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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended October 31, 1997
Commission file number 000-23250
MARKET AMERICA, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1784094
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7605-A Business Park Drive
Greensboro, North Carolina
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(Address of principal executive offices)
27409
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(Zip Code)
(910) 605-0040
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that 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 | |
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of December 8, 1997.
19,950,000
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PART I
ITEM 1 Statement of Financial Position as of October 31, 1997 and April
30, 1997
Statement of Operations for the Three and Six Month Periods Ended
October 31, 1997 and 1996
Statement of Changes in Stockholders' Equity for the Three Month
Periods Ended October 31, 1997 and 1996
Statement of Cash Flows for the Three and Six Month Periods Ended
October 31, 1997 and 1996
Notes to Financial Statements as of October 31, 1997
2
Statement of Financial Position as of
MARKET AMERICA, INC. October 31, 1997 and April 30, 1997
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ASSETS
(Unaudited)
October 31, April 30,
1997 1997
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 24,415,912 $ 2,323,943
Short-term investments 17,294,869
Advances and receivables 30,993
Advances to officers and employees 63,457
Notes receivable, employees 57,093 58,095
Inventories 1,990,886 1,244,586
Other current assets 25,990 19,944
------------ -------------
Total current assets 26,584,331 20,941,437
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PROPERTY AND EQUIPMENT
Furniture and equipment 909,303 839,057
Software 258,204 128,840
Leasehold improvements 6,370 2,570
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1,173,877 970,467
Less accumulated depreciation and
amortization 371,419 294,553
------------ -------------
Total property and equipment 802,458 675,914
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OTHER ASSETS
Restricted cash 76,907 74,077
Deposits 2,670
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Total other assets 79,577 74,077
------------ -------------
TOTAL ASSETS $ 27,466,366 $ 21,691,428
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 961,696 $ 1,550,609
Payroll taxes payable 5,747 43,854
Sales taxes payable 497,245 239,414
Commissions payable 1,549,145 1,516,365
Accrued compensation 84,718 276,212
Income taxes payable 2,574,241 1,866,021
Unearned revenue 882,000 1,026,022
Current portion of long-term debt 259,884 250,254
------------ -------------
Total current liabilities 6,814,676 6,768,751
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LONG-TERM DEBT 233,520 281,707
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STOCKHOLDERS' EQUITY
Common stock; $.00001 par value;
800,000,000 shares authorized;
19,950,000 shares issued and
outstanding 199 199
Additional paid-in capital 39,801 39,801
Retained earnings 20,378,170 14,600,970
------------ -------------
Total stockholders' equity 20,418,170 14,640,970
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TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 27,466,366 $ 21,691,428
============ =============
The accompanying notes are an integral part of these financial statements.
3
Statement of Operations for the Three
and Six Month Periods Ended October 31,
MARKET AMERICA, INC. 1997 and 1996
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Three Month Periods Ended Six Month Periods Ended
------------------------------ ---------------------------------
October 31, October 31, October 31, October 31,
1997 1996 1997 1996
---- ---- ---- ----
SALES $ 21,729,643 $ 15,498,785 $ 41,193,466 $ 31,183,453
COST OF SALES 3,275,930 2,755,257 5,928,709 5,724,139
------------ ------------ ------------ ------------
GROSS PROFIT 18,453,713 12,743,528 35,264,757 25,459,314
------------ ------------ ------------ ------------
OPERATING EXPENSES
Commissions 10,272,125 7,261,106 19,002,581 14,275,380
Salaries 1,170,856 764,559 2,094,338 1,632,582
Freight 564,695 806,084 1,492,182 1,515,503
Consulting 22,427 79,200 78,363 199,720
Rent 163,864 119,300 287,356 169,515
Depreciation and amortization 42,775 27,224 76,866 52,478
Other operating expenses 997,433 748,854 2,779,796 1,536,233
------------ ------------ ------------ ------------
Total operating expenses 13,234,175 9,806,327 25,811,482 19,381,411
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 5,219,538 2,937,201 9,453,275 6,077,903
------------ ------------ ------------ ------------
OTHER INCOME (LOSS)
Interest 242,168 131,032 414,491 244,030
Loss on disposal of assets (4,595)
Miscellaneous (25,747) 11,109 9,140 71,611
------------ ------------ ------------ ------------
Total other income 216,421 142,141 423,631 311,046
------------ ------------ ------------ ------------
INCOME BEFORE TAXES 5,435,959 3,079,342 9,876,906 6,388,949
PROVISION FOR INCOME TAXES 2,310,846 1,245,288 4,099,706 2,560,616
------------ ------------ ------------ ------------
NET INCOME $ 3,125,113 $ 1,834,054 $ 5,777,200 3,828,333
============ ============ ============ =========
NET INCOME PER SHARE $ .16 $ .09 $ .29 $ .19
============ ============ ============ =========
The accompanying notes are an integral part of these financial statements.
4
Statement of Changes in Stockholders'
Equity for the Three Month Periods
MARKET AMERICA, INC. Ended October 31, 1997 and 1996
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Common Stock Additional
------------------------- Paid-in Retained
Shares Amount Capital Earnings Total
----------- ------ --------- ---------- ------
Balances at July 31, 1996 19,950,000 $199 $39,801 $8,124,028 $8,164,028
Net income 1,834,054 1,834,054
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Balances at October 31, 1996 19,950,000 $199 $39,801 $9,958,082 $9,998,082
========== ==== ======= =========== ===========
Balances at July 31, 1997 19,950,000 $199 $39,801 $17,253,057 $17,293,057
Net income 3,125,113 3,125,113
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Balances at October 31, 1997 19,950,000 $199 $39,801 $20,378,170 $20,418,170
========== ==== ======= =========== ===========
The accompanying notes are an integral part of these financial statements.
5
Statement of Cash Flows for the Three and Six Month
MARKET AMERICA, INC. Periods Ended October 31, 1997 and 1996
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Three Month Periods Ended Six Month Periods Ended
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October 31, October 31, October 31, October 31,
1997 1996 1997 1996
----------- ---------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $3,125,113 $1,834,054 $5,777,200 $3,828,333
Add items not requiring the use of cash:
Depreciation and amortization 42,775 27,224 76,866 52,478
Increase in advances to and receivables
from employees (94,450) (9,264) (94,450) (12,764)
(Increase) decrease in notes receivable,
employees (469) (37,177) 1,002 (6,974)
Decrease in interest receivable 1,236
(Increase) decrease in inventories (203,230) 445,848 (746,300) (93,443)
(Increase) decrease in prepaid expenses 33,424 (4,522) (6,046) 7,980
Increase (decrease) in accounts payable (485,553) 227,901 (588,913) 397,075
Increase (decrease) in taxes payable 1,183,004 (95,571) 927,944 (237,402)
Increase (decrease) in commissions
payable 262,608 110,500 32,780 (683,562)
Increase (decrease) in accrued
compensation (33,555) 17,578 (191,494) (306,693)
Increase (decrease) in unearned revenue 75,300 62,038 (144,022) 247,562
------------- ------------ ----------- ----------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 3,904,967 2,578,609 5,044,567 3,193,826
------------ ----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of short-term
investments 17,294,869
Purchase of furniture and equipment
(41,749) (55,706) (70,246) (89,099)
Purchase of software (129,364) (129,364)
Purchase of leasehold improvements
(3,800) (3,800)
Sale of investments 130,000
Increase in restricted cash (1,943) (2,830)
Increase in
deposits (2,670) (2,670)
------------ ----------- ---------- ---------
NET CASH PROVIDED (USED)
FROM INVESTING ACTIVITIES
(179,526) (55,706) 17,085,959 40,901
------------ ----------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in advances from
shareholders 3,505 (115,091)
Reduction in obligations under capital
lease (1,389) (1,389)
Increase (decrease) in notes payable
(22,922) 19,527 (38,557) 6,570
------------ ----------- ----------- ----------
NET CASH PROVIDED (USED)
FROM FINANCING ACTIVITIES
(22,922) 21,643 (38,557) (109,910)
------------ ----------- ----------- ----------
NET INCREASE IN CASH 3,702,519 2,544,546 22,091,696 3,124,817
CASH AT BEGINNING OF PERIOD
20,713,393 11,036,179 2,323,943 10,455,908
------------ ----------- ----------- ----------
CASH AT END OF PERIOD $24,415,912 $13,580,725 $24,415,912 $13,580,725
============ =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
6
Notes to Financial Statements
MARKET AMERICA, INC. As of October 31, 1997
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Interim Financial Information
The unaudited interim financial statements of Market America, Inc. (the
"Company") 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 October 31, 1997 and for the three and six month
periods ended October 31, 1997 and 1996. 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 quarter and six months ended
October 31, 1997 may not be indicative of the results that may be expected for
the fiscal year ending April 30, 1998.
Earnings Per Share
Effective for years beginning subsequent to December 15, 1996, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128. This statement specifies the calculation, presentation, and disclosure
requirements for earnings per share. The implementation of this statement is not
expected to have a material effect on the Company's financial statements.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories increased from $1,787,656 at July 31, 1997 to $1,990,886 at
October 31, 1997. This $203,230 (11%) increase is primarily attributed to
additional products offered by the Company.
Accounts Payable
The Company's trade accounts payable decreased from $1,550,609 at April 30, 1997
to $961,696 at October 31, 1997, in part because the Company's strong cash
position has enabled it take advantage of all available vendor discounts.
Management continues to monitor accounts payable closely and is constantly
exploring ways to maximize vendor discount programs.
Related Party Transactions
The Company leased a yacht which is used as an integral part of direct sales
training and recruitment program. The yacht is leased from an entity of which
Mr. & Mrs. James H. Ridinger, officers and major stockholders of the Company,
have a beneficial interest. During the quarter ended October 31, 1997, $178,655
of expenses in excess of income were incurred relating to the maintenance and
operation of the yacht. Management believes that a significant portion of the
operating and maintenance expenses of the yacht can be offset through chartering
in the future.
7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity & Capital Resources
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. Cash and cash equivalents
increased approximately $22.1 million to $24.4 million for the six months ending
October 31, 1997. This increase can be attributed primarily to the conversion of
$17.3 million of short-term investment to cash during the quarter ended July 31,
1997. Management is currently evaluating various short-term investment options
for the Company.
The nature of the Company's business and its continued growth is yielding
considerable cash flow from operations. The Company's cash flow from operations
was $3.9 million for the three months ended October 31, 1997, as compared to
$2.6 million for the same period of the previous year. This $1.3 million
increase can be attributed primarily to the increase in the Company's net
earnings. Given the cash provided by operations and the current cash balances of
the Company, management believes that it has sufficient working capital for the
next year. However, an unusually adverse operating environment could require the
use of cash reserves.
The Company's warehouse and office lease expired on October 31, 1997. An
18-month lease extension with a buyout option was executed for the present
facility subsequent to the expiration of the original lease. Management
continues to explore other alternatives to leasing this facility. At this time,
management has not reached a decision as to whether the Company will continue
leasing at the present or another location.
On October 31, 1997 current assets and liabilities of the Company were
approximately $26.6 million and $6.8 million, respectively. The Company's
current ratio was 3.90 to 1.0 at October 31, 1997 versus 3.09 to 1.0 at April
30, 1997. Stockholders' equity increased approximately $3.1 million during the
three month period ending October 31, 1997. The Company has not declared any
stock or cash dividends since its inception. Management has no plans to declare
any dividends in the near future as all cash and cash equivalents are being
maintained for operations and future expansion.
Results of Operations
Sales revenue for the three and six months ended October 31, 1997, were $21.7
million and $41.2 million compared to $15.5 million and $31.2 million, increases
of approximately 40% and 32% respectively, compared to the corresponding 1996
periods. Management believes the three and six month increases in sales are due
to an expanding distributor base which has increased consumer awareness of the
Company and its products. The Company's sales and weight loss, health, and
nutritional products continue to be strong due to the general public's interest
in health and fitness. Also, considerable interest has been received regarding
the new Motivestm customized cosmetics line. This product line has steadily
increased its position within the Company's product alignment and management
believes sales of the product will continue to grow and that it will become a
sales leader.
8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONT'D)
The Company's gross profit percentages for the three and six months ended
October 31, 1997 were 84.92% and 85.61% respectively, compared to 82.22% and
81.64% for the same 1996 periods. The increase in gross profit percentages were
primarily due to the sales mix of products sold during the periods, inasmuch as
the increase in sales of higher gross profit margin products was greater than
increases in sales of other products, yielding a higher overall gross profit.
Management's constant search for higher gross profit producing products, such as
the Motivestm customized cosmetics line, also contributed to the increase.
Commissions paid to independent distributors are a vital part of the Company's
marketing program. Commissions grew approximately $3.0 million to $4.7 million
for the three and six months ended October 31, 1997, versus the corresponding
periods in 1996. The dollar increase in commissions was roughly proportional to
the increase in revenue for the three and six month periods ending October 31,
1997, although commissions, as a percentage of sales, grew slightly during the
periods. Management expects commissions as a percentage of sales to remain
relatively constant for the remainder of 1997.
Total operating expenses, as a percentage of sales, were 60.90% and 62.66% for
the three and six month periods ended October 31, 1997 as compared to 63.27% and
62.15% for the respective 1996 periods. The largest component of total operating
expenses was commissions expense. As previously discussed, commissions expense
remained relatively constant as a percentage of sales and was directly related
to the increase in sales volume. Salary expenses, as a percentage of sales, for
the three and six month periods ended October 31, 1997, were 5.39% and 5.08%.
This compares to the 4.93% and 5.24% for the same 1996 periods. Due to an
expanding product line and double digit increases in sales revenue, the Company
has had to employ more people to run its operations efficiently. The Company has
increased it's full-time workforce approximately 50% from October 31, 1996 to
October 31, 1997.
Pre-tax income, as a percentage of sales, increased 5.15% to 25.02% and 3.49% to
23.98% for the three and six month periods ended October 31, 1997, as compared
to the same periods last year. This resulted in an increase in income taxes for
the current year. Income taxes were $2.3 million and $4.1 million for the three
and six months ended October 31, 1997. They increased from $1.2 million and $2.6
million for the same periods in 1996. The increases in sales, gross profit, and
corresponding net income were the primary reason for the increased tax
liability. Income taxes payable grew from $1,866,021 at April 30, 1996 to
$2,574,241 at October 31, 1997.
9
PART II
ITEM 1 LEGAL PROCEEDINGS
During the period covered by this report, no legal proceedings
required to be reported became reportable events, and there were
no material developments in or terminations of previously
reported proceedings, except that the Company's defense of
numerous appeals in the case originally styled as Larry A. Masi
v. Market America, Inc. et al., Civil Case No. 95-CV-6374 (D.
N.J.), have concluded favorably for the Company, with the
bankruptcy court's approval of a settlement agreement being
upheld and all appeals of Mr. Masi having been exhausted.
The Company is subject to other litigation from time to time
arising from its operations, including litigation involving
distributor compliance and terminations. Management believes that
any such pending litigation will not have a material effect on
the Company's financial position or results of operations.
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on
September 30, 1997. At the meeting, James H. Ridinger, Loren A.
Ridinger, Dennis J. Franks and Marty Weissman were unanimously
re-elected as directors of the Company.
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits to this report are listed in the Exhibit Index,
which is incorporated herein by reference.
(b) Reports on Form 8-K
None
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MARKET AMERICA, INC.
(Registrant)
Date: December 15, 1997 By: /s/
---------------------------------
James H. Ridinger, President
and CEO
Date: December 15, 1997 /s/
---------------------------------
James H. Ridinger, President
and CEO (as Principal Financial
Officer)
11
MARKET AMERICA, INC.
EXHIBITS TO FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Identification
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2.1 Agreement and Plan of Merger dated as of October 1, 1993
between Atlantis 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)
3.1 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)
3.2 Articles of Amendment of the Company (incorporated by
reference to Exhibit 3.3 to the Com pany's Annual Report on
Form 10-K filed with the Commission on July 30, 1996,
Commission File No. 000-23250)
3.3 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)
10.1* Lease between Miracle Marine, Inc. and Market America, Inc.
dated June 1, 1997
27* Financial Data Schedule
* Filed herewith.
12