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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1997 Commission File No. 000-23250
MARKET AMERICA, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1784094
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7605-A Business Park Drive
Greensboro, NC 27409
------------------------------- ---------
(Address of Principal Executive (Zip Code)
offices)
(910) 605-0040
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities Registered under Section 12(b) of the Exchange Act:
None
(Title of Class)
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.00001 per share
(Title of Class)
Check if the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period as the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained herein and no such disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of shares of Common Stock of the registrant held by
non-affiliates (based on the August 5, 1997 closing sale price of $6.375) was
$34,982,258 million. The Common Stock is traded over-the-counter and quoted
through the OTC Bulletin Board. As of August 5, 1997, 19,950,000 shares of the
Common Stock were outstanding.
Documents Incorporated by Reference:
Certain information from the Notice and Information Statement for the
registrant's annual meeting of stockholders, scheduled to be held September 30,
1997, is incorporated by reference to Part III, Items 10, 11, 12 and 13 of this
report.
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1. PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Market America, Inc. ("Market America" or the "Company") is a product
brokerage company that markets a wide range of consumer-oriented products and
services through a network of independent distributors. The Company was founded
in 1992 by James H. Ridinger, and has experienced substantial growth in revenue
and net income in recent years.
The Company's product lines include health and nutrition products,
personal care products, cosmetics, fragrances, telecommunications services, and
home cleaning products. The Company's distributors are compensated through a
proprietary network marketing plan. As of April 30, 1997, the Company had 73,000
distributors in all 50 U.S. states, Canada, Puerto Rico and the Bahamas.
The results of the Company's performance during fiscal 1997 are
discussed in greater detail in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," contained in Item 7 of this
Report. That section should be read in its entirety in conjunction with the
discussion of the Company's business in this Item 1.
The Company's principal executive offices and national distribution
center are located at 7605-A Business Park Drive, Greensboro, North Carolina
27409. Its telephone number at that address is (910) 605-0040.
Products and Services
The Company maintains the following product lines, which the Company
calls "stores" in connection with its network marketing plan: health and
nutrition products, custom-blended cosmetics, custom-fit blue jeans, jewelry,
photo services, personal and skin care products, fragrances, security products,
cleaning and other home care supplies, water filtrators, personalized training
and self help programs, telecommunications services, personal financial
management tools and automotive supplies.
The Company obtains its products from third-party sources. It does not
engage in any manufacturing activities. All of the Company's products are
marketed as proprietary product lines with proprietary trade names or under
trade names of the supplier or manufacturer under exclusive contracts or with
exclusive rights residing in the Company. This strategy helps provide the
Company with flexibility to enter new markets, offer recently popular products
and avoid the capital requirements and liability exposure frequently involved in
developing and manufacturing products.
In the fiscal year ended April 30, 1997, the Company's sales of products
exceeding 10% of sales revenue included 27% from the Company's primary
antioxidant product and 18% from the Company's primary weight management
product. No other product represented more than 10% of sales revenues.
The Company continually searches for new products and services. It seeks
out emerging trends in consumer-oriented products and services and innovative
product breakthroughs. The management team, in response to suggestions from the
field distributors, analyze sales trends,
-2-
meets with manufacturers' research and development departments, and attempts to
maintain optimum levels of inventory from a mix and volume perspective.
Marketing
The Company markets its products and services directly to consumers
through a network of independent distributors under a proprietary network
marketing plan.
The Company's marketing plan departs from concepts and structures found
in traditional multi-level marketing and direct sales programs. It has been
designed to address many of the problems traditionally associated with such
programs. Distributors are not required to purchase any inventory and have small
monthly sales quotas. Most of the Company's distributors sell its products on a
part-time basis for supplemental income. The Company also has developed
sophisticated software that tracks each distributor's sales volumes and
commission payouts.
The Company refers to its concept of bringing established companies and
product lines under its marketing umbrella as the "mall without walls." Each
product line is promoted to distributors as a "store." Each store is
individually packaged as a self-sufficient business with its own identity,
trademarks, training material and marketing support. A Market America
distributor can specialize exclusively in one store or can choose to sell a
number of product lines. The concept is similar to being a manufacturer's
representative for one or more product lines, with the products of different
manufacturers coming under the same marketing plan. This enables a distributor's
volume from various product lines to be combined to maximize commission
earnings. It also permits the Company and its distributors to change their
marketing directions when confronted with new product trends, price compression,
regulatory actions and other factors that affect their marketing.
Market America supports its independent distributors in a variety of
ways. The Company provides product and marketing support, sales conventions and
a variety of training materials and programs. From July 1996 to July 1997, the
Company held the following regional conventions:
Region 1 - April 1997 in Boston, MA
Region 2 - May 1997 in York, PA
Region 3 - October 1996 in Atlanta, GA
Region 4 - September 1996 in Chicago, IL.
Region 5 - November 1996 in Dallas, TX
Region 6 - April 1997 in Minneapolis, MN
Region 7 - April 1997 in Portland, OR
Region 8 - March 1997 in San Diego, CA
The Company has sponsored a leadership school in Fort Lauderdale, Florida,
during the past year.
The Company's current marketing efforts focus on high interest areas of
the United States and Canada. The Company also is focusing on mass customization
(share of customer) "one-to-one marketing," a marketing strategy introduced at
its July 1996 convention. The Company initiated its "Preferred Customer" program
during the 1997 fiscal year as an extension of its "one-
-3-
to-one marketing" strategy. The Company is now seeking to build relationships
with manufacturers capable of responding to the individual needs of its
"Preferred Customers."
The fifth annual Market America, Inc. convention was held in July 1997
at the Koury Convention Center, Greensboro, North Carolina, with over 15,000
people in attendance. It is expected that this huge response will translate, as
it did last year, into major increases in sales and number of distributors in
the ensuing months.
Government Regulation
The Company is subject to extensive laws and regulations, including
those governing the content, packaging, labeling, distribution, sale and storage
of certain of its products and those governing product claims and advertising.
In addition, the Company's network marketing system is or may be subject
to or affected by extensive government regulation, including, without
limitation, state regulation of marketing practices and federal and state
regulation of the offer and sale of business franchises, business opportunities,
and securities. The Company believes that it is in compliance with these
requirements and maintains communications regularly with regulatory authorities
in a number of jurisdictions. Additionally, an adverse determination by any one
state could influence the decisions of regulatory authorities in other
jurisdictions. Any or all of these factors could adversely affect the way the
Company does business and could affect the Company's ability to attract
potential distributors. Although the regulations governing network marketing are
complex and vary from state to state, the Company believes that it is in
compliance with the regulations and interpretations of the various regulatory
authorities.
Thermogenic weight management products have contributed significantly to
the Company's revenues. One of the ingredients in these products is a Chinese
herb, Ma Huang, which contains naturally occurring ephedrine in small
quantities. Ephedrine products have been the subject of adverse publicity
relating to alleged harmful effects, including the deaths of several
individuals. On April 10, 1996, the U.S. Food and Drug Administration issued a
statement warning consumers not to purchase or ingest dietary supplements
containing natural sources of ephedrine that are claimed to produce certain
effects (none of which are claimed by the Company's products), and the FDA
stated that it intended to issue a proposed regulation regarding
ephedrine-containing products by December 31, 1996. On June 4, 1997, the FDA
announced proposed rulemaking to control ephedrine products. There can be no
assurance that the FDA will not succeed in to imposing additional regulations,
possibly prohibiting, limiting potencies or placing other restrictions, on the
sale of such products. The herbal industry opposes such action and is pursuing
legal, political and scientific solutions.
Competition
The Company is subject to significant competition for the recruitment of
distributors from other network marketing organizations, including those that
market health and nutrition products and cosmetics, as well as other types of
products. Some of the Company's competitors are substantially larger and have
available considerably greater financial resources than the Company. The
Company's ability to remain competitive depends, in significant part, on the
Company's success in recruiting and retaining distributors through an attractive
compensation plan and other incentives. The Company believes that its marketing
plan provides its distributors with significant earning potential and other
features superior to those found in the marketing
-4-
plans of other network marketing companies. There can be no assurance however,
that the Company's programs for recruitment and retention of distributors will
be successful.
In addition, marketing health and nutrition products, cosmetics and
certain other of the Company's products are highly competitive businesses. These
market segments include numerous manufacturers, distributors, marketers,
retailers and physicians that actively compete for the business of consumers.
The markets are highly sensitive to the introduction of new products that may
rapidly capture a significant share of the market.
Trademark, Trade Secret and Software Protection
The Company has trademarked the terms "Market America's mall without
walls" and "unfranchise," which are used to describe its retail concept and
independent distributor system, respectively.
The Company 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. The Company derives such protection by contract
with distributors and by keeping its software program confidential. Like other
companies in the direct sales/network marketing industry, the Company does not
have patent protection for its marketing plan. It therefore relies upon the
copyright laws to protect against unauthorized copying of its software, and upon
copyright and trade secret laws for the protection of the literature that
explains the marketing plan. The Company also enters into confidentiality
agreements with its distributors. Despite this protection, competitors could
copy certain aspects of the Company's marketing plan or software or obtain
information that the Company regards as a trade secret. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate to deter misappropriation. Further, there can be no assurance
that any registered trademarks can be successfully defended. In any event, the
Company believes that factors such as innovation, expertise and market
responsiveness are more important than the legal protections described above.
History
The Company is a North Carolina corporation. It was founded as a
Delaware corporation in 1992. The Company merged with a public company in 1993.
The merged company then changed its name to Market America, Inc. and moved its
jurisdiction of incorporation to North Carolina, also in 1993.
Employees
As of April 30, 1997 the Company had 180 full-time employees and no
part-time employees. These numbers do not include the Company's distributors,
who are independent contractors. The Company is not a party to any collective
bargaining agreements, and considers its employee relations to be satisfactory.
Where to Get More Information
As a public company, the Company files periodic reports and other
information with the U.S. Securities and Exchange Commission. Copies of such
information may be obtained upon payment of prescribed fees from the SEC's
Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. Such information also may be accessed electronically at the SEC's
World Wide Web site at http://www.sec.gov. Certain periodic reports and other
information recently filed by the Company with the SEC may be accessed
electronically at the Company's World Wide Web site at
http://www.marketamericausa.com.
Forward-Looking Information
Certain discussions in this report contain forward-looking statements
within the meaning of the federal securities laws. Although the Company believes
that the expectations reflected in these forward-looking statements are based
upon reasonable assumptions, there can be no assurance that these expectations
will be realized. Factors that could cause actual results to differ materially
from current expectations include decreases in sales volume or number of
distributors, materially unfavorable regulatory action, loss of key personnel
and changes in economic conditions.
ITEM 2. PROPERTIES
The Company leases 40,000 square feet of commercial space in an office
park in Greensboro, North Carolina, which houses its executive offices and
national distribution center. The lease expires on October 31, 1997. The Company
currently is negotiating an extension of the lease.
-5-
ITEM 3. LEGAL PROCEEDINGS
In Wilson et al. v. Health Power Products, Inc. et al., No. 95-552,942
(140th District Court, Lubbock County, Texas), one of the plaintiffs alleges
that he suffered seizures from ingestion of a single dosage of ThermaChrome
5000, an energy and weight maintenance product distributed by the Company, which
is a defendant in the proceeding. The Company's insurer has undertaken the
defense of this proceeding, and the Company and the insurer are vigorously
opposing the claim of the plaintiffs for damages. Although it is not possible to
predict the outcome of this litigation, management is of the opinion that it
will not have a material impact on the Company.
In Entin v. Health Power Products, Inc. et al., No. 17289/95 (Suffolk
County, N.Y. Supreme Court), in which the Company is a defendant, the plaintiff
alleges that she contracted Graves' disease from the ingestion of the Company's
product, ThermaChrome 5000. The Company has been informed that Graves' disease
is a genetically inherited disorder. Defense of this claim is being pursued
vigorously by the Company's insurer. Although it is not possible to predict the
outcome of this litigation, management is of the opinion that it will not have a
material impact on the Company.
The Company has reached a settlement in a lawsuit instituted in 1993,
Larry A. Masi v. Market America, Inc. et al., Civil Case No. 95-CV-6374 (JEI)
(D. N.J.), in which the bankruptcy trustee for Larry A. Masi alleged that he was
entitled to Common Stock of the Company and damages. Under the settlement, the
Company agreed to make payments to the bankruptcy trustee in the amount of
$400,000, $25,000 of which already has been paid by the Company. The remaining
$375,000 was scheduled to be paid in installments over 30 months, without
interest, following court approval of the settlement. The U.S. Bankruptcy Court
for the District of New Jersey approved the settlement upon recommendation of
the bankruptcy trustee. The only objection to the settlement was entered by Mr.
Masi. None of Mr. Masi's creditors objected to the settlement. The U.S. District
Court for New Jersey approved the settlement on Mr. Masi's appeal of the
bankruptcy judge's order approving the settlement. Mr. Masi appealed the
District Court's order pro se to the U.S. Court of Appeals, after the withdrawal
of his lawyers from the case. The case is now pending before the Third Circuit.
The Company is subject to other litigation from time to time arising
from its operations, including litigation involving distributor terminations.
Management believes that any such pending litigation will not have a material
effect on the Company's financial position or results of operations.
The Company and several of its officers and employees have been affected
by an investigation being conducted by the staff of the U.S. Securities and
Exchange Commission since the Fall of 1994. The inquiry began as an
investigation into the activities of persons operating out of Spokane,
Washington who were responsible for attempting to take numerous companies,
including the Company, public through a process involving a "reverse merger"
with a public company shell in the early to mid-1990's. At the present time, the
Company is unable to predict the outcome of the investigation or whether it
might result in legal proceedings involving the Company or any of its officers
or employees.
-6-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information. The Company's Common Stock is traded
over-the-counter. Quotations are published through the OTC Bulletin Board. The
following table gives the range of quoted high and low bid prices for the
Company's Common Stock for each quarter within fiscal years 1996 and 1997 and as
of a recent date. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Quarter Low Bid High Bid
------- ------- --------
May 1, 1995 to July 31, 1995 $1.69 $2.00
August 1, 1995 to October 31, 1995 $1.75 $5.12
November 1, 1995 to January 31, 1996 $4.62 $11.24
February 1, 1996 to April 30, 1996 $9.75 $12.00
May 1, 1996 to July 31, 1996 $8.50 $12.00
August 1, 1996 to October 31, 1996 $6.00 $10.25
November 1, 1996 to January 31, 1997 $5.12 $8.25
February 1, 1997 to April 30, 1997 $4.00 $7.12
The closing sale price of the Company's Common Stock on August 5, 1997
was $6.38.
Holders. As of August 5, 1997, there were 383 holders of record of the
Company's Common Stock.
Cash Dividends. The Company has never paid cash dividends on its Common
Stock, and currently has no plans to pay cash dividends. The Company intends to
retain earnings to finance expansion and development of its business.
ITEM 6 SELECTED FINANCIAL DATA
The financial statements of the Company for the year ended April 30,
1997 were audited by Dixon, Odom and Co., L.L.P., independent certified public
accountants. The financial statements of the Company for the four years ended
April 30, 1996, 1995, 1994 and 1993 were audited by Terrence J. Dunne,
independent certified accountant. The following data should be read in
conjunction with the Company's audited financial statements and the notes
thereto.
-7-
Year Ended Year Ended Year Ended Year Ended Year Ended
4-30-97 4-30-96 4-30-95 4-30-94 4-30-93
------- ------- ------- ------- -------
Operating
Revenues $ 66,281,671 $ 42,479,911 $ 19,592,056 $ 9,391,946 $ 1,321,874
Net Income
(Loss) $ 8,471,221 $ 5,153,227 $ 794,767 $ 212,210 $ (30,455)
Net Income
(Loss) Per
Share $ 0.43 $ 0.26 $ 0.04 $ 0.01 $ (NIL)
Total Assets $ 21,691,428 $ 12,238,284 $ 3,619,045 $ 1,274,761 $ 325,782
Working
Capital $ 14,172,686 $ 5,751,385 $ 1,123,745 $ (27,686) $ (191,833)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Following is a schedule of selected financial statistics and ratios for
the Company on a comparative basis for the three most recent fiscal years:
Fiscal Current Percentage Current Percentage
Year End Assets Change Liabilities Change
-------- ------ ------ ----------- ------
4-30-95 $ 3,285,778 228.34% $ 2,162,033 110.23%
4-30-96 $ 11,495,565 249.86% $ 5,744,180 165.68%
4-30-97 $ 20,941,437 81.13% $ 6,768,751 17.84%
Fiscal Working Percentage Current Percentage Operating Percentage
Year End Capital Change Ratio Change Income Change
-------- --------- ---------- --------- ---------- -------- --------
4-30-95 $ 1,123,745 4,158.89% 151.98% 4,158.89% $ 1,345,915 321.27%
4-30-96 $ 5,751,385 411.80% 200.12% 31.67% $ 8,220,599 510.78%
4-30-97 $ 14,172,686 143.63% 309.38% 54.60% $ 13,276,603 61.50%
The primary current assets of the Company as of April 30, 1997 are cash
and short-item investments of $19,618,812, and inventory in the amount of
$1,244,586. Inventory turnover is high due to the type of products that the
Company sells and the increasing demand for these products.
In regard to liquidity, as of April 30, 1997, current assets exceeded
current liabilities by $14,172,686, for a current ratio of 3.09 to 1. This
compares with an excess of current assets over current liabilities of $5,751,385
as of April 30, 1996, for a current ratio of 2 to 1.
Income from operations increased by 61.5% from $8,220,599 for the year
ended April 30, 1996 to $13,276,603 for the year ended April 30, 1997. This
increase was primarily due to a 56% increase in revenues from $42,479,911 to
$66,281,671.
-8-
Sales continued to increase for the fifth consecutive year. The primary
reason for the continued increase in sales has been the increase in the number
of independent distributors throughout the United States and Canada. The primary
operating expense for the fiscal year ended April 30, 1997 was $29,645,933 in
commissions to independent contract or salespeople through whom all sales were
generated. Net income as a percentage of sales was 12.79% compared to 12.14% for
the prior fiscal year. The Company anticipates continued strong growth in sales,
and is also continuing to implement operating efficiencies in order to improve
net income. The Company has experienced considerable growth in distributorships
during the past two years. This growth can be attributed to concentrated efforts
to expand the Company's national meeting and seminar program to its present
level, as discussed under Item 1, "Description of Business--Marketing."
Focus on "one to one marketing" with continued improvement of the
Company's stores has caused new activity in the Company's inventory mix.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MARKET AMERICA, INC.
FINANCIAL STATEMENTS
April 30, 1997 and 1996
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MARKET AMERICA, INC.
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TABLE OF CONTENTS
Page No.
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INDEPENDENT AUDITOR'S REPORT................................. 1
FINANCIAL STATEMENTS
Balance Sheets............................................. 2
Statements of Income....................................... 3
Statements of Changes in Stockholders' Equity.............. 4
Statements of Cash Flows................................... 5
Notes of Financial Statements.............................. 7
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MARKET AMERICA, INC.
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Market America, Inc.
Greensboro, North Carolina
We have audited the accompanying balance sheet of Market America, Inc. as of
April 30, 1997 and the related statements of income, changes in stockholders'
equity and cash flows for the year then ended. 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 audit. The financial
statements of Market America, Inc. as of April 30, 1996 and for the years ended
April 30, 1996 and 1995, were audited by another auditor whose report dated July
5, 1996 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the financial position of Market America, Inc. as of
April 30, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Dixon, Odom & Co., L.L.P
Greensboro, North Carolina
August 1, 1997
Page 1
MARKET AMERICA, INC.
BALANCE SHEETS
April 30, 1997 and 1996
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1997 1996
-------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 2,323,943 $ 10,386,088
Short-term investment (Note 2) 17,294,869 -
Notes receivable, employees (Note 3) 58,095 61,696
Inventories (Note 1) 1,244,586 1,020,117
Other current assets 19,944 27,664
------------- -------------
TOTAL CURRENT ASSETS 20,941,437 11,495,565
------------- -------------
PROPERTY AND EQUIPMENT (Notes 1 & 4)
Furniture and equipment 839,057 588,455
Software 128,840 128,840
Leasehold improvements 2,570 2,570
------------- -------------
970,467 719,865
Less accumulated depreciation 294,553 176,966
------------- -------------
675,914 542,899
------------- -------------
OTHER ASSETS
Restricted cash (Note 4) 74,077 69,820
Long-term investments (Note 6) - 130,000
------------- -------------
74,077 199,820
------------- -------------
$ 21,691,428 $ 12,238,284
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 4) $ 250,254 $ 243,891
Note payable - related party (Note 6) - 292,714
Accounts payable 1,550,609 1,024,429
Sales and payroll taxes payable 283,268 233,515
Commissions payable 1,516,365 1,842,806
Accrued compensation 276,212 376,746
Income taxes payable 1,866,021 1,372,978
Unearned revenue (Note 5) 1,026,022 357,101
------------- -------------
TOTAL CURRENT LIABILITIES 6,768,751 5,744,180
-------------- --------------
LONG-TERM DEBT (Note 4) 281,707 324,355
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, $.00001 par value; 800,000.000 shares
authorized; 19,950,000 issued and outstanding 199 199
Additional paid-in capital 39,801 39,801
Retained earnings 14,600,970 6,129,749
------------- -------------
14,640,970 6,169,749
$ 21,691,428 $ 12,238,284
============= =============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. Page 2
MARKET AMERICA, INC.
STATEMENTS OF INCOME
Years Ended April 30, 1997, 1996 and 1995
================================================================================
1997 1996 1995
------------- ------------- ------------
Sales $ 66,281,671 $ 42,479,911 $ 19,592,056
Cost of Sales 12,249,121 9,173,672 4,343,000
------------- ------------- ------------
GROSS PROFIT 54,032,550 33,306,239 15,249,056
Operating Expenses
Commissions 29,645,933 18,643,914 10,336,579
Salaries 3,724,976 1,799,270 878,702
Freight 2,837,867 1,653,617 674,433
Consulting 377,234 885,345 593,158
Rents 389,862 239,387 111,084
Depreciation and amortization 122,839 75,315 45,532
Other operating expenses 3,657,236 1,788,792 1,263,653
------------- ------------- ------------
40,755,947 25,085,640 13,903,141
------------- ------------- ------------
INCOME FROM OPERATIONS 13,276,603 8,220,599 1,345,915
Other Income (Expense)
Interest income 595,651 232,855 49,917
Interest expense (40,707) (33,515) (40,895)
Loss on disposals of assets (6,808) (4,507) (30,826)
Miscellaneous income 451,051 89,678 4,455
------------- ------------- ------------
999,187 284,511 (17,349)
------------- ------------- ------------
INCOME BEFORE TAXES 14,275,790 8,505,110 1,328,566
Income Taxes (Note 8) 5,804,569 3,351,883 533,799
------------- ------------- ------------
NET INCOME $ 8,471,221 $ 5,153,227 $ 794,767
============= ============= ============
Net Income Per Share $ .43 $ .26 $ .04
============= ============= ============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. Page 3
MARKET AMERICA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended April 30, 1997, 1996 and 1995
================================================================================
Common Stock Additional
-------------------------- Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
BALANCE, April 30, 1994 19,950,000 $ 199 $ 39,801 $ 181,755 $ 221,755
Net income - - - 794,767 794,767
------------- ------------ ------------ ------------- ------------
BALANCE, April 30, 1995 19,950,000 199 39,801 976,522 1,016,522
Net income - - - 5,153,227 5,153,227
------------- ------------ ------------ ------------- ------------
BALANCE, April 30, 1996 19,950,000 199 39,801 6,129,749 6,169,749
Net income - - - 8,471,221 8,471,221
------------- ------------ ------------ ------------- ------------
BALANCE, April 30, 1997 19,950,000 $ 199 $ 39,801 $ 14,600,970 $ 14,640,970
============= ============ ============ ============= ============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. Page 4
MARKET AMERICA, INC.
STATEMENTS OF CASH FLOWS
Years Ended April 30, 1997, 1996 and 1995
================================================================================
1997 1996 1995
------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,471,221 $ 5,153,227 $ 794,767
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 122,839 75,315 45,532
Loss on disposal of assets 6,808 4,507 30,826
(Increase) in inventories (224,469) (569,935) (264,788)
(Increase) decrease in other current assets 7,720 (21,427) 1,835
Increase in accounts payable 526,180 310,617 320,763
Increase in taxes payable 542,796 1,105,530 354,662
Increase (decrease) in commissions payable (326,441) 1,340,007 249,200
Increase (decrease) in accrued compensation (100,534) 246,652 130,094
Increase in unearned revenue 668,921 44,901 312,200
Increase in note payable (settlement) - 400,000 147,000
Increase (decrease) in interest payable - (7,109) 7,109
------------- ------------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 9,695,041 8,082,285 2,129,200
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (258,067) (170,433) (139,949)
Purchase of long-term investments - (130,000) 4,579
Purchase of short-term investments (17,294,869) - -
Proceeds from sale of long-term investments 125,405 - -
(Increase) decrease in notes receivable, employees 3,601 (61,696) -
Increase in restricted cash (4,257) (69,820) -
------------- ------------- ------------
NET CASH USED FOR
INVESTING ACTIVITIES (17,428,187) (431,949) (135,370)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments on) notes payable
and long-term debt (328,999) (94,288) 28,270
------------- ------------- ------------
NET CASH PROVIDED BY
(USED FOR) FINANCING ACTIVITIES (328,999) (94,288) 28,270
------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (8,062,145) 7,556,048 2,022,100
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 10,386,088 2,830,040 807,940
------------- ------------- ------------
CASH AND CASH EQUIVALENTS
AND END OF YEAR $ 2,323,943 $ 10,386,088 $ 2,830,040
============= ============= ============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. Page 5
MARKET AMERICA, INC.
STATEMENTS OF CASH FLOWS
Years Ended April 30, 1997, 1996 and 1995
================================================================================
1997 1996 1995
------------- ------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 28,467 $ 33,376 $ 33,786
============= ============= ============
Income taxes $ 5,311,526 $ 3,351,883 $ 123,229
============= ============= ============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. Page 6
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1997, 1996 and 1995
================================================================================
NOTE 1 o ORGANIZATION AND SIGNIFICANT POLICIES
Market America, Inc. 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
part-time independent contractors to sell these products. The Company supplies
marketing information to these individuals in order to assist them in their
sales efforts. The Company sells its products throughout the United States,
Canada, Puerto Rico and the Bahamas.
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. The Company maintains its
cash in bank deposit accounts which, at times, may exceed federally insured
limits. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk on cash and cash equivalents.
Short-term investments
The Company classifies short-term investments in debt securities as
held-to-maturity securities and, accordingly, carries them at amortized cost in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
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 on a straight line
basis over the estimated useful lives of the assets. 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.
Revenue recognition
The Company recognizes sales revenue at the time products are shipped.
- --------------------------------------------------------------------------------
Page 7
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1997,1996 and 1995
================================================================================
NOTE 1 o ORGANIZATION AND SIGNIFICANT POLICIES (Continued)
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related to temporary differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets and liabilities represent
the future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Net income per share
Net income per share is determined based on 19,950,000 common shares, the
weighted average number of common shares outstanding during each of the years
ended April 30, 1997, 1996 and 1995.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Reclassifications
Certain reclassifications have been made to prior-year amounts to conform with
the current-year financial statement presentation.
New accounting standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." This Statement
specifies the computation, presentation and disclosure requirements for earnings
per share, and its implementation is not expected to have a significant impact
on the Company's net income per share. The Company will adopt this new standard
during the third quarter of its year ending April 30, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement establishes standards of reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. This
Statement will be effective for the Company's fiscal year ending April 30, 1999,
and the Company does not intend to early adopt. Adoption of this Statement is
not expected to have a significant effect on the Company's financial statements.
- --------------------------------------------------------------------------------
Page 8
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1997, 1996 and 1995
================================================================================
NOTE 2 o SHORT-TERM INVESTMENT
Short-term investment at April 30 consisted of the following:
1997 1996
-------------- --------------
Master note, maturing September 30, 1997, earning
interest of 4.5% at April 30, 1997. $ 17,294,869 $ -
=============== ===============
NOTE 3 o NOTES RECEIVABLE, EMPLOYEES
The Company has several employee loans evidenced by promissory notes. All of the
notes bear interest at the rate of 6% per annum. The largest of the notes, in
the amount of $38,751 at April 30, 1997, is secured by 50,000 shares of Market
America, Inc. common stock. All of the remaining notes are unsecured.
NOTE 4 o LONG-TERM DEBT
1997 1996
------------ -------------
Notes payable collateralized by equipment, due in monthly installments
aggregating $2,440 at April 30, 1997, including interest ranging from 6% to
8%. One of these notes is also collateralized by a certificate of deposit
that is reported as restricted cash on the accompanying
balance sheets. $ 91,541 $ 96,369
Obligation due in monthly installments of $3,000 including
interest discounted at 9% with remaining balance due
December 31, 1999. 65,420 96,877
Obligation arising in settlement of litigation as approved by
the U.S. Bankruptcy Court for the District of New Jersey. (a) 375,000 375,000
------------ ------------
531,961 568,246
Less current portion due within one year 250,254 243,891
------------ ------------
$ 281,707 $ 324,355
============ ============
- --------------------------------------------------------------------------------
Page 9
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1997, 1996 and 1995
================================================================================
NOTE 4 o LONG-TERM DEBT (Continued)
Future maturities of long-term debt at April 30, 1997 are estimated to be due as
follows:
Year Ending April 30,
1998 $ 250,254
1999 172,209
2000 77,542
2001 27,886
2002 4,070
------------
$ 531,961
============
(a) The plaintiff (Masi) has appealed the U.S. Bankruptcy Court's approval of
the settlement to the U.S. Third Circuit Court of Appeals, and the Company
will continue to vigorously oppose the plaintiff's attempts to overturn the
approval of this settlement. The Company has deferred payments under the
approved settlement until all appeals are resolved. The ultimate resolution
of this matter is not presently determinable.
NOTE 5 o UNEARNED REVENUE
The Company sponsors two conventions per year for its distributors. The unearned
revenue represents cash collected from advance ticket sales.
NOTE 6 o RELATED PARTY TRANSACTIONS
Note payable to related party at April 30, 1996, represented loans received by
the Company from Mr. James H. Ridinger, an officer and stockholder, which were
due on demand and included interest of 8% per annum. Interest expense related to
this debt amounted to $13,325, $28,823, and $21,411 during the years ended April
30, 1997, 1996, and 1995, respectively.
On April 15, 1996, the Company purchased the former home of Mr. And Mrs.
Ridinger to provide lodging and meeting facilities for corporate guests. The
home was purchased for $130,000 and thereafter sold to an unrelated third party
on May 29, 1996.
- --------------------------------------------------------------------------------
Page 10
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1997, 1996 and 1995
================================================================================
NOTE 7 o OPERATING LEASE COMMITMENTS
The Company occupies leased premises in Greensboro, North Carolina. The lease
commenced on April 1, 1995, and will terminate on October 31, 1997. The Company
is negotiating an extension of this lease. 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 as of April
30, 1997 are as follows:
1998 $ 158,280
1999 69,570
2000 9,672
------------
Total future minimum lease payments $ 237,522
============
NOTE 8 o INCOME TAXES
Income tax expense is comprised of the following:
1997 1996 1995
------------ ------------ ------------
Current tax provision
Federal $ 4,671,743 $ 2,687,762 $ 426,201
State 1,132,826 664,121 107,598
------------ ------------ ------------
5,804,569 3,351,883 533,799
Deferred tax provision - - -
------------ ------------ ------------
Total income tax provision $ 5,804,569 $ 3,351,883 $ 533,799
============ ============ ============
A reconciliation of the statutory U.S. federal income tax rate and the effective
income tax rate is as follows:
1997 1996 1995
------------- ------------ ------------
Statutory U.S. federal rate 35.0% 34.0% 34.0%
State income tax, net of federal benefit 5.1 5.1 5.2
Other, net .6 .3 1.0
---------- ----------- -----------
40.7% 39.4% 40.2%
========== =========== ===========
- --------------------------------------------------------------------------------
Page 11
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1997, 1996 and 1995
================================================================================
NOTE 9 o LITIGATION
As of April 30, 1997, the Company was a defendant in two lawsuits (exclusive of
the matter discussed in Note 4 to the financial statements). These lawsuits
involve product liability claims and have been referred to the Company's
liability insurer for defense. The Company vigorously opposes these claims, and
it is, at this time, impractical to estimate any possible adverse monetary
effects on the Company.
In addition to the lawsuits mentioned previously, the Company is involved in
other lawsuits arising in the ordinary course of business. In the opinion of the
Company's legal counsel and management, any liability resulting from such
litigation will not be material in relation to the Company's financial position.
NOTE 10 o FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the balance sheets for cash and cash
equivalents, short-term investments, notes receivable and note payable
approximate their respective fair values. The carrying value of long-term debt
exceeds its estimated fair value by approximately $36,000 at April 30, 1997 and
1996. Fair values are based primarily on current interest rates available for
those or similar instruments.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Item 10 is incorporated herein by reference to
the Company's Notice and Information Statement to be filed on or about August
28, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to Item 11 is incorporated herein by reference to
the Company's Notice and Information Statement to be filed on or about August
28, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information relating to Item 12 is incorporated herein by reference to
the Company's Notice and Information Statement to be filed on or about August
28, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Item 13 is incorporated herein by reference to
the Company's Notice and Information Statement to be filed on or about August
28, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are included in this report.
Balance Sheets as of April 30, 1997 and 1996
Statements of Income for the Years Ended April 30, 1997, 1996
and 1995
Statements of Changes in Stockholders' Equity for the Years
Ended April 30, 1997, 1996 and 1995
Statements of Cash Flows for the Years ended April 30, 1997, 1996
and 1995
Notes to Financial Statements
-10-
(a)(2) Financial Statement Schedules
Not applicable.
(a)(3) Exhibits
The exhibits to this report are identified in the Exhibit Index, which
appears immediately after the signature page and is incorporated in
this Item 14 by this reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last
quarter of the fiscal year covered by this report.
-11-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Greensboro, State of North Carolina, on August 13, 1997.
MARKET AMERICA, INC.
By: /s/ James H. Ridinger
----------------------------
James H. Ridinger
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ James H. Ridinger August 13, 1997
- --------------------------------------
James H. Ridinger
President, Chief Executive Officer and Director
(Principal Executive, Financial and Accounting Officer)
/s/ Loren A. Ridinger August 13, 1997
- --------------------------------------
Loren A. Ridinger
Vice President of Administration and Director
/s/ Dennis Franks August 13, 1997
- --------------------------------------
Dennis Franks
Executive Vice President and Director
/s/ Martin Weissman August 13, 1997
- --------------------------------------
Martin Weissman
Executive Vice President and Director
-12-
MARKET AMERICA, INC.
EXHIBITS TO FORM 10-K
EXHIBIT INDEX
Exhibit
Number Identification
------ --------------
2(1) Agreement and Plan of Merger dated as of October 1, 1993 between Atlantic
Ventures, Inc. and Market America, Inc. and Addendum (to same) dated
October 1, 1993 (incorporated by reference to Exhibits 2.1 and 2.2,
respectively, to the Company's Current Report on Form 8-K filed October 6,
1993, Commission File No. 000-23250)
3(i)(1) Articles of Incorporation of the Company (incorporated by reference to Exhibit
3.1 to the Company's Current Report on Form 8-K filed with the Commission
on November 3, 1993, Commission File No. 000-23250)
3(i)(2) Articles of Amendment of the Company (incorporated by reference to Exhibit
3.3 to the Company's Annual Report on Form 10-K filed with the Commission
on July 30, 1996, Commission File No. 000-23250)
3(ii) By-Laws of the Company (incorporated by reference to Exhibit 3.4 to the
Company's annual report on Form 10-K filed with the Commission on July 30,
1996, Commission File No. 000-23250)
4(1) Article 2 of the Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3(i) to the Company's Current Report on Form 8-K filed
with the Commission on November 3, 1993, Commission File No. 000-23250)
4(2) Articles of Merger of Atlantis Ventures, Inc. and Market America, Inc.
(incorporated by reference to Exhibit 2.3 to the Company's Current Report on
Form 8-K filed with the Commission on November 3, 1993, Commission File
No. 000-23250)
27 Financial Data Schedule*
* Filed herewith.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FDS --
<TEXT>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Financial Condition at April 30, 1997 and the Statement of
Operations for the year ended April 30, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000880121
<NAME> Market America
<MULTIPLIER> 1
<CURRENCY> U.S Dollars
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 2,323,943
<SECURITIES> 17,294,869
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,244,586
<CURRENT-ASSETS> 20,941,437
<PP&E> 970,467
<DEPRECIATION> 294,553
<TOTAL-ASSETS> 21,691,428
<CURRENT-LIABILITIES> 6,768,751
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 199
<OTHER-SE> 14,640,771
<TOTAL-LIABILITY-AND-EQUITY> 21,691,428
<SALES> 66,281,671
<TOTAL-REVENUES> 66,281,671
<CGS> 12,249,121
<TOTAL-COSTS> 12,249,121
<OTHER-EXPENSES> 40,755,947
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,707
<INCOME-PRETAX> 14,275,790
<INCOME-TAX> 5,804,569
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,471,221
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43