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 January 31, 2002
Commission file number 000-23250
------------------------
MARKET AMERICA, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1784094
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1302 Pleasant Ridge Road
Greensboro, North Carolina
(Address of principal executive offices)
27409
(Zip Code)
(336) 605-0040
(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 March 16, 2002.
19,420,000
================================================================================
PART I
ITEM 1 Statement of Financial Position as of January 31, 2002 (Unaudited)
and April 30, 2001
Statement of Operations for the Three and Nine-Month Periods Ended
January 31, 2002 and 2001 (Unaudited)
Statement of Changes in Stockholders' Equity for the Nine-Month
Periods Ended January 31, 2002 and 2001 (Unaudited)
Statement of Cash Flows for the Nine-Month Periods Ended January 31,
2002 and 2001 (Unaudited)
Notes to Financial Statements as of January 31, 2002 (Unaudited)
2
Statement of Financial Position as of
MARKET AMERICA, INC. January 31, 2002 and April 30, 2001
- ------------------------------------------------------------------------------------------------
(Unaudited)
January 31, 2002 April 30, 2001
------------------- ------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 75,077,234 $ 60,511,367
Investment in available-for-sale securities 2,374,884 6,301,797
Income tax refunds receivable 230,957 2,366,440
Interest receivable 57,356 550,827
Advances to related parties - 16,222
Advances to officers, directors and employees 276,771 236,467
Inventories 3,084,984 3,296,701
Deferred tax assets 359,400 372,500
Prepaid income taxes 607,000 -
Other current assets 443,827 134,190
------------------- ------------------
Total current assets 82,512,413 73,786,511
------------------- ------------------
PROPERTY AND EQUIPMENT
Furniture and equipment 6,129,099 5,346,209
Buildings 8,155,040 4,593,133
Yacht 3,610,000 3,610,000
Software 450,755 397,000
Building construction in progress 103,975 -
Leasehold improvements 1,290,001 1,253,536
------------------- ------------------
19,738,870 15,199,878
Less accumulated depreciation and
amortization 2,947,286 1,913,505
------------------- ------------------
Total property and equipment 16,791,584 13,286,373
------------------- ------------------
OTHER ASSETS
Restricted cash 2,785,000 2,933,477
Deposit on building - 1,100,000
Other 1,398,668 1,326,729
------------------- ------------------
Total other assets 4,183,668 5,360,206
------------------- ------------------
TOTAL ASSETS $ 103,487,665 $ 92,433,090
=================== ===================
The accompanying notes are an integral part of these financial statements.
3
Statement of Financial Position as of
MARKET AMERICA, INC. January 31, 2002 and April 30, 2001
- --------------------------------------------------------------------------------------------------
(Unaudited)
January 31, 2002 April 30, 2001
-------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 87,409 $ 80,478
Accounts payable - trade 1,233,762 1,861,504
Commissions payable 3,462,520 2,676,825
Sales tax payable 977,736 1,039,156
Income taxes payable - 3,811,363
Other accrued liabilities 623,029 526,462
Unearned revenue 3,933,819 4,289,569
------------------- ------------------
Total current liabilities 10,318,275 14,285,357
------------------- ------------------
LONG-TERM DEBT 1,880,667 1,955,346
------------------- ------------------
DEFERRED TAX LIABILITIES 135,000 92,300
------------------- ------------------
STOCKHOLDERS' EQUITY
Common stock, $.00001 par value;
800,000,000 shares authorized;
19,420,000 shares issued and
outstanding at January 31, 2002 and
April 30, 2001 194 194
Additional paid-in-capital 39,801 39,801
Retained earnings 91,107,731 76,030,856
Accumulated other comprehensive income:
Unrealized gains on available-for-sale
securities, net of deferred taxes 5,997 29,236
------------------- ------------------
Total stockholders' equity 91,153,723 76,100,087
------------------- ------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 103,487,665 $ 92,433,090
=================== ==================
The accompanying notes are an integral part of these financial statements.
4
Statement of Operations for the Three and
MARKET AMERICA, INC. Nine-Month Periods Ended January 31, 2002 and 2001 (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Three-Month Periods Ended Nine-Month Periods Ended
January 31, 2002 January 31, 2001 January 31, 2002 January 31, 2001
---------------- ---------------- ---------------- ----------------
SALES $ 37,899,571 $ 32,564,585 $ 115,090,765 $ 101,416,349
COST OF SALES 9,136,466 8,450,477 29,292,956 26,570,136
--------------------- -------------------- ------------------- -----------------------
GROSS PROFIT 28,763,105 24,114,108 85,797,809 74,846,213
--------------------- -------------------- ------------------- -----------------------
SELLING EXPENSES
Commissions 16,346,720 14,107,445 48,975,500 44,533,385
--------------------- -------------------- ------------------- -----------------------
GENERAL and ADMINISTRATIVE
EXPENSES
Salaries 2,474,089 1,804,410 6,555,927 5,171,301
Depreciation & amortization 369,440 358,619 1,045,686 684,371
Rents 308,594 279,427 912,443 914,437
Consulting 47,235 53,161 162,265 566,868
Other operating expenses 2,046,216 1,821,033 5,607,062 4,848,344
--------------------- -------------------- ------------------- -----------------------
5,245,574 4,316,650 14,283,383 12,185,321
--------------------- -------------------- ------------------- -----------------------
INCOME FROM OPERATIONS 7,170,811 5,690,013 22,538,926 18,127,507
--------------------- -------------------- ------------------- -----------------------
OTHER INCOME (EXPENSE)
Interest income 321,849 787,974 1,533,042 2,121,720
Interest expense (32,123) (64,569) (178,679) (116,838)
Dividend income 177 26 24,806 1,443
Realized gain on
available-for-sale
securities 101,680 235,207 172,998 606,607
Gain (loss) on disposal
of assets - 19,765 - (92,398)
Miscellaneous 138,267 136,660 372,670 461,623
--------------------- -------------------- ------------------- -----------------------
Total other income (expense) 529,850 1,115,063 1,924,837 2,982,157
--------------------- -------------------- ------------------- -----------------------
INCOME BEFORE TAXES 7,700,661 6,805,076 24,463,763 21,109,664
PROVISION FOR INCOME TAXES 2,981,477 2,179,742 9,386,888 7,502,059
--------------------- -------------------- ------------------- -----------------------
NET INCOME $ 4,719,184 $ 4,625,334 $ 15,076,875 $ 13,607,605
===================== ==================== =================== =======================
BASIC EARNINGS PER COMMON SHARE $ 0.24 $ 0.24 $ 0.78 $ 0.70
===================== ==================== =================== =======================
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 19,420,000 19,420,000 19,420,000 19,431,051
===================== ==================== =================== =======================
The accompanying notes are an integral part of these financial statements.
5
Statement of Changes in Stockholders' Equity for the
MARKET AMERICA, INC. Nine-month Periods Ended January 31, 2002 and 2001 (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
Additional Accumulated Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
--------------------------------------------------------------------------------------------
Balance at April 30, 2000 19,550,000 $ 195 $ 39,801 $ 56,187,461 $51,695 $ 56,279,152
Comprehensive Income:
Net Income - - - 13,607,605 - 13,607,605
Other Comprehensive
Income:
Unrealized holdings gains
on available-for-sale
securities, net of deferred
taxes of $240,862 - - - - 410,241 410,241
Reclassification
adjustment for gains
realized in net income, net
of deferred taxes of
$226,738 - - - - (379,869) (379,869)
----------
Total Comprehensive
Income 13,637,977
----------
Purchase and retirement of
Common stock (130,000) (1) - (368,999) - (369,000)
-------------------------------------------------------------------------------------------
Balance at January 31, 2001 19,420,000 $ 194 $ 39,801 $ 69,426,067 $82,067 $ 69,548,129
===========================================================================================
Balance at April 30, 2001 19,420,000 $ 194 $ 39,801 $76,030,856 $ 29,236 $76,100,087
Comprehensive Income:
Net Income - - - 15,076,875 - 15,076,875
Other Comprehensive
Income:
Unrealized holding gains
on available-for-sale
securities net of
deferred taxes of
$49,731 - - - - 85,750 85,750
Reclassification
adjustment for net
gains realized in net
income, net of deferred
taxes of $64,009 - - - - (108,989) (108,989)
----------
Total Comprehensive
Income 15,053,636
-------------------------------------------------------------------------------------------
Balance at January 31, 2002 19,420,000 $ 194 $ 39,801 $91,107,731 $ 5,997 $91,153,723
===========================================================================================
The accompanying notes are an integral part of these financial statements
6
Statement of Cash Flows for the Nine-
Month Periods Ended January 31, 2002 and 2001
MARKET AMERICA, INC. (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
January 31, 2002 January 31,2001
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 15,076,875 $ 13,607,605
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,045,686 684,371
Deferred income taxes 70,078 (185,000)
Loss on disposal of fixed assets - 92,398
Gains on sales of available-for-sale securities (172,998) (606,607)
(Increase) decrease in income tax refunds receivable 2,135,483 (1,120,161)
(Increase) decrease in interest receivable 493,471 -
(Increase) decrease in inventories 211,717 (1,047,687)
(Increase) decrease in prepaid income taxes (607,000) -
(Increase) decrease in other current assets (309,637) (375,409)
(Increase) decrease in other assets (83,844) 37,275
Increase (decrease) in accounts payable - trade (627,742) (433,618)
Increase (decrease) in commissions payable 785,695 125,125
Increase (decrease) in sales tax payable (61,420) 10,612
Increase (decrease) in income taxes payable (3,811,363) (3,429,598)
Increase (decrease) in other accrued liabilities 96,567 282,253
Increase (decrease) in unearned revenue (355,750) 554,301
-------------------- -----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,885,818 8,195,860
-------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale securities (14,517,684) (24,544,425)
Proceeds from sale or maturity of available-for-sale securities 18,580,078 24,744,291
(Increase) decrease in advances to officers, directors
and employees (40,304) 2,783
(Increase) decrease in amounts due to/from related parties 16,222 1,818
(Increase) decrease in restricted cash 148,477 (264,593)
Proceeds from sale of equipment - 68,000
Capital expenditures (3,438,992) (4,984,762)
-------------------- -----------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 747,797 (4,976,888)
-------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase and retirement of common stock - (369,000)
Principal payments on long-term debt (67,748) (53,978)
Proceeds from long-term debt - 1,280,837
-------------------- -----------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (67,748) 857,859
-------------------- -----------------------
NET INCREASE IN CASH & CASH EQUIVALENTS 14,565,867 4,076,831
CASH & CASH EQUIVALENTS AT
BEGINNING OF PERIOD 60,511,367 43,870,755
-------------------- -----------------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 75,077,234 $ 47,947,586
==================== =======================
The accompanying notes are an integral part of these financial statements.
7
Statement of Cash Flows for the Nine-
Month Periods Ended January 31, 2002 and 2001
MARKET AMERICA, INC. (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
January 31, 2002 January 31, 2001
-------------------- ----------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 178,679 $ 116,838
Income taxes $ 13,817,000 $ 12,236,340
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Net change in unrealized holding gains or losses on
available-for-sale securities, net of deferred
income taxes (benefit) of ($14,278) and $14,124 $ (23,239) $ 30,372
The accompanying notes are an integral part of these financial statements.
8
Notes to Financial Statements
MARKET AMERICA, INC. January 31, 2002 (Unaudited)
- -------------------------------------------------------------------------------
Interim Financial Information
The unaudited interim financial statements of Market America, Inc. (the
"Company") as of January 31, 2002 and 2001 have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying interim financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's financial statements as of January 31, 2002 and for the
three and nine-month periods ended January 31, 2002 and 2001. Management
suggests that these financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's latest
Annual Report on Form 10-K. The results of operations for the three and
nine-month periods ended January 31, 2002 may not be indicative of the results
that may be expected for the fiscal year ending April 30, 2002.
Earnings Per Share
The Company computes earnings per share ("EPS") based upon the requirements of
Statement of Financial Accounting Standards No. 128. This statement specifies
the calculation, presentation and disclosure requirements for both basic and
diluted EPS. The Company does not present diluted EPS because it does not have
any securities or contracts outstanding with dilutive potential for its common
shares.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform with
the current period financial statements presentations. Reclassifications made
had no effect on previously reported net income.
Related Party Transactions
In December 1999, the Company entered into an agreement with a company owned by
Mr. and Mrs. James H. Ridinger, officers/stockholders of the Company, to lease
real estate in Miami, Florida for direct sales training and education, as well
as other corporate functions. The monthly rental is $60,000 and the lease has a
20-year term with a renewal option for an additional 20-year term. The Company
has paid a $600,000 non-interest bearing damage deposit as part of this lease,
which is included in other assets on the balance sheet. The amount of rent
expense under this agreement aggregated $180,000 and $540,000 during each of the
three and nine-month periods ended January 31, 2002 and 2001, respectively. In
connection with this lease, the Company has guaranteed a $5.3 million five-year
loan to the related company for the purchase of the real estate being leased. As
of January 31, 2002, the guaranteed loan had an outstanding balance of
$4,080,306. The Company had restricted cash of $2,560,000 as collateral under
the loan guarantee as of January 31, 2002. In October 2001, the Company began
construction of a $675,000 building on this leased property in order to further
expand the meeting and training facilities in Miami, Florida. As of January 31,
2002, the Company had paid approximately $104,000 towards the construction of
this facility.
During the year ended April 30, 1999, the Company entered into a 33-year net
ground lease with a company owned by Mr. and Mrs. James H. Ridinger,
officers/stockholders of the Company, for the site on which the Company has
constructed its new headquarters and warehouse facility in Greensboro, North
Carolina at a cost of $4,593,133. Required rental payments are $17,000 per month
since October 2000, and $10,666 per month prior to that date. The amount of rent
expense under this agreement was $51,000 and $153,000 for the three-month and
nine-month periods ended January 31, 2002, respectively. Rent expense for the
three-month and nine-month periods ended January 31, 2001 was $51,000 and
$121,330, respectively. In June 1999, the Company paid $500,000 to the Ridinger
company for a Right of First Refusal on this site, which provides the Company
with the opportunity to purchase the land, should it be offered for sale, before
the land is offered for sale to other parties. The amount paid is included in
other assets and is being amortized on a straight-line basis over the lease
term. The unamortized balance will be applied to the purchase price of the land
in the event the Company buys it. On June 28, 1999, the Company became guarantor
of a $1.6 million bank loan to the Ridinger company used for the purchase of the
land. The guaranteed loan had an outstanding balance of $1,040,450 at January
31, 2002. This loan and the Company's term loan are cross-collateralized by the
land being leased from the Ridinger company and by the building improvement
constructed thereon by the Company. The guaranteed loan is repayable over a
five-year period.
9
Notes to Financial Statements
MARKET AMERICA, INC. January 31, 2002 (Unaudited)
- -------------------------------------------------------------------------------
In June 2001, the Company purchased a facility in Miami, Florida from an
unrelated party for $3,560,400. The Company had made an earnest money deposit of
$1,100,000 on this facility during the fourth quarter of fiscal 2001 and paid
the remaining $2,460,400 in cash upon closing. The Company will lease the land
on which the facility sits from a company owned by Mr. and Mrs. James H.
Ridinger, officers/stockholders of the Company, at an amount and period yet to
be determined. The Company is in the process of obtaining an independent
appraisal of the property in order to set the lease amount at fair value. The
Company has paid $80,000 towards the lease of this property during the
nine-months ended January 31, 2002. The building will be depreciated over the
shorter of its estimated useful life or the term of the ground lease. The
Company has estimated and recorded approximately $89,000 of depreciation expense
on the building during the nine-months ended January 31, 2002.
Substantially all of the Company's leasehold improvements are to properties
leased from related companies.
Related party transactions are more fully described in the Company's most recent
Annual Report on Form 10-K.
Management Buyout Offer
On January 11, 2002, Market America Inc. ("Market America") issued a press
release announcing that it had accepted a previously announced proposal to take
the Company private at a price of $8.00 per share. The proposal is from a
management group led by President and Chief Executive Officer, James H.
Ridinger. The transaction is subject to the approval of a majority of the shares
held by Market America's unaffiliated shareholders. Mr. Ridinger holds
approximately 77% of Market America's common stock. The Board of Directors of
Market America authorized the preparation of merger agreement and proxy
materials for a special meeting of shareholders anticipated to be scheduled for
June 2002 following clearance of such proxy materials by the Securities and
Exchange Commission.
10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company had unrestricted and restricted cash on deposit with various
financial institutions and available-for-sale debt securities totaling $80.2
million as of January 31, 2002 compared to $69.7 million as of April 30, 2001.
The $80.2 million as of January 31, 2002 was comprised of $75.1 million of
unrestricted cash, $2.8 million of restricted cash and $2.3 million of
available-for-sale securities.
The restricted cash consisted primarily of certificates of deposit, which were
restricted for use as collateral under a guarantee of a $5.3 million loan
extended by a financial institution to a related company controlled by Mr. and
Mrs. James H. Ridinger, officers and stockholders of the Company, during fiscal
2000. The guaranteed loan had an outstanding balance of $4,080,306 as of January
31, 2002. The loan proceeds were used by the related company to purchase real
estate in Miami, Florida. The Company is leasing this real estate under a
twenty-year agreement. The real estate is used for direct sales training and
education as well as other corporate functions (see Related Party Transactions
in the Notes to Financial Statements above). During October 2001, the Company
began construction of a $675,000 building on this leased real estate in order to
further expand the training and meeting facilities in Miami, Florida. The costs
of this facility will be funded from cash flows from operations. As of January
31, 2002, the Company had paid approximately $104,000 towards the construction
of this facility.
The available-for-sale securities consist of commercial paper. These securities
were purchased in order to increase the Company's yield on assets pending use in
the Company's business and can be converted into cash if the need arises.
The Company has a five-year $2.1 million term loan related to its office and
distribution facility in Greensboro, North Carolina. The loan contains an annual
fixed interest rate of 7.625% and requires 59 monthly payments of $19,750,
including interest, with a balloon payment of all outstanding principal plus
interest due in June 2005. The building was constructed on land leased from a
related company (see "Related Party Transactions" in the Notes to Financial
Statements above).
The Company is also a guarantor of a $1.6 million loan by a financial
institution to a related company. The guaranteed loan had an outstanding balance
of $1,040,450 as of January 31,2002. The proceeds of the loan were used by the
related company to purchase the land on which the Company constructed its new
office and distribution facility in Greensboro, North Carolina. This loan and
the Company's building loan are cross-collateralized by the land being leased
from the related company and by the building constructed thereon by the Company.
The guaranteed loan is repayable over a five-year period.
In June 2001, the Company purchased a facility in Miami, Florida for $3,560,400.
The Company had made an earnest money deposit of $1,100,000 on this facility
during the fourth quarter of fiscal 2001 and paid the remaining $2,460,400 in
cash upon closing. See "Related Party Transactions" above for a further
discussion of this transaction.
Management believes that its current level of cash and cash equivalents and its
cash provided by operations will provide sufficient resources for operations in
the foreseeable future. In the event that the Company's operating environment
becomes adverse, there can be no assurance that additional financing would not
be required.
Results of Operations
The Company's sales continued to grow during the three and nine-month periods
ended January 31, 2002. Net sales increased 16.4% to $37.9 million from $32.6
million for the quarter ended January 31, 2002 compared to the same period in
2001. Net sales increased by 13.5% to $115.0 million from $101.4 million for the
nine-month period ended January 31, 2002 compared to the same period in 2001.
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Commission expense was $16.3 million and $14.1 million for the three-month
periods ended January 31, 2002 and 2001, respectively. Commission expense was
$49.0 million and $44.5 million for the nine-month periods ended January 31,
2002 and 2001, respectively. Commissions, as a percentage of sales, were 43.1%
and 43.3% for the three-month periods ended January 31, 2002 and 2001,
respectively, and 42.6% and 43.9% for the nine-month periods ended January 31,
2002 and 2001, respectively. The commission payout as a percentage of business
volume earned through commissionable product sales has remained consistent
during both the three and nine-month periods ended January 31, 2002 when
compared to the same prior year periods.
General and administrative expenses were $5.2 million and $4.3 million for the
three-month periods ended January 31, 2002 and 2001, respectively, and $14.3
million and $12.2 million for the nine-month periods ended January 31, 2002 and
2001, respectively. As a percentage of sales, general and administrative
expenses were 13.8% and 13.3% for the three-month periods ended January 31, 2002
and 2001, respectively, and 12.4% and 12.0% for the nine-month periods ended
January 31, 2002 and 2001, respectively. For the three and nine-month periods
ended January 31, 2002 and 2001, other general and administrative expenses
included the following items:
Three-Months Nine-Months
Ended January 31, Ended January 31,
2002 2001 2002 2001
----------- ---------- ---------- -----------
Insurance $ 298,797 $ 278,464 $ 809,417 $ 520,317
Other taxes and licenses 384,525 137,406 798,111 472,525
Legal and professional fees 307,931 233,346 707,624 557,436
Repairs and maintenance 116,244 110,345 468,033 706,856
Utilities 88,951 72,883 268,611 251,548
Other 849,768 988,589 2,555,266 2,339,662
---------- ---------- ---------- ----------
$2,046,216 $1,821,033 $5,607,062 $4,848,344
========== ========== ========== ==========
The increase in salary expense for the fiscal 2002 periods is primarily a result
of the timing of officer bonuses and an increase in the number of employees in
the Company's Information Technology departments due to the expansion of the
Company's internet presence over the past year.
Depreciation and amortization expense increased in the fiscal 2002 periods due
to the completion of the office and distribution facility in Greensboro, North
Carolina during July 2000, renovation completions of the office and training
center in Miami, Florida and the expansion of the training facilities in Miami,
Florida. The facility in North Carolina is being depreciated over 33 years
(ground lease term). The equipment and furnishings for these facilities are
being depreciated over 10 years. The new meeting and training facility in Miami,
Florida purchased during June 2001 will be depreciated over the shorter of it's
estimated useful life or the term of the ground lease for the land upon which
the facility sits. The Company has estimated and recorded approximately $42,500
and $89,000 of depreciation expense for this facility during the three and
nine-month periods ended January 31, 2002, respectively.
The Company incurred larger consulting expenses during the fiscal 2001 periods
due to renovations of the leased corporate facility in Miami, Florida.
12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONCLUDED
Insurance expense increased during the fiscal 2002 periods due to higher health
care costs incurred and number of employees covered under the Company's
self-insured health insurance plan. The amount of expense incurred under the
plan can vary from year to year depending upon the health and number of Company
employees. The Company's health plan has a $50,000 annual stop limit per
employee and an annual aggregate stop loss limit of approximately $889,000. The
Company also incurred larger property insurance due to the completion of the
Company's office and distribution facility in Greensboro, North Carolina during
July 2000 and expansion of corporate facilities in Miami, Florida.
Other taxes and licenses have increased as a result of the Company recognizing
approximately $125,000 more in property taxes during the three and nine-month
periods ended January 31, 2002 compared to same prior year periods. During
fiscal 2002, property tax bills were paid early in order to receive a discount
on the bills. Certain property taxes were included in the fourth quarter of
fiscal 2001. The Company also incurred approximately $80,000 more in property
taxes during the current year due to the expansion of corporate facilities in
Miami, Florida and the completion of the new office and distribution facility in
Greensboro, North Carolina during July 2000. The Company has also incurred
larger payroll taxes during the current year due to the growth in the number of
employees.
The primary result of the increase in legal and professional fees during the
current year is directly related to the proposed going private transaction (see
Notes to Financial Statements - Management Buyout Offer above).
Repairs and maintenance costs were lower during the fiscal 2002 periods due to
larger expenditures associated with the Company's yacht and the Miami training
and office facility during the prior year.
Other operating expenses were 5.4% and 5.6% of sales for the three-month periods
ended January 31, 2002 and 2001, respectively. Other operating expenses were
4.9% and 4.8% of sales for the nine-month periods ended January 31, 2002 and
2001, respectively.
The effective income tax rate for the prior year periods was lower due to
changes made during the prior year in the Company's multi-state allocation
methodology. These changes resulted in the amendment of state income tax returns
for fiscal years 1997, 1998 and 1999 during the prior year.
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, loss of key
suppliers and general economic conditions.
ITEM 3 QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISKS
The Company has evaluated the disclosure requirements of Item 305 of S-K
"Quantitative and Qualitative Disclosure about Market Risk," and has concluded
that the Company has no market risk sensitive instruments for which these
additional disclosures are required.
13
PART II
ITEM 1 LEGAL PROCEEDINGS
As a result of the proposed going-private transactions (see Notes to
Financial Statements - Management Buyout Offer), Market America and its
directors have been named as defendants in a class action lawsuit filed
in Superior Court in Guilford County, State of North Carolina, on
October 19, 2001. The plaintiff purports to represent a class of all of
the public shareholders of Market America whose shares would be
converted into the right to receive $8.00 in cash per share in
connection with the Merger. The complaint asserts that the $8.00 per
share price to be paid to public shareholders in connection with the
Merger is inadequate. The complaint also alleges that the director
defendants are engaged in self-dealing and are not acting in good faith
toward the plaintiff and the other members of his class and that the
directors have breached their fiduciary duties to plaintiff and the
other members of the class. The complaint seeks an order certifying the
class and remedies including injunctive relief that would, if granted,
prevent the completion of the merger, as well as costs and certain
unspecified monetary damages. On December 20, 2001, the defendants
filed their answer, generally denying the allegations of the complaint.
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 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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
On January 14, 2002, the Company filed Form 8-K with the
Securities and Exchange Commission. The report explained that on
January 11, 2002, the Company issued a press release announcing
that it had accepted a previously announced proposal to take the
Company private at a price of $8.00 per share. The proposal is
from a management group led by President and Chief Executive
Officer, James H. Ridinger. The transaction is subject to the
approval of a majority of the shares held by Market America's
unaffiliated shareholders. Mr. Ridinger holds approximately 77%
of Market America's common stock. The Board of Directors of
Market America authorized the preparation of merger agreement and
proxy materials for a special meeting of shareholders anticipated
to be scheduled for June 2002 following clearance of such proxy
materials by the Securities and Exchange Commission.
14
- --------------------------------------------------------------------------------
SIGNATURE
- --------------------------------------------------------------------------------
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: March 17, 2002 \s\ James H. Ridinger
- ----------------------------------- ------------------------------------
James H. Ridinger, President and CEO
(Principal Executive Officer and
Principal Financial Officer)
15
EXHIBITS TO FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Identification
----------- --------------
2.1 Agreement and Plan of Merger dated as of October 31, 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 3.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1996 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 for the fiscal year
ended April 30, 1996 filed with the Commission on July 30, 1996,
Commission File No. 000-23250)
10.2 Vendor agreement between Market America, Inc. and Isotonix (x)
Corporation dated October 25, 1993 (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended April 13, 1998 filed with the Commission on
August 13, 1998, Commission File No.
000-23250)
10.4 Lease between Miracle Holdings LLC and Market America, Inc. dated
November 1, 1998 (incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 1999 filed with the Commission on July 29, 1999,
Commission File No. 000-23250)
10.5 Right of First Refusal agreement between Market America, Inc. and
Miracle Holdings LLC dated May 20, 1999 (incorporated by reference
to Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the fiscal year ended April 30, 1999 filed with the Commission on
July 29, 1999, Commission File No. 000-23250)
10.6 Lease between Miracle Properties LLC and Market America, Inc.
dated February 1, 2000 (incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10K for the fiscal year
ended April 30, 2000 filed with the Commission on July 28, 2000,
Commission File No. 000-23250)
16