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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, 1999 Commission File No. 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 No.)
7605 Business Park Drive
Greensboro, NC 27409
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(Address of Principal Executive (Zip Code)
offices)
(336) 605-0040
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(Registrant's Telephone Number, Including Area Code)
Securities Registered under Section 12(b) of the Exchange Act:
None
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(Title of Class)
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.00001 per share
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(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 July 26, 1999 closing sale price of $6.44) was
$23,832,830 million. The Common Stock is traded over-the-counter and quoted
through the OTC Bulletin Board. As of July 26, 1999, 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 August 25,
1999, is incorporated by reference in Part III, Items 10,11, 12 and 13 of this
report.
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Item 1. Business
Introduction
Market America, Inc. is a seven-year-old product brokerage and one-to-one
marketing company that sells an assortment of consumer-oriented products and
services, including automotive lubricants, enzyme-activated cleaning and soil
conditioning products, biologically activated hydrocarbon remediation products,
water filters, household cleaning products, frozen gourmet meals, gourmet
coffee, flower arrangements, dietary and nutritional supplements, vitamins,
photographic services, personal protection devices, jewelry, a full line of
custom-blended cosmetics and a separate line of cosmetics developed especially
for teenagers, personal care products including skin and hair care products and
bath products, personal development products and various marketing support
materials. The Company operates through a network of approximately 65,000
independent distributors.
The Company has attempted to position itself as a leader in a relatively 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, Inc. considers itself a leader in mass
customization. The Company has thus far introduced its customized Motives(TM)
cosmetics line and a customized gourmet food line.
Market America considers itself a leading edge marketing and distribution
company. The Company believes it has taken the best attributes of existing
franchising and network distribution systems and combined them into a unique
marketing plan, referred to as The UnFranchise(R). The UnFranchise(R) system is
not a franchise, not a retail store, not a mail order business and not a
traditional multi-level/direct sales company. Market America is a product
brokerage company that combines the power of direct selling with the blueprint
for success often associated with the franchising industry without the costs and
charges normally associated with franchising. Market America is a hybrid between
franchising and direct selling. It is like franchising because of the
systemization and required methods of doing business. Within this structured
environment, Market America applies the power of direct selling by developing
one-to-one relationships but taking this concept to a new level by focusing upon
individual needs of customers through mass customization.
The Company's principal executive offices and national distribution center are
located at 7605 Business Park Drive, Greensboro, North Carolina 27409. The
telephone number at that address is (336) 605-0040.
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 "Mall without Walls(TM)." The Company 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 30.6% of gross revenue during
the fiscal year ended April 30, 1999. During the years ended April 30, 1998 and
1997, OPC-3 constituted 34.2% and 25.4%, respectively, of gross revenue. Sales
volume for the Company's former leading seller, Thermochrome 5000, an energy and
weight management product, remained stable in fiscal years 1999 and 1998, but
was less than 10% of gross revenue. In fiscal year 1997, sales of Thermochrome
5000 constituted 17.1% of gross revenue.
As a product brokerage company, the Company does not engage in manufacturing
activities. All products sold by the Company are purchased from unrelated
suppliers. All of the Company's products are sold under trade names that are
exclusive to the Company 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 the Company with
vitamin compounds and nutritional supplements, including OPC-3, that accounted
for 44.0% of the Company's gross sales in fiscal year 1999, 49.3% in fiscal year
1998 and 37.5% in fiscal year 1997, under a contract dating from 1993. In order
to reduce the risk of reliance on a single manufacturer, the Company is
continually in the process of identifying alternative sources for its products.
Marketing
Sales of the Company's products are primarily dependent upon the efforts of the
Company's independent distributors and preferred customers. Distributor growth
is important to continued success in the direct selling industry. The Company
had 64,883, 59,298 and 48,597 active distributors at April 30, 1999, 1998 and
1997, 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 the Company's
product lines expand and as distributor recruitment increases.
The Company 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 the Company's most significant expense and
represent approximately 45.03%, 44.63% and 44.73% of net sales volume for the
years ended April 30, 1999, 1998 and 1997, respectively. Management believes
distributor commissions as a percent of net sales will remain relatively
constant for the year ending April 30, 2000.
The Company's product return policy allows retail customers to return product to
a distributor and receive a full cash refund within three business days. The
Company reimburses any distributor who then provides proper documentation and
the returned product within thirty days.
The Company less a 10% restocking fee will refund the return of marketable and
unused products initiated by a distributor within thirty days of purchase.
The Company upon receipt of proper documentation from the distributor will
replace product that was damaged during shipment. Returns of marketable and
unused products have been less than one half of one percent each of the past
three fiscal years.
New Product Status
Market America continually searches for new, innovative, market driven products
and services. The 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 vast
pool of human resources that is networked from around the world and includes
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.
The Company currently is developing health and nutrition products that mix well
with its current health products. Longevity and preventive healthcare are hot
areas of product development that satisfy the growing demand generated from the
baby boomer generation. The senior market adds additional value to this area as
life expectancy continues to rise.
Skin rejuvenating products are growing in popularity and offer a great
opportunity for additional product development. Recent breakthroughs in the
topical treatment of skin with nutrients and special herbs have proven to be in
demand as demonstrated by the success of Market America's VitaShield Vitamin C
Therapy products that include the Vitamin C Intensive Treatment, the Intensive
Moisturizer and OPC-3 Triple Serum. These skin-rejuvenating products accounted
for approximately $4.3 million of gross revenue during the year ended April 30,
1999. Additional research is being done in the development of improved delivery
technology of the nutrients to all three layers of the skin. Market America
attempts to stay informed of new scientific developments pertaining to this
area.
Market America is completing its second year in the product development of
made-to-measure clothing. Leveraging its large contingent of independent
contractors and customer relationships, the Company will be able to implement
its one-to-one marketing philosophies to offer mass customization of women's
dress trousers. This project is underway and nearing completion of its final
test phases. Successful implementation will provide Market America entry into a
new billion-dollar market place, as well as providing worldwide recognition as a
leader in the mass customization of apparel. This project has been pursued
through the support of the Textile Industry's Research and Development Center
and the Textile Clothing Technology Company.
Backlog
The Company typically ships products within 24 hours after the receipt of the
order. As of April 30, 1999, there was no significant backlog.
Employees
At April 30, 1999 the Company employed 199 persons at the Greensboro, North
Carolina corporate headquarters and distribution center. Unions do not represent
any of the Company's employees. The company believes that its employee relations
are satisfactory.
Seasonality
The Company'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, Inc." and Market America's "Mall without Walls" are registered
as the Company's service marks. The Company has also obtained registered
trademarks for "The Unfranchise," a name it uses to designate its marketing
system. The Company also has various registered product trademarks, including
its "Motives" customized cosmetics, "Thermochrome 5000" nutritional supplement,
"Royal Spa" personal care products, "Ultimate Aloe" nutritional supplements and
personal care products. The Company holds no patents.
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. Access to the
Company's proprietary marketing plan software is limited to those with a need to
know. The Company also seeks to protect its official literature under copyright
and/or trade secret protection acts. The Company aggressively pursues anyone who
violates its proprietary rights. Litigating hazards will always exist in the
protection of such rights. The Company also believes that such factors as
innovation, expertise and market responsiveness are of equal importance with the
legal protections described above.
Competition
The direct selling industry is highly competitive and sensitive to consumer
demand and distributor retention. The Company must compete with both retail
outlets and other direct selling companies for many of its sales and
distributors. Many of the Company'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
the Company. Therefore, to attract and retain distributors the Company has
attempted to distinguish itself from competitors with a unique sales and
compensation plan and innovative products, including customized products.
However, no assurance can be given that similar products and marketing plans
will not be developed and adopted by competitors in the near future.
The Company believes that the leading network marketing company in the world,
based on total sales, in 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. The Company believes there are other manufacturers of competing product
lines that may or will launch direct selling enterprises, which will compete
with the Company in certain of its product lines and for distributors. There can
be no assurance that the Company 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, the Company has avoided
material capital expenditures to comply with Federal, state, or local
environmental laws. The Company does not expect this to change in the
foreseeable future.
As a product broker and distributor of consumer durable goods, the Company 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 many aspects of the Company's
operations. Product labeling, distribution, packaging, advertising, and content
are all subject to intense laws and regulations. The Company 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
the Company's operations.
Other laws and regulations affecting the Company 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 these laws are directed at ensuring 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 such organizations or other non-retail sales related criteria.
Where required by law, the Company obtains regulatory approval of its network
marketing system.
The Company 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 the Company or its distributors to comply with these
laws and could have an adverse effect on the Company in a particular market or
in general. The Company monitors the activities of its distributors through its
national meeting and training seminar system, in accordance with the management
and supervisory responsibilities of its higher level distributors, certified
trainers and advisory council members. Through such efforts the Company seeks to
minimize the possibility of unauthorized conduct by any distributor.
The Company 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 the Company's
network marketing program. Any or all of such requirements could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Markets
The Company's primary markets have been in the United States, Canada, and most
U.S. possessions. Approximately 3.7% of the Company's sales in fiscal 1999 were
outside the United States. Sales outside of the United States were likewise
immaterial in the two prior fiscal years.
Risk Factors
Important factors that may cause results of the Company's operations to differ
from expectations include the following:
Increased Government Regulation and Changes in Government Regulations. Any of
the government agencies that regulate aspects of the Company's operations could
enact new rules that prohibit the sale or distribution of Company products or
require changes in operating practices which could have a material adverse
effect on the sales and results of operations of the Company. The Company is not
aware of any pending legislation or any other regulatory changes that would have
a material effect on the Company.
Product Liability. By acting as a product broker and distributor of consumer
durable goods, the Company is subject to the risk of product liability claims.
To protect itself from these possible claims, the Company maintains $20.0
million of product liability insurance. To date, the Company has paid no product
liability claims and its insurers have paid only two immaterial claims submitted
by the Company. Management believes that the Company's stringent supplier
selection process and substantial insurance coverage shields the Company from
exposure to a materially adverse product liability judgment.
Risk of Loss of Key Management Personnel. James H. Ridinger, Chief Executive
Officer and Chairman of the Board, is vital to the success and growth of the
Company. His recognition and marketing appeal contributes significantly to the
Company's success. The Company's dependence on Mr. Ridinger means that his loss
could have a material adverse effect on the Company's financial position and
results of operations.
Reliance on Independent Distributors. The recruitment and retention of
independent distributors is vital to the long-term success of the Company.
Management devotes considerable time and effort to the marketing of the
Company's marketing plan and products. The Company's annual convention,
leadership school, moving up seminars, and various sales tapes and videos are
marketing tools utilized by the Company. None of these things, however, can
provide full assurance that current distributors will not leave the business.
Reliance on Key Manufacturers. Due to the unique nature of several of the
Company's products, the Company relies upon exclusive manufacturing
arrangements. There will always be a risk of unexpected contingencies affecting
these manufacturers which could adversely affect the Company. The Company
continues to pursue arrangements to minimize these risks.
Forward-Looking Information
Statements in this report concerning the Company'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, decreases in sales volume or number of
distributors, unfavorable regulatory action, loss of key personnel and general
economic conditions.
Item 2. Properties
The Company currently leases a 40,000 square foot building, in Greensboro, North
Carolina under a five year lease agreement which expires June 30, 2003. The
agreement requires a twelve-month notice to the landlord in order to terminate
the lease prior to the expiration date. The building serves as the Company's
headquarters and contains both corporate offices and the Company's primary
distribution center. The rent is $25,713 per month. The Company is constructing
a 100,000 square foot office and distribution center in Greensboro, North
Carolina to replace its current headquarters and provide room for expansion.
Management estimates that construction will be completed during the summer of
2000.
The Company also leases a 6,000 square foot warehouse in Brampton, Ontario for
distribution of products to Canadian distributors. The lease agreement requires
a $3,200 monthly payment in US dollars and expires on November 25, 2001.
The Company also leases office and meeting space in Miami, Florida for use by
corporate officers and employees when conducting business in Florida.
Item 3. Legal Proceedings
On May 4, 1999, after the end of the period covered by this report, the Company
agreed to settle an SEC administrative proceeding, In the Matter of Market
America, Inc. et al., SEC Administrative Proceeding File No. 3-9889 (May 4,
1999), that resulted from a previously reported SEC staff investigation. In the
settlement, the Company neither admitted nor denied the SEC's allegations, but
agreed to be subject to a cease-and-desist order against future violations of
the provisions of the securities laws requiring public companies to file
periodic reports with the SEC. The SEC had alleged that the Company's periodic
reports from 1994 to 1998 had not accurately disclosed all ownership of the
Company's stock of its Chairman and Chief Executive Officer.
The Company 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 the
Company's financial position or results of operations.
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.
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
The Company's common stock is traded in the over-the-counter market under the
symbol MARK. Quotations are published through the OTC Bulletin Board. The
following information reflects the actual reported range of high and low bid
quotations for the Company's common stock for each quarter within the fiscal
years ended April 30, 1999 and 1998 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.
Year Ending Year Ending
April 30, 1999 April 30, 1998
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High Low High Low
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First Quarter $7 $4-1/2 $7-3/4 $4-1/8
Second Quarter 5-3/16 3-13/16 8 5-5/8
Third Quarter 4-1/2 3 6-1/4 5
Fourth Quarter 4-1/2 3-5/8 6-1/4 5-1/4
The closing sale price for the Company's common stock on July 26, 1999 was
$6.44. As of that date, there were 452 holders of record of the Company's common
stock. The Company has never declared or paid any dividends on its Common Stock
since its inception. Management has no plans to declare any dividends in the
near future but may re-evaluate the Company's dividend policy as various factors
change.
Item 6. Selected Financial Data
Income Statement Data:
Year Ended April 30,
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1999 1998 1997 1996 1995
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Operating Revenues $110,347,824 $ 87,531,005 $ 66,281,671 $ 42,479,911 $ 19,592,056
Income from Operations 21,076,766 17,339,402 13,276,101 8,220,599 1,305,020
Income before
Income Taxes 23,585,650 18,783,209 14,275,790 8,505,110 1,328,566
Net Income 14,191,025 10,840,540 8,471,221 5,153,227 794,767
Net Income Per Share 0.71 0.54 0.43 0.26 0.04
Balance Sheet Data:
Years Ended April 30,
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1999 1998 1997 1996 1995
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Working Capital $ 38,560,369 $ 24,496,643 $ 14,172,686 $ 5,751,385 $ 1,123,745
Inventories 1,852,487 1,468,321 1,244,586 1,020,117 450,182
Total Assets 48,998,497 33,584,430 21,691,428 12,238,284 3,619,045
Current Ratio 5.1 4.1 3.1 2.0 1.5
Quick Ratio 4.8 3.9 2.9 1.8 1.3
Long-Term Debt 10,000 164,315 281,707 324,355 128,290
Shareholders' Equity 39,672,535 25,481,510 14,640,970 6,169,749 1,016,522
Return on Shareholders'
Equity (1) 43.6% 54.0% 81.4% 143.4% 128.4%
(1) Net income divided by average shareholders' equity.
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Results of Operations
The following table summarizes the Company's operating results for the three
most recent fiscal years. All amounts are in millions of dollars, except for the
earnings per share data.
Fiscal Year Ending April 30, 1999 April 30,1998 April 30, 1997
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Sales Revenue $110.3 100.00% $87.5 100.00% $ 66.3 100.00%
Cost of Sales 28.1 25.44 21.1 24.16 17.5 26.37
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Gross Profit 82.3 74.56 66.4 75.84 48.8 73.63
Selling Expenses
Commissions 49.7 45.03 39.1 44.63 29.6 44.73
Sales Tax .4 .33 2.0 2.27 .4 .58
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Total Selling Expenses 50.1 45.36 41.1 46.89 30.0 45.31
General and Administrative
Expense
Salaries 5.1 4.61 4.0 4.60 2.7 4.11
Professional fees 1.3 1.18 .8 .89 .4 .65
Lease expense .9 .90 .7 .79 .4 .57
Insurance .6 .57 .4 .49 .2 .30
Other taxes and licenses .5 .42 .4 .44 .2 .33
Utilities .3 .30 .2 .26 .2 .31
Consulting .3 .24 .1 .14 .4 .57
Depreciation and
Amortization .2 .19 .2 .19 .1 .19
Other Operating Expenses 1.9 1.70 1.2 1.32 .8 1.28
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Total General and
Administrative Expenses 11.1 10.74 8.0 9.14 5.5 8.30
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Income From Operations 21.1 19.10 17.3 19.81 13.3 20.03
Other Income (Expense) 2.5 2.27 1.4 1.65 1.0 1.51
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Income before
Income Taxes 23.6 21.37 18.8 21.46 14.3 21.54
Income Taxes 9.4 8.51 8.0 9.07 5.8 8.76
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Net Income $ 14.2 12.86% $10.8 12.38% $ 8.5 12.78%
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Earnings per share $ .71 $ .54 $ .43
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Sales revenue and net income increased for the seventh consecutive year. For the
years ended April 30, 1999, 1998 and 1997, sales were $110.3, $87.5 and $66.3
million, respectively. This represents a $21.2 million (32%) sales growth from
1997 to 1998 and a $22.8 million (26.1%) sales growth from 1998 to 1999. The
fiscal 1999 sales growth is primarily due to two separate factors. Foremost, the
Company increased the average number of monthly orders by 13.9% over the
previous fiscal year creating approximately $13.2 million in additional
revenues. In addition, the average dollar amount per sales order increased by
10.6% over the previous fiscal year. This resulted in approximately $9.6 million
in increased revenue.
Sales growth during the year ended April 30, 1998 compared to the prior year
primarily resulted from an increase in the average number of monthly orders by
26.2%, which resulted in approximately $17.9 million in additional gross
revenue. The fiscal 1998 growth in sales revenue is also related to a 4.6%
growth in the average dollar amount per sales order, which resulted in
approximately $2.4 million of additional gross revenue over fiscal 1997.
Cost of goods sold has increased from $17.5 million for the year ended April 30,
1997 to $21.1 million for the year ended April 30, 1998 to $28.1 million for the
year ended April 30, 1999. The increase in cost of goods sold as a percentage of
sales from fiscal 1998 to 1999 was mainly due to marginal increases in shipping
costs and credit card processing fees. The decrease in cost of goods sold as a
percentage of sales during fiscal 1998 compared to fiscal 1997 was mainly due to
increased purchasing power resulting in lower product cost and the increased
availability of operating cash flow allowing the Company to take advantage of
vendor discounts.
Commissions remained relatively constant as a percentage of sales during the
most recent three fiscal years. As a percentage of sales, commissions were
45.03% and 44.63% and 44.73% for the years ended April 30, 1999, 1998 and 1997,
respectively. Management anticipates that commission expense will range from 43%
to 46% during fiscal 2000.
Sales tax expense totaled $358,741, $1,985,462 and $383,606 during the years
ended April 30, 1999, 1998 and 1997, respectively. The significant increase from
1997 to 1998 was the result of an agreement reached with the North Carolina
Department of Revenue whereby North Carolina agreed not to seek to impose sales
tax on shipments out of state by common carrier to or for the benefit of
independent distributors. This encouraged the Company to initiate voluntary
remission of prior sales taxes to applicable states and resulted in substantial
payments of tax to those states. During the fiscal year ended April 30, 1998,
the Company paid approximately $1,416,000 in prior year sales taxes. Management
believes that these payments and the sales tax liabilities provided for in the
April 30, 1999 balance sheet substantially cover all past taxes due.
Salary expense increased from $2.7 million during 1997 to $4.0 million (48.2%
increase) during 1998 to $5.1 million (27.5% increase) during 1999. As a
percentage of sales, salary expense increased from 4.11% during 1997 to 4.60%
during 1998. However, during fiscal 1999 salary expense remained constant at
4.61% of sales. The increase in salary expense as a percentage of sales during
the year ended April 30, 1998 compared to the prior year was a result of the
rapid growth of the Company and a commitment by management to improve human
resources within the Company in order to better serve the needs of the Company's
distributors. Management expects salary expense to decrease in fiscal 2000 as a
percentage of sales.
Professional fees incurred during the years ended April 30, 1999, 1998 and 1997
were $1,305,221, $782,969 and $427,797, respectively. The increase during each
fiscal year was primarily due to legal fees incurred relating to the Securities
and Exchange Commission (SEC) investigation of the Company and certain
individuals associated with the Company. Management expects the costs of
professional fees to decrease during fiscal 2000 as a result of a settlement
with the SEC on May 4, 1999 (see the above discussion under "Item 3. Legal
Proceedings").
The Company incurred lease expense of $995,994, $695,507 and $380,319 during the
years ended April 30, 1999, 1998 and 1997, respectively. Lease expense has
increased in each of the past two fiscal years due in large part to the
increased use of the Company's Miami office and meeting facility, as well as the
charter use of a yacht, which is used for distributor training and seminars. In
addition, during fiscal 1999 the Company began leasing land on which a new
corporate headquarters and distribution facility is being built for completion
during fiscal 2000.
Insurance expense has increased over the past two fiscal years from $196,163 in
1997 to $429,468 in 1998 to $626,108 in 1999. These increases were a result of
the increase in the number of employees, the rising costs of health care and
upgrades to the Company's health insurance plan. Management expects insurance
expense to decrease as a percentage of sales in fiscal 2000 as a result of
several large unusual health care claims against the Company's self insured
health care plan during fiscal 1999 and the stabilization in employee growth
experienced during fiscal 1999.
Other taxes and licenses incurred by the Company during the years ended April
30, 1999, 1998 and 1997 were $458,155, $386,779 and $219,884, respectively. The
primary cause of the increase in these items is a result of the Company
incurring larger payroll tax burdens due to the growth of the number of
employees over the past two years. The Company has also paid a larger franchise
tax each year as a result of the growth in annual profits.
Consulting expenses were approximately $266,000, $124,000, and $377,000 for the
years ended April 30, 1999, 1998 and 1997 respectively. The increase in
consulting costs during fiscal 1999 related to the continued development of
customized apparel. Management expects consulting expenses to remain constant
during fiscal year 2000 due to the completion of the customized apparel test
project and the implementation of upgrades to the Market America homepage on the
Internet. The decrease in consulting expenses during fiscal 1998, as compared to
fiscal 1997, resulted from a commitment by management to improve human resources
within the Company, which reduced the need for external consultants during 1998.
Other operating expenses were $1,875,698, $1,155,498 and $849,336 for the years
ended April 30, 1999, 1998 and 1997, respectively. Other operating expenses
consist primarily of office supplies, postage, advertising, repairs and
maintenance, travel and other necessary business expenses.
Net income after taxes rose 30.9%, or $3.4 million, to $14.2 million for the
year ended April 30, 1999 from $10.8 million for the year ended April 30, 1998,
after having risen 27%, or $2.3 million, to $10.8 million for the year ended
April 30, 1998 from $8.5 million for the year ended April 30, 1997. The increase
in net income is primarily attributed to the growth in sales and decrease in
sales tax expense (as described above). As a result, earnings per common share
increased $0.17 per share for the year ended April 30, 1999 over the year ended
April 30, 1998 (from $0.54 per share to $0.71 per share), an increase of 31.5%.
Liquidity And Capital Resources
The Company's primary source of funds is the cash generated from operating
activities. For the year ended April 30, 1999, cash provided by operating
activities was $15.3 million compared to $11.7 million and $9.7 million in 1998
and 1997, respectively. The Company's consistent sales growth and solid profit
margins have fueled these increases.
Working capital at April 30, 1999 was $38.6 million compared to $24.5 million
and $14.2 million at April 30, 1998 and 1997, respectively. This increase is due
primarily to the increase in cash from continued strong growth. In May of 1999,
management authorized $12 million to be placed in a highly liquid investment
vehicle that is expected to earn an approximate 12% annualized rate of return.
During the fiscal year ended April 30, 1999, these funds earned an approximate
5.2% annualized rate of return.
The Company invested $346,315 in 1999 for property and equipment purchases
compared to $280,546 and $258,067 in 1998 and 1997 respectively. Sales growth
and higher inventory levels have required the Company to invest in more computer
and warehouse equipment. The Company began construction of a $4.6 million
100,000 square foot office and distribution center in Greensboro, North Carolina
during the summer of 1999. Management plans to finance the building with
approximately $2.5 million of cash on hand and borrow the remaining $2.1
million.
The Company believes that its current level of cash and cash equivalents and its
cash provided by operations will provide sufficient resources for operations in
the next 12 months. In the event that the Company's operating environment
becomes adverse, there can be no assurance that additional financing would not
be required.
The Year 2000 Issue
The Year 2000 (Y2K) issue stems from the use of two digits rather than four to
define calendar dates. By using two digit dates, systems may fail or make
miscalculations due to their inability to distinguish dates in the 1900s from
dates in the 2000s. The Company continues to aggressively address the business
issues associated with the Year 2000 issue. The Company has formed a Year 2000
task force and has implemented a compliance plan.
The Company has upgraded approximately 75% of its core operating systems to be
Year 2000 compliant. The Company purchased a test system in order to run test
transactions with dates beyond in the Year 2000. This allowed the Company's task
force personnel to determine what changes were needed in the current systems.
The costs incurred by the Company for the completed upgrades were approximately
$16,000, excluding internal costs that the Company does not track. In order to
complete the conversion of the remaining 25% of the core operating systems to
Y2K compliance, the Company is currently contracting with outside vendors to
update the voice response system and phone system. The expected costs of these
updates are approximately $20,000. The Company fully expects the remaining
upgrades and testing thereof to be completed by October 31, 1999.
Testing on application software will continue into the second quarter of fiscal
2000. Currently, the Company is converting the commissions, sales, order entry
and credit file applications with the use of internal personnel. During fiscal
1999, the Company upgraded the following software to the current Y2K compliant
version: accounting, sales tax and shipping applications. The Company expects
the internal conversions and testing of the upgraded application software to be
completed and, therefore, Year 2000 compliant by October 31, 1999.
If the Company's systems for commission calculation and payment are not Y2K
compliant by December 31, 1999 it could have a material adverse effect on the
Company's financial statements. However, the Company expects to be fully Y2K
compliant by October 31, 1999.
In addition, the Company has requested information regarding Year 2000
compliance plans and current status from 68 of it's most significant vendors and
financial institutions. Management has determined that the remaining vendors
would not have a significant impact on the Company's operations due to Year 2000
noncompliance. Currently, 54.4% of the parties contacted have responded, with
only 19.1% of respondents certifying in writing that they are Y2K compliant. At
present, the Company is not aware of any significant risk exposure associated
with the parties that have not either certified their Y2K compliance or
responded. As a result, the Company is unable to predict the impact on its
business if such parties are unable to comply. In order to reduce any such
impact, the Company has contacted backup vendors for its significant products
and may increase inventory levels during the fourth calendar quarter for
products which are obtained from vendors who have not certified their Y2K
compliance.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 8. Financial Statements And Supplementary Data
Included immediately after signature page.
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 scheduled to be filed on or about
August 14, 1999.
Item 11. Executive Compensation
Information relating to Item 11 is incorporated herein by reference to the
Company's Notice and Information Statement scheduled to be filed on or about
August 14, 1999.
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 scheduled to be filed on or about
August 14, 1999.
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 scheduled to be filed on or about
August 14, 1999.
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, 1999 and 1998
Statements of Income for the Years Ended April 30, 1999, 1998, and
1997
Statements of Changes in Stockholders' Equity for the Years Ended
April 30, 1999, 1998, and 1997
Statements of Cash Flows for the Years ended April 30, 1999, 1998,
and 1997
Notes to Financial Statements
(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.
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 July 28, 1999.
MARKET AMERICA, INC.
BY: /s/ James H. Ridinger
-----------------------------------
James H. Ridinger
President & 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 July 28, 1999
- ------------------------------------------------------
James H. Ridinger
President, Chief Executive Officer & Director
(Principal Executive, Financial & Accounting Officer)
/s/ Loren A. Ridinger July 28, 1999
- ------------------------------------------------------
Loren A. Ridinger
Senior Executive Vice President & Director
/s/ Dennis Franks July 28, 1999
- ------------------------------------------------------
Dennis Franks
Executive Vice President & Director
/s/ Martin Weissman July 28, 1999
- ------------------------------------------------------
Martin Weissman
Executive Vice President & Director
MARKET AMERICA, INC.
FINANCIAL STATEMENTS
Years Ended April 30, 1999, 1998 and 1997
MARKET AMERICA, INC.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page No.
--------
INDEPENDENT AUDITORS' REPORT................................. 1
FINANCIAL STATEMENTS
Balance Sheets........................................... 2
Statements of Income..................................... 3
Statements of Changes in Stockholders' Equity............ 4
Statements of Cash Flows................................. 5
Notes to Financial Statements............................ 7
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, 1999 and 1998 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, 1999. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended April 30, 1999 in
conformity with generally accepted accounting principles.
/s/ Dixon Odom PLLC
- --------------------------------------
Greensboro, North Carolina
June 11, 1999, except for Note 14
as to which the date is June 28, 1999
--------
Page 1
MARKET AMERICA, INC.
BALANCE SHEETS
April 30, 1999 and 1998
- --------------------------------------------------------------------------------
ASSETS 1999 1998
---- ----
CURRENT ASSETS
Cash and cash equivalents (Note 1) $45,426,920 $18,379,127
Short-term investments (Notes 1 and 2) - 12,415,465
Advances to related parties (Note 6) 187,646 62,445
Notes receivable, employees 92,794 51,919
Inventories (Note 1) 1,852,487 1,468,321
Deferred tax assets (Note 8) 160,000 -
Other current assets 156,484 57,971
----------- -----------
TOTAL CURRENT ASSETS 47,876,331 32,435,248
----------- -----------
PROPERTY AND EQUIPMENT (Note 1)
Furniture and equipment 1,234,438 983,959
Software 271,365 259,199
Building construction in progress (Note 14) 33,070 -
Leasehold improvements 6,370 6,370
----------- -----------
1,545,243 1,249,528
Less accumulated depreciation 653,933 462,036
----------- -----------
891,310 787,492
----------- -----------
OTHER ASSETS
Restricted cash - 79,018
Other 230,856 282,672
----------- -----------
230,856 361,690
----------- -----------
$48,998,497 $33,584,430
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---- ----
CURRENT LIABILITIES
Current portion of long-term debt (Note 3) $ 120,000 $ 152,476
Accounts payable - trade 1,107,633 1,066,274
Commissions payable 2,280,902 2,755,776
Sales tax payable (Note 11) 792,438 802,786
Income taxes payable 2,062,211 1,863,132
Other accrued liabilities 693,256 202,886
Unearned revenue (Note 4) 2,259,522 1,095,275
----------- -----------
TOTAL CURRENT LIABILITIES 9,315,962 7,938,605
----------- -----------
LONG-TERM DEBT (Note 3) 10,000 164,315
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 7, 11 and 14)
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 39,632,535 25,441,510
----------- -----------
39,672,535 25,481,510
----------- -----------
$48,998,497 $33,584,430
=========== ===========
- ----------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. Page 2
MARKET AMERICA, INC.
STATEMENTS OF INCOME
Years Ended April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Sales $ 110,347,824 $ 87,531,005 $ 66,281,671
Cost of Sales 28,071,236 21,144,983 17,476,574
------------- ------------- -------------
GROSS PROFIT 82,276,588 66,386,022 48,805,097
Selling Expenses
Commissions 49,692,793 39,061,225 29,645,933
Sales tax (Note 11) 358,741 1,985,462 383,606
------------- ------------- -------------
50,051,534 41,046,687 30,029,539
------------- ------------- -------------
General and Administrative Expenses
Salaries 5,085,053 4,028,643 2,722,855
Consulting 266,154 124,211 377,234
Rents (Note 6 and 7) 995,994 695,507 380,319
Depreciation and amortization 208,868 167,483 122,839
Other expenses (Note 9) 4,592,219 2,984,089 1,896,210
------------- ------------- -------------
11,148,288 7,999,933 5,499,457
------------- ------------- -------------
INCOME FROM OPERATIONS 21,076,766 17,339,402 13,276,101
Other Income (Expense)
Interest income 1,763,306 1,073,582 595,651
Interest expense (24,337) (91,539) (40,205)
Gain (loss) on disposals of assets (8,537) 500 (6,808)
Miscellaneous income 778,452 461,264 451,051
------------- ------------- -------------
2,508,884 1,443,807 999,689
------------- ------------- -------------
INCOME BEFORE TAXES 23,585,650 18,783,209 14,275,790
Income Taxes (Note 8) 9,394,625 7,942,669 5,804,569
------------- ------------- -------------
NET INCOME $ 14,191,025 $ 10,840,540 $ 8,471,221
============= ============= =============
Basic earnings per common share (Note 1) $ .71 $ .54 $ .43
============= ============= =============
Weighted average number of common
shares outstanding 19,950,000 19,950,000 19,950,000
============= ============= =============
- ------------------------------------------------------------------------------------------
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, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Common Stock Additional
--------------------------- Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
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
Net income - - - 10,840,540 10,840,540
----------- ----------- ----------- ----------- -----------
BALANCE, April 30, 1998 19,950,000 199 39,801 25,441,510 25,481,510
Net income - - - 14,191,025 14,191,025
----------- ----------- ----------- ----------- -----------
BALANCE, April 30, 1999 19,950,000 $ 199 $ 39,801 $39,632,535 $39,672,535
=========== =========== =========== =========== ===========
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. Page 4
MARKET AMERICA, INC.
STATEMENTS OF CASH FLOWS
Years Ended April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,191,025 $ 10,840,540 $ 8,471,221
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 208,868 167,483 122,839
(Gain) loss on disposal of assets 8,537 (500) 6,808
Increase in inventories (384,166) (223,735) (224,469)
Increase in deferred tax assets (160,000) - -
(Increase) decrease in other current assets (98,513) (38,708) 8,401
(Increase) decrease in other assets 51,816 (281,991) (681)
Increase (decrease) in accounts payable - trade 41,359 (484,335) 526,180
Increase (decrease) in commissions payable (474,874) 1,239,411 (326,441)
Increase (decrease) in sales tax payable (10,348) 563,372 239,414
Increase (decrease) in income taxes payable 199,079 (2,889) 493,043
Increase (decrease) in other accrued liabilities 490,370 (117,180) (290,195)
Increase in unearned revenue 1,164,247 69,253 668,921
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 15,227,400 11,730,721 9,695,041
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (346,315) (280,546) (258,067)
Proceeds from sale of property and equipment 25,092 1,985 -
(Increase) decrease of short-term investments 12,415,465 4,879,404 (17,294,869)
Proceeds from sale of long-term investments - - 125,405
Advances to related parties (125,201) (62,445) -
(Increase) decrease in notes receivable, employees (40,875) 6,176 3,601
(Increase) decrease in restricted cash 79,018 (4,941) (4,257)
------------ ------------ ------------
NET CASH PROVIDED (USED)
FOR INVESTING ACTIVITIES 12,007,184 4,539,633 (17,428,187)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable and long-term debt (186,791) (215,170) (328,999)
------------ ------------ ------------
NET CASH USED FOR
FINANCING ACTIVITIES (186,791) (215,170) (328,999)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 27,047,793 16,055,184 (8,062,145)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 18,379,127 2,323,943 10,386,088
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 45,426,920 $ 18,379,127 $ 2,323,943
============ ============ ============
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. Page 5
MARKET AMERICA, INC.
STATEMENTS OF CASH FLOWS (Continued)
Years Ended April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 26,776 $ 93,752 $ 28,467
============ ============ ============
Income taxes $ 9,355,546 $ 7,945,558 $ 5,311,526
============ ============ ============
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. Page 6
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 o ORGANIZATION AND SIGNIFICANT ACCOUNTING 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
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.
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 the straight-line
basis over the estimated useful lives of the assets as follows:
Furniture and equipment 5 to 10 years
Software 3 to 10 years
Leasehold improvements 15 years
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 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.
- --------------------------------------------------------------------------------
Page 7
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 o ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Income Taxes
Income taxes have been provided using the liability method in accordance with
Statement of Financial Accounting Standards (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
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. The measurement and presentation of net income
did not change. The Company has no items of other comprehensive income.
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. Reclassifications have no
effect on previously reported net income.
- --------------------------------------------------------------------------------
Page 8
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 o ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Standards
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting For the Costs of Computer Software Developed
For or Obtained For Internal Use." The SOP will require the capitalization of
certain costs incurred in connection with developing or obtaining software for
internal use. The SOP is effective for fiscal years beginning after December 15,
1998. The Company plans to adopt the provisions of this SOP in its fiscal year
ending April 30, 2000. The Company does not anticipate there will be a material
impact on the results of its operations or its financial position resulting from
the adoption of SOP 98-1.
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 is effective for fiscal years beginning
after June 15, 1999. The Company plans to adopt the provisions of SFAS No. 133
in its year ending April 30, 2001. Management is currently evaluating the impact
on the results of operations and financial position after SFAS No. 133 is
adopted.
NOTE 2 o SHORT-TERM INVESTMENTS
Short-term investments at April 30 consisted of the following:
1999 1998
---- ----
Master note, matured in 1999 $ - $ 7,692,279
Business Eurodollars Term/Non-Sweep, matured
in 1999 - 4,723,186
----------- -----------
$ - $12,415,465
=========== ===========
- --------------------------------------------------------------------------------
Page 9
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 3 o LONG-TERM DEBT
1999 1998
---- ----
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,including interest
discounted at 9% $130,000 $240,000
Notes payable, repaid in 1999 - 76,791
-------- --------
130,000 316,791
Less current portion due within one year 120,000 152,476
-------- --------
$ 10,000 $164,315
======== ========
Future maturities of long-term debt at April 30, 1999 are due as follows:
2000 $ 120,000
2001 10,000
---------
$ 130,000
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.
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
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 $15,524 during the year ended April 30, 1999.
No discretionary contributions were made in 1999.
- --------------------------------------------------------------------------------
Page 10
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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 for use by Company
management when conducting business in Florida and for the lease of a yacht on a
per event basis. The yacht is used as an integral part of the direct sales
training and education activities of the Company. Both lease agreements have
5-year terms with options to renew. The amount of rent expense under both
agreements aggregated to $423,600 and $252,000 during the years ended April 30,
1999 and 1998, respectively. These related entities owed the Company $187,646
and $62,445 at April 30, 1999 and 1998, 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 plans
to construct its new headquarters and warehouse facility in Greensboro, North
Carolina. Required rental payments are $10,666 per month, and the amount of rent
expense under this agreement was $64,000 for the year ended April 30, 1999. In
June 1999, the Company paid $500,000 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 will be applied to the purchase price of the land in the event the
Company buys it.
NOTE 7 o OPERATING LEASE COMMITMENTS
The Company occupies leased premises in Greensboro, North Carolina and Miami,
Florida. The Greensboro lease term expires June 30, 2003 but can be terminated
early with twelve-months advance written notice by either party to the lease.
The Miami lease is with a related party (see Note 6) beginning August 1997 and
is for five 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 as of April
30, 1999 are as follows:
Related Unrelated
Parties Parties Total
------- ------- -----
2000 $ 451,992 $ 139,752 $ 591,744
2001 451,992 128,000 579,992
2002 451,992 52,011 504,003
2003 451,992 - 451,992
2004 127,992 - 127,992
Thereafter 3,519,780 - 3,519,780
---------- ---------- ----------
Total future minimum lease payments $5,455,740 $ 319,763 $5,775,503
========== ========== ==========
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MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 o INCOME TAXES
Income tax expense is comprised of the following:
1999 1998 1997
---- ---- ----
Current tax provision
Federal $ 7,713,716 $ 6,483,683 $ 4,671,743
State 1,840,909 1,458,986 1,132,826
----------- ----------- -----------
9,554,625 7,942,669 5,804,569
----------- ----------- -----------
Deferred tax provision
Federal (130,000) - -
State (30,000) - -
----------- ----------- -----------
(160,000) - -
----------- ----------- -----------
Total income tax provision $ 9,394,625 $ 7,942,669 $ 5,804,569
=========== =========== ===========
A reconciliation of the statutory U.S. federal income tax rate and the effective
income tax rate is as follows:
1999 1998 1997
---- ---- ----
Statutory U.S. federal rate 35.0% 35.0% 35.0%
State income tax, net of federal benefit 5.0 4.8 5.1
Effect of non-deductible expenses .2 1.5 -
Other, net (.4) 1.0 .6
---- ---- ----
39.8% 42.3% 40.7%
==== ==== ====
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities as of April 30, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax assets
Accrued liabilities $ 160,000 $ -
Deferred tax liabilities - -
--------- ---------
Net deferred tax assets $ 160,000 $ -
========= =========
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MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 o OTHER GENERAL AND ADMINISTRATIVE EXPENSES
For the years ended April 30, 1999, 1998 and 1997, Other General and
Administrative Expenses included the following items:
1999 1998 1997
---- ---- ----
Legal and professional fees $1,305,221 $ 782,969 $ 427,797
Insurance 626,108 429,468 196,162
Other taxes and licenses 458,155 386,779 219,884
Utilities 327,037 229,375 203,031
Other 1,875,698 1,155,498 849,336
---------- ---------- ----------
$4,592,219 $2,984,089 $1,896,210
========== ========== ==========
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
introduces 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, 1999
Product revenue from external customers $106,290,160 $ 4,057,664
Long-lived assets 891,310 -
April 30, 1998
Product revenue from external customers 85,261,874 2,269,131
Long-lived assets 787,492 -
April 30, 1997
Product revenue from external customers 65,756,692 524,979
Long-lived assets 675,914 -
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MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 o CONTINGENCIES
During the year ended April 30, 1998, the Company reached an agreement with the
North Carolina Department of Revenue whereby North Carolina would not seek to
impose sales tax on shipments out of state by common carrier to or for the
benefit of independent distributors. This enabled the Company to initiate
voluntary remission of such prior taxes to applicable states and resulted in a
substantial increase in sales tax expense for the year ended April 30, 1998.
Management believes that all sales tax liabilities are adequately provided for
at April 30,1999 and 1998, and that the final resolution of this matter will not
have a material effect on future earnings.
The Company is currently being examined by the Internal Revenue Service for its
fiscal year ended April 30, 1996. Adjustments have been proposed by the
examining agent; however, management believes it has meritorious defenses to
most of the adjustment being asserted and will vigorously defend its positions
through the administrative appeals process and, if necessary, litigation.
Management believes that all income tax liabilities are adequately provided for
at April 30, 1999 and that the final resolution of the matter will not have a
material effect on future earnings.
On April 27, 1999, the United States District Court for the Middle District of
North Carolina entered a judgment against the Company in the amount of $959,106
with respect to a number of claims made against the Company by various former
distributors. In connection with that judgment, the Company has filed a Motion
for Judgment as a Matter of Law seeking to eliminate or reduce the amount of the
judgment on various grounds including that the amounts awarded are not warranted
by law. The Company intends to vigorously pursue that motion and, if that motion
is not successful, may appeal the judgment. The outcome of this matter is not
presently determinable.
On May 4, 1999, the Company agreed to settle a Securities and Exchange
Commission (SEC) administrative proceeding that resulted from an SEC staff
investigation. In the settlement, the Company neither admitted nor denied the
SEC's allegations, but agreed to be subject to a cease-and-desist order against
future violations of the provisions of the securities laws requiring public
companies to file accurate and complete periodic reports with the SEC. The SEC
had alleged that the Company's periodic reports from 1994 to 1998 had not fully
disclosed the interests in the Company's common stock of its Chairman and Chief
Executive Officer.
The Company is involved in litigation arising in the ordinary course of
business. In the opinion of the Company's legal counsel and management, the
final resolution of these matters will not have a material adverse effect on the
Company's financial position or future results of operations.
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MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 12 o FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the balance sheets for cash and cash
equivalents, short-term investments, and notes receivable approximate their
respective fair values. The carrying value of long-term debt exceeds its
estimated fair value by approximately $7,000 and $21,000 at April 30, 1999 and
1998, respectively. Fair values are based primarily on 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 30.6%, 34.2% and 25.4% of the Company's total sales during
the years ended April 30, 1999, 1998 and 1997, 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 44.0%, 49.3% and 37.5% of the Company's total sales
during the years ended April 30, 1999, 1998 and 1997, 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.
NOTE 14 o SUBSEQUENT EVENTS
Subsequent to April 30, 1999, the Company paid $3.6 million cash to purchase a
yacht to be used as an integral part of the direct sales training and education
activities of the Company.
On June 28, 1999, the Company obtained a construction loan commitment of $2.1
million to be used for the construction of its new corporate headquarters and
warehouse facility in Greensboro, North Carolina. The building will be
constructed on land leased from a related company (see Note 6) and is expected
to cost approximately $4.6 million. Upon completion, the Company plans to
depreciate the building over the 33-year term of the ground lease. The loan will
be repayable over a five-year period following completion of construction and
bears interest of 7.625%.
On June 28, 1999, the Company became guarantor of a bank loan to a related
company of $1.6 million. This loan and the loan described in the
immediately-preceding paragraph are cross- collateralized by the land being
leased from the related company (see Note 6) and by the building improvement to
be constructed thereon by the Company. The guaranteed loan is repayable over a
five-year period following completion of the building construction.
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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)
3.1 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 Company'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)
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)
10.1* Lease between Miracle Marine, Inc. and Market America, Inc. dated May
1, 1998
10.2 Vendor Agreement between Market America, Inc. and Isotonix(r)
Corporation dated October 25, 1993 (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K filed with the
Commission on August 13, 1998, Commission File No. 000-23250)
10.3* Lease between Miracle Properties LLC and Market America, Inc. dated May
1, 1998
10.4* Lease between Miracle Holdings LLC and Market America, Inc. dated
November 1, 1998
10.5* Right of First Refusal agreement between Market America, Inc. and
Miracle Holdings, LLC dated May 20, 1999
27* Financial Data Schedule
* Filed herewith.
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