================================================================================
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, 1999
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)
7605 Business Park Drive
Greensboro, North Carolina
----------------------------------------
(Address of principal executive offices)
27409
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(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 14, 1999.
19,950,000
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<PAGE>
PART I
ITEM 1 Statement of Financial Position as of January 31, 1999 (Unaudited)
and April 30, 1998
Statement of Operations for the Three and Nine-Month Periods Ended
January 31, 1999 and 1998 (Unaudited)
Statement of Changes in Stockholders' Equity for the Nine-Month
Periods Ended January 31, 1999 and 1998 (Unaudited)
Statement of Cash Flows for the Nine-Month Periods Ended January 31,
1999 and 1998 (Unaudited)
Notes to Financial Statements as of January 31, 1999 (Unaudited)
<PAGE>
Statement of Financial Position as of
MARKET AMERICA, INC. January 31, 1999 and April 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
January 31, 1999 April 30, 1998
---------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $30,349,025 $18,379,127
Short term investments 7,645,112 12,415,465
Advances to related parties 244,945 62,445
Notes receivable employees 210,986 51,919
Inventories 1,726,198 1,468,321
Other current assets 222,954 57,971
----------- -----------
Total current assets 40,399,220 32,435,248
----------- -----------
PROPERTY AND EQUIPMENT
Furniture and equipment 1,199,471 983,959
Software 270,749 259,199
Leasehold improvements 21,827 6,370
----------- -----------
1,492,047 1,249,528
Less accumulated depreciation and
amortization 599,009 462,036
----------- -----------
Total property and equipment 893,038 787,492
----------- -----------
OTHER ASSETS
Restricted cash 82,443 79,018
Other 280,856 282,672
----------- -----------
Total other assets 363,299 361,690
----------- -----------
TOTAL ASSETS $41,655,557 $33,584,430
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Financial Position as of
MARKET AMERICA, INC. January 31, 1999 and April 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
January 31, 1999 April 30, 1998
---------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,686,426 $ 1,066,274
Sales tax payable 735,570 802,786
Commissions payable 1,926,920 2,755,776
Other accrued liabilities 242,159 202,886
Income taxes payable (332,767) 1,863,132
Unearned revenue 1,192,450 1,095,275
Current portion of long-term debt 120,000 152,476
----------- -----------
Total current liabilities 5,570,758 7,938,605
----------- -----------
LONG TERM DEBT 40,000 164,315
----------- -----------
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 36,004,799 25,441,510
----------- -----------
Total stockholders' equity 36,044,799 25,481,510
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $41,655,557 $33,584,430
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations for the Three and
MARKET AMERICA, INC. Nine Month Periods Ended January 31, 1999 and 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
Three Month Periods Ended Nine Month Periods Ended
------------------------- ------------------------
January 31, 1999 January 31, 1998 January 31, 1999 January 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
SALES $27,123,874 $20,555,064 $80,711,996 $61,546,215
COST OF SALES 6,376,288 5,082,894 19,533,078 13,583,587
----------- ----------- ----------- -----------
GROSS PROFIT 20,747,586 15,472,170 61,178,918 47,962,628
----------- ----------- ----------- -----------
SELLING EXPENSES
Commissions 11,942,982 9,294,667 36,503,754 28,297,248
Sales tax 253,066 1,099,956 778,121 1,482,603
----------- ----------- ----------- -----------
12,196,048 10,394,623 37,281,875 29,779,851
----------- ----------- ----------- -----------
GENERAL and ADMINISTRATIVE EXPENSES
Salaries 1,392,763 1,116,099 3,432,853 2,839,328
Consulting 69,473 31,846 167,041 110,569
Rents 267,586 154,912 663,553 422,267
Depreciation & amortization 51,750 39,999 153,944 116,865
Other operating expense 1,147,432 1,096,310 3,457,156 2,837,388
----------- ----------- ----------- -----------
2,929,004 2,488,657 7,874,547 6,346,417
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 5,622,534 2,588,890 16,022,496 11,836,360
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Income other 114,499 64,389 387,505 266,704
Interest income, net 496,739 212,424 1,258,826 630,405
Loss on disposal of assets (2,133) - (8,537) -
Miscellaneous 40,865 12,045 151,100 21,185
----------- ----------- ----------- -----------
Total other income (expense) 649,970 288,858 1,788,390 918,294
----------- ----------- ----------- -----------
INCOME BEFORE TAXES 6,272,504 2,877,748 17,811,390 12,754,654
PROVISION FOR INCOME TAXES 2,708,348 1,468,364 7,248,101 5,568,070
----------- ----------- ----------- -----------
NET INCOME $ 3,564,156 $ 1,409,384 $10,563,289 $ 7,186,584
=========== =========== =========== ===========
BASIC EARNINGS PER COMMON SHARE
$ 0.18 $ 0.07 $ 0.53 $ 0.36
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,950,000 19,950,000 19,950,000 19,950,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Stockholders' Equity for the
Nine Month Periods Ended January 31, 1999 and 1998
MARKET AMERICA, INC. (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
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 - - - 7,186,584 7,186,584
---------- ---- ------- ----------- -----------
Balances at January 31, 1998 19,950,000 $199 $39,801 $21,787,554 $21,827,554
========== ==== ======= =========== ===========
Balances at April 30, 1998 19,950,000 $199 $39,801 $25,441,510 $25,481,510
Net Income - - - 10,563,289 10,563,289
---------- ---- ------- ----------- -----------
Balances at January 31, 1999 19,950,000 $199 $39,801 $36,004,799 $36,044,799
========== ==== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows for the Nine
Month Periods Ended January 31, 1999 and 1998
MARKET AMERICA, INC. (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
January 31, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $10,563,289 $ 7,186,584
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of assets 8,537 -
Depreciation and amortization 153,944 166,865
(Increase) decrease in inventories (257,877) (325,766)
(Increase) decrease in other current assets (164,983) (40,169)
(Increase) decrease in other assets 1,816 (2,981)
Increase (decrease) in accounts payable 620,152 (310,201)
Increase (decrease) in sales tax payable (67,216) 599,796
Increase (decrease) in income taxes payable (2,195,899) (341,389)
Increase (decrease) in commissions payable (828,856) 32,900
Increase (decrease) in other accrued liabilities 39,273 (232,875)
Increase (decrease) in unearned revenue 97,175 (144,022)
----------- -----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 7,969,355 6,538,742
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in short-term investments 4,770,353 17,294,869
(Increase) decrease in notes receivable, employees (159,067) (30,311)
Advances to related parties (182,500) (91,052)
Increase in restricted cash (3,425) (4,121)
Proceeds from disposal of assets 25,093 -
Capital expenditures (293,120) (231,037)
----------- -----------
NET CASH PROVIDED FROM
INVESTING ACTIVITIES 4,157,334 16,938,348
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (156,791) (169,402)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,969,898 23,307,688
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 18,379,127 2,323,943
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $30,349,025 $25,631,631
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to Financial Statements
MARKET AMERICA, INC. January 31, 1999(Unaudited)
- --------------------------------------------------------------------------------
Interim Financial Information
The unaudited interim financial statements of Market America, Inc. (the
"Company") as of January 31, 1999 and 1998 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, 1999 and for the
three and nine-month periods ended January 31, 1999 and 1998. 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, 1999 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 or contracts 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, which are excluded from the measurement of net income. Since the
Company does not have any transactions that affect stockholders' equity other
than net income, the adoption of this standard did not have any 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 require the Company
to disclose segment information.
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 separate agreements with two different companies owned by Mr.
and Mrs. James H. Ridinger, officers and controlling stockholders of the
Company. One agreement is for the lease of real estate in Miami, Florida for use
by Company management when conducting business in Florida. This agreement has a
five-year term, with an option to renew. The amount of rental expense incurred
under this lease for the three and nine-month periods ended January 31, 1999 was
$91,800 and $133,800, respectively. The other agreement is for the lease of a
yacht on a per event basis. The Company uses the yacht as an integral part of
its direct sales training, education and recruitment activities. This agreement
also has a five-year term with an option to renew. The amount of rental expense
<PAGE>
Notes to Financial Statements
MARKET AMERICA, INC. January 31, 1999(Unaudited)
- --------------------------------------------------------------------------------
incurred for the yacht for the three and nine-month periods ended January 31,
1999 was $90,000 and $210,000, respectively.
The Company is currently negotiating an agreement with a company owned by Mr.
and Mrs. James H. Ridinger for a 30-year net ground lease for the site on which
the Company plans to construct its new headquarters and warehouse facility in
Greensboro, North Carolina. The lease is expected to require initial monthly
payments of approximately $12,000. Management expects the monthly payments to be
adjusted every five years for half of the increase in the Consumer Price Index
during the previous five-year period.
At January 31, 1999 the three companies owned by Mr. and Mrs. Ridinger owed the
Company $244,945.
<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 $40,399,220 and $5,570,758,
respectively, at January 31, 1999. This yielded a current ratio of 7.3 at
January 31, 1999 compared to 4.1 at April 30, 1998. The increase in the current
ratio is primarily attributable to the cash provided by continued growth during
the nine-month period ended January 31, 1999.
Cash and cash equivalents, investments with maturity dates of three months or
less when purchased, were $30.3 million at January 31, 1999 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 and a decision by management during
the nine-month period ended January 31, 1999 to convert $4.8 million of
short-term investments to cash. Management believes that the Company's 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
nine-month periods ending January 31, 1999 and 1998 is attributed to a decision
by management during the 1999 period to convert $4.8 million of short-term
investments to cash. During the nine-month period ended January 31, 1998,
management converted $17.3 million of short-term investments to cash.
The Company's liquidity and capital resources will be affected by its decision
in September 1998 to construct a new 80,000 square-foot headquarters and
warehouse facility near its current headquarters and warehouse, adjacent to the
principal airport in Greensboro, North Carolina. The Company is negotiating a
30-year net ground lease for the site of the new facility. The lease is expected
to require initial monthly payments of approximately $12,000. Management expects
the monthly payments to be adjusted every five years for half of the increase in
the Consumer Price Index during the previous five-year period. Management
expects that the cost of constructing the new facility will not exceed $3.7
million. The Company intends on using $2 million generated from operations and
financing the remaining $1.7 million with a 10 to 15 year loan. Management
believes that the new facility will have a positive effect on the efficiency of
the Company's operations and should contribute to enhanced profitability.
Results of Operations
The Company's sales continued to grow during the three and nine-month periods
ended January 31, 1999. Net sales increased 32% for the quarter ended January
31, 1999 to $27.1 million compared to $20.6 million for the quarter ended
January 31, 1998. Net sales also increased by 31.1% for the nine-month period
ended January 31, 1999 to $80.7 million from $61.5 million for the nine-month
period ended January 31, 1998. Management believes that its emphasis on
one-to-one marketing, mass customization and the expansion of its National
Meeting, Training and Seminar System, including new training programs such as
Moving Up Seminars, to over 30,000 meetings on an annual basis has lead to this
growth.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Gross profit as a percentage of net sales for the three-month periods ended
January 31, 1999 and 1998 was 76.5% and 75.3%, respectively. Gross profit as a
percentage of net sales for the nine-month periods ended January 31, 1999 and
1998 was 75.8% and 78%, respectively. The decrease in the gross profit margin
for the nine-month period is attributable to upgrades of production costs for
many products and the sales mix of products sold during the second quarter of
fiscal 1999.
Commission expense was $11.9 million and $9.3 million for the three-month
periods ended January 31, 1999 and 1998, respectively. Commission expense was
$36.5 million and $28.3 million for the nine-month periods ended January 31,
1999 and 1998, respectively. Commissions, as a percentage of sales, were 44% and
45.2% for the three-month periods ended January 31, 1999 and 1998, respectively,
and 45.2% and 46% for the nine-month periods ended January 31, 1999 and 1998,
respectively. The total dollar increase in commission expense was directly
related to the corresponding increase in net sales.
Year 2000 Issue
The Year 2000 issue is a result of computer systems that use two digits rather
than four to define calendar dates. By using two digit dates, systems may fail
or make miscalculations due to the inability to distinguish dates in the 1900s
from dates in the 2000s.
The Company continues to address the business issues associated with the Year
2000 issue. In doing so, the Company has formed a Year 2000 task force to
develop and implement a compliance plan. The Company has made a preliminary
assessment of its systems and is currently performing tests in order to ensure
that internal systems will recognize the Year 2000. The Company expects these
tests to continue into the summer of 1999 with the goal to be Year 2000
compliant by July 31, 1999.
Management believes at this time that costs associated with becoming Year 2000
compliant should not have a material adverse effect on the Company.
Although the Company expects its internal systems to be compliant as described
above, the Company intends to prepare a contingency plan during the first
quarter of fiscal 2000.
In addition, the Company has requested information regarding Year 2000
compliance plans and current status from its major vendors and financial
institutions. At present, the Company is not aware of any significant risk
exposure associated with these parties. As a result, the Company is unable to
predict the impact on its business if such parties are unable to comply.
Forward-Looking Statements
Statements in this report concerning the Company's business outlook or 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, as well as other risks, some of which are detailed in the
Company's filings with the Securities and Exchange Commission.
<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.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits to this report are listed in the Exhibit Index, which is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
NONE
<PAGE>
- -------------------------------------------------------------------------------
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 15, 1999 /s/ James H. Ridinger
------------------ -----------------------------------
James H. Ridinger, President and CEO
(Principal Executive Officer and
Principal Financial Officer)
<PAGE>
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)
10.1 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 30, 1998
filed with the Commission on August 13, 1998, Commission File No. 000-23250)
27* Financial Data Schedule
- ----------------
* Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Financial Position at January 31, 1999 (Unaudited) and the
Statement of Operations for the three months ended January 31, 1999 (Unaudited)
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000880121
<NAME> Market America, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> NOV-1-1998
<PERIOD-END> JAN-31-1999
<EXCHANGE-RATE> 1
<CASH> 30,349,025
<SECURITIES> 7,645,112
<RECEIVABLES> 455,931
<ALLOWANCES> 0
<INVENTORY> 1,726,198
<CURRENT-ASSETS> 40,399,220
<PP&E> 1,492,047
<DEPRECIATION> 599,009
<TOTAL-ASSETS> 41,655,557
<CURRENT-LIABILITIES> 5,570,758
<BONDS> 0
0
0
<COMMON> 199
<OTHER-SE> 36,044,600
<TOTAL-LIABILITY-AND-EQUITY> 41,655,557
<SALES> 27,123,874
<TOTAL-REVENUES> 27,123,874
<CGS> 6,376,288
<TOTAL-COSTS> 6,376,288
<OTHER-EXPENSES> 15,125,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> 6,272,504
<INCOME-TAX> 2,708,348
<INCOME-CONTINUING> 5,622,534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,564,156
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
