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UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended July 31, 1998
Commission file number 000-23250
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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)
7605-A Business Park Drive
Greensboro, North Carolina
(Address of principal executive offices)
27409
(Zip Code)
(336) 605-0040
(Registrant's Telephone Number, Including Area Code)
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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 September 14, 1998.
19,950,000
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<PAGE>
PART I
ITEM 1 Statement of Financial Position as of July 31, 1998 (Unaudited)
and April 30, 1998
Statement of Operations for the Three Month Periods Ended
July 31, 1998 and 1997 (Unaudited)
Statement of Changes in Stockholders' Equity for the Three
Month Periods Ended July 31, 1998 and 1997 (Unaudited)
Statement of Cash Flows for the Three Month Periods Ended
July 31, 1998 and 1997 (Unaudited)
Notes to Financial Statements as of July 31, 1998 (Unaudited)
<PAGE>
Statement of Financial Position as of
MARKET AMERICA, INC. July 31, 1998 and April 30, 1998
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ASSETS
(Unaudited)
July 31, April 30,
1998 1998
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CURRENT ASSETS
Cash and cash equivelents $ 21,028,540 $ 18,379,127
Short-term investments 12,497,523 12,415,465
Advances to related parties 116,912 62,445
Notes receivable, employees 79,316 51,919
Inventories 1,977,064 1,468,321
Other current assets 25,249 57,971
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Total current assets 35,724,604 32,435,248
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PROPERTY AND EQUIPMENT
Furniture and equipment 1,156,990 983,959
Software 267,783 259,199
Leasehold improvements 6,370 6,370
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998,964 970,467
Less accumulated depreciation 498,795 462,036
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Total property and equipment 932,348 787,492
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OTHER ASSETS
Restricted cash 80,443 79,018
Other 289,481 282,672
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Total other assets 369,924 361,690
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TOTAL ASSETS $ 37,026,876 $ 33,584,430
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,205,216 $ 1,066,274
Sales tax payable 726,650 802,786
Commissions payable 1,794,225 2,755,776
Other accrued liabilities 132,124 202,886
Income taxes payable 2,436,686 1,863,132
Unearned revenue 1,095,000 1,095,275
Current portion of long-term
debt 151,835 152,476
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Total current liabilities 7,541,736 7,938,605
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LONG-TERM DEBT 128,566 164,315
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The accompanying notes are an integral part of these financial statements.
<PAGE>
STOCKHOLDERS' EQUITY
Common stock, $.00001 par value;
800,000,000 shares authorized;
19,950,000 shares issued and
outstanding 199 199
Additional paid-in capital 39,801 39,801
Retained earnings 29,316,574 25,441,510
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Total stockholders' equity 29,356,574 25,481,510
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 37,026,876 $ 33,584,430
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The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Operations for the Three Month
MARKET AMERICA, INC. Periods Ended July 31, 1998 and 1997 (Unaudited)
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July 31, July 31,
1998 1997
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SALES $ 26,826,596 $ 19,253,264
COST OF SALES 6,285,268 4,037,338
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GROSS PROFIT 20,541,328 15,215,926
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SELLING EXPENSES
Commissions 11,912,958 8,730,456
Sales tax 243,789 120,443
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12,156,747 8,850,899
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GENERAL and ADMINISTRATIVE EXPENSES
Salaries 982,190 812,459
Consulting 45,557 55,936
Rents 190,623 108,927
Depreciation and amortization 50,319 34,091
Other operating expenses 983,650 1,117,119
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2,252,339 2,128,532
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INCOME FROM OPERATIONS 6,132,242 4,236,495
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OTHER INCOME (EXPENSE)
Interest income 389,407 172,323
Interest expense (23,466) (2,759)
Loss on disposal of assets (6,404)
Miscellaneous 41,839 34,888
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Total other income (expense) 401,376 204,452
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INCOME BEFORE TAXES 6,533,618 4,440,947
PROVISION FOR INCOME TAXES 2,658,554 1,788,860
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NET INCOME $ 3,875,064 $ 2,652,087
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BASIC EARNINGS PER COMMON SHARE $ .19 $ .13
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WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 19,950,000 19,950,000
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The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Stockholders' Equity for the
Three Month Periods Ended July 31, 1998 and 1997
MARKET AMERICA, INC. (Unaudited)
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Common Stock Additional
------------------ Paid-in Retained
Shares Amount Capital Earnings Total
---------- ------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balances at April 30, 1997 19,950,000 $199 $39,801 $14,600,970 $14,640,970
Net income 2,652,087 2,652,087
---------- ---- ------- ----------- -----------
Balances at July 31, 1997 19,950,000 $199 $39,801 $17,253,057 $17,293,057
========== ==== ======= =========== ===========
Balances at April 30, 1998 19,950,000 $199 $39,801 $25,441,510 $25,481,510
Net income 3,875,064 3,875,064
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Balances at July 31, 1998 19,950,000 $199 $39,801 $29,316,574 $29,356,574
========== ==== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows for the
Three Month Periods Ended July 31, 1998 and 1997
MARKET AMERICA, INC. (Unaudited)
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<S> <C> <C>
July 31, July 31,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,875,064 $ 2,652,087
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of assets 6,404 -
Depreciation and amortization 50,391 34,091
Increase in inventories (508,743) (543,070)
(Increase) decrease in other current assets 32,722 (39,470)
(Increase) decrease in other assets (6,809) -
Increase (decrease) in accounts payable 138,942 (103,360)
Increase (decrease) in sales tax payable (76,136) -
Increase (decrease) in income taxes payable 573,554 (255,060)
Decrease in commissions payable (961,551) (229,828)
Decrease in other accrued liabilities (70,762) (157,939)
Decrease in unearned revenue (275) (219,322)
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NET CASH PROVIDED FROM OPERATING ACTIVITIES 3,052,729 1,138,129
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CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in short-term investments (82,058) 17,294,869
(Increase) decrease in notes receivable, employees (27,397) 1,471
Advances to related parties (54,467) -
Increase in restricted cash (1,425) (887)
Proceeds from sale of assets 23,286 -
Capital expenditures (224,865) (28,497)
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NET CASH PROVIDED FROM (USED IN)
INVESTING ACTIVITIES (366,926) 17,266,956
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CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (36,390) (15,635)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 2,649,413 18,389,450
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 18,379,127 2,323,943
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $21,028,540 $20,713,393
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</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to Financial Statements
MARKET AMERICA, INC. July 31, 1998(Unaudited)
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Interim Financial Information
The unaudited interim financial statements of Market America, Inc. (the
"Company")as of July 31, 1998 and 1997 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 July 31, 1998 and for the three
month periods ended July 31, 1998 and 1997. Management suggests that these
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's latest Annual Report on
Form 10-K. The results of operations for the quarter ended July 31, 1998 may not
be indicative of the results that may be expected for the fiscal year ending
April 30, 1999.
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 have any securities outstanding with dilutive
potential for its common shares.
Adoption of Accounting Standards
On May 1, 1998, the Company adopted Statement of Financial Accounting Standards
"SFAS" No. 130, "Reporting Comprehensive Income." Comprehensive income is the
total of net income and other changes in equity, excluding transactions with
stockholders, that are excluded from the measurement of net income. Since the
Company does not have any transactions which effect equity other than net
income, the adoption of this standard did not have a material effect on the
Company's financial statements.
On May 1, 1998 the Company also adopted SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." Since the Company only has one
business segment, the adoption of this standard did not have a material effect
on the Company's financial statements.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform with
the current period financial statements presentation. Reclassifications made had
no effect on previously reported net income.
Related Party Transactions
The Company has an agreement with two companies owned by Mr. & Mrs. James H.
Ridinger, officers and major 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, education, and recruitment
activities of the Company. Both lease agreements have 5-year terms with options
to renew. The amount of rent expense incurred for the three month period ended
July 31, 1998 was $21,000 for the real estate and $60,000 for the yacht. At July
31, 1998 these companies owed the Company $116,912.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity & Capital Resources
The Company's current assets and liabilities were $35,724,604 and $7,541,736
respectively at July 31, 1998. This yielded a current ratio of 4.7 at July 31,
1998 compared to 4.1 at April 30, 1998. The increase in the current ratio is
primarily attributable to the cash provided by the continued strong growth
during the quarter.
Cash and cash equivalents, investments with maturity dates of three months or
less when purchased, were $21.0 million at July 31, 1998 compared to $18.4
million at April 30, 1998. This increase in cash is directly related to the
Company's positive cash flow from operations. Management believes that its cash
reserves and cash flows provided by operations will provide sufficient working
capital for the remainder of the fiscal year.
The significant decrease in cash provided by investing activities between the
quarters ending July 31, 1997 and 1998 is attributed to the reclassification of
approximately $17.3 million of master notes from short-term investments to cash
and cash equivalents at July 31, 1997. The reclassification was a result of the
maturity dates of these investments being less than three months as of July 31,
1997. During the quarter ended July 31, 1998, the Company had no such
reclassifications between short-term investments and cash and cash equivalents.
During 1999, working capital may be reduced substantially by a decision to
construct a new corporate office and warehouse facility. Management continues to
evaluate whether the Company will be better served leasing office and warehouse
space or constructing a facility. If management decides to move forward with the
construction of a facility, the expectation is that the investment will not
exceed $6.0 million. Management intends to continue investing its cash reserves
in highly liquid investments until a decision is made as to the expansion of the
office and warehouse facilities.
Results of Operations
The Company's sales continued to grow during the quarter ended July 31, 1998.
Net sales increased 39.3% to $26.8 million from $19.3 million for the quarter
ended July 31, 1998 compared to the same period in 1997. Management believes
that its emphasis on one-to-one marketing and mass customization has lead to
this growth.
Gross profit as a percentage of net sales for the three month periods ended July
31, 1998 and 1997 was 76.6% and 79.0%, respectively. Management credits the
decrease to a misclassification of approximately $520,000 of expenses out of
cost of goods sold into other operating expenses at July 31, 1997. This
misclassification was corrected during the quarter ended October 31, 1997. Gross
profit as a percentage of net sales for the quarter ending July 31, 1997,
excluding the misclassification, was 76.3%.
Commission expense was $11.9 million for the three month period ended July 31,
1998. This compares to $8.7 million for the respective 1997 period. Commissions,
as a percentage of sales, were 44.4% and 45.3% for the three month periods ended
July 31, 1998 and 1997, respectively. The total dollar increase in commission
expense was directly related to the corresponding increase in net sales.
General and administrative expenses were $2.3 million and $2.1 million for the
three month periods ended July 31, 1998 and 1997, respectively. As a percentage
of sales, general and administrative expenses were 8.4% and 11.1% for the three
month periods ended July 31, 1998 and 1997, respectively. The decrease in
general and administrative expenses as a percentage of sales is attributable to
the misclassification of expenses discussed above (see discussion regarding
gross profit percentages). As a percentage of sales, general and administrative
expenses at July 31, 1997, excluding the misclassification, was 8.3%.
<PAGE>
PART II
ITEM 1 LEGAL PROCEEDINGS
During the period covered by this report, no legal proceedings required
to be reported became reportable events, and there were no material
developments in or terminations of previously reported proceedings,
except for the development reported in the Form 8-K referred to in Item
6 below, in which it was reported that the Company had been informed by
the SEC staff on May 14, 1998 that the staff was considering
recommending institution of a civil injunctive enforcement action
against the Company and certain individuals associated with the
Company. The Company does not believe that any enforcement action
against the Company or persons associated with the Company is
warranted. At the present time, however, the Company is unable to
predict the outcome of the investigation or whether it might result in
civil proceedings involving the Company or its associates.
ITEM 2 CHANGES IN SECURITIES
NONE
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 SUBMISSION 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 June 4, 1998, the Company filed a Form 8-K with the Securities and
Exchange Commission reporting under Item 5 thereof, a development in a
previously reported SEC investigation.
<PAGE>
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SIGNATURE
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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 September 14, 1998 /s/ James H. Ridinger
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James H. Ridinger, President and CEO
(Principal Executive Officer and
Principal Financial Officer)
<PAGE>
EXHIBITS TO FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Identification
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2.1 Agreement and Plan of Merger dated as of October 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)
10.1 Lease between Miracle Marine, Inc. and Market America, Inc. dated June 1,
1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended October 31, 1997 filed with the
Commission on December 15, 1997, Commission File No. 000-23250)
10.2 Vendor agreement between Market America, Inc. and Isontonix (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)
27* Financial Data Schedule
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* Filed herewith.
