functions. This resulted in approximately $450,000 of
increased travel costs. Without these increased costs, other operating expenses
would have been slightly lower as a percentage of sales than the prior year.
Market America's effective tax rate was 31.1% in fiscal 2001 compared to
38.3% in fiscal 2000 and 39.8% in fiscal 1999. During the fiscal year ended
April 30, 2001, Market America amended prior years' state income tax returns due
to a change in its multi-state income allocation methodology claiming state tax
refunds of $3,477,237. Management expects Market America's effective income tax
rate to be approximately 37% in fiscal 2002. Earnings per share in fiscal 2001
were increased by approximately $0.12 due to state income tax refunds.
LIQUIDITY AND CAPITAL RESOURCES
Market America had unrestricted and restricted cash on deposit with various
financial institutions and available-for-sale debt securities totaling $80.2
million as of January 31, 2002 compared to $69.7 million as of April 30, 2001.
The $80.2 million as of January 31, 2002 was comprised of $75.1 million of
unrestricted cash, $2.8 million of restricted cash and $2.3 million of
available-for-sale securities.
The restricted cash consisted primarily of certificates of deposit, which
were restricted for use as collateral under a guarantee of a $5.3 million loan
extended by a financial institution to a related company controlled by Mr. and
Mrs. James H. Ridinger during fiscal 2000. The guaranteed loan had an
outstanding balance of $4,080,306 as of January 31, 2002. The loan proceeds were
used by the related company to purchase real estate in Miami, Florida. Market
America is leasing this real estate under a twenty-year agreement. The real
estate is used for direct sales training and education as well as other
corporate functions. See "MANAGEMENT OF MARKET AMERICA" and "FINANCIAL
STATEMENTS." During October 2001, Market America began construction of a
$675,000 building on this leased real estate in order to further expand the
training and meeting facilities in Miami, Florida. The costs of this facility
will be funded from cash flows from operations. As of January 31, 2002, Market
America had paid approximately $104,000 towards the construction of this
facility.
The available-for-sale securities consist of commercial paper. These
securities were purchased in order to increase Market America's yield on assets
pending use in Market America's business and can be converted into cash if the
need arises.
Market America has a five-year $2.1 million term loan related to its office
and distribution facility in Greensboro, North Carolina. The loan contains an
annual fixed interest rate of 7.625% and requires 59 monthly payments of
$19,750, including interest, with a balloon payment of all outstanding principal
plus interest due in June 2005. The building was constructed on land leased from
a related company. See "MANAGEMENT OF MARKET AMERICA" and "FINANCIAL
STATEMENTS."
Market America is also a guarantor of a $1.6 million loan by a financial
institution to a related company. The guaranteed loan had an outstanding balance
of $1,040,450 as of January 31,2002. The proceeds of the loan were used by the
related company to purchase the land on which Market America constructed its new
office and distribution facility in Greensboro, North Carolina. This loan and
Market America's building loan are cross-collateralized by the land being leased
from the related company and by the building constructed thereon by Market
America. The guaranteed loan is repayable over a five-year period.
75
In June 2001, Market America purchased a facility in Miami, Florida for
$3,560,400. Market America had made an earnest money deposit of $1,100,000 on
this facility during the fourth quarter of fiscal 2001 and paid the remaining
$2,460,400 in cash upon closing. See "MANAGEMENT OF MARKET AMERICA" and
"FINANCIAL STATEMENTS."
Management believes that its current level of cash and cash equivalents and
its cash provided by operations will provide sufficient resources for operations
in the foreseeable future. In the event that Market America's operating
environment becomes adverse, there can be no assurance that additional financing
would not be required.
THE BUSINESS
PRODUCTS AND MANUFACTURING
Market America offers a wide variety of market-driven products and
services. These products and services are presented in a unique marketing
environment known as the "Market America's Mall without WallsTM." Market America
presents its products within this virtual mall atmosphere in a broad assortment
of "stores". These stores do not constitute market segments but, rather,
represent a positioning of the products for marketing purposes.
In the last three fiscal years, the only product or class of similar
products or services whose sales exceeded 10% of the company's gross revenue was
OPC-3, or Oligomeric Proanthocyanidins, which represented 32.2% of gross revenue
during the fiscal year ended April 30, 2001. During the fiscal years ended April
30, 2000 and 1999, OPC-3 constituted 31.2% and 30.6%, respectively, of gross
revenue.
As a product brokerage company, Market America does not engage in
manufacturing activities. All products sold by Market America are purchased from
unrelated suppliers. Virtually all of Market America's products are sold under
trade names that are exclusive to Market America under contracts that protect
the trade names and prevent them from being used by other direct sales
companies. This strategy provides flexibility in introducing new products and
withdrawing products from the market, and minimizes capital investment and
product liability exposure. One supplier, Purity Technologies Inc. (formerly
Isotonix Corporation), a manufacturer of vitamin and nutritional products,
supplies Market America with vitamin compounds and nutritional supplements,
including OPC-3, that accounted for 49.8% of Market America's gross sales in
fiscal year 2001, 46.0% in fiscal year 2000 and 44.0% in fiscal year 1999, under
a contract dating from 1993. In order to reduce the risk of reliance on a single
manufacturer, Market America is continually in the process of identifying
alternative sources for its products.
76
MARKETING
Sales of Market America's products are primarily dependent upon the efforts
of Market America's independent distributors and preferred customers.
Distributor growth is important to continued success in the direct selling
industry. Market America had 80,270, 73,214 and 66,394 active distributors
during the fiscal years ended April 30, 2001, 2000 and 1999, respectively. In
order to qualify as an "active" distributor, individuals must meet certain
sales, reporting and management requirements. Management expects the number of
active distributors to continue to grow as Market America's product lines expand
and as distributor recruitment increases.
Market America believes its distributor compensation plan is one of the
most financially rewarding in the direct selling industry. Distributor
commissions are calculated and paid weekly based on "business volume," which is
a cumulative measure of distributor or wholesale cost of goods purchased and
sold by distributors. Commissions are Market America's most significant expense
and represented approximately 42.8%, 44.6% and 45.0% of net sales revenue for
the fiscal years ended April 30, 2001, 2000 and 1999, respectively. The decrease
in commission expense as a percentage of sales revenue during fiscal 2001 may be
attributed to a change in the product mix of commissionable products purchased
by distributors. However, the commission payout as a percentage of business
volume earned through commissionable product sales has remained constant from
fiscal 2000 to fiscal 2001.
Market America's product return policy allows retail customers to return a
product to a distributor and receive a full cash refund within three business
days. Market America reimburses any distributor who then provides proper
documentation and the returned product within thirty days. Market America will
refund the costs of returned marketable and unused products by a distributor
within one year of purchase, less a 10% restocking fee. Market America, upon
receipt of proper documentation from the distributor, will replace product that
was damaged during shipment. Returns of marketable and unused products have not
been significant in any of the past three fiscal years.
NEW PRODUCT STATUS
Market America continually searches for new, innovative, market-driven
products and services. Market America's Product Development Department carefully
follows market trends, as well as new published research available through
select trade journals. Market America also obtains valuable product information
from its substantial network of contacts around the world, including
manufacturers, scientific authorities, field representatives, and the Direct
Selling Association. Using a systemized approach, the management team reviews
information and selects new products and services over a pre-determined period
of time to meet sensitive timelines. Standards for product selection include
guidelines for optimal levels of inventory for maximum results from a new
product launch.
Market America expects to continue to develop its health and nutrition
product line, adding products to enhance lifestyle and longevity. During fiscal
2001, Market America began development of a secretagogue human growth hormone
("HGH") enhancer. The enhancer uses a special blend of nutritional ingredients
that naturally increase the production and release of HGH by the pituitary
gland. When specific amino acids and nutrients are combined in a precise peptide
formulation with other biologically active nutrients and taken as directed, they
effectively raise HGH levels in the body. Due to delays in product introduction
to the marketplace, Market America did not ship any HGH until early May 2001.
77
Upon shipment, Market America recognized approximately $1 million of revenue
from the first time orders of this product.
During fiscal 2000, Market America formed an Internet Advisory Board
("IAB"), comprised of seven experts in the Internet field, for the purpose of
advising and developing an Internet site which would enhance distributors'
business opportunities. In August 2000, Phase II, of a three-phase program, was
completed. Phase II provided distributors with the option to have e-commerce
available on a custom web site allowing them to receive and process transactions
through the Internet. Phase III was completed during February 2001. The
completion of Phase III included the introduction of Market America's
WebCenters. The WebCenters provide distributors with the ability to market web
sites with e-commerce capabilities to small business owners.
BACKLOG
Market America typically ships products within 24 hours after the receipt
of the order. As of January 31, 2002, Market America had no significant backlog.
EMPLOYEES
At January 31, 2002, Market America employed 248 persons at its Greensboro,
North Carolina corporate headquarters and distribution center and 23 persons at
its Miami, Florida location. Unions do not represent any of Market America's
employees. Market America believes that its employee relations are satisfactory.
SEASONALITY
Market America's revenues and business operations have not experienced
significant seasonal fluctuations, and management does not expect this to be a
concern in the future.
TRADEMARKS, PATENTS AND PROPRIETARY INFORMATION
"Market America" and "Market America's Mall without Walls" are registered
as Market America's service marks. Market America has also obtained registered
trademarks for "The Unfranchise," a name it uses to designate its marketing
system. Market America also has various registered product trademarks,
"Thermochrome 5000" nutritional supplement, "Royal Spa" personal care products,
"Ultimate Aloe" nutritional supplements and personal care products, "Mineral
Blast" nutritional supplement, "Glucosatrin" nutritional supplement and "Clear
Shield" and "Vitashield" skin care products. Market America holds no patents.
Market America regards its marketing plan as proprietary and has
implemented protective measures of both a legal and a practical nature to ensure
that it retains that status. Market America derives such protection by contract
with distributors and by keeping its software program confidential. Access to
Market America's proprietary marketing plan software is limited to those with a
need to know. Market America seeks to protect its official literature by means
of copyright protection. Market America aggressively pursues anyone who violates
its proprietary rights and distributor non-competition and non-solicitation
contractual provisions. Litigating risks always exist in the protection of such
rights. Market America also believes that such factors as innovation, expertise
and market responsiveness are of equal importance with the legal protections
described above.
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COMPETITION
The direct selling industry is highly competitive and sensitive to consumer
demand and distributor retention. Market America must compete with both retail
outlets and other direct selling companies for many of its sales and
distributors. Many of Market America's products compete with national brand-name
items that have much more consumer recognition. There are many competitors for
both sales and distributors with substantially greater financial resources than
Market America.
Market America believes that its leading competition, based on total sales,
is Amway Corporation and its affiliates, and that Avon Products, Inc. is the
leading direct seller of beauty and related products worldwide. Leading
competitors in the nutritional products and nutritional direct selling markets
include Nature's Sunshine Products, Inc., Nu Skin International Inc., Herbalife
International Inc., Shaklee Corporation and Usana Inc. Market America believes
there are other manufacturers of competing product lines that may or intend to
launch direct selling enterprises, which will compete with Market America in
certain of its product lines and for distributors. There can be no assurance
that Market America will be able to successfully meet the challenges posed by
such increased competition.
GOVERNMENT REGULATION AND COMPLIANCE WITH ENVIRONMENTAL LAWS
As a distributor without any manufacturing processes, Market America has
avoided material capital expenditures to comply with federal, state, or local
environmental laws. Market America does not expect this to change in the
foreseeable future.
As a product broker and distributor of consumer nondurable goods, Market
America and its products are subject to extensive government regulations. The
Food and Drug Administration, Federal Trade Commission, Environmental Protection
Agency, and Consumer Product Safety Commission are a few of the governmental
agencies responsible for regulating and monitoring Market America's products.
Product labeling, distribution, packaging, advertising, and content are all
subject to intense laws and regulations. Market America believes it is in
substantial compliance with all laws and regulations, but there is no assurance
that legislation or regulations adopted in the future will not adversely affect
Market America's operations.
Other laws and regulations affecting Market America have been enacted to
prevent the use of deceptive or fraudulent practices that have sometimes been
inappropriately associated with legitimate direct selling and network marketing
activities. These include anti-pyramiding, securities, lottery, referral
selling, anti-fraud and business opportunity statutes, regulations and court
cases. Illegal schemes typically referred to as "pyramid," "chain distribution,"
or "endless chain" schemes, compensate participants into the scheme. Often such
schemes are characterized by large up-front entry or sign-up fees, over-priced
products of low value, little or no emphasis on the sale or use of products,
high pressure recruiting tactics and claims of huge and quick financial rewards
with little or no effort. Generally the laws directed at such schemes attempt to
ensure that product sales ultimately are made to consumers and that advancement
within such sales organizations is based on sales of the enterprise's products,
rather than investments in the organizations themselves or other non-retail
sales-related criteria. Where required by law, Market America obtains regulatory
approval of its network marketing system.
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Market America remains subject to the risk that, in one or more of its
present or future markets, its marketing system or the conduct of certain of its
distributors could be found not to be in compliance with applicable laws and
regulations. Failure by Market America or its distributors to comply with these
laws could have an adverse effect on Market America in a particular market or in
general. Market America monitors the activities of its distributors through its
national meeting, training and seminar system, in accordance with the management
and supervisory responsibilities of its higher level distributors, certified
trainers and advisory council members. Through such efforts Market America seeks
to minimize the possibility of unauthorized conduct by any distributor.
Market America cannot predict the nature of any future law, regulation,
interpretation or application, nor can it predict what effect additional
governmental legislation or regulations, judicial decisions, or administrative
orders, when and if promulgated, would have on its business in the future. It is
possible that such future developments may require revisions to Market America's
marketing program. Any or all of such requirements could have a material adverse
effect on Market America's business, results of operations and financial
condition.
MARKETS
Market America's primary markets have been in the United States, Canada,
and most U.S. possessions. Approximately 7.8%, 5.7% and 3.7% of Market America's
sales in fiscal 2001, 2000 and 1999, respectively, were outside the 50 states.
If business factors continue to be favorable, management intends to expand
operations to Australia during the fourth quarter of fiscal 2002.
PROPERTY
During the fiscal year ended April 30, 2001, Market America leased a 40,000
square foot building, in Greensboro, North Carolina. The lease covering this
property was terminated without penalty on July 10, 2000 when Market America
moved into a new corporate office and distribution center it had been
constructing since the summer of 1999. The new 102,000 square foot building in
Greensboro, North Carolina serves as Market America's headquarters and primary
distribution center. Management believes that this facility will meet Market
America's needs for office and distribution space for the foreseeable future.
Market America has a five-year $2.1 million term loan with a fixed interest rate
of 7.625%. The loan requires monthly payments, including interest, of $19,750
for 59 months with all remaining principal and interest due in June 2005. The
land on which the building resides is leased under a 33-year net ground lease
with a related company owned by Mr. and Mrs. Ridinger. See "MANAGEMENT OF MARKET
AMERICA."
In addition, Market America leases a 9,100 square foot warehouse in
Brampton, Ontario for distribution of products to Canadian distributors. The
lease agreement requires a $7,621.24 (Canadian) monthly payment and expires on
November 25, 2006.
Market America also leases office and meeting and training space in Miami,
Florida, from a company owned by Mr. and Mrs. Ridinger, for use in direct sales
training and education as well as other corporate functions. The lease agreement
is for twenty years and requires a $60,000 monthly payment. The lease is
renewable for an additional twenty-year period. Management has committed to
expanding the meeting and training facilities in Miami, Florida during fiscal
2002 in order to provide additional space for distributor events and corporate
80
meetings. In October 2001, Market America began construction of a $675,000
building on this leased property in order to further expand the meeting and
training facilities in Miami, Florida. As of January 31, 2002, Market America
had paid approximately $104,000 towards the construction of this facility. See
"MANAGEMENT OF MARKET AMERICA."
In June 2001, Market America purchased a facility in Miami, Florida from an
unrelated party for $3,560,400. Market America had made an earnest money deposit
of $1,100,000 on this facility during the fourth quarter of fiscal 2001 and paid
the remaining $2,460,400 in cash upon closing. Market America leases the land on
which the facility sits from a company owned by Mr. and Mrs. James H. Ridinger,
officers/stockholders of Market America, for $15,000 per month. The one-year
lease was effective as of June 2001 and provides for automatic renewals for up
to 32 additional one-year terms at $15,000 per month. See "MANAGEMENT OF MARKET
AMERICA."
LEGAL PROCEEDINGS
As a result of the proposed Merger, Market America and its directors have
been named as defendants in a class action lawsuit filed in Guilford County,
State of North Carolina, Superior Court Division on October 19, 2001. The
plaintiff purports to represent a class of all of the public shareholders of
Market America whose shares would be converted into the right to receive $8.00
in cash per share in connection with the Merger. The complaint asserts that the
$8.00 per share price to be paid to public shareholders in connection with the
Merger is inadequate. The complaint also alleges that the director defendants
are engaged in self-dealing and are not acting in good faith toward the
plaintiff and the other members of his class and that the directors have
breached their fiduciary duties to plaintiff and the other members of his class.
The complaint seeks an order certifying the class and remedies including
injunctive relief that would, if granted, prevent the completion of the merger
as well as costs and certain unspecified monetary damages.
While Market America and its directors intend to defend themselves
vigorously, there can be no assurance given as to the outcome of this lawsuit.
Market America is periodically involved in routine litigation incidental to
its business, including litigation involving distributor terminations.
Management believes that any such pending litigation will not have a material
effect on Market America's financial position or results of operations.
MANAGEMENT OF MARKET AMERICA
Set forth below is the background of the directors and executive officers
of Market America, including Mr. Ridinger, as well as a Vice President and the
Director of Field Development of Market America (who are each members of the
Offering Group, but are not considered executive officers of Market America).
Each person listed below is a citizen of the United States:
o James H. Ridinger, Chairman, President and Chief Executive Officer. Mr.
Ridinger founded Market America in 1992 and has served as a Director,
Chairman, President and Chief Executive Officer since that time. He is
51 years old.
o Loren A. Ridinger, Director, Senior Vice President and Secretary. Mrs.
Ridinger has been a Director of Market America since 1993 and has held
a number of executive positions with Market America since its founding
in 1992. As second in command to the chief executive officer on
81
operations and administration, Ms. Ridinger coordinates the activities
of the vice presidents, manages the advisory council, heads field
relations, and manages the Miami training center staff. She is
responsible for oversight and development of the Motives line, the
national training and seminar system, oversight of the dispute
resolution board, and oversight of advertising materials . She is the
wife of James H. Ridinger and is 33 years old.
o Martin L. Weissman, Director and Executive Vice President. Mr. Weissman
has been a Director since 1993 and has served as an Executive Vice
President since 1994. Mr. Weissman was a founder, owner and Executive
Vice President of Howard Carpet Mills of Chatsworth, Georgia. For
Market America, Martin L. Weissman is responsible for maintaining
margins on all products, vendor relations including pricing, terms, and
related matters. He is also involved in new product evaluation. He
oversees the purchasing and scientific affairs and quality control
departments and assists Loren A. Ridinger with the Motives line. He is
responsible for investor and distributor relations. He oversees the
internet affiliate marketing program and is involved with all aspects
of vendor and product development for foreign expansion. He is 59
years old.
o Dennis J. Franks, Executive Vice President. Mr. Franks has served in
this office since 1993. He is a former professional football player and
marketing professional for a number of companies. For Market America,
Mr. Franks is primarily responsible for North American and Pacific Rim
sales and marketing including recruiting, training, literature
development, field presentations and product development. He oversees
the field development department and provides marketing support to
Loren A.. Ridinger. Mr. Franks also assists with crisis control and
sits on various management committees, including the Corrective Action
Board, participates in the Moving Ups training series, handles field
communications, assists in the Preferred Customer and 1:1 Development
initiatives, serves as "Mall Manager," and assists with distributor
relations. Mr. Franks' duties include presentation and training at
National, Regional and District Events. He is 49 years old.
o Marc Ashley, Vice President. Mr. Ashley has been an employee of Market
America since 1992. He is a brother of Loren A. Ridinger. For Market
America, Mr. Ashley is responsible for overseeing and directing over
250 employees. This includes but is not limited to all aspects of
Information Systems, Corporate Services, Human Resources, Field
Compliance, Publications, Data Services, the Distribution Center, and
the Certified Training Program. He chairs and/or sits on various
management committees and the Corrective Action Board. Mr. Ashley is
responsible for various National, Regional and District presentations
and training. He is 31 years old.
o Joseph V. Bolyard, Vice President. His responsibilities include
oversight of the Events and Quality Assurance Departments and all
aspects of international expansion. He also oversees the Commissions
Analysis and Accounting Departments and budgeting for the Motor Yacht
Utopia and oversees the corporate budget process. Mr. Bolyard sits on
various management committees including product, publications,
internet/MIS, payables, International, marketing, Quality Steering,
policy improvement and legal. Mr. Bolyard has recently assumed a role
82
as a presenter at national events and will be expected to continue
developing this role. Mr. Bolyard has been an employee of Market
America since 1992. He is 32 years old.
o Andrew Weissman, Director of Field Development. Mr. Weissman directs
the Field Development Department which includes defining and promoting
the New Generation Goals, presentations and training at national,
regional and district events. He is responsible for development of
business building tools and assists with Moving Up and UFO trainings
and seminars. He participates on various committees and assists with
distributor relations. Mr. Weissman, who is the son of Martin L.
Weissman, has been an employee of Market America since April, 1997. He
is 29 years old.
Each of the persons listed above has been employed principally by Market
America, in the positions described above, during the last five years.
The principal business address of each of the persons listed above is the
same as that listed herein for the principal executive offices of Market
America, 1302 Pleasant Ridge Road, Greensboro, North Carolina 27409. The
telephone number at that address is (336) 605-0040.
During the last five years, neither Market America, nor, to the best
knowledge of Market America, any of its executive officers or directors of
Market America has been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors).
During the last five years, neither Market America, nor, to the best
knowledge of Market America, any of its executive officer or director of Market
America has been a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction and as a result of such proceeding was or is
subject to a judgment, decree or final order enjoining future violations of, or
prohibiting or mandating activities subject to, federal or state securities laws
or finding any violation with respect to such laws, except as follows: On May 4,
1999, Market America entered into a settlement with the SEC in which it
consented to the entry of an order enjoining it from violating certain antifraud
and other provisions of the federal securities laws. Market America did not
admit or deny the allegations made in the proceeding. Also on May 4, 1999, James
H. Ridinger entered into a settlement with the SEC in which he consented to the
entry of an order enjoining him from violating certain antifraud and other
provisions of the federal securities laws. In connection with Mr. Ridinger's
settlement, Mr. Ridinger agreed to pay a fine of $100,000 and disgorgement and
prejudgment interest of $304,695. Mr. Ridinger neither admitted nor denied the
allegations made in the proceeding. The proceedings against Market America and
Mr. Ridinger involved the manner in which Market America was taken public in
1992 and 1993, the failure to disclose the use of proceeds of the initial public
offering, and Mr. Ridinger's sharing in those proceeds. There is also a civil
suit pending against Mr. Ridinger by a purchaser of Market America Stock who is
seeking damages in connection with a number of allegations, including those
which were the basis of the SEC proceedings against Mr. Ridinger.
There are no family relationships between any director or officer listed
above and any other director or officer listed above other than as indicated
above.
The five executive officers of Market America (James H. Ridinger, Loren A.
Ridinger, Martin L. Weissman, Dennis J. Franks and Marc Ashley) own and operate
business development centers as independent contractors and distributors within
83
the field sales organization of Market America. In this capacity, they perform
the typical and usual functions of field sales representatives, in return for
which their business development centers earn commissions under the performance
compensation plan applicable to all of Market America's distributors. For the
fiscal year ended April 30, 2001, these individuals earned distributor
commissions as follows: James H. Ridinger $631,470; Loren A. Ridinger $7,695;
Dennis J. Franks $243,545; Martin L. Weissman $153,670; and Marc Ashley $19,395.
On March 26, 2002, Mr. Ridinger transferred ownership of the 15 business
development centers owned by him to Miracle Marketing. See "PARTIES TO THE
MERGER--Miracle Marketing."
84
In December 1999, Market America entered into an agreement with a company
owned by Mr. and Mrs. James H. Ridinger, to lease real estate in Miami, Florida
for direct sales training and education, as well as other corporate functions.
The monthly rental is $60,000 and the lease has a 20-year term with a renewal
option for an additional 20-year term. Market America has paid a $600,000
non-interest bearing damage deposit as part of this lease, which is included in
other assets on the balance sheet. The amount of rent expense under this
agreement aggregated $180,000 and $540,000 during each of the three and
nine-month periods ended January 31, 2002 and 2001, respectively. In connection
with this lease, Market America has guaranteed a $5.3 million five-year loan to
the related company for the purchase of the real estate being leased. As of
January 31, 2002, the guaranteed loan had an outstanding balance of $4,080,306.
Market America had restricted cash of $2,560,000 as collateral under the loan
guarantee as of January 31, 2002. In October 2001, Market America began
construction of a $675,000 building on this leased property in order to further
expand the meeting and training facilities in Miami, Florida. As of January 31,
2002, Market America had paid approximately $104,000 towards the construction of
this facility.
During the year ended April 30, 1999, Market America entered into a 33-year
net ground lease with a company owned by Mr. and Mrs. James H. Ridinger for the
site on which Market America has constructed its new headquarters and warehouse
facility in Greensboro, North Carolina at a cost of $4,593,133. Required rental
payments are $17,000 per month since October 2000, and $10,666 per month prior
to that date. The amount of rent expense under this agreement was $51,000 and
$153,000 for the three-month and nine-month periods ended January 31, 2002,
respectively. Rent expense for the three-month and nine-month periods ended
January 31, 2001 was $51,000 and $121,330, respectively. In June 1999, Market
America paid $500,000 to the Ridinger company for a Right of First Refusal on
this site, which provides Market America with the opportunity to purchase the
land, should it be offered for sale, before the land is offered for sale to
other parties. The amount paid is included in other assets and is being
amortized on a straight-line basis over the lease term. The unamortized balance
will be applied to the purchase price of the land in the event Market America
buys it. On June 28, 1999, Market America became guarantor of a $1.6 million
bank loan to the Ridinger company used for the purchase of the land. The
guaranteed loan had an outstanding balance of $1,040,450 at January 31, 2002.
This loan and Market America's term loan are cross-collateralized by the land
being leased from the Ridinger company and by the building improvement
constructed thereon by Market America. The guaranteed loan is repayable over a
five-year period.
In June 2001, Market America purchased a facility in Miami, Florida from an
unrelated party for $3,560,400. Market America had made an earnest money deposit
of $1,100,000 on this facility during the fourth quarter of fiscal 2001 and paid
the remaining $2,460,400 in cash upon closing. Market America leases the land on
which the facility sits from a company owned by Mr. and Mrs. James H. Ridinger,
officers/stockholders of Market America, for $15,000 per month. The one-year
lease was effective as of June 2001 and provides for automatic renewals for up
to 32 additional one-year terms at $15,000 per month. The building will be
depreciated over the shorter of its estimated useful life or the term of the
ground lease. Market America has estimated and recorded approximately $89,000 of
depreciation expense on the building during the nine-months ended January 31,
2002
The Ridinger companies owed Market America on average $11,549 during the
fiscal year ended April 30, 2001. As of April 30, 2001, these companies owed
Market America $16,222.
85
Substantially all of Market America's leasehold improvements are to
properties leased from such related companies.
On June 30, 2000, Market America entered into a note receivable agreement
with Marc Ashley in the amount of $100,415.83. The note is secured by 25,000
shares of Market America Stock and bears an annual interest rate of 6.5%. Under
the agreement, Mr. Ashley is required to make interest-only payments for the
first 24 months of the note term, followed by principal and interest payments
for the next 120 months. Mr. Ashley made a nonscheduled $10,000 principal
payment against the note in April 2001.
Directors hold office for a period of one year from the Annual Meeting of
Shareholders at which they are elected or until their successors are duly
elected and qualified. At the 2001 Annual Meeting, each of James H. Ridinger,
Loren A. Ridinger and Martin L. Weissman were elected to serve until the 2002
Annual Meeting.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of [Record Date] regarding
(i) the ownership interest of persons known to the management of Market America
to be the beneficial owners of more than 5% of Market America Stock on such
date, each director and executive officer of Market America, and each member of
the Offering Group and (ii) the ownership interest of all executive officers and
directors as a group, (iii) the ownership interest of the Offering Group as a
group, and (iv) the ownership interest, as of the Effective Time, of Miracle
Marketing.
On [Record Date], [19,420,000] shares of Market America Stock were
outstanding.
Each shareholder is entitled to one vote for each such share of Market
America Stock registered in the shareholder's name on the Record Date.
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
---------------------------------
NAME AND ADDRESS OF POSITION WITH SHARES PERCENTAGE
BENEFICIAL OWNER MARKET AMERICA
- ---------------------------------------------------------------------------------------
James H. Ridinger Chairman of the Board, 15,040,200(1) 77.5%
Chief Executive Officer
and President
Loren A. Ridinger Director and Senior Vice 101,450(1) 0.5%
President
Martin L. Weissman Director and Executive 532,000(1)(2) 2.7%
Vice President
Dennis J. Franks Executive Vice President 150,000(1) 0.8%
Marc Ashley Vice President 50,000(1) 0.3%
Joseph V. Bolyard Vice President 20,000(1) 0.1%
Andrew Weissman Director of Field 50,000(1) 0.3%
Development
All executive officers
and directors as a group 15,873,650(1)(2) 81.7%
(first 5 persons)
Total Offering Group 15,943,650(1)(2) 82.1%
Miracle Marketing 15,711,650(3) 80.9%
(Immediately prior to Merger)
86
(1) Pursuant to the Offering Group Agreement, the Offering Group have
restricted their rights to sell such shares of Market America Stock and
have granted to Mr. Ridinger a proxy to vote such shares in favor of the
Merger. Mr. Ridinger intends to vote all shares subject to the Voting
Agreement in favor of the Merger.
(2) Includes 232,000 shares of Market America Stock beneficially owned by
Martin L. Weissman IRA, T.D. Waterhouse Custodian, that will be cashed
out in the Merger.
(3) Pursuant to the Offering Group Agreement, the Offering Group have agreed
to transfer their shares of Market America Stock (other than 232,000
shares of Market America Stock beneficially owned by Martin L. Weissman
IRA, T.D. Waterhouse) to Miracle Marketing immediately prior to the
Merger.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of Market America as of and for the
two years ended April 30, 2001, included in this Proxy Statement under
"FINANCIAL STATEMENTS" have been audited by Dixon Odom PLLC, Market America's
independent auditors, as stated in their reports appearing herein. A
representative of Dixon Odom PLLC will be at the Special Meeting to answer
questions by shareholders and will have the opportunity to make a statement, if
so desired.
OTHER MATTERS
At the time of preparation of this Proxy Statement, the Board knows of no
other matters which will be acted upon at the Special Meeting other than the
approval of the Merger, the Merger Agreement and the transactions contemplated
thereby. If any other matters are presented for action at the Special Meeting or
at any adjournment or adjournments thereof, it is intended that the proxies will
be voted with respect thereto in accordance with the best judgment and in the
discretion of the proxy holders.
2002 ANNUAL MEETING OF SHAREHOLDERS
Market America does not plan to hold an annual meeting of shareholders
during 2002 unless the Merger is not consummated. If the Merger is not
consummated, shareholder proposals must have been received by the Secretary of
Market America in a timely manner in order to be considered for inclusion in the
proxy materials for Market America's 2002 Annual Meeting of Shareholders.
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INDEX OF DEFINED TERMS
----------------------
Appraisal Rights.......................................................55
Article 13.............................................................56
Burnham................................................................17
Closing Date...........................................................63
Dissenting Shares......................................................60
Effective Time.........................................................59
Exchange Act...........................................................11
Indemnified Parties....................................................62
MA Acquisition Sub..................................................1, 10
Management Forecast....................................................19
Market America.........................................................10
Market America Stock...................................................10
Merger.................................................................10
Merger Agreement.......................................................10
Merger Consideration...................................................10
Miracle Marketing...................................................1, 10
Offering Group.....................................................10, 52
Offering Group Agreement...............................................52
Paying Agent...........................................................60
Record Date............................................................12
Schedule 13E-3.........................................................11
SEC....................................................................11
Special Meeting........................................................10
Termination Date.......................................................65
88
MARKET AMERICA, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets as of April 30, 2001 and 2000 F-3
Statements of Income for the years ended April 30, 2001, F-5
2000 and 1999
Statements of Changes in Stockholders' Equity for the years F-6
ended April 30, 2001, 2000, and 1999
Statements of Cash Flows for the years ended April 30, 2001, F-7
2000 and 1999
Notes to Financial Statements F-9
Interim Financial Statements:
Statement of Financial Position as of January 31, 2002 (Unaudited) F-19
and April 30, 2001
Statement of Operations for the Three and Nine-Month Periods F-21
Ended January 31, 2002 and 2001 (Unaudited)
Statement of Changes in Stockholders' Equity for the Nine-Month F-22
Periods Ended January 31, 2002 and 2001 (Unaudited)
Statement of Cash Flows for the Nine-Month Periods Ended F-23
January 31, 2002 and 2001 (Unaudited)
Notes to January 31, 2002 Interim Financial Statements (Unaudited) F-25
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Market America, Inc.
Greensboro, North Carolina
We have audited the accompanying balance sheets of Market America, Inc. as of
April 30, 2001 and 2000 and the related statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended April 30, 2001. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Market America, Inc. as of
April 30, 2001 and 2000, and the results of its operations and its cash flows
for each of the years in the three-year period ended April 30, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Dixon Odom PLLC
Greensboro, North Carolina
June 13, 2001
F-2
MARKET AMERICA, INC.
BALANCE SHEETS
APRIL 30, 2001 AND 2000
- -------------------------------------------------------------------------------------------------------------------------
ASSETS 2001 2000
---------------- ----------------
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 60,511,367 $ 43,870,755
Investment in available-for-sale securities (Notes 1 and 2) 6,301,797 9,299,820
Income tax refunds receivable (Note 8) 2,366,440 -
Interest receivable 550,827 106,723
Advances to related parties (Note 6) 16,222 6,978
Advances to officers, directors and employees (Note 6) 236,467 425,958
Inventories (Note 1) 3,296,701 2,430,734
Deferred tax assets (Note 8) 372,500 404,000
Other current assets 134,190 44,558
---------------- ----------------
TOTAL CURRENT ASSETS 73,786,511 56,589,526
---------------- ----------------
PROPERTY AND EQUIPMENT (Notes 1 and 6)
Yacht 3,610,000 3,610,000
Furniture and equipment 5,346,209 3,007,076
Building 4,593,133 3,076,870
Software 397,000 306,975
Leasehold improvements 1,253,536 348,410
---------------- ----------------
15,199,878 10,349,331
Less accumulated depreciation 1,913,505 1,093,028
---------------- ----------------
13,286,373 9,256,303
---------------- ----------------
OTHER ASSETS
Restricted cash (Notes 6 and 16) 2,933,477 2,637,635
Deposit on building (Note 14) 1,100,000 -
Other (Note 6) 1,326,729 1,282,000
---------------- ----------------
5,360,206 3,919,635
---------------- ----------------
$ 92,433,090 $ 69,765,464
================ ================
The accompanying notes are an integral part of the financial statements.
F-3
TABLE (CONTD)
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
---------------- ----------------
CURRENT LIABILITIES
Current portion of long-term debt (Note 3) $ 80,478 $ 73,949
Accounts payable - trade 1,861,504 2,095,449
Commissions payable 2,676,825 2,542,125
Sales tax payable (Note 11) 1,039,156 845,454
Income taxes payable 3,811,363 3,642,394
Other accrued liabilities (Note 11) 526,462 837,481
Unearned revenue (Note 4) 4,289,569 2,694,246
---------------- ----------------
TOTAL CURRENT LIABILITIES 14,285,357 12,731,098
---------------- ----------------
LONG-TERM DEBT (Note 3) 1,955,346 755,214
---------------- ----------------
DEFERRED TAX LIABILITIES (Note 8) 92,300 -
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7, 11 and 14)
STOCKHOLDERS' EQUITY
Common stock, $.00001 par value; 800,000,000 shares
authorized; 19,420,000 and 19,550,000 shares issued and
outstanding at April 30, 2001 and 2000, respectively 194 195
Additional paid-in capital 39,801 39,801
Retained earnings 76,030,856 56,187,461
Accumulated other comprehensive income
Unrealized gains on available-for-sale
securities, net of deferred tax 29,236 51,695
---------------- ----------------
76,100,087 56,279,152
---------------- ----------------
$ 92,433,090 $ 69,765,464
================ ================
The accompanying notes are an integral part of the financial statements.
F-4
MARKET AMERICA, INC.
STATEMENTS OF INCOME
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
- -------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
Sales (Note 1) $ 138,513,706 $ 135,965,263 $ 110,347,824
Cost of Sales 36,405,439 33,913,335 28,071,236
---------------- ---------------- ----------------
GROSS PROFIT 102,108,267 102,051,928 82,276,588
---------------- ---------------- ----------------
Selling Expenses
Commissions 59,300,200 60,580,701 49,692,793
---------------- ---------------- ----------------
General and Administrative Expenses
Salaries 8,522,042 6,910,803 5,085,053
Consulting 640,713 819,128 266,154
Rents (Note 6 and 7) 1,193,551 1,380,351 995,994
Depreciation and amortization 937,208 439,095 208,868
Other expenses (Notes 5 and 9) 6,585,768 6,027,142 4,950,960
---------------- ---------------- ----------------
17,879,282 15,576,519 11,507,029
---------------- ---------------- ----------------
INCOME FROM OPERATIONS 24,928,785 25,894,708 21,076,766
Other Income (Expense)
Interest income 3,366,261 2,277,909 1,763,306
Interest expense (173,397) (157,100) (24,337)
Dividend income 29,137 71,449 -
Realized gain on available-for-sale securities 686,260 50,423 -
Loss on disposals of property and equipment (92,398) - (8,537)
Miscellaneous income 581,493 708,657 778,452
---------------- ---------------- ----------------
4,397,356 2,951,338 2,508,884
---------------- ---------------- ----------------
INCOME BEFORE TAXES 29,326,141 28,846,046 23,585,650
Income Taxes (Note 8) 9,113,747 11,055,124 9,394,625
---------------- ---------------- ----------------
NET INCOME $ 20,212,394 $ 17,790,922 $ 14,191,025
================ ================ ================
Basic earnings per common share (Note 1) $ 1.04 $ .89 $ .71
================ ================ ================
Weighted average number of common
shares outstanding 19,428,356 19,936,301 19,950,000
================ ================ ================
The accompanying notes are an integral part of the financial statements.
F-5
MARKET AMERICA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
- -----------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Additional Compre-
Common Stock Paid-In Retained hensive
Shares Amount Capital Earnings Income Total
---------- ----------- ----------- ----------- ----------- -----------
BALANCE, April 30, 1998 19,950,000 $ 199 $ 39,801 $25,441,510 $ - $25,481,510
COMPREHENSIVE INCOME
Net income - - - 14,191,025 - 14,191,025
---------- ----------- ----------- ----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME 14,191,025
-----------
BALANCE, April 30, 1999 19,950,000 199 39,801 39,632,535 - 39,672,535
Purchase and retirement of
common stock (400,000) (4) - (1,235,996) - (1,236,000)
COMPREHENSIVE INCOME
Net income - - - 17,790,922 - 17,790,922
Other comprehensive income:
Unrealized holding gains on
securities arising during the year,
net of deferred taxes of $54,000 - - - - 82,118 82,118
Reclassification adjustment for
gains realized in net income, net
of deferred taxes of $(20,000) - - - - (30,423) (30,423)
---------- ----------- ----------- ----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME - 17,842,617
BALANCE, April 30, 2000 19,550,000 195 39,801 56,187,461 51,695 56,279,152
Purchase and retirement of
common stock (130,000) (1) - (368,999) - (369,000)
COMPREHENSIVE INCOME
Net income - - - 20,212,394 - 20,212,394
Other comprehensive income:
Unrealized holding gains on
securities arising during the year,
net of deferred taxes of $237,716 - - - - 409,885 409,885
Reclassification adjustment for gains
realized in net income, net of
deferred taxes of $(253,916) - - - - (432,344) (432,344)
---------- ----------- ----------- ----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME 20,189,935
-----------
BALANCE, April 30, 2001 19,420,000 $ 194 $ 39,801 $76,030,856 $ 29,236 $76,100,087
========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-6
MARKET AMERICA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
- -------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,212,394 $ 17,790,922 $ 14,191,025
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 937,208 439,095 208,868
Deferred income taxes 140,000 (278,000) (160,000)
Gain on sale of available-for-sale securities (686,260) (50,423) -
Loss on disposals of property and equipment 92,398 - 8,537
Increase in income tax refunds receivable (2,366,440) - -
Increase in interest receivable (444,104) (31,723) (58,345)
Increase in inventories (865,967) (578,247) (384,166)
(Increase) decrease in other current assets (89,632) 36,926 (40,168)
Decrease in other assets 29,957 48,856 51,816
Increase (decrease) in accounts payable - trade (233,945) 987,816 41,359
Increase (decrease) in commissions payable 134,700 261,223 (474,874)
Increase (decrease) in sales tax payable 193,702 53,016 (10,348)
Increase in income taxes payable 168,969 1,580,183 199,079
Increase (decrease) in other accrued liabilities (311,019) 144,225 490,370
Increase in unearned revenue 1,595,323 434,724 1,164,247
-------------- -------------- --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 18,507,284 20,838,593 15,227,400
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale securities (35,951,121) (44,350,932) -
Proceeds from sale or maturity of available-
for-sale securities 39,596,745 35,187,230 -
Purchase of property and equipment (5,111,803) (8,804,088) (346,315)
Proceeds from sale of property and equipment 68,000 - 25,092
Deposit on building (1,100,000) - -
Decrease in short-term investments - - 12,415,465
(Increase) decrease in:
Advances to related parties (9,244) 180,668 (125,201)
Advances to officers, directors and employees 98,932 (333,164) (40,875)
Restricted cash (295,842) (2,637,635) 79,018
Other assets - (1,100,000) -
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (2,704,333) (21,857,921) 12,007,184
-------------- -------------- --------------
The accompanying notes are an integral part of the financial statements.
F-7
MARKET AMERICA, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
- -------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase and retirement of common stock (369,000) (1,236,000) -
Payments on notes payable and long-term debt (74,176) (120,000) (186,791)
Proceeds from long-term debt 1,280,837 819,163 -
-------------- -------------- --------------
NET CASH PROVIDED BY
(USED IN) FINANCING ACTIVITIES 837,661 (536,837) (186,791)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 16,640,612 $ (1,556,165) $ 27,047,793
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 43,870,755 45,426,920 18,379,127
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS
AND END OF YEAR $ 60,511,367 $ 43,870,755 $ 45,426,920
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 173,397 $ 157,100 $ 26,776
============== ============== ==============
Income taxes $ 11,171,218 $ 9,752,941 $ 9,355,546
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Net change in unrealized holding gains on
available-for-sale securities, net of
deferred income taxes of $(16,200) in
2001 and $34,000 in 2000. $ (22,459) $ 51,695 $ -
============== ============== ==============
The accompanying notes are an integral part of the financial statements.
F-8
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 1 o ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Market America, Inc. (the Company) is based in Greensboro, North Carolina. It
was incorporated on April 27, 1992. The Company distributes a variety of
consumer home-use products to the public through a network-marketing concept
which utilizes independent contractors to sell these products. The Company
supplies marketing information to these individuals in order to assist them in
their sales efforts. The principal market for the Company's products is
primarily throughout the United States. The Company also sponsors conventions
and seminars for its distributors. Revenue from ticket sales to the conventions
and seminars amounted to approximately 2.9%, 2.8% and 2.2% of total sales for
the years ended April 30, 2001, 2000 and 1999, respectively.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Included in cash
equivalents as of April 30, 2001 and 2000 are money market accounts and
government agency obligations and commercial paper with maturities ranging from
30 to 90 days. The Company maintains its cash in bank deposit accounts which
generally exceed federally insured limits. The Company has not experienced any
losses in such accounts.
Available-For-Sale Securities
- -----------------------------
Available-for-sale securities consist primarily of readily marketable debt
securities with remaining maturities of greater than 90 days at time of
purchase. Available-for-sale securities are stated at fair value with unrealized
gains and losses, net of income taxes, included in accumulated other
comprehensive income in stockholders' equity. Realized gains and losses are
included in income and are determined on a specific identification basis.
Unrealized losses are charged against income when a decline in fair value is
determined to be other than temporary.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets as follows:
Yacht 10 years
Furniture and equipment 5 to 10 years
Software 3 years
Leasehold improvements Shorter of the lease term or 15 years
Building Shorter of the ground lease term or 39 years
F-9
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 1 o ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment (Continued)
- ---------------------------------
Maintenance, repairs, and minor renewals are charged to operations as incurred.
Additions, improvements, and major renewals are capitalized. The cost of assets
retired or sold, together with the related accumulated depreciation, is removed
from the accounts and any gain or loss on disposition is credited or charged to
operations. In accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
periodically reviews long-lived assets when indicators of impairment exist, and
if the value of the assets is impaired, an impairment loss would be recognized.
Revenue Recognition
- -------------------
The Company recognizes sales revenues at the time products are shipped. Sales
revenues are collected at or prior to the time of shipment. The Company
recognizes sales revenues at the time products are shipped. Sales revenues are
collected at or prior to the time of shipment. Revenue from ticket sales to the
Company's conventions and seminars is recognized at the time the related events
occur.
Income Taxes
- ------------
Income taxes have been provided using the liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes."
Earnings Per Share
- ------------------
SFAS No. 128, "Earnings Per Share" specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS"). Basic EPS excludes all
dilution and has been computed using the weighted average number of common
shares outstanding during the periods. Diluted EPS would reflect the potential
dilution that would occur if securities or other contracts to issue common stock
were exercised or converted into common stock. The Company has no dilutive
potential common shares.
Comprehensive Income
- --------------------
During the year ended April 30, 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which requires the Company to display
comprehensive income and its components as part of the Company's full set of
financial statements. Comprehensive income is comprised of net income and other
comprehensive income. Other comprehensive income includes certain changes in
stockholders' equity that are excluded from net income, such as translation
adjustments, unrealized holding gains and losses on available-for-sale
securities, and certain derivative instruments.
F-10
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 1 o ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet at their fair values. This Statement also
specifies the accounting for changes in fair value depending upon the intended
use of the derivative. The Statement, as amended by SFAS No. 137, is effective
for fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 on
May 1, 2001 did not have a significant effect on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition in financial statements. The adoption of SAB 101 during the
first fiscal quarter of 2001 did not affect the Company's financial statements.
Reclassifications
- -----------------
Certain reclassifications have been made to prior year amounts to conform with
the 2001 financial statement presentation. Reclassifications have no effect on
previously reported net income.
NOTE 2 o INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
Investments in available-for-sale securities consists of the following:
2001 2000
---------------------------------------- ----------------------------------------
Gross Fair Gross Fair
Unrealized Market Unrealized Market
Cost Gains Value Cost Gains Value
----------- ----------- ----------- ----------- ----------- -----------
Governmental agency obligations
maturing through August 2001 $ 1,881,108 $ - $ 1,881,108 $ 2,951,344 $ - $ 2,951,344
Commercial paper, maturing
through June 2001 4,373,653 47,036 4,420,689 6,262,781 85,695 6,348,476
----------- ----------- ----------- ----------- ----------- -----------
$ 6,254,761 $ 47,036 $ 6,301,797 $ 9,214,125 $ 85,695 $ 9,299,820
=========== =========== =========== =========== =========== ===========
F-11
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 2 o INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
Gross realized gains and losses for the year ended April 30, 2001 were $686,260
and $0, respectively. Gross realized gains and losses for the year ended April
30, 2000 were $2,115,146 and $2,064,723, respectively.
NOTE 3 o LONG-TERM DEBT
2001 2000
-------------- ---------------
Obligation arising in settlement of litigation as approved by the
U.S. Bankruptcy Court for the District of New Jersey, payable
in monthly installments of $10,000. $ - $ 10,000
Note payable in monthly installments of $19,750, including
interest at 7.625%, with remaining balance due in
June 2005. Collateralized by deed of trust. 2,035,824 819,163
-------------- ---------------
2,035,824 829,163
Less current portion due within one year 80,478 73,949
-------------- ---------------
$ 1,955,346 $ 755,214
============== ===============
Future maturities of long-term debt at April 30, 2001 are due as follows:
2002 $ 80,478
2003 89,085
2004 95,841
2005 103,899
2006 1,666,521
--------------
$ 2,035,824
==============
NOTE 4 o UNEARNED REVENUE
The Company has unearned revenue from two sources. The Company sponsors several
conventions per year for its distributors. A portion of the unearned revenue
represents cash collected from advance ticket sales for these conventions. The
remainder of the unearned revenue represents deposits paid to the Company by
distributors for future purchases of products.
F-12
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 5 o EMPLOYEE BENEFITS
During the year ended April 30, 1999, the Company adopted a 401(k) savings plan
to provide retirement benefits for its employees. As allowed under section
401(k) of the Internal Revenue Code, the plan provides tax-deferred salary
deductions for eligible employees. Employees may contribute from 1% to 15% of
their annual compensation to the plan, limited to a maximum annual amount as set
periodically by the Internal Revenue Service. The Company matches employee
contributions up to specified limits. In addition, the plan provides for
discretionary contributions as determined by the Board of Directors. Such
discretionary contributions to the plan are allocated among eligible
participants in the proportion of their salaries to the total salaries of all
participants. Company contributions to the plan totaled $28,208, $30,902 and
$15,524 during the years ended April 30, 2001, 2000 and 1999, respectively. No
discretionary contributions were made in 2001, 2000 or 1999.
NOTE 6 o RELATED PARTY TRANSACTIONS
During the year ended April 30, 1998, the Company entered into agreements with
two companies owned by Mr. and Mrs. James H. Ridinger, officers/stockholders of
the Company, to lease real estate in Miami, Florida and for the lease of a yacht
on a per event basis. Both lease agreements were cancelled in fiscal year 2000.
In December 1999, the Company entered into an agreement with a company owned by
Mr. and Mrs. James H. Ridinger to lease different real estate in Miami, Florida
for direct sales training and education, as well as other corporate functions.
The monthly rental is $60,000 and the lease has a 20-year term and a renewal
option for an additional 20-year term. The Company has paid a $600,000 damage
deposit as part of this lease, which is included in other assets. The amount of
rent expense under these agreements aggregated to $720,000, $683,600 and
$423,600 during the years ended April 30, 2001, 2000, and 1999, respectively.
These related entities owed the Company $16,222 and $6,978 at April 30, 2001 and
2000, respectively.
During the year ended April 30, 1999, the Company entered into an agreement with
a company owned by Mr. and Mrs. James H. Ridinger, officers/stockholders of the
Company, for a 33-year net ground lease for the site on which the Company has
constructed its new headquarters and warehouse facility in Greensboro, North
Carolina at a cost of $4,593,133. Required rental payments are $17,000 per month
since October 2000, and $10,666 per month prior to that date. The amount of rent
expense under this agreement was $172,330, $127,988 and $64,000 for the years
ended April 30, 2001, 2000 and 1999, respectively. In June 1999, the Company
paid $500,000 to the related company for a Right of First Refusal on this site
which provides the Company with the opportunity to purchase the land, should it
be offered for sale, before the land is offered for sale to other parties. The
amount paid is included in other assets and is being amortized on a
straight-line basis over the lease term. The unamortized balance will be applied
to the purchase price of the land in the event the Company buys it. On June 28,
1999, the Company became guarantor of a $1.6 million bank loan to the related
party used for the purchase of the land. This loan and the Company's term loan
are cross-collateralized by the land being leased from the related company and
by the building improvement constructed thereon by the Company. The guaranteed
loan is repayable over a five-year period following completion of the building
construction and had an outstanding balance of $1,551,167 at April 30, 2001. In
connection with the lease of real estate in Miami, Florida, the Company has
guaranteed a $5.3 million five-year loan to the related company for the purchase
of the real estate being leased. The outstanding balance of the guaranteed loan
was $5,248,075 at April 30, 2001. The Company has restricted cash of $2,703,152
and $2,637,635 at April 30, 2001 and 2000, respectively, as collateral under the
loan guarantee.
Advances to officers, directors and employees include amounts due from officers
and directors of $317,377 and $383,952 at April 30, 2001 and 2000, respectively.
Other assets at April 30, 2001 include $90,559, which is the noncurrent portion
of advances to officers and directors.
Substantially all of the Company's leasehold improvements are to properties
leased from related companies.
F-13
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 7 o OPERATING LEASE COMMITMENTS
The Company occupies leased premises in Greensboro, North Carolina and Miami,
Florida. The Miami lease is with a related party (see Note 6) beginning December
1999 and is for twenty years. The Company has a ground lease with a related
party (see Note 6) for a 33-year period, which commenced in November 1998. The
Company also leases automobiles under long-term operating leases.
Future minimum rental payments required under operating leases that have an
initial or remaining non-cancelable lease term in excess of one year are as
follows as of April 30, 2001:
Related Unrelated
Parties Parties Total
--------------- -------------- --------------
2002 $ 924,000 $ 76,445 $ 1,000,445
2003 924,000 24,435 948,435
2004 924,000 11,342 935,342
2005 924,000 - 924,000
2006 924,000 - 924,000
Thereafter 14,982,000 - 14,982,000
--------------- -------------- --------------
Total future minimum lease payments $ 19,602,000 $ 112,222 $ 19,714,222
=============== ============== ==============
F-14
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2001, 2000 AND 1999
- -------------------------------------------------------------------------------------------------------------------------
NOTE 8 o INCOME TAXES
Income tax expense is comprised of the following:
2001 2000 1999
--------------- -------------- --------------
Current tax provision (benefit)
Federal $ 11,098,241 $ 9,568,134 $ 7,713,716
State (2,124,494) 1,764,990 1,840,909
--------------- -------------- --------------
8,973,747 11,333,124 9,554,625
--------------- -------------- --------------
Deferred tax provision (benefit)
Federal 89,175 (225,875) (130,000)
State 50,825 (52,125) (30,000)
--------------- -------------- --------------
140,000 (278,000) (160,000)
--------------- -------------- --------------
Total income tax provision $ 9,113,747 $ 11,055,124 $ 9,394,625
=============== ============== ==============
A reconciliation of the statutory U.S. federal income tax rate and the effective income tax rate is as follows:
2001 2000 1999
-------- ------- -------
Statutory U.S. federal rate 35.0% 35.0% 35.0%
State income taxes and (refunds),
net of federal (benefit) expense (4.6) 4.0 5.0
Effect of non-deductible expenses .6 .9 .2
Other, net .1 (1.6) (.4)
-------- -------- --------
31.1% 38.3% 39.8%
======== ======== ========
During the year ended April 30, 2001, the Company amended prior years income tax returns for several states due to a change
in its multi-state income allocation methodology claiming state tax refunds of $3,477,237. Because of the refunds,
the Company's effective income tax rate for the year ended April 30, 2001 was reduced from 38.8% to 31.1%.
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities as of April 30, 2001
and 2000 are as follows:
2001 2000
-------------- --------------
Deferred tax assets
Accrued liabilities $ 390,300 $ 438,000
Deferred tax liabilities
Property and equipment (92,300) -
Unrealized gains on securities (17,800) (34,000)
-------------- ---------------
Net deferred tax assets $ 280,200 $ 404,000
============== ===============
F-15
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2001, 2000 AND 1999
- -------------------------------------------------------------------------------------------------------------------
NOTE 9 o OTHER GENERAL AND ADMINISTRATIVE EXPENSES
For the years ended April 30, 2001, 2000 and 1999, Other General and
Administrative Expenses included the following items:
2001 2000 1999
--------------- -------------- --------------
Repairs and maintenance $ 815,362 $ 540,411 $ 149,698
Legal and professional fees 864,509 1,241,117 1,305,221
Insurance 755,513 844,534 626,108
Other taxes and licenses 763,772 624,634 458,155
Utilities 331,550 365,503 327,037
Other 3,055,062 2,410,943 2,084,741
--------------- -------------- --------------
$ 6,585,768 $ 6,027,142 $ 4,950,960
=============== ============== ==============
NOTE 10 o SEGMENT INFORMATION
During the year ended April 30, 1999, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which introduced a new model for segment reporting. The Company sells a variety of consumer home use
products that have similar economic characteristics, customers and distribution methods. The Company, therefore, reports
only one segment. The Company's geographic information is as follows:
United
States Other
------------------ ------------------
April 30, 2001
Product revenue from external customers $ 127,726,468 $ 10,787,238
Property and equipment 13,286,373 -
April 30, 2000
Product revenue from external customers 128,301,572 7,663,691
Property and equipment 9,256,303 -
April 30, 1999
Product revenue from external customers 106,290,160 4,057,664
Property and equipment 891,310 -
F-16
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 11 o CONTINGENCIES
The Company is engaged in continuing negotiations and litigation with two states
regarding sales tax liabilities for prior years. Sales tax payable at April 30,
2001 and 2000 includes a provision of approximately $700,000 relating to these
matters. Although the outcome of these matters is not presently determinable,
management believes that the outcome will not have a material adverse effect on
the Company's financial position, results of operations or cash flows.
On April 27, 1999, judgment was entered in the case of Market America vs. Rossi,
et al, by the United States District Court for the Middle District of North
Carolina. This case involved termination of a group of distributors for
violation of the Company's former Independent Distributor Agreement. During the
litigation of that case, the Company revised its Independent Distributor
Agreement. The revised Independent Distributor Agreement has been upheld in the
North Carolina courts since that revision and the North Carolina Court of
Appeals has specifically endorsed the Company's ability to enter into covenants
not to compete with its distributors. As a result, the Rossi case has no
continuing impact on the Company or its distributors, all of whom are subject to
the revised Independent Distributors Agreement. It is, however, important to
note that many of the Defendants in the Rossi case were earning substantial
commissions from the Company at the time of their terminations. The Courts held
that the Defendants were only entitled to receive commissions through the
Company's annual renewal date of all Distributor Agreements which amounted to a
total of less than $170,000 for all Defendants. Moreover, the Defendant's
actions, which led to their terminations, ultimately resulted in their loss of
commissions far in excess of the total award in the cases which amounted to
$787,487, including interest. The Company has satisfied all monetary awards.
The Company is involved in litigation arising in the ordinary course of
business. Although litigation is subject to inherent uncertainties, the
Company's legal counsel and management currently believe that the ultimate
outcome of these matters, individually and in the aggregate, will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
NOTE 12 o FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the balance sheets for cash and cash
equivalents, investment in available-for-sale securities, advances, restricted
cash and long-term debt approximate their respective fair values at April 30,
2001 and 2000. Fair values are based on quoted market prices or current interest
rates available for those or similar instruments.
NOTE 13 o MAJOR PRODUCT AND SUPPLIER
The Company's number one selling product is OPC-3, a powerful antioxidant. This
product accounted for 32.2%, 31.2% and 30.6% of the Company's total sales during
the years ended April 30, 2001, 2000 and 1999, respectively.
One of the Company's suppliers, Purity Technologies, Inc., a manufacturer of
vitamin and nutritional products, supplies the Company with vitamin compounds
and nutritional supplements, including OPC-3. Sales of products purchased from
this supplier accounted for 49.8%, 46.0% and 44.0% of the Company's total sales
during the years ended April 30, 2001, 2000 and 1999, respectively. Although
there are other suppliers of these products, a change in suppliers could cause a
delay in shipments to customers, which could ultimately affect operating
results.
F-17
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 14 o SUBSEQUENT EVENTS
Subsequent to April 30, 2001, the Company purchased a building in Miami,
Florida, from an unrelated party for $3,560,000. The Company had made an earnest
money deposit of $1,100,000 on this building prior to April 30, 2001 and paid
the remaining $2,460,000 in cash in June 2001. The Company will lease the land
on which the building resides from a company owned by Mr. and Mrs. James H.
Ridinger, officers/stockholders of the Company, at an amount and period yet to
be determined. The building will be depreciated over the shorter of its
estimated useful life or the term of the ground lease.
NOTE 15 O SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
2001 2001 2001 2001
--------------- --------------- --------------- ----------------
Year ended April 30, 2001
Net sales $ 33,536,881 $ 35,314,883 $ 32,564,585 $ 37,097,357
Gross profit 24,551,082 26,181,022 24,114,108 27,270,237
Net income 3,557,189 5,425,082 4,625,334 6,604,789
Net income per common share $ .18 $ .28 $ .24 $ .34
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
2000 2000 2000 2000
--------------- --------------- --------------- ----------------
Year ended April 30, 2000
Net sales $ 30,828,703 $ 34,794,209 $ 32,392,382 $ 37,949,969
Gross profit 22,819,349 26,169,972 24,407,977 28,654,630
Net income 3,555,107 5,539,616 3,598,988 5,097,211
Net income per common share $ .18 $ .28 $ .18 $ .26
During the fourth quarter of 2001, the Company recorded state income tax refunds
due to a change in its multi-state income allocation methodology. These refunds,
net of federal taxes, increased net income in the fourth quarter of 2001 by
$1,538,186 ($.08 per common share).
NOTE 16 o RESTRICTED CASH
In addition to the restricted cash disclosed in Note 6, the Company also has
$230,325 of cash restricted at April 30, 2001 under an agreement with a third
party check processor.
F-18
MARKET AMERICA, INC.
STATEMENT OF FINANCIAL POSITION
AS OF JANUARY 31, 2002 AND APRIL 30, 2001
- -----------------------------------------------------------------------------------------------------------------------
January 31, 2002 April 30, 2001
(Unaudited)
------------------ ------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 75,077,234 $ 60,511,367
Investment in available-for-sale securities 2,374,884 6,301,797
Income tax refunds receivable 230,957 2,366,440
Interest receivable 57,356 550,827
Advances to related parties - 16,222
Advances to officers, directors and
employees 276,771 236,467
Inventories 3,084,984 3,296,701
Deferred tax assets 359,400 372,500
Prepaid income taxes 607,000 -
Other current assets 443,827 134,190
------------- ------------
Total current assets 82,512,413 73,786,511
------------- ------------
PROPERTY AND EQUIPMENT
Furniture and equipment 6,129,099 5,346,209
Buildings 8,155,040 4,593,133
Yacht 3,610,000 3,610,000
Software 450,755 397,000
Building construction in progress 103,975 -
Leasehold improvements 1,290,001 1,253,536
------------- ------------
19,738,870 15,199,878
Less accumulated depreciation and
amortization 2,947,286 1,913,505
------------- ------------
Total property and equipment 16,791,584 13,286,373
------------- ------------
OTHER ASSETS
Restricted cash 2,785,000 2,933,477
Deposit on building - 1,100,000
Other 1,398,668 1,326,729
------------- ------------
Total other assets 4,183,668 5,360,206
------------- ------------
TOTAL ASSETS $ 103,487,665 $ 92,433,090
============= ============
The accompanying notes are an integral part of the financial statements.
F-19
TABLE (CONT'D)
January 31, 2002 April 30, 2001
(Unaudited)
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 87,409 $ 80,478
Accounts payable - trade 1,233,762 1,861,504
Commissions payable 3,462,520 2,676,825
Sales tax payable 977,736 1,039,156
Income taxes payable - 3,811,363
Other accrued liabilities 623,029 526,462
Unearned revenue 3,933,819 4,289,569
------------- ------------
Total current liabilities 10,318,275 14,285,357
------------- ------------
LONG-TERM DEBT 1,880,667 1,955,346
------------- ------------
DEFERRED TAX LIABILITIES 135,000 92,300
------------- ------------
STOCKHOLDERS' EQUITY
Common stock, $.00001 par value;
800,000,000 shares authorized;
19,420,000 shares issued and
outstanding at October 31, 2001 and 194 194
April 30, 2001
Additional paid-in-capital 39,801 39,801
Retained earnings 91,107,731 76,030,856
Accumulated other comprehensive income:
Unrealized gains on available-for-sale
securities, net of deferred taxes 5,997 29,236
------------- ------------
Total stockholders' equity 91,153,723 76,100,087
------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 103,487,665 $ 92,433,090
============= ============
The accompanying notes are an integral part of the financial statements.
F-20
MARKET AMERICA, INC.
STATEMENT OF OPERATIONS
FOR THREE AND NINE MONTH PERIODS ENDED JANUARY 31, 2002 AND 2001
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
JANUARY 31, 2002 JANUARY 31, 2001 JANUARY 31, 2002 JANUARY 31, 2001
SALES $ 37,899,571 $ 32,564,585 $ 115,090,765 $ 101,416,349
COST OF SALES 9,136,466 8,450,477 29,292,956 26,570,136
------------ ------------ ------------- -------------
GROSS PROFIT 28,763,105 24,114,108 85,797,809 74,846,213
------------ ------------ ------------- -------------
SELLING EXPENSES
Commissions 16,346,720 14,107,445 48,975,500 44,533,385
------------ ------------ ------------- -------------
GENERAL and ADMINISTRATIVE
EXPENSES
Salaries 2,474,089 1,804,410 6,555,927 5,171,301
Depreciation & amortization 369,440 358,619 1.045,686 684,371
Rents 308,594 279,427 912,443 914,437
Consulting 47,235 53,161 162,265 566,868
Other operating expenses 2,046,216 1,821,033 5,607,062 4,848,344
------------ ------------ ------------- -------------
5,245,574 4,316,650 14,283,383 12,185,321
------------ ------------ ------------- -------------
INCOME FROM OPERATIONS 7,170,811 5,690,013 22,538,926 18,127,507
------------ ------------ ------------- -------------
OTHER INCOME (EXPENSE)
Interest income 321,849 1,533,042
787,974 2,121,720
Interest expense (32,123) (64,569) (178,679) (116,838)
Dividend income 177 26 24,806 1,443
Realized gain (loss) on
available-for-sale securities 101,680 235,207 172,998 606,607
Loss on disposal of Assets - 19,765 - (92,398)
Miscellaneous 138,267 136,660 372,670 461,623
------------ ------------ ------------- -------------
Total other income (expense) 529,850 1,115,063 1,924,837 2,982,157
------------ ------------ ------------- -------------
INCOME BEFORE TAXES 7,700,661 6,805,076 24,463,763 21,109,664
PROVISION FOR
INCOME TAXES 2,981,477 2,179,742 9,386,888 7,502,059
------------ ------------ ------------- -------------
NET INCOME $ 4,719,184 $ 4,625,334 $ 15,076,875 $ 13,607,605
============ ============ ============= =============
BASIC EARNINGS PER COMMON
SHARE $ 0.24 $ 0.24 $ 0.78 $ 0.70
============ ============ ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,420,000 19,420,000 19,420,000 19,431,051
============ ============ ============= =============
The accompanying notes are an integral part of the financial statements.
F-21
MARKET AMERICA, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR NINE MONTH PERIODS ENDED JANUARY 31, 2002 AND 2001
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
Additional Accumulated Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
-------------------------------------------------------------------------------------
Balance at April 30, 2000 19,550,000 $ 195 $ 39,801 $ 56,187,461 $ 51,695 $ 56,279,152
Comprehensive Income:
Net Income - - - 13,607,605 - 13,607,605
Other Comprehensive
Income:
Unrealized holdings
gains
on available-for-sale
securities, net of
deferred taxes of $240,862 - - - - 410,241 410,241
Reclassification
adjustment for gains
realized in net income,
net of deferred taxes of
$226,738 - - - - (379,869) (379,869)
------------
Total Comprehensive
Income 13,637,977
------------
Purchase and retirement of
Common stock (130,000) (1) - (368,999) - (369,000)
Balance at January 31, 2001 19,420,000 $ 194 $ 39,801 $ 69,426,067 $ 82,067 $ 69,548,129
--------------------------------------------------------------------------------------
Balance at April 30, 2001 19,420,000 $ 194 $ 39,801 $ 76,030,856 $ 29,236 $ 76,100,087
=== ==== ======================================================================================
Comprehensive Income:
Net Income - - - 15,076,875 - 15,076,875
Other Comprehensive
Income:
Unrealized holding
gains on available-for-sale
securities net of deferred
taxes of $49,731 - - - - 85,750 85,750
Reclassification
adjustment for net gains
realized in net income,
net of deferred taxes of
$64,009 - - - - (108,989) (108,989)
-------------
Total Comprehensive
Income 15,053,636
--------------------------------------------------------------------------------------
Balance at January 31, 2002 19,420,000 $ 194 $ 39,801 $91,107,731 $ 5,997 $ 91,153,723
======================================================================================
The accompanying notes are an integral part of the financial statements.
F-22
MARKET AMERICA, INC.
STATEMENT OF CASH FLOWS
FOR NINE MONTH PERIODS ENDED JANAURY 31, 2002 AND 2001
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
January 31, 2002 January 31,2001
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 15,076,875 $ 13,607,605
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,045,686 684,371
Deferred income taxes 70,078 (185,000)
Loss on disposal of fixed assets - 92,398
Gains on sales of available-for-sale securities (172,998) (606,607)
(Increase) decrease in income tax refunds receivable 2,135,483 (1,120,161)
(Increase) decrease in interest receivable 493,471 -
(Increase) decrease in inventories 211,717 (1,047,687)
(Increase) decrease in prepaid income taxes (607,000) -
(Increase) decrease in other current assets (309,637) (375,409)
(Increase) decrease in other assets (83,844) 37,275
Increase (decrease) in accounts payable - trade ( 627,742) (433,618)
Increase (decrease) in commissions payable 785,695 125,125
Increase (decrease) in sales tax payable (61,420) 10,612
Increase (decrease) in income taxes payable (3,811,363) (3,429,598)
Increase (decrease) in other accrued liabilities 96,567 282,253
Increase (decrease) in unearned revenue (355,750) 554,301
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,885,818 8,195,860
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale securities (14,517,684) (24,544,425)
Proceeds from sale or maturity of available-for-sale 18,580,078 24,744,291
(Increase) decrease in advances to officers, directors and employees (40,304) 2,783
(Increase) decrease in amounts due to/from related parties 16,222 1,818
(Increase) decrease in restricted cash 148,477 (264,593)
Proceeds from sale of equipment - 68,000
Capital expenditures (3,438,992) (4,984,762)
------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 747,797 (4,976,888)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase and retirement of common stock - (369,000)
Principal payments on long-term debt (67,748) (53,978)
Proceeds from long-term debt - 1,280,837
------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (67,748) 857,859
------------- --------------
The accompanying notes are an integral part of the financial statements.
F-23
MARKET AMERICA, INC.
STATEMENT OF CASH FLOWS
FOR NINE MONTH PERIODS ENDED JANAURY 31, 2002 AND 2001
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
January 31, 2002 January 31, 2001
---------------- ----------------
NET INCREASE IN CASH & CASH EQUIVALENTS 14,565,867 4,076,831
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 60,511,367 43,870,755
------------- -------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 75,077,234 $ 47,947,586
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 178,679 $ 116,838
Income taxes $ 13,817,000 $ 12,236,340
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Net change in unrealized holding gains or losses on
available-for-sale securities, net of deferred
income taxes (benefit) of ($14,278) and $14,124 $ (23,239) $ 30,372
The accompanying notes are an integral part of the financial statements.
F-24
MARKET AMERICA, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS JANUARY 31, 2002
(UNAUDITED)
- --------------------------------------------------------------------------------
Interim Financial Information
The unaudited interim financial statements of Market America, Inc. (the
"Company") as of January 31, 2002 and 2001 have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying interim financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's financial statements as of January 31, 2002 and for the
three and nine-month periods ended January 31, 2002 and 2001. Management
suggests that these financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's latest
Annual Report on Form 10-K. The results of operations for the three and
nine-month periods ended January 31, 2002 may not be indicative of the results
that may be expected for the fiscal year ending April 30, 2002.
Earnings Per Share
The Company computes earnings per share ("EPS") based upon the requirements of
Statement of Financial Accounting Standards No. 128. This statement specifies
the calculation, presentation and disclosure requirements for both basic and
diluted EPS. The Company does not present diluted EPS because it does not have
any securities or contracts outstanding with dilutive potential for its common
shares.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform with
the current period financial statements presentations. Reclassifications made
had no effect on previously reported net income.
Related Party Transactions
In December 1999, the Company entered into an agreement with a company owned by
Mr. and Mrs. James H. Ridinger, officers/stockholders of the Company, to lease
real estate in Miami, Florida for direct sales training and education, as well
as other corporate functions. The monthly rental is $60,000 and the lease has a
20-year term with a renewal option for an additional 20-year term. The Company
has paid a $600,000 non-interest bearing damage deposit as part of this lease,
which is included in other assets on the balance sheet. The amount of rent
expense under this agreement aggregated $180,000 and $540,000 during each of the
three and nine-month periods ended January 31, 2002 and 2001, respectively. In
connection with this lease, the Company has guaranteed a $5.3 million five-year
loan to the related company for the purchase of the real estate being leased. As
of January 31, 2002, the guaranteed loan had an outstanding balance of
$4,080,306. The Company had restricted cash of $2,560,000 as collateral under
the loan guarantee as of January 31, 2002. In October 2001, the Company began
construction of a $675,000 building on this leased property in order to further
expand the meeting and training facilities in Miami, Florida. As of January 31,
2002, the Company had paid approximately $104,000 towards the construction of
this facility.
F-25
MARKET AMERICA, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS JANUARY 31, 2002
(UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended April 30, 1999, the Company entered into a 33-year net
ground lease with a company owned by Mr. and Mrs. James H. Ridinger,
officers/stockholders of the Company, for the site on which the Company has
constructed its new headquarters and warehouse facility in Greensboro, North
Carolina at a cost of $4,593,133. Required rental payments are $17,000 per month
since October 2000, and $10,666 per month prior to that date. The amount of rent
expense under this agreement was $51,000 and $153,000 for the three-month and
nine-month periods ended January 31, 2002, respectively. Rent expense for the
three-month and nine-month periods ended January 31, 2001 was $51,000 and
$121,330, respectively. In June 1999, the Company paid $500,000 to the Ridinger
company for a Right of First Refusal on this site, which provides the Company
with the opportunity to purchase the land, should it be offered for sale, before
the land is offered for sale to other parties. The amount paid is included in
other assets and is being amortized on a straight-line basis over the lease
term. The unamortized balance will be applied to the purchase price of the land
in the event the Company buys it. On June 28, 1999, the Company became guarantor
of a $1.6 million bank loan to the Ridinger company used for the purchase of the
land. The guaranteed loan had an outstanding balance of $1,040,450 at January
31, 2002. This loan and the Company's term loan are cross-collateralized by the
land being leased from the Ridinger company and by the building improvement
constructed thereon by the Company. The guaranteed loan is repayable over a
five-year period.
In June 2001, the Company purchased a facility in Miami, Florida from an
unrelated party for $3,560,400. The Company had made an earnest money deposit of
$1,100,000 on this facility during the fourth quarter of fiscal 2001 and paid
the remaining $2,460,400 in cash upon closing. The Company will lease the land
on which the facility sits from a company owned by Mr. and Mrs. James H.
Ridinger, officers/stockholders of the Company, at an amount and period yet to
be determined. The Company is in the process of obtaining an independent
appraisal of the property in order to set the lease amount at fair value. The
Company has paid $80,000 towards the lease of this property during the
nine-months ended January 31, 2002. The building will be depreciated over the
shorter of its estimated useful life or the term of the ground lease. The
Company has estimated and recorded approximately $89,000 of depreciation expense
on the building during the nine-months ended January 31, 2002.
Substantially all of the Company's leasehold improvements are to properties
leased from related companies.
Related party transactions are more fully described in the Company's most recent
Annual Report on Form 10-K.
Management Buyout Offer
On January 11, 2002, Market America Inc. ("Market America") issued a press
release announcing that it had accepted a previously announced proposal to take
the Company private at a price of $8.00 per share. The proposal is from a
management group led by President and Chief Executive Officer, James H.
Ridinger. The transaction is subject to the approval of a majority of the shares
held by Market America's unaffiliated shareholders. Mr. Ridinger holds
approximately 77% of Market America's common stock. The Board of Directors of
Market America authorized the preparation of merger agreement and proxy
materials for a special meeting of shareholders anticipated to be scheduled for
June 2002 following clearance of such proxy materials by the Securities and
Exchange Commission.
F-26
PRELIMINARY COPY
MARKET AMERICA, INC.
--------------------
PROXY FOR THE SPECIAL MEETING
OF SHAREHOLDERS TO BE HELD _____ __, 2002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
-----------------------------------------------------------
The undersigned shareholder of Market America, Inc., a North Carolina
corporation ("Market America"), acknowledges receipt of the Notice of Special
Meeting of Shareholders and the Proxy Statement dated [Mail Date], and, revoking
all prior proxies, hereby appoint(s) James H. Ridinger and Martin L. Weissman,
and each of them, with full power of substitution, as proxies to represent and
vote all shares of Common Stock of Market America, which the undersigned would
be entitled to vote if present in person at the Special Meeting of Shareholders
of Market America to be held on [Meeting Date] at [Meeting Time], local time,
and at any adjournment or adjournments thereof (the "Meeting"). These proxies
are authorized to vote in their discretion upon such other matters as may
properly come before the Meeting.
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
[X] PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE.
THE BOARD OF DIRECTORS HAS NO SPECIFIC RECOMMENDATION REGARDING
YOUR VOTE; HOWEVER, THE MERGER CANNOT BE COMPLETED AND THE MERGER
CONSIDERATION WILL NOT BE PAID UNLESS AT LEAST 1,738,176 SHARES HELD BY
UNAFFILIATED SHAREHOLDERS ARE VOTED "FOR" THE PROPOSAL.
The undersigned hereby instructs said proxies or their substitutes to vote
as specified below on the following matter and in accordance with their
judgment on any other matters which may properly come before the Meeting.
1. Agreement and Plan of Merger and transactions contemplated thereby.
FOR AGAINST ABSTAIN
|_| |_| |_|
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL
BE VOTED FOR THE ABOVE PROPOSAL.
Please mark, sign, date and return this proxy card promptly using the
enclosed envelope.
Signature:
-----------------------------------------------------------
Signature:
-----------------------------------------------------------
IF HELD JOINTLY
Date: _________________, 2002
NOTE: Please sign exactly as name(s) appear on your stock certificates. If
your stock certificate is registered in the names of two or more
persons, each should sign. Executors, administrators, trustees,
guardians, attorneys, and corporate officers should add their titles.
ANNEX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
MIRACLE MARKETING INC.
MA ACQUISITION SUB INC.
AND
MARKET AMERICA, INC.
DATED March 27, 2002
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 The Merger..........................................................1
1.1 The Merger...........................................................2
1.2 Effective Time.......................................................2
1.3 Effects of the Merger................................................2
1.4 Articles of Incorporation and Bylaws; Directors and Officers.........2
1.5 The Closing..........................................................2
ARTICLE 2 Effect of the Merger on Securities of the Company...................3
2.1 Conversion of Acquisition Sub Stock..................................3
2.2 Conversion of Company Stock..........................................3
2.3 Exchange of Certificates.............................................3
2.4 Closing of Transfer Books............................................5
2.5 No Further Ownership Rights in Company Stock.........................5
ARTICLE 3 Representations and Warranties of the Company.......................5
3.1 Organization, Standing and Power.....................................5
3.2 Capital Structure....................................................5
3.3 Authority; Non-Contravention.........................................6
3.4 SEC Documents........................................................7
3.5 Absence of Certain Events............................................7
ARTICLE 4 Representations and Warranties of The Purchasers....................8
4.1 Organization, Standing and Power.....................................8
4.2 Authority; Non-Contravention.........................................8
4.3 Brokers..............................................................9
4.4 Litigation...........................................................9
4.5 Capital Structure and Shareholders...................................9
ARTICLE 5 Covenants...........................................................9
5.1 Interim Operations of the Company....................................9
5.2 Meeting of the Company's Shareholders...............................10
5.3 Filings, Other Action...............................................10
5.4 Inspection of Records...............................................11
5.5 Publicity...........................................................11
5.6 Proxy Statement and Other SEC Filings...............................11
5.7 Further Action......................................................12
5.8 Expenses............................................................13
5.9 Indemnification.....................................................13
5.10 Takeover Statute..................................................13
5.11 Conduct of Business by the Purchasers Pending the Merger..........14
5.12 Transfer of Offering Group Shares.................................14
5.13 Conveyance Taxes..................................................14
ARTICLE 6 Conditions to Merger...............................................14
6.1 Conditions to Each Party's Obligation to Effect the Merger..........14
6.2 Conditions to Obligation of Company to Effect the Merger............15
6.3 Conditions to Obligation of the Purchasers to Effect the Merger.....15
ARTICLE 7 Termination........................................................16
i
7.1 Termination by Mutual Consent.......................................16
7.2 Termination by any Party............................................16
7.3 Extension, Waiver...................................................16
ARTICLE 8 General Provisions.................................................18
8.1 Nonsurvival of Representations, Warranties and Agreements...........18
8.2 Assignment; Binding Effect..........................................18
8.3 Entire Agreement....................................................18
8.4 Amendment...........................................................18
8.5 Governing Law.......................................................18
8.6 Counterparts........................................................18
8.7 Headings............................................................18
8.8 Interpretation......................................................19
8.9 Waivers.............................................................19
8.10 Incorporation of Schedules........................................19
8.11 Severability......................................................19
8.12 Enforcement of Agreement..........................................19
ii
DEFINITIONS
Agreement.....................................................................1
Alternative Proposal.........................................................12
Articles of Merger............................................................1
Certificates..................................................................3
Closing.......................................................................2
Closing Date..................................................................2
Code.........................................................................10
Company Stock.................................................................1
Company.......................................................................1
Company Options...............................................................6
Company Permits...............................................................9
Company SEC Documents.........................................................8
Department of State...........................................................1
Dissenting Shares.............................................................3
Effective Time................................................................1
Evaluation Material..........................................................27
Exchange Act..................................................................8
Company Stock.................................................................1
Governmental Entity...........................................................7
Indemnified Parties..........................................................17
Instrument....................................................................7
Material Adverse Change.......................................................6
Material Adverse Effect.......................................................6
Meeting of Shareholders......................................................15
Merger........................................................................1
Merger Consideration..........................................................3
NCBCA.........................................................................1
Paying Agent..................................................................4
Preferred Stock...............................................................6
Proponents...................................................................20
Proxy Statement..............................................................16
Acquisition Sub...............................................................1
Acquisition Sub Stock.........................................................1
Redemption Price..............................................................4
Continuing Shares.............................................................1
Schedules.....................................................................5
SEC...........................................................................8
Securities Act................................................................8
Stock Plan....................................................................6
Surviving Corporation.........................................................1
Tax..........................................................................10
Tax Return...................................................................10
iii
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated March , 2002,
between MA ACQUISITION SUB INC., a North Carolina corporation (the "Acquisition
Sub"), MIRACLE MARKETING INC., a Delaware corporation (the "Marketing" and,
together with Acquisition Sub, the "Purchasers") and MARKET AMERICA, INC., a
North Carolina corporation (and together with its subsidiaries, the "Company").
RECITALS
--------
A. James H. Ridinger, Loren A. Ridinger, Martin L. Weissman,
Andrew Weissman, Marc Ashley, Dennis Franks and Joseph Bolyard (collectively,
the "Offering Group"") beneficially own, collectively, 15,943,650 shares of the
common stock, par value .00001 per share, of the Company (the "Company Stock" ),
representing approximately 82% of the issued and outstanding shares of Company
Stock as of the date hereof (such shares being referred to herein collectively
as the "Offering Group Shares" ).
B. Acquisition Sub is the wholly-owned subsidiary of Marketing,
which has been formed by Marketing for the purpose of consummating the
transactions described herein.
C. In connection with the transactions contemplated hereby, the
Offering Group have agreed to transfer Offering Group Shares (such shares so
transferred being referred to hereinafter as the "Continuing Shares") to
Marketing in exchange for shares of the common stock, par value $.00001 per
share, of Marketing (the "Marketing Stock" ), thereof, so that, as of such time,
Marketing will own approximately 82% of the issued and outstanding shares of
Company Stock.
D. The Boards of Directors of each of Marketing, Acquisition Sub
and the Company have approved, and deem it advisable and in the best interests
of their respective companies and shareholders to consummate a merger (the
"Merger") of Acquisition Sub, with and into the Company, wherein each issued and
outstanding share of Company Stock, except shares of Company Stock held by
persons who comply with the provisions of North Carolina law regarding the right
of shareholders to dissent from the Merger and require appraisal of their shares
of Company Stock and Continuing Shares, will be converted into the right to
receive $8.00 per share, in cash, without interest, and each issued and
outstanding share of common stock, par value $.00001 per share, of Acquisition
Sub (the "Acquisition Sub Stock") shall be converted into a share of common
stock in the Surviving Corporation (as hereinafter defined).
E. Marketing, Acquisition Sub and the Company desire to make
certain representations, warranties, covenants and agreements in connection with
the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions hereof,
and in accordance with the North Carolina Business Corporation Act ("NCBCA"),
Acquisition Sub shall be merged with and into the Company at the Effective Time
(as hereinafter defined). Following the Merger, the separate corporate existence
of Acquisition Sub shall cease and the Company shall continue as the surviving
corporation (the "Surviving Corporation") and shall succeed to and assume all
the rights and obligations of Acquisition Sub in accordance with the NCBCA.
1.2 Effective Time. Subject to the provisions of this Agreement, the Merger
shall become effective when the Articles of Merger (the "Articles of Merger"),
executed in accordance with the relevant provisions of the NCBCA, is filed with
the Secretary of State of the State of North Carolina (the "Secretary of
State"). When used in this Agreement, the term "Effective Time" shall mean the
date and time at which the Articles of Merger is filed with the Secretary of
State. The filing of the Articles of Merger shall be made as soon as reasonably
practicable (but not later than the first business day) after the satisfaction
or waiver of the conditions to the Merger set forth herein.
1.3 Effects of the Merger. The Merger shall have the effects set forth in
the NCBCA.
1.4 Articles of Incorporation and Bylaws; Directors and Officers.
------------------------------------------------------------
(a) The Articles of Incorporation and the Bylaws of the Company, as in
effect immediately prior to the Effective Time, shall be amended by the Articles
of Merger to make such changes regarding the capitalization of the Surviving
Corporation as the Purchasers may request and, as so amended, the Articles of
Incorporation and the Bylaws of the Company shall be the Articles of
Incorporation and the Bylaws of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.
(b) The directors of the Company at the Effective Time shall, from and
after the Effective Time, be the initial directors of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal, in accordance with the
Surviving Corporation's Articles of Incorporation and Bylaws.
(c) The officers of the Company at the Effective Time and such other
persons as designated by Marketing shall, from and after the Effective Time, be
the initial officers of the Surviving Corporation until their successors have
been duly elected or appointed and qualified or until their earlier death,
resignation or removal, in accordance with the Surviving Corporation's Articles
of Incorporation and Bylaws.
1.5 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the transactions contemplated by this Agreement (the "Closing") shall
take place (a) at such time and place as the parties shall agree on the first
business day following the day on which the last to be fulfilled or waived of
the conditions set forth in Article 6 shall be fulfilled or waived in accordance
herewith or (b) at such other time, date or place as the parties may agree. The
date on which the Closing occurs is hereinafter referred to as the "Closing
Date."
ARTICLE 2
2
EFFECT OF THE MERGER ON SECURITIES
OF THE COMPANY
2.1 Conversion of Acquisition Sub Stock. At the Effective Time, each share
of Acquisition Sub Stock outstanding immediately prior to the Effective Time
shall cease to be outstanding, shall be cancelled and retired and shall cease to
exist and each holder of a certificate or certificates representing any such
shares of Acquisition Sub Stock shall thereafter cease to have any rights with
respect thereto.
2.2 Conversion of Company Stock.
---------------------------
(a) Subject to Section 2.2(b), at the Effective Time each issued and
outstanding share of Company Stock (other than Continuing Shares and Dissenting
Shares as hereinafter defined) shall be converted into the right to receive
$8.00, in cash, without interest (the "Merger Consideration"). All such shares
of Company Stock, when so converted, shall cease to be outstanding, shall be
canceled and retired and shall cease to exist, and each holder of a certificate
or certificates (the "Certificates") representing any such shares of Company
Stock shall thereafter cease to have any rights with respect thereto, except the
right to receive the Merger Consideration. At the Effective Time, each
Certificate representing any Continuing Shares shall thereafter without any
action on the part of the holder thereof, be deemed to represent the same number
of shares of the Surviving Corporation.
(b) Notwithstanding any provision of this Agreement to the contrary,
if required by the NCBCA but only to the extent required thereby, shares of
Company Stock which are issued and outstanding immediately prior to the
Effective Time and which are held by holders of such shares of Company Stock who
have properly exercised appraisal rights with respect thereto in accordance with
the NCBCA (the "Dissenting Shares") will not be exchangeable for the right to
receive the Merger Consideration, and holders of such shares of Company Stock
will be entitled to receive payment of the appraised value of such shares of
Company Stock in accordance with the provisions of the NCBCA unless and until
such holders shall fail to perfect or shall effectively withdraw or shall have
lost their rights to appraisal and payment under the NCBCA. If, after the
Effective Time, any such holder fails to perfect or effectively withdraws or
loses such right, such shares of Company Stock will thereupon be treated as if
they had been converted into and have become exchangeable for, at the Effective
Time, the right to receive the Merger Consideration, without any interest
thereon. The Company will give the Purchasers prompt notice of any demands
received by the Company for appraisals of shares of Company Stock. The Company
shall not, except with the prior written consent of the Purchasers, make any
payment with respect to any demands for appraisal or offer to settle or settle
any such demands.
(c) At or prior to the Effective Time, the Company shall have made
arrangements, the effect of which shall be that no shares of Company Stock or
other capital stock of the Company or the Surviving Corporation shall be
issuable pursuant to options or warrants to purchase shares, or securities
convertible into shares, of Company Stock.
2.3 Exchange of Certificates.
------------------------
3
(a) Prior to the Effective Time, the Company shall appoint a bank or
trust company to act as paying agent hereunder, (the "Paying Agent") for the
payment of the Merger Consideration upon surrender of Certificates. All of the
fees and expenses of the Paying Agent shall be borne by the Surviving
Corporation.
(b) Marketing shall take all steps necessary to enable and cause the
Surviving Corporation to provide the Paying Agent with cash in amounts necessary
to pay the Merger Consideration, when and as such amounts are needed by the
Paying Agent.
(c) As soon as reasonably practicable after the Effective Time but no
later than 20 days of such time, the Paying Agent shall mail to each holder of
record of Company Stock immediately prior to the Effective Time (excluding any
Dissenting Shares) (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of such Certificates to the Paying Agent and shall be
in such form and have such other provisions as the Surviving Corporation shall
reasonably specify) and (ii) instructions for the use thereof in effecting the
surrender of the Certificates in exchange for the Merger Consideration. Upon
surrender of a Certificate for cancellation to the Paying Agent or to such other
agent or agents as may be appointed by the Surviving Corporation, together with
such letter of transmittal, duly executed, and such other documents as may
reasonably be required by the Paying Agent, the holder of such Certificate shall
be entitled to receive in exchange therefor a bank check in the amount of cash
into which the shares of Company Stock theretofore represented by such
Certificate shall have been converted pursuant to Section 2.2, and the
Certificates so surrendered shall forthwith be canceled. No interest will be
paid or will accrue on the cash payable upon the surrender of any Certificate.
If payment is to be made to a person other than the person in whose name the
Certificate so surrendered is registered, it shall be a condition of payment
that such Certificate shall be properly endorsed or otherwise in proper form for
transfer and that the person requesting such payment shall pay any transfer or
other taxes required by reason of the transfer of such Certificate or establish
to the satisfaction of the Surviving Corporation that such tax has been paid or
is not applicable.
Until surrendered as contemplated by this Section 2.3, each Certificate
(other than Certificates representing Dissenting Shares) shall be deemed at any
time after the Effective Time to represent only the right to receive upon such
surrender the amount of cash, without interest, into which the shares of Company
Stock theretofore represented by such Certificate shall have been converted
pursuant to Section 2.2.
(d) None of Marketing, Acquisition Sub, the Company, the Surviving
Corporation, the Paying Agent or any other person shall be liable to any former
holder of shares of Company Stock for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(e) In the event that any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Paying Agent
4
will issue in exchange for such lost, stolen or destroyed Certificate the Merger
Consideration, deliverable in respect thereof pursuant to this Agreement.
2.4 Closing of Transfer Books. At or after the Effective Time, there shall
be no transfers on the stock transfer books of the Company of the shares of
Company Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged for the consideration
deliverable in respect thereof pursuant to this Agreement in accordance with the
procedures set forth in this Article 2.
2.5 No Further Ownership Rights in Company Stock. From and after the
Effective Time, the holders of shares of Company Stock which were outstanding
immediately prior to the Effective Time shall cease to have any rights with
respect to such shares of Company Stock except as otherwise provided in this
Agreement or by applicable law. All cash paid upon the surrender of Certificates
in accordance with the terms hereof shall be deemed to have been paid in full
satisfaction of all rights pertaining to the shares of Company Stock.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchasers that, except as set
forth in schedules hereto specifically referring to the Sections hereof intended
to be so qualified (the "Schedules"):
3.1 Organization, Standing and Power. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated and has the requisite corporate power
and authority to carry on its business as now being conducted. The Company is
duly qualified to do business, and is in good standing, in each jurisdiction
where the character of its properties owned or held under lease or the nature of
its activities makes such qualification necessary, except where the failure to
be so qualified and in good standing would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. For purposes of this
Agreement, "Material Adverse Change" or "Material Adverse Effect" means, when
used with respect to Marketing, Acquisition Sub or the Company, as the case may
be, any change or effect, either individually or in the aggregate, that is
materially adverse to the business, assets, financial condition or results of
operations of Marketing, Acquisition Sub, or the Company, as the case may be.
3.2 Capital Structure. The authorized capital stock of the Company consists
of 800,000,000 shares, of which all shares are designated as Company Stock.
At the date hereof (i) 19,420,000 shares of Company Stock were issued and
outstanding. All outstanding shares of Company Stock are validly issued, fully
paid and nonassessable and not subject to preemptive rights.
As of the date hereof, there are no options, warrants, rights, commitments,
agreements, arrangements or undertakings of any kind to which the Company is a
5
party or by which it is bound obligating the Company to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock or
other voting securities of the Company.
3.3 Authority; Non-Contravention.
----------------------------
(a) The Board of Directors of the Company has approved this Agreement
and determined that the Merger is fair and in the best interests of the Company
and its shareholders, and the Company has all requisite corporate power and
authority to enter into this Agreement and, subject to approval of the Merger by
the shareholders of the Company as set forth in Section 6.1(a), to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Company, subject to such approval of the Merger by the
shareholders of the Company as set forth in Section 6.1(a). This Agreement has
been duly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms. The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation,
contractually require any offer to purchase or any prepayment of any debt,
contractually require the payment of (or result in the vesting of) any
severance, golden parachute, change of control or similar type of payment, or
give rise to the loss of a material benefit under, or result in the creation of
any lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company under, any provision of:
(i) the Articles of Incorporation or Bylaws of the Company,
(ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, concession, franchise or
license (any of the foregoing, an "Instrument") applicable to the Company (other
than Instruments involving aggregate payments by or to the Company of $100,000
or less), or
(iii) any judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to, or Company Permit (as defined in Section 3.7) of or
relating to, the Company or any of its properties or assets, other than, in the
case of clauses (ii) or (iii), any such conflicts, violations, defaults, rights,
offers, prepayments, payments, losses or liens, that, individually or in the
aggregate, would not have a Material Adverse Effect on the Company, materially
impair the ability of the Company to perform its obligations hereunder or
prevent the consummation of any of the transactions contemplated hereby.
(b) No filing or registration with, or authorization, consent or
approval of, any domestic (federal and state), foreign or supranational court,
commission, governmental body, regulatory or administrative agency, authority or
tribunal (a "Governmental Entity") is required by or with respect to the Company
in connection with the execution and delivery of this Agreement by the Company
or the consummation by the Company of the transactions contemplated hereby,
except for (i) in connection or in compliance with the provisions of the
Securities Exchange Act of 1934, as amended (including the rules and regulations
6
promulgated thereunder, the "Exchange Act"), (ii) the filing of the Articles of
Merger with the Secretary of State and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business,
(iii) such filings and approvals as may be required by any applicable state
securities or "blue sky" laws or state takeover laws, and (iv) such other
consents, orders, authorizations, registrations, approvals, declarations and
filings the failure of which to be obtained or made would not, individually or
in the aggregate, have a Material Adverse Effect on the Company, materially
impair the ability of the Company to perform its obligations hereunder or
prevent the consummation of any of the transactions contemplated hereby.
3.4 SEC Documents.
-------------
(a) Since May 1, 2000, the Company has filed all documents with the
Securities and Exchange Commission ("SEC") required to be filed under the
Securities Act of 1933, as amended (including the rules and regulations
promulgated thereunder) (the "Securities Act"), or the Exchange Act (such
documents filed with the SEC on or before the date of this Agreement being the
"Company SEC Documents"). As of their respective dates, (i) the Company SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (ii) none of the
Company SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the Company SEC Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except, in the case of unaudited statements
contained in Quarterly Reports on Form 10-Q of the Company, as permitted by the
Exchange Act) applied on a consistent basis during the periods involved (except
as may be indicated therein or in the notes thereto) and fairly present in all
material respects the financial position of the Company as at the dates thereof
and the results of its operations and changes in shareholders' equity and cash
flow for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments and to any other adjustments described
therein).
(b) Except as set forth in the Company SEC Documents, the Company has
no liability or obligation of any nature (whether accrued, absolute, contingent
or otherwise) which would be required to be reflected on a balance sheet, or in
the notes thereto, prepared in accordance with generally accepted accounting
principles, except for liabilities and obligations incurred in the ordinary
course of business consistent with past practice since October 31, 2001 which
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company.
(c) To the extent there are such and to the extent permitted by
applicable law, the Company has heretofore made available to Purchasers a
complete and correct copy of any amendments or modifications which have not yet
been filed with the SEC to agreements, documents or other instruments which
previously have been filed with the SEC pursuant to the Exchange Act.
3.5 Absence of Certain Events. Since October 31, 2001, the Company has
7
operated its business only in the ordinary course consistent with past practice
and, except as contemplated by this Agreement or disclosed in the Company SEC
Documents, there has not occurred any Material Adverse Change in the Company;
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each of the Purchasers represents and warrants to the Company as follows:
4.1 Organization, Standing and Power. Each of the Purchasers is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it is incorporated and has the requisite corporate
power and authority to carry on its business as now being conducted.
4.2 Authority; Non-Contravention.
----------------------------
(a) Each of the Purchasers has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by each of the
Purchasers and the consummation by it of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on its part. This
Agreement has been duly executed and delivered by each of the Purchasers and
constitutes its valid and binding obligation, enforceable against it in
accordance with its terms. The execution and delivery of this Agreement do not,
and the consummation of the transactions contemplated hereby and compliance with
the provisions hereof will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or
give rise to the loss of a material benefit under, or result in the creation of
any lien upon any of the properties or assets of Marketing or Acquisition Sub
under, any provision of:
(i) Its Articles or Certificate of Incorporation or Bylaws,
(ii) any Instrument applicable to it, or
(iii) subject to the governmental filings and other matters
referred to in Section 4.2(b), any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to it or any of its properties or
assets, other than, in the case of clauses (ii) or (iii), any such conflicts,
violations, defaults, rights, offers, prepayments, payments, losses or liens,
that, individually or in the aggregate, would not have a Material Adverse Effect
on it, materially impair its ability to perform its obligations hereunder or
prevent the consummation of any of the transactions contemplated hereby.
(b) No filing or registration with, or authorization, consent or
approval of, any Governmental Entity is required by or with respect to it in
connection with its execution and delivery of this Agreement or its consummation
of the transactions contemplated hereby, except for (i) in connection with or in
compliance with the provisions of the Exchange Act, (ii) the filing of the
8
Articles of Merger with the Secretary of State and appropriate documents with
the relevant authorities of other states in which Acquisition Sub is qualified
to do business, (iii) such filings and approvals as may be required by any
applicable state securities or "blue sky" laws or state takeover laws, and (iv)
such other consents, orders, authorizations, registrations, approvals,
declarations and filings the failure of which to be obtained or made would not,
individually or in the aggregate, have a Material Adverse Effect on it,
materially impair its ability to perform its obligations hereunder or prevent
the consummation of any of the transactions contemplated hereby.
4.3 Brokers. No broker, investment banker or other person is entitled to
any broker's, finder's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Marketing or Acquisition Sub.
4.4 Litigation. There are no actions, suits, proceedings, investigations or
reviews pending against Marketing or Acquisition Sub or, to its knowledge,
threatened against it, at law or in equity, or before or by any federal or state
commission, board, bureau, agency, regulatory or administrative instrumentality
or other Governmental Entity or any arbitrator or arbitration tribunal.
4.5 Capital Structure and Shareholders.
----------------------------------
(a) Pursuant to the agreement by and among the members of the Offering
Group and Marketing, each of the members of the Offering Group (i) has agreed to
transfer to the Offering Group the number of Offering Group Shares designated
opposite his or her name on Schedule 4.5 hereto as "Continuing Shares"
immediately prior to the Effective Time; and (ii) has granted to James H.
Ridinger, as sole director of Marketing, an irrevocable proxy to vote all
Offering Group Shares set forth opposite his name on Schedule 4.5 in favor of
the Merger and on all matters relating to the Merger and special power of
attorney to transfer ownership of such Offering Group Shares to Marketing in the
event of the failure of such Offering Group member to do so in accordance with
clause (i) hereof.
(b) The authorized capital stock of Acquisition Sub consists of 1000
shares, of which all shares are designated as Acquisition Sub Stock. At the date
hereof (i) 1000 shares of Acquisition Sub Stock were issued and outstanding and
held by Marketing, and (ii) no shares of Acquisition Sub Stock are held by
Acquisition Sub in its treasury. All outstanding shares of Acquisition Sub are
validly issued, fully paid and nonassessable and not subject to preemptive
rights.
ARTICLE 5
COVENANTS
5.1 Interim Operations of the Company.
---------------------------------
9
(a) From and after the date of this Agreement until the Effective
Time, except as contemplated by any other provision of this Agreement, unless
Acquisition Sub has consented in writing thereto, the Company:
(i) shall conduct its operations according to its usual, regular
and ordinary course in substantially the same manner as heretofore conducted;
(ii) shall use its reasonable efforts to preserve intact its
business organization and goodwill, keep available the services of its officers
and employees and maintain satisfactory relationships with those persons having
business relationships with it;
(iii) shall not amend its Articles of Incorporation or Bylaws or
comparable governing instruments;
(iv) shall not make any tax election except consistent with past
practice or settle or compromise any material income tax liability;
(v) shall not settle or compromise any pending or threatened suit,
action or claim relating to the transactions contemplated hereby; or
(vi) shall not agree or otherwise commit to take any of the
foregoing actions or take, or agree to take, any action which would result in a
failure of the condition to Closing set forth in Section 6.3(a).
5.2 Meeting of the Company's Shareholders. The Company will take all action
necessary in accordance with applicable law and its Articles of Incorporation
and Bylaws to convene a meeting of its shareholders (the "Meeting of
Shareholders") as promptly as practicable to consider and vote upon the approval
of this Agreement and the Merger. The Board of Directors of the Company shall
refrain from recommending such approval, but each of Acquisition Sub and the
Company shall take all appropriate and lawful action to solicit such approval,
including, without limitation, timely mailing the Proxy Statement (as defined in
Section 5.6); provided, however, that such solicitation is subject to any action
(including any withdrawal) taken by, or upon authority of, the Board of
Directors of the Company in the exercise of its good faith judgment based upon
the advice of outside counsel as to its fiduciary duties imposed by law.
5.3 Filings, Other Action. Subject to the terms and conditions herein
provided, the Company and the Purchasers shall:
(a) use all reasonable efforts to cooperate with one another in
(i) determining which filings are required to be made prior to the Effective
Time with, and which consents, approvals, permits or authorizations are required
to be obtained prior to the Effective Time from, any Governmental Entity in
connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; and
(b) use all reasonable efforts to take, or cause to be taken, all
other action and do, or cause to be done, all other things necessary, proper or
appropriate to consummate and make effective the transactions contemplated by
10
this Agreement. If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purpose of this Agreement, the proper
officers and directors of each of Marketing, Acquisition Sub and the Company, as
appropriate, shall take all such necessary action.
5.4 Inspection of Records. From the date hereof to the Effective Time, the
Company shall (i) allow all designated officers, attorneys, accountants and
other representatives of the Purchasers reasonable access at all reasonable
times upon reasonable notice to the offices, records and files, correspondence,
audits and properties, as well as to all information relating to commitments,
contracts, titles and financial position, or otherwise pertaining to the
business and affairs, of the Company, (ii) furnish to the Purchasers' counsel,
financial advisors, auditors and other authorized representatives such financial
and operating data and other information as such persons may reasonably request,
(iii) instruct its employees, counsel and financial advisors to cooperate with
Acquisition Sub and Marketing in their investigation of the business of the
Company, and (iv) make its management personnel available for discussions with
representatives of the Purchasers at mutually convenient times.
5.5 Publicity. The initial press release relating to this Agreement shall
be a joint press release and thereafter the Company, the Purchasers shall,
subject to their respective legal obligations (including requirements of stock
exchanges and other similar regulatory bodies), consult with each other, and use
all reasonable efforts to agree upon the text of any press release, before
issuing any such press release or otherwise making public statements with
respect to the transactions contemplated hereby and in making any filings with
any Governmental Entity or with any national securities exchange (or other
similar regulatory body) with respect thereto.
5.6 Proxy Statement and Other SEC Filings.
-------------------------------------
(a) The Company shall prepare and file with the SEC as soon as
practicable a preliminary form of the proxy statement (the "Proxy Statement") to
be mailed to the holders of Company Stock in connection with the Meeting of
Shareholders. The Company will cause the Proxy Statement to comply as to form in
all material respects with the applicable provisions of the Exchange Act. The
Company will use its reasonable best efforts to respond to any comments of the
SEC or its staff and to cause the Proxy Statement to be cleared by the SEC. The
Company will notify the Purchasers of the receipt of any comments from the SEC
or its staff and of any request by the SEC or its staff for amendments or
supplements to the Proxy Statement or for additional information and will supply
the Purchasers with copies of all correspondence between the Company or any of
its representatives, on the one hand, and the SEC or its staff, on the other
hand, with respect to the Proxy Statement prior to its being filed with the SEC
and shall give Marketing the opportunity to review all amendments and
supplements to the Proxy Statement and all responses to requests for additional
information and replies to comments prior to their being filed with, or sent to,
the SEC. Each of the Company and Marketing agrees to use its reasonable best
efforts, after consultation with the other parties hereto, to respond promptly
to all such comments of and requests by the SEC. As promptly as practicable
after the Proxy Statement has been cleared by the SEC, the Company shall mail
the Proxy Statement to the shareholders of the Company. If at any time prior to
the approval of this Agreement by the Company's shareholders there shall occur
any event that should be set forth in an amendment or supplement to the Proxy
11
Statement, the Company will prepare and mail to its shareholders such an
amendment or supplement.
(b) The Company agrees that the Proxy Statement and each amendment or
supplement thereto at the time of mailing thereof and at the time of the Meeting
of Shareholders will not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or omission to state a
material fact was made by the Company in reliance upon and in conformity with
written information concerning the Purchasers furnished to the Company by the
Purchasers specifically for use in the Proxy Statement. Each of the Purchasers
agrees that the information concerning such Purchaser provided by it in writing
for inclusion in the Proxy Statement and each amendment or supplement thereto,
at the time of mailing thereof and at the time of the Meeting of Shareholders
will not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(c) The parties hereto, together with the Offering Group (each, for
purposes of this paragraph c and the following paragraph d, a "Filing Person"
and collectively "Filing Persons") shall prepare and file with the SEC as soon
as practicable a Rule 13e-3 Transaction Statement on Schedule 13E-3 (the
"Schedule 13E-3") in connection with the Merger. The parties hereto will cause
the Schedule 13E-3 to comply as to form in all material respects with the
applicable provisions of the Exchange Act. Each of the parties hereto will use
its reasonable best efforts to respond to any comments of the SEC or its staff
and to cause the Schedule 13E-3 to be cleared by the SEC. Each party will notify
each other Filing Person of the receipt of any comments from the SEC or its
staff and of any request by the SEC or its staff for amendments or supplements
to the Schedule 13E-3 or for additional information and will supply the other
Filing Persons with copies of all correspondence between it or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Schedule 13E-3 prior to its being filed with the SEC and
shall give the other Filing Persons and their respective counsel the opportunity
to review all amendments and supplements to the Schedule 13E-3 and all responses
to requests for additional information and replies to comments prior to their
being filed with, or sent to, the SEC. Each of the parties hereto agrees to use
its reasonable best efforts, after consultation with the other Filing Persons,
to respond promptly to all such comments of and requests by the SEC. Marketing
agrees to cause the filing in cooperation with the Surviving Corporation and the
Offering Group of a final Schedule 13E-3 promptly after the consummation of the
Merger.
(d) Each party hereto agrees that the Schedule 13E-3 and each
amendment or supplement thereto at the time of the final filing will not
include, as to such party, an untrue statement of a material fact or omit to
state, with respect to such party, a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
5.7 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performance set forth
12
herein or the waiver thereof, perform such further acts and execute such
documents as may be reasonably required to effect the Merger.
5.8 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses except as
expressly provided herein.
5.9 Indemnification.
---------------
(a) From and after the Effective Time, Marketing agrees to, and to
cause the Surviving Corporation to, indemnify and hold harmless all past and
present officers and directors of the Company, including directors acting as
members of a committee of the Board of Directors (the "Indemnified Parties") to
the full extent such persons may be indemnified by the Company pursuant to the
Company's Articles of Incorporation and Bylaws as in effect as of the date
hereof and the NCBCA for acts and omissions occurring at or prior to the
Effective Time and shall advance reasonable litigation expenses incurred by such
persons in connection with defending any action arising out of such acts or
omissions, provided that such persons provide the requisite affirmations and
undertakings, as required by applicable law or set forth in the Company's
Articles of Incorporation or Bylaws as in effect prior to the Effective Time.
(b) Any Indemnified Party will promptly notify Marketing and the
Surviving Corporation of any claim, action, suit, proceeding or investigation
for which such party may seek indemnification under this Section; provided,
however, that the failure to furnish any such notice shall not relieve Marketing
or the Surviving Corporation from any indemnification obligation under this
Section except to the extent Marketing or the Surviving Corporation is
prejudiced thereby. In the event of any such claim, action, suit, proceeding, or
investigation, (x) the Surviving Corporation will have the right to assume the
defense thereof by counsel reasonably acceptable to the Indemnified Parties, and
the Surviving Corporation will not be liable to such Indemnified Parties for any
legal expenses of other counsel or any other expenses subsequently incurred
thereafter by such Indemnified Parties in connection with the defense thereof,
except that all Indemnified Parties (as a group) will have the right to retain
one separate counsel, reasonably acceptable to such Indemnified Parties and
Marketing, at the expense of the indemnifying party if the named parties to any
such proceeding include both the Indemnified Parties and the Surviving
Corporation and the representation of such parties by the same counsel would be
inappropriate due to a conflict of interest between them, (y) the Indemnified
Parties will cooperate in the defense of any such matter, and (z) the Surviving
Corporation will not be liable for any settlement effected without its prior
written consent.
(c) This Section 5.9 is intended to benefit the Indemnified Parties
and shall be binding on all successors and assigns of Marketing, the Company and
the Surviving Corporation. Marketing hereby guarantees the performance by the
Surviving Corporation of the indemnified obligations pursuant to this
Section 5.9.
5.10 Takeover Statute. If any "fair price", "moratorium", "control share
acquisition" or other form of anti-takeover statute or regulation shall become
applicable to the transactions contemplated hereby, the Company and the members
of the Board of Directors of the Company shall grant such approvals and take
such actions as are reasonably necessary so that the transactions contemplated
13
hereby may be consummated as promptly as practicable on the terms contemplated
hereby and otherwise act to eliminate or minimize the effects of such statute or
regulation on the transactions contemplated hereby.
5.11 Conduct of Business by the Purchasers Pending the Merger. Prior to the
Effective Time and subject to any applicable regulatory approvals, each of the
Purchasers shall perform its obligations under this Agreement in accordance with
the terms hereof and thereof and take all other actions necessary or appropriate
for the consummation of the transactions contemplated hereby.
5.12 Transfer of Offering Group Shares. Prior to the Effective Time,
Marketing shall use its reasonable efforts to cause the consummation of the
transfer by the members of the Offering Group to it of the number of Offering
Group Shares set forth in Schedule 4.5 as described in Section 4.5(a).
5.13 Conveyance Taxes. The Company and the Purchasers shall cooperate in
the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees, and any similar taxes which become
payable in connection with the transactions contemplated by this Agreement that
are required or permitted to be filed on or before the Effective Time.
ARTICLE 6
CONDITIONS TO MERGER
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved, in the manner required by applicable law or by the applicable
regulations of any stock exchange or other regulatory body, as the case may be,
by the holders of the majority of the issued and outstanding shares of the
Company Stock entitled to be voted thereon excluding any Offering Group Shares
or Continuing Shares.
(b) None of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the consummation
of the transactions contemplated by this Agreement. In the event any such order
or injunction shall have been issued, each party agrees to use its reasonable
efforts to have any such injunction lifted.
(c) All consents, authorizations, orders and approvals of (or filings
or registrations with) any Governmental Entity required in connection with the
execution, delivery and performance of this Agreement shall have been obtained
or made, except for filings in connection with the Merger and any other
documents required to be filed after the Effective Time and except where the
failure to have obtained or made any such consent, authorization, order,
approval, filing or registration would not have a Material Adverse Effect on
Marketing, Acquisition Sub or the Company following the Effective Time.
14
6.2 Conditions to Obligation of Company to Effect the Merger. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) Each of the Purchasers shall have performed in all material
respects its agreements contained in this Agreement required to be performed on
or prior to the Closing Date, and the respective representations and warranties
of the Purchasers contained in this Agreement and in any document delivered in
connection herewith shall be true and correct as of the Closing Date, except
(i) for changes specifically permitted by this Agreement or otherwise accepted
in writing by the Company, (ii) for non-performance or breaches which,
separately or in the aggregate, would not have a Material Adverse Effect on
Marketing or Acquisition Sub or on the ability of the parties to consummate the
transactions contemplated by this Agreement and (iii) that those representations
and warranties which address matters only as of a particular date shall remain
true and correct, in all material respects, as of such date.
(b) There shall not have been any action taken, or any statute, rule,
regulation, order, judgment or decree proposed, enacted, promulgated, entered,
issued, or enforced by any Governmental Entity, and there shall be no action,
suit or proceeding pending (with a reasonable likelihood of success), which (i)
makes this Agreement, the Merger, or any of the other transactions contemplated
by this Agreement illegal or imposes or may impose material damages or penalties
in connection therewith, or (ii) otherwise prohibits, restricts, or delays
consummation of the Merger or any of the other transactions contemplated by this
Agreement in any material respect.
6.3 Conditions to Obligation of the Purchasers to Effect the Merger. The
obligations of the Purchasers to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior to
the Closing Date, and the representations and warranties of the Company
contained in this Agreement and in any document delivered in connection herewith
shall be true and correct as of the Closing Date, except (i) for changes
specifically permitted by this Agreement or otherwise accepted in writing by the
Purchasers, (ii) for non-performance or breaches which, separately or in the
aggregate, would not have a Material Adverse Effect on the Company, the
Purchasers or on the ability of the parties to consummate the transactions
contemplated by this Agreement and (iii) that those representations and
warranties which address matters only as of a particular date shall remain true
and correct, in all material respects, as of such date.
(b) From the date of this Agreement through the Effective Time, there
shall not have occurred any Material Adverse Change with respect to the Company.
(c) There shall not have been any action taken, or any statute, rule,
regulation, order, judgment or decree proposed, enacted, promulgated, entered,
issued, or enforced by any Governmental Entity, and there shall be no action,
suit or proceeding pending (with a reasonable likelihood of success), which
(i) makes this Agreement, the Merger, or any of the other transactions
15
contemplated by this Agreement illegal or imposes or may impose material damages
or penalties in connection therewith, (ii) requires the divestiture of a
material portion of the business of Marketing, or of the Company or of the
Surviving Corporation taken as a whole, (iii) imposes material limitations on
the ability of Marketing effectively to exercise full rights of ownership of
shares of capital stock of the Surviving Corporation (including the right to
vote such shares on all matters properly presented to the shareholders of the
Surviving Corporation) or makes the holding by Marketing of any such shares
illegal or subject to any materially burdensome requirement or condition, (iv)
requires Marketing, the Company, the Surviving Corporation or any of their
respective material affiliates to cease or refrain from engaging in any material
business, or (v) otherwise prohibits, restricts, or delays consummation of the
Merger or any of the other transactions contemplated by this Agreement in any
material respect or increases or may increase in any material respect the
liabilities or obligations of Marketing or the Surviving Corporation arising out
of this Agreement, the Merger, or any of the other transactions contemplated by
this Agreement.
(d) Not more than 5% of the outstanding shares of the Company entitled
to vote at the Meeting of Shareholders shall have perfected appraisal rights in
respect of the Merger.
ARTICLE 7
TERMINATION
7.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the approval of this Agreement by the shareholders of the Company, by the mutual
consent of Marketing, Acquisition Sub and the Company.
7.2 Termination by any Party. This Agreement may be terminated and the
Merger may be abandoned by action of the Board of Directors of any party hereto
if (a) the Merger shall not have been consummated by July 31, 2002, (b) the
approval of the Company's shareholders required by Section 6.1(a) shall not have
been obtained at a meeting duly convened therefor or at any adjournment thereof
or (c) a United States federal or state court of competent jurisdiction or
United States federal or state governmental, regulatory or administrative agency
or commission shall have issued an order, decree or ruling or taken any other
action permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and non-appealable; provided, that the
party seeking to terminate this Agreement pursuant to this clause (c) shall have
used all reasonable efforts to remove such injunction, order or decree; and
provided, in the case of a termination pursuant to clause (a) above, that the
terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the failure to consummate the Merger by July 31, 2001.
7.3 Extension, Waiver.
-----------------
At any time prior to the Effective Time, any party hereto, by action taken
by its Board of Directors, may, to the extent legally allowed, (i) extend the
16
time for the performance of any of the obligations or other acts of the other
parties hereto, (ii) waive any inaccuracies in the representations and
warranties made to such party contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions for the benefit of such party contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
17
ARTICLE 8
GENERAL PROVISIONS
8.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Merger and shall not survive
the Merger, provided, however, that the agreements contained in Article 2 shall
survive the Merger.
8.2 Assignment; Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except for the provisions of
Section 5.9, nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
8.3 Entire Agreement. This Agreement, the Schedules, and any documents
delivered by the parties in connection herewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
8.4 Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
shareholders of the Company, but after any such shareholder approval, no
amendment shall be made which by law requires the further approval of
shareholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
8.5 Governing Law. This Agreement shall be governed by, and construed in
accordance with the laws of North Carolina applicable to contracts executed and
to be performed entirely within that State without regard to the conflicts of
laws principles thereof.
8.6 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
8.7 Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
18
interpretive effect whatsoever.
8.8 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
8.9 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
8.10 Incorporation of Schedules. The Schedules attached hereto and referred
to herein are hereby incorporated herein and made a part hereof for all purposes
as if fully set forth herein.
8.11 Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
8.12 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to obtain an injunction or
injunctions to prevent breaches of this Agreement, this being in addition to any
other remedy to which they are entitled at law or in equity. By each party's
execution and delivery hereof, such party hereby irrevocably submits to the
jurisdiction of any such court in connection with any such suit or proceeding,
irrevocably waives any objection, including any objection to the laying of venue
or based on the grounds of forum non conveniens, which it may now or hereafter
have to the bringing of any action or proceeding in such jurisdiction in respect
of this Agreement or any document related hereto and each waives personal
service of any summons, complaint or other process which may be made by any
other means permitted by North Carolina law. EACH PARTY HERETO IRREVOCABLY
WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY SUIT OR PROCEEDING BROUGHT TO ENFORCE
OR INTERPRET THIS AGREEMENT.
19
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
MARKET AMERICA, INC.
By: /s/ James H. Ridinger
-----------------------------------
James H. Ridinger
President
MIRACLE MARKETING INC.
By: /s/ James H. Ridinger
-----------------------------------
James H. Ridinger
President
MA ACQUISITION SUB INC.
By: Miracle Marketing Inc.,
Its Sole Shareholder
By: /s/ James H. Ridinger
-----------------------------------
James H. Ridinger
President
20
SCHEDULE 4.5
------------
- ---------------------------- --------------------- ------------------------
OFFERING GROUP MEMBERS OFFERING GROUP SHARES CONTINUING SHARES
- ---------------------------- --------------------- -----------------------
James H. Ridinger 15,040,200 15,040,200
- ---------------------------- --------------------- -----------------------
Loren A. Ridinger 101,450 101,450
- ---------------------------- --------------------- -----------------------
Martin L. Weissman 532,0001 300,000
- ---------------------------- --------------------- -----------------------
Marc Ashley 150,000 150,000
- ---------------------------- --------------------- -----------------------
Dennis J. Franks 50,000 50,000
- ---------------------------- --------------------- -----------------------
Joseph V. Bolyard 20,000 20,000
- ---------------------------- --------------------- -----------------------
Andrew Weissman 50,000 50,000
- ---------------------------- --------------------- -----------------------
TOTAL 15,943,650 15,711,650
- ---------------------------- --------------------- -----------------------
- -------------------
1 Includes 232,000 shares of Market America Stock beneficially owned by
Martin L. Weissman IRA, T.D. Waterhouse Custodian.
ANNEX B
ARTICLE 13.
DISSENTERS' RIGHTS.
Part 1. Right to Dissent and Obtain Payment for Shares.
SS.55-13-01. DEFINITIONS.
In this Article:
(1) "Corporation" means the issuer of the shares held by a
dissenter before the corporate action, or the surviving or
acquiring corporation by merger or share exchange of that
issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent
from corporate action under G.S. 55-13-02 and who
exercises that right when and in the manner required by
G.S.55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means
the value of the shares immediately before the
effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action
unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at a rate that
is fair and equitable under all the circumstances, giving
due consideration to the rate currently paid by the
corporation on its principal bank loans, if any, but not
less than the rate provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares
are registered in the records of a corporation or the
beneficial owner of shares to the extent of the rights
granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a
beneficial owner of shares held in a voting trust or by a
nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the
beneficial shareholder. (1925, c. 77, s. 1; 1943, c. 270;
G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39;
1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
SS. 55-13-02. RIGHT TO DISSENT.
(a) In addition to any rights granted under Article 9, a shareholder
is entitled to dissent from, and obtain payment of the fair value of his shares
in the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation
(other than a parent corporation in a merger whose shares
are not affected under G.S. 55-11-04) is a party unless
(i) approval by the shareholders of that corporation is
not required under G.S. 55-11-03(g) or (ii) such shares
are then redeemable by the corporation at a price not
greater than the cash to be received in exchange for such
shares;
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares
will be acquired, unless such shares are then redeemable
by the corporation at a price not greater than the cash to
be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation
other than as permitted by G.S. 55-12-01, including a sale
in dissolution, but not including a sale pursuant to court
order or a sale pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be
distributed in cash to the shareholders within one year
after the date of sale;
(4) An amendment of the articles of incorporation that
materially and adversely affects rights in respect of a
dissenter's shares because it (i) alters or abolishes a
preferential right of the shares; (ii) creates, alters, or
abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or
repurchase, of the shares; (iii) alters or abolishes a
preemptive right of the holder of the shares to acquire
shares or other securities; (iv) excludes or limits the
right of the shares to vote on any matter, or to cumulate
votes; (v) reduces the number of shares owned by the
shareholder to a fraction of a share if the fractional
share so created is to be acquired for cash under G.S.
55-6-04; or (vi) changes the corporation into a nonprofit
corporation or cooperative organization; or
(5) Any corporate action taken pursuant to a shareholder vote
to the extent the articles of incorporation, bylaws, or a
resolution of the board of directors provides that voting
or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his
shares under this Article may not challenge the corporate action creating his
entitlement, including without limitation a merger solely or partly in exchange
for cash or other property, unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall
be no right of shareholders to dissent from, or obtain payment of the fair value
of the shares in the event of, the corporate actions set forth in subdivisions
(1), (2), or (3) of subsection (a) of this section if the affected shares are
any class or series which, at the record date fixed to determine the share-
holders entitled to receive notice of and to vote at the meeting at which the
plan of merger or share exchange or the sale or exchange of property is to be
acted on, were (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or (ii) held by at least 2,000
record shareholders. This subsection does not apply in cases in which either:
2
(1) The articles of incorporation, bylaws, or a resolution of
the board of directors of the corporation issuing the
shares provide otherwise; or (2) In the case of a plan of
merger or share exchange, the holders of the class or
series are required under the plan of merger or share
exchange to accept for the shares anything except:
a. Cash;
b. Shares, or shares and cash in lieu of fractional
shares of the surviving or acquiring corporation, or
of any other corporation which, at the record date
fixed to determine the shareholders entitled to
receive notice of and vote at the meeting at which
the plan of merger or share exchange is to be acted
on, were either listed subject to notice of issuance
on a national securities exchange or designated as a
national market system security on an interdealer
quotation system by the National Association of
Securities Dealers, Inc., or held by at least 2,000
record shareholders; or
c. A combination of cash and shares as set forth in
sub-subdivisions a. and b.of this subdivision.
SS.55-13-03. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(a) A record shareholder may assert dissenters' rights as to fewer
than all the shares registered in his name only if he dissents with respect to
all shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
(1) He submits to the corporation the record shareholder's
written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
the beneficial shareholder.
Part 2. Procedure for Exercise of Dissenters' Rights.
SS.55-13-20. NOTICE OF DISSENTERS' RIGHTS.
(a) If proposed corporate action creating dissenters' rights under
G.S. 55-13-02 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S.
55-13-02 is taken without a vote of shareholders, the corporation shall no later
than 10 days thereafter notify in writing all shareholders entitled to assert
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dissenters' rights that the action was taken and send them the dissenters'
notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this
section, such failure shall not invalidate any corporate action taken; but any
shareholder may recover from the corporation any damage which he suffered from
such failure in a civil action brought in his own name within three years after
the taking of the corporate action creating dissenters' rights under G.S.
55-13-02 unless he voted for such corporate action.
SS.55-13-21. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action creating dissenters' rights under
G.S. 55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must
actually receive, before the vote is taken written notice
of his intent to demand payment for his shares if the
proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection
(a) is not entitled to payment for his shares under this Article.
SS. 55-13-22. DISSENTERS' NOTICE.
(a) If proposed corporate action creating dissenters' rights under
G.S. 55-13-02 is authorized at a shareholders' meeting, the corporation shall
mail by registered or certified mail, return receipt requested, a written
dissenters' notice to all shareholders who satisfied the requirements of
G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after
shareholder approval, or if no shareholder approval is required, after the
approval of the board of directors, of the corporate action creating dissenters'
rights under G.S. 55-13-02, and must:
(1) State where the payment demand must be sent and where and
when certificates for certificated shares must be
deposited;
(2) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the
payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than 30 nor
more than 60 days after the date the subsection (a) notice
is mailed; and
(5) Be accompanied by a copy of this Article.
SS.55-13-23. DUTY TO DEMAND PAYMENT.
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22
must demand payment and deposit his share certificates in accordance with the
terms of the notice.
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(b) The shareholder who demands payment and deposits his share
certificates under subsection (a) retains all other rights of a shareholder
until these rights are cancelled or modified by the taking of the proposed
corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this Article.
SS. 55-13-24. SHARE RESTRICTIONS.
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
SS. 55-13-25. PAYMENT.
(a) As soon as the proposed corporate action is taken, or within 30
days after receipt of a payment demand, the corporation shall pay each dissenter
who complied with G.S. 55-13-23 the amount the corporation estimates to be the
fair value of his shares, plus interest accrued to the date of payment.
(b) The payment shall be accompanied by:
(1) The corporation's most recent available balance sheet as
of the end of a fiscal year ending not more than 16 months
before the date of payment, an income statement for that
year, a statement of cash flows for that year, and the
latest available interim financial statements, if any;
(2) An explanation of how the corporation estimated the fair
value of the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment
under G.S. 55-13-28; and
(5) A copy of this Article.
SS.55-13-26. FAILURE TO TAKE ACTION.
(a) If the corporation does not take the proposed action within 60
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
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SS.55-13-28. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH CORPORATION'S PAYMENT
OR FAILURE TO PERFORM.
(a) A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of the amount in excess of the payment by the corporation under G.S.
55-13-25 for the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under
G.S. 55-13-25 is less than the fair value of his shares or
that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under G.S. 55-13-25;
or
(3) The corporation, having failed to take the proposed
action, does not return the deposited certificates or
release the transfer restrictions imposed on uncertifica-
ted shares within 60 days after the date set for demanding
payment.
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing (i) under
subdivision (a)(1) within 30 days after the corporation made payment for his
shares or (ii) under subdivisions (a)(2) and (a)(3) within 30 days after the
corporation has failed to perform timely. A dissenter who fails to notify the
corporation of his demand under subsection (a) within such 30-day period shall
be deemed to have withdrawn his dissent and demand for payment.
Part 3. Judicial Appraisal of Shares.
SS. 55-13-30. COURT ACTION.
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the
dissenter may commence a proceeding within 60 days after the earlier of (i) the
date payment is made under G.S. 55-13-25, or (ii) the date of the dissenter's
payment demand under G.S. 55-13-28 by filing a complaint with the Superior Court
Division of the General Court of Justice to determine the fair value of the
shares and accrued interest. A dissenter who takes no action within the 60-day
period shall be deemed to have withdrawn his dissent and demand for payment.
(a1) Repealed by Session Laws 1997-202, s. 4.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters
(whether or not residents of this State) whose demands remain unsettled parties
to the proceeding as in an action against their shares and all parties must be
served with a copy of the complaint. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the superior court in which the proceeding is
commenced under subsection (a) is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The parties are entitled to
the same discovery rights as parties in other civil proceedings. The proceeding
shall be tried as in other civil actions. However, in a proceeding by a
dissenter in a corporation that was a public corporation immediately prior to
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consummation of the corporate action giving rise to the right of dissent under
G.S. 55-13-02, there is no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judg-
ment for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation.
SS.55-13-31. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, and shall assess
the costs as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not
substantially comply with the requirements of G.S.
55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of
either or any other party, if the court finds that the
party against whom the fees and expenses are assessed
acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
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