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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, 2000
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.)
1302 Pleasant Ridge Road
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 |_|
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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. |x|
The aggregate market value of shares of Common Stock of the registrant held by
non-affiliates (based on the July 26, 2000 closing sale price of $4.13) was
$14,669,944 million. The Common Stock is traded over-the-counter and quoted
through the OTC Bulletin Board. As of July 26, 2000, 19,450,000 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 September 13,
2000, is incorporated by reference in Part III, Items 10, 11, 12 and 13 of this
report.
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PART I
Item 1. Business
Introduction
Market America is an eight-year-old marketing and distribution company. The
Company has taken the attributes of traditional franchising and network
distribution systems and combined them into a unique marketing plan, referred to
as The UnFranchise(R). The UnFranchise(R) combines the one-to-one marketing
concepts of direct selling with the systemization concepts of franchising.
Market America, Inc. sells an assortment of consumer-oriented products and
services, including customized apparel, automotive lubricants, enzyme-activated
cleaning and soil conditioning products, biologically activated hydrocarbon
remediation products, water filters, household cleaning products, gourmet
coffee, flower arrangements, dietary and nutritional supplements, vitamins,
photographic services, personal protection devices, jewelry, a full line of
custom-blended cosmetics, 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 81,000 independent
distributors.
The Company has positioned 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.
The Company has thus far introduced its customized Motives(TM) cosmetics line
and a customized gourmet food line.
The Company's principal executive offices and national distribution center are
located at 1302 Pleasant Ridge Road, 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 31.2% of gross revenue during
the fiscal year ended April 30, 2000. During the years ended April 30, 1999 and
1998, OPC-3 constituted 30.6% and 34.2%, respectively, 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. Virtually, 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 46.0% of the Company's gross sales in fiscal year 2000, 44.0% in fiscal year
1999 and 49.3% in fiscal year 1998, 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.
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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 81,379, 64,883 and 59,298 active distributors at April 30, 2000, 1999 and
1998, 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 44.56%, 45.03% and 44.63% of net sales volume for the
years ended April 30, 2000, 1999 and 1998, respectively. Management believes
distributor commissions as a percent of net sales will remain relatively
constant for the year ending April 30, 2001.
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 will refund the costs of returned marketable and unused products by
a distributor within one year of purchase, less a 10% restocking fee.
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 not been significant 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
substantial network of contacts around the world, including 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.
Market America expects to continue to develop its health and nutrition product
line, adding products to enhance lifestyle and longevity. During fiscal 2000,
the Company began selling Glucosatrin, a nutritional approach to healthy joints
and cartilage, which accounted for approximately $3.3 million in sales.
Market America is completing its third year in the product development of
made-to-measure clothing. Leveraging its large contingent of independent
contractors and customer relationships, the Company plans to be able to
implement its One-to-One Marketing philosophies to offer mass customization of
men's and women's casual and dress trousers. This project continues to improve
and is nearing completion of its final test phases. Successful implementation
will provide Market America entry into a billion-dollar market place. This
product has been pursued through the support of the Textile Industry's Research
and Development Center and the Textile Clothing Technology Company. The Company
is also in the beginning stages of customized shoes and vitamin products.
During fiscal 2000, Market America formed an Internet Advisory Board (IAB),
comprised of seven experts in the Internet field, for the purpose of advising
and developing an Internet site which would enhance distributors' business
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opportunities. In February 2000, Phase I was completed and launched. Phase I was
comprised primarily of a new corporate web site, a distributor locator system,
and custom web sites for distributors. The distributor locator system and the
custom web pages provide web surfers with the ability to search for and order
from distributors who have purchased a locator listing and custom web page from
the Company. Sales of the distributor locator listings accounted for
approximately $136,000 in fiscal 2000. The custom web sites, presently numbering
in excess of 3,000, are dynamically generated and are designed to allow
distributors the ability to create and modify their own personal Market America
web site. Sales of custom web sites approximated $245,000 for fiscal 2000. Phase
II, scheduled for launch in August 2000, will add e-commerce capabilities to the
custom web sites and Market America's web site.
Backlog
The Company typically ships products within 24 hours after the receipt of the
order. As of April 30, 2000, there was no significant backlog.
Employees
At April 30, 2000 the Company employed 212 persons at its Greensboro, North
Carolina corporate headquarters and distribution center and 11 persons at its
Miami, Florida location. 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, "Mineral Blast" nutritional supplement and "Clear
Shield" and "Vitashield" skin 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 by means of
copyright protection. The Company aggressively pursues anyone who violates its
proprietary rights and distributor non-competition and non-solicitation
contractual provisions. Litigating risks 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
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consumer recognition. There are many competitors for both sales and distributors
with substantially greater financial resources than the Company.
The Company believes that the leading network marketing company in the world,
based on total sales, is 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 the Company's products. 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 the organizations themselves 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 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.
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Markets
The Company's primary markets have been in the United States, Canada, and most
U.S. possessions. Approximately 5.7%, 3.7% and 2.6% of the Company's sales in
fiscal 2000, 1999 and 1998, respectively, were outside the United States.
Management intends on making several trips to Australia and the Pacific Rim
during the second and third quarters of fiscal 2001 in order to determine the
feasibility of opening operations in these areas. If business factors are
favorable, the Company could begin operations in these areas during the fourth
quarter of fiscal 2001.
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 and
products 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 product
liability insurance at a level consistent with responsible industry practices.
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.
Risk of Distributor Defections. Large-scale distributor defections have been
common in the direct sales industry. 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"
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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 2. Properties
During the year ended April 30, 2000, the Company leased a 40,000 square foot
building, in Greensboro, North Carolina. The lease covering this property was
terminated without penalty on July 10, 2000 when the Company moved into the new
corporate office and distribution center it had been constructing since the
summer of 1999. The new 102,000 square foot building in Greensboro, North
Carolina serves as the Company's headquarters and primary distribution center.
Management believes that this facility will meet the Company's needs for office
and distribution space for the foreseeable future. The Company has a five-year
$2.1 million mortgage with a fixed interest rate of 7.625%. The loan requires
monthly payments, including interest, of approximately $20,000 for fifty-nine
months with all remaining principal and interest due on the sixty month from
loan inception.
In addition, the Company 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 in
direct sales training and education as well as other corporate functions. The
lease agreement is for twenty years and requires a $60,000 monthly payment. The
lease is renewable for an additional twenty-year period. The Company is
committed to construct a $1.85 million training and meeting facility on the
leased property in order to provide additional space for distributor events and
corporate meetings.
Item 3. Legal Proceedings
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.
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.
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PART II
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, 2000 and 1999 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, 2000 April 30, 1999
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High Low High Low
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First Quarter $10 $3-7/8 $7 $4-1/2
Second Quarter 6-7/8 4-15/16 5-3/16 3-13/16
Third Quarter 5-9/16 4-1/2 4-1/2 3
Fourth Quarter 5 3-3/4 4-1/2 3-5/8
The closing sale price for the Company's common stock on July 25, 2000 was
$4.19. As of that date, there were 460 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:
<TABLE>
<CAPTION>
--------------------------Year Ended April 30,--------------------------
2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Operating Revenues $135,965,263 $110,347,824 $ 87,531,005 $ 66,281,671 $ 42,479,911
Income from Operations 25,894,708 21,076,766 17,339,402 13,276,101 8,220,599
Income before Income Taxes 28,846,046 23,585,650 18,783,209 14,275,790 8,505,110
Net Income 17,790,922 14,191,025 10,840,540 8,471,221 5,153,227
Net Income Per Common Share 0.89 0.71 0.54 0.43 0.26
</TABLE>
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Balance Sheet Data:
<TABLE>
<CAPTION>
--------------------------Year Ended April 30,--------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $43,858,428 $38,560,369 $24,496,643 $14,172,686 $ 5,751,385
Inventories 2,430,734 1,852,487 1,468,321 1,244,586 1,020,117
Total Assets 69,765,464 48,998,497 33,584,430 21,691,428 12,238,284
Current Ratio 4.4 5.1 4.1 3.1 2
Quick Ratio 4.2 4.8 3.9 2.9 1.8
Long-Term Debt 755,214 10,000 164,315 281,707 324,355
Shareholders' Equity 56,279,152 39,672,535 25,481,510 14,640,970 6,169,749
Return on
Shareholders' Equity (1) 37.1% 43.6% 54.0% 81.4% 143.4%
</TABLE>
(1) Net income divided by average shareholders' equity.
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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.
<TABLE>
<CAPTION>
Fiscal Year Ended April 30, 2000 April 30, 1999 April 30, 1998
------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Sales Revenue $ 136.0 100% $ 110.3 100% $ 87.5 100%
Cost of Sales 34.0 25.0% 28.1 25.4% 21.1 24.2%
-------------------- --------------------- ---------------------
Gross Profit 102.0 75.0% 82.3 74.6% 66.4 75.8%
Selling Expenses:
Commissions 60.6 44.6% 49.7 45.0% 39.1 44.6%
Sales Tax 0.2 0.1% 0.4 0.3% 2.0 2.3%
-------------------- --------------------- ---------------------
Total Selling Expenses 60.8 44.7% 50.1 45.4% 41.1 46.9%
General and Administrative
Expenses:
Salaries 6.9 5.1% 5.1 4.6% 4.0 4.6%
Professional fees 1.2 0.9% 1.3 1.2% 0.8 0.9%
Rent expense 1.4 1.0% 0.9 0.9% 0.7 0.8%
Insurance 0.8 0.6% 0.6 0.6% 0.4 0.5%
Other taxes and licenses 0.6 0.4% 0.5 0.4% 0.4 0.4%
Utilities 0.4 0.3% 0.3 0.3% 0.2 0.3%
Consulting 0.8 0.6% 0.3 0.2% 0.1 0.1%
Depreciation and
Amortization 0.4 0.3% 0.2 0.2% 0.2 0.2%
Other Operating Expense 2.8 2.1% 1.9 1.7% 1.2 1.3%
-------------------- --------------------- ---------------------
Total General and
Administrative Expenses 15.3 11.3% 11.1 10.1% 8.0 9.1%
-------------------- --------------------- ---------------------
Income From Operations 25.9 19.0% 21.1 19.1% 17.3 19.8%
Other Income (Expense) 2.9 2.2% 2.5 2.3% 1.4 1.7%
-------------------- --------------------- ---------------------
Income before Income Taxes 28.8 21.2% 23.6 21.4% 18.8 21.5%
Income Taxes 11.0 8.1% 9.4 8.5% 8.0 9.1%
-------------------- --------------------- ---------------------
Net Income $ 17.8 13.1% $ 14.2 12.9% $ 10.8 12.4%
-------------------- --------------------- ---------------------
Earnings per common share $ 0.89 $ 0.71 $ 0.54
-------- -------- -------
</TABLE>
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Sales revenue increased for the eighth consecutive year. For the years ended
April 30, 2000, 1999 and 1998, sales were $136.0, $110.3 and $87.5 million,
respectively. This represents a $22.8 million (26.1%) sales growth from 1998 to
1999 and a $25.7 million (23.3%) sales growth from 1999 to 2000. The growth in
sales during fiscal 2000 and 1999 can be attributed to growth in the number of
average orders per month and the average dollar amount per order.
The Company's focus on recruitment resulted in a 25.4% growth of distributors,
which was responsible for a 10.4% increase in the number of average orders per
month in fiscal 2000 or approximately $11.2 million of additional sales revenue.
The Company's focus on training distributors to retail product resulted in a
14.0% increase in the number of average orders per month during fiscal 1999 or
approximately $13.2 million of additional sales revenue.
In addition, the Company's increased emphasis over the past two years on
"One-to-One marketing", which allows distributors to emphasize products to their
customers based on the customer's wants and needs, has created better
relationships between distributors and their customers resulting in an increased
average dollar amount per order. The average dollar amount per sales order
increased by 11.0% and 10.6% during fiscal 2000 and 1999, respectively. These
increases resulted in approximately $13.2 million and $9.6 million of additional
sales revenue during the years ended April 30, 2000 and 1999, respectively.
Cost of goods sold as a percentage of revenue was 25.0%, 25.4% and 24.2% for
fiscal years ending April 30, 2000, 1999 and 1998, respectively. 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.
Commissions remained relatively constant as a percentage of sales during the
most recent three fiscal years. As a percentage of sales, commissions were 44.6%
and 45.0% and 44.6% for the years ended April 30, 2000, 1999 and 1998,
respectively. Management anticipates that commission expense will range from 43%
to 46% during fiscal 2001.
Sales tax expense totaled $212,821, $358,741 and $1,985,462 during the years
ended April 30, 2000, 1999 and 1998, respectively. The significant decrease from
1998 to 1999 was the result of an agreement reached in 1998 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, 2000 balance sheet substantially cover all past taxes due.
Salary expense was $6.9 million in fiscal 2000, a 35.3% increase from $5.1
million in fiscal 1999. Fiscal 1999 increased by 27.5% from $4.0 million in
fiscal 1998. As a percentage of sales, salary expense was 5.1% for fiscal 2000
and constant at 4.6% during 1999 and 1998. The increase in fiscal 2000 was a
result of a commitment by management to improve human resources within the
Company to better serve the needs of the Company's distributors. The Company
also paid approximately $1.7 million in bonuses for fiscal 2000. Management
expects salary expense to remain at approximately 5% of sales in fiscal 2001.
Professional fees incurred during the years ended April 30, 2000, 1999 and 1998
were $1,241,117, $1,305,221 and $782,969, respectively. The increase in
professional fees from 1998 to 1999 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 remain consistent with fiscal 2000 during
fiscal 2001.
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The Company incurred rent expense of $1,380,351, $995,994 and $695,507 during
the years ended April 30, 2000, 1999 and 1998, respectively. Rent expense
increased during fiscal 2000 due to the expansion of office and training
facilities in Miami, Florida. Increased use of the Company's Miami office and
meeting facility resulted in the expense increase for fiscal 1999 compared to
fiscal 1998. In addition, during fiscal 1999 the Company began leasing land on
which the Company's new corporate headquarters and distribution facility is
located in Greensboro, North Carolina. The Company expects lease expense to
remain consistent with fiscal 2000 during fiscal 2001.
Insurance expense was $844,534 in 2000, $626,108 in 1999 and $429,468 in 1998.
The increase in fiscal 2000 from the previous year was due to higher general
liability and property insurance resulting from the expanded corporate
facilities in Miami, Florida. The increase in fiscal 1999 over fiscal 1998 was 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 increase in fiscal 2001 by $60,000 as a result of the
completion of the new corporate headquarters and distribution facility in
Greensboro, North Carolina and the expansion of facilities in Miami, Florida to
be completed by the end of fiscal 2001.
Other taxes and licenses incurred by the Company during the years ended April
30, 2000, 1999 and 1998 were $624,634, $458,155 and $386,779, respectively. The
primary cause of the increase in this line item over the past two fiscal years
is a result of the Company incurring larger payroll tax burdens due to 33%
growth in the number of employees over the past two fiscal years. The Company
has also incurred larger property taxes due to the expansion of corporate
facilities in both Greensboro, North Carolina and Miami, Florida.
Consulting expenses were $819,128, $266,154 and $124,211 for the years ended
April 30, 2000, 1999 and 1998 respectively. In fiscal 2000, the Company incurred
consulting fees relating to renovations of the leased corporate facility in
Miami, Florida and the expansion of its Internet site of approximately $424,000
and $214,000, respectively. The increase in consulting costs during fiscal 1999
related to the continued development of customized apparel. Management expects
consulting expenses to remain consistent in fiscal 2001.
Other operating expenses were $2,738,533, $1,875,698 and $1,155,498 for the
years ended April 30, 2000, 1999 and 1998, respectively. Other operating
expenses consist primarily of office supplies, postage, advertising, repairs and
maintenance, travel and other necessary business expenses. Due to the Company's
increased emphasis on distributor recruitment in fiscal 2000, management
presence at corporate events and meetings increased, as well as at distributor
functions. This resulted in approximately $450,000 of increased travel costs.
Without these increased costs, other operating expenses would have been slightly
lower as a percentage of sales than the prior year.
Liquidity and Capital Resources
The Company had unrestricted and restricted cash on deposit with various
financial institutions and available-for-sale debt securities totaling $55.81
million as of April 31, 2000 compared to $45.43 million as of April 30, 1999.
The $55.81 million as of April 30, 2000 was comprised of $43.87 million of
unrestricted cash, $2.64 million of restricted cash and $9.30 million of
available-for-sale securities. The restricted cash consisted of certificates of
deposit, which were restricted for use as collateral for a loan by a financial
institution to a related party (see Related Party Transactions in the Notes to
Financial Statements). The available-for-sale debt securities consist of
obligations of governmental agencies and 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 when the need arises.
The Company's primary source of funds is the cash generated from operating
activities. For the year ended April 30, 2000, cash provided by operating
activities was $20.8 million compared to $15.2 million and $11.7 million in 1999
and 1998, respectively. The Company's consistent sales growth and profit margins
have fueled these increases.
13
<PAGE>
Working capital at April 30, 2000 was $43.9 million compared to $38.6 million
and $24.5 million at April 30, 1999 and 1998, respectively. This increase was
due primarily to the net increase in cash and available-for-sale securities as a
result of continued strong growth over the past two fiscal years.
During fiscal 2000, the Company entered into a twenty-year lease agreement with
a related party for a facility in Miami, Florida to be used for direct sales
training and education as well as other corporate functions. In connection with
this lease, the Company guaranteed a $5.3 million five-year loan by a financial
institution to the related party for the leased real estate. The Company
restricted approximately $2.6 million of cash as collateral under the loan
guarantee. As required by the lease agreement, the Company paid a $600,000
damage deposit to the related party, which is included in other assets on the
April 30, 2000 balance sheet. The Company is committed to construct a $1.85
million training and meeting facility on the leased property in order to provide
additional space for distributor events and corporate meetings. This facility
will be funded from cash flow from operations.
In June 1999, the Company paid $500,000 to a related party for a Right of First
Refusal on the leased land on which the new facility in Greensboro, North
Carolina is located. The Right of First Refusal 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 on the April 30, 2000 balance sheet and will be amortized on a
straight-line basis over the lease term. On June 28, 1999, the Company became
guarantor of a $1.6 million bank loan to the related party used for the purchase
of the land. This loan and the Company's construction loan are cross
collateralized by the land being leased from the related party and by the
building improvement constructed thereon by the Company. The guaranteed loan is
repayable over a five-year period following completion of the building
construction.
The Company invested $8,804,088 in 2000 for property and equipment purchases
compared to $346,315 and $280,546 in 1999 and 1998 respectively. Foremost, the
Company began construction of a $4.6 million, 102,000 square foot office and
distribution center in Greensboro, North Carolina during the summer of 1999. The
facility was completed in early July 2000. The Company financed the building
with approximately $2.5 million of cash on hand and borrowed the remaining $2.1
million on a five-year loan bearing interest at 7.625% annually. The total
investment in the building during fiscal 2000 was approximately $3.1 million.
Secondly, the Company also purchased a $3.6 million yacht in June 1999 to be
used for direct sales training and education activities. The Company also spent
approximately $1.8 million on furnishings and equipment for the new office and
distribution center in Greensboro, North Carolina and the new leased meeting and
training facility in Miami, Florida, as well as approximately $300,000 for
improvements to the leased facility in Miami, Florida. Management does not
anticipate any significant capital expenditures during fiscal 2001 for
international expansion.
The Company believes that its current level of cash and cash equivalents and its
cash provided by operating activities 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 8. Financial Statements And Supplementary Data
Included immediately after exhibit #27.
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None
14
<PAGE>
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 25, 2000.
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 25, 2000.
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 25, 2000.
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 25, 2000.
15
<PAGE>
PART IV
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, 2000 and 1999
Statements of Income for the Years Ended April 30, 2000, 1999,
and 1998
Statements of Changes in Stockholders' Equity for the Years Ended
April 30, 2000, 1999, and 1998
Statements of Cash Flows for the Years ended April 30, 2000,
1999, and 1998
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 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.
16
<PAGE>
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 27, 2000.
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 27, 2000
-----------------------------------------
James H. Ridinger
President, Chief Executive Officer & Director
(Principal Executive, Financial & Accounting Officer)
/s/ Loren A. Ridinger July 27, 2000
-----------------------------------------
Loren A. Ridinger
Senior Executive Vice President & Director
/s/ Dennis Franks July 27, 2000
-----------------------------------------
Dennis Franks
Executive Vice President & Director
/s/ Martin Weissman July 27, 2000
------------------------------------------
Martin Weissman
Executive Vice President & Director
17
<PAGE>
MARKET AMERICA, INC.
FINANCIAL STATEMENTS
Years Ended April 30, 2000, 1999 and 1998
18
<PAGE>
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
19
<PAGE>
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, 2000 and 1999 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, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended April 30, 2000 in
conformity with generally accepted accounting principles.
/s/ Dixon Odom PLLC
-------------------------------
Greensboro, North Carolina
June 23, 2000
20
<PAGE>
MARKET AMERICA, INC.
BALANCE SHEETS
April 30, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 43,870,755 $ 45,426,920
Investment in available-for-sale securities (Notes 1 and 2) 9,299,820 -
Advances to related parties (Note 6) 6,978 187,646
Notes receivable, officers, directors and employees (Note 6) 425,958 92,794
Inventories (Note 1) 2,430,734 1,852,487
Deferred tax assets (Note 8) 404,000 160,000
Other current assets 151,281 156,484
------------ ------------
TOTAL CURRENT ASSETS 56,589,526 47,876,331
------------ ------------
PROPERTY AND EQUIPMENT (Notes 1 and 3)
Yacht 3,610,000 -
Furniture and equipment 3,007,076 1,234,438
Building construction in progress 3,076,870 33,070
Software 306,975 271,365
Leasehold improvements 348,410 6,370
------------ ------------
10,349,331 1,545,243
Less accumulated depreciation 1,093,028 653,933
------------ ------------
9,256,303 891,310
------------ ------------
OTHER ASSETS
Restricted cash (Note 6) 2,637,635 -
Other (Note 6) 1,282,000 230,856
------------ ------------
3,919,635 230,856
------------ ------------
$ 69,765,464 $ 48,998,497
============ ============
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt (Note 3) $ 73,949 $ 120,000
Accounts payable - trade 2,095,449 1,107,633
Commissions payable 2,542,125 2,280,902
Sales tax payable (Note 11) 845,454 792,438
Income taxes payable 3,642,394 2,062,211
Other accrued liabilities 837,481 693,256
Unearned revenue (Note 4) 2,694,246 2,259,522
------------ ------------
TOTAL CURRENT LIABILITIES 12,731,098 9,315,962
------------ ------------
LONG-TERM DEBT (Note 3) 755,214 10,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 6, 7, and 11)
STOCKHOLDERS' EQUITY
Common stock, $.00001 par value; 800,000,000 shares
authorized; 19,550,000 and 19,950,000 shares issued and
outstanding at April 30, 2000 and 1999, respectively 195 199
Additional paid-in capital 39,801 39,801
Retained earnings 56,187,461 39,632,535
Accumulated other comprehensive income
Unrealized gains on available-for-sale
securities, net of deferred tax 51,695 -
------------ ------------
56,279,152 39,672,535
------------ ------------
$ 69,765,464 $ 48,998,497
============ ============
</TABLE>
22
<PAGE>
MARKET AMERICA, INC.
STATEMENTS OF INCOME
Years Ended April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
-------------- ------------- ------------
<S> <C> <C> <C>
Sales $ 135,965,263 $ 110,347,824 $ 87,531,005
Cost of Sales 33,913,335 28,071,236 21,144,983
-------------- ------------- ------------
GROSS PROFIT 102,051,928 82,276,588 66,386,022
Selling Expenses
Commissions 60,580,701 49,692,793 39,061,225
Sales tax (Note 11) 212,821 358,741 1,985,462
-------------- ------------- ------------
60,793,522 50,051,534 41,046,687
-------------- ------------- ------------
General and Administrative Expenses
Salaries 6,910,803 5,085,053 4,028,643
Consulting 819,128 266,154 124,211
Rents (Note 6 and 7) 1,380,351 995,994 695,507
Depreciation and amortization 439,095 208,868 167,483
Other expenses (Note 9) 5,814,321 4,592,219 2,984,089
-------------- ------------- ------------
15,363,698 11,148,288 7,999,933
-------------- ------------- ------------
INCOME FROM OPERATIONS 25,894,708 21,076,766 17,339,402
Other Income (Expense)
Interest income 2,277,909 1,763,306 1,073,582
Interest expense (157,100) (24,337) (91,539)
Dividend income 71,449 - -
Realized gain on available-for-sale securities 50,423 - -
Gain (loss) on disposals of fixed assets - (8,537) 500
Miscellaneous income 708,657 778,452 461,264
-------------- ------------- ------------
2,951,338 2,508,884 1,443,807
-------------- ------------- ------------
INCOME BEFORE TAXES 28,846,046 23,585,650 18,783,209
Income Taxes (Note 8) 11,055,124 9,394,625 7,942,669
-------------- ------------- ------------
NET INCOME $ 17,790,922 $ 14,191,025 $ 10,840,540
============== ============= ============
Basic earnings per common share (Note 1) $ .89 $ .71 $ .54
============== ============= ============
Weighted average number of common
shares outstanding 19,936,301 19,950,000 19,950,000
============== ============= ============
</TABLE>
23
<PAGE>
MARKET AMERICA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Additional Compre-
-------------------------- Paid-In Retained hensive
Shares Amount Capital Earnings Income Total
----------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, April 30, 1997 19,950,000 $ 199 $ 39,801 $14,600,970 $ - $14,640,970
COMPREHENSIVE INCOME
Net income - - - 10,840,540 - 10,840,540
----------- ------ --------- ----------- ----------- -----------
TOTAL COMPREHENSIVE
INCOME 10,840,540
-----------
BALANCE, April 30, 1998 19,950,000 199 39,801 25,441,510 - 25,481,510
COMPREHENSIVE INCOME
Net income - - - 14,191,025 - 14,191,025
----------- ------ --------- ----------- ----------- -----------
TOTAL COMPREHENSIVE
INCOME 14,191,025
-----------
BALANCE, April 30, 1999 19,950,000 199 39,801 39,632,535 - 39,672,535
Purchase and retirement of
common stock (400,000) (4) - (1,235,996) - (1,236,000)
COMPREHENSIVE INCOME
Net income - - - 17,790,922 - 17,790,922
Other comprehensive income, net
of tax:
Unrealized holding gains on
securities arising during the
year, net of deferred taxes of
$34,000 - - - - 51,695 51,695
---------- ------ --------- ------------ --------- -----------
TOTAL COMPREHENSIVE
INCOME 17,842,617
-----------
BALANCE, April 30, 2000 19,550,000 $ 195 $ 39,801 $ 56,187,461 $ 51,695 $56,279,152
========== ====== ========= ============ ========= ===========
</TABLE>
24
<PAGE>
MARKET AMERICA, INC.
STATEMENTS OF CASH FLOWS
Years Ended April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,790,922 $ 14,191,025 $ 10,840,540
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 439,095 208,868 167,483
Deferred income taxes (278,000) (160,000) -
Gain on sale of available-for-sale securities (50,423) - -
(Gain) loss on disposal of fixed assets - 8,537 (500)
Increase in inventories (578,247) (384,166) (223,735)
(Increase) decrease in other current assets 5,203 (98,513) (38,708)
(Increase) decrease in other assets 48,856 51,816 (281,991)
Increase (decrease) in accounts payable - trade 987,816 41,359 (484,335)
Increase (decrease) in commissions payable 261,223 (474,874) 1,239,411
Increase (decrease) in sales tax payable 53,016 (10,348) 563,372
Increase (decrease) in income taxes payable 1,580,183 199,079 (2,889)
Increase (decrease) in other accrued liabilities 144,225 490,370 (117,180)
Increase in unearned revenue 434,724 1,164,247 69,253
-------------- -------------- --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 20,838,593 15,227,400 11,730,721
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale securities (44,350,932) - -
Proceeds from sale or maturity of available
for-sale securities 35,187,230 - -
Purchase of property and equipment (8,804,088) (346,315) (280,546)
Proceeds from sale of property and equipment - 25,092 1,985
(Increase) decrease of short-term investments - 12,415,465 4,879,404
(Increase) decrease in:
Advances to related parties 180,668 (125,201) (62,445)
Notes receivable, officers and employees (333,164) (40,875) 6,176
Restricted cash (2,637,635) 79,018 (4,941)
Other assets (1,100,000) - -
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (21,857,921) 12,007,184 4,539,633
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase and retirement of common stock (1,236,000) - -
Payments on notes payable and long-term debt (120,000) (186,791) (215,170)
Proceeds from long-term debt 819,163 - -
-------------- -------------- --------------
NET CASH USED IN
FINANCING ACTIVITIES (536,837) (186,791) (215,170)
-------------- -------------- -------------
</TABLE>
25
<PAGE>
MARKET AMERICA, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (1,556,165) $ 27,047,793 $ 16,055,184
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 45,426,920 18,379,127 2,323,943
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS
AND END OF YEAR $ 43,870,755 $ 45,426,920 $ 18,379,127
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 157,100 $ 26,776 $ 93,752
============== ============== ==============
Income taxes $ 9,752,941 $ 9,355,546 $ 7,945,558
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Net change in unrealized holding gains on
available-for-sale securities, net of deferred
income taxes of $34,000. $ 51,695 $ - $ -
============== ============== ==============
</TABLE>
26
<PAGE>
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
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. Included in cash
equivalents as of April 30, 2000 and 1999 are government agency obligations,
commercial paper, and money market accounts with maturities ranging from 30 to
90 days. The Company maintains its cash in bank deposit accounts which, at
times, exceed federally insured limits. The Company has not experienced any
losses in such accounts.
Available-For-Sale Securities
Available-for-sale securities consist of readily marketable debt securities with
remaining maturities of greater than 90 days at time of purchase.
Available-for-sale securities are stated at fair value with unrealized gains and
losses, net of income taxes, included in accumulated other comprehensive income
in stockholders' equity. Realized gains and losses are included in income and
are determined on a specific identification basis. Unrealized losses are charged
against income when a decline in fair value is determined to be other than
temporary.
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:
Yacht 10 years
Furniture and equipment 5 to 10 years
Software 3 years
Leasehold improvements Shorter of the lease term or 20 years
As discussed in Note 6, the Company is constructing its new headquarters and
warehouse facility on land leased from a related company. Upon completion
(expected in July 2000), the building will be depreciated over the term of the
ground lease.
27
<PAGE>
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 1 o ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment (Continued)
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 (SFAS) 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.
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
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.
28
<PAGE>
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 1 o ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Recently Issued Accounting Pronouncements
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, as amended by SFAS No. 137, is effective
for fiscal years beginning after June 15, 2000. Management is currently
evaluating the impact on financial position, results of operations and cash
flows after SFAS No. 133 is adopted.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is currently assessing
the impact of SAB 101 on its financial statements, and believes that the effect,
if any, will not be material to the Company's operating results.
29
<PAGE>
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 2 o INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
Investments in available-for-sale securities consists of the following:
<TABLE>
<CAPTION>
2000 1999
---------------------------------------- ----------------------------------------
Gross Fair Gross Fair
Unrealized Market Unrealized Market
Cost Gains Value Cost Gains Value
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Governmental agency obligations
maturing through August 2000 $ 2,951,344 $ -- $ 2,951,344 $ -- $ -- $ --
Commercial paper, maturing
through July 2000 6,262,781 85,695 6,348,476 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
$ 9,214,125 $ 85,695 $ 9,299,820 $ -- $ -- $ --
=========== =========== =========== =========== =========== ===========
</TABLE>
Gross realized gains and losses for the year ended April 30, 2000 were
$2,115,146 and $2,064,723, respectively.
NOTE 3 o LONG-TERM DEBT
<TABLE>
<CAPTION>
2000 1999
-------------- ---------------
<S> <C> <C>
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. $ 10,000 $ 130,000
Note payable in monthly installments of $19,750, including
interest at 7.625%, with remaining balance due in
June 2005. Collateralized by deed of trust. 819,163 --
-------------- ---------------
829,163 130,000
Less current portion due within one year 73,949 120,000
-------------- ---------------
$ 755,214 $ 10,000
============== ===============
Future maturities of long-term debt at April 30, 2000 are due as follows:
2001 $ 73,949
2002 82,365
2003 88,969
2004 96,102
2005 487,778
--------------
$ 829,163
==============
</TABLE>
30
<PAGE>
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 3 o LONG-TERM DEBT (CONTINUED)
Amounts due under the note payable above represent advances under a $2,100,000
loan commitment being used for construction of the Company's new headquarters
and warehouse facility. The total cost of the building is expected to
approximate $4,600,000, of which $3,076,870 had been incurred as of April 30,
2000.
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
discretionary 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 $30,902 and $15,524
during the years ended April 30, 2000 and 1999, respectively. No discretionary
contributions were made in 2000 or 1999.
31
<PAGE>
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
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 and for the lease of a yacht
on a per event basis. Both lease agreements were cancelled in fiscal 2000. In
December 1999, the Company entered into an agreement with a company owned by Mr.
and Mrs. James H. Ridinger to lease different 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. The Company is
committed to construct a training and meeting facility on this leased property
during the year ending April 30, 2001 for a cost of approximately $1,850,000 to
provide additional space. The Company has paid a $600,000 damage deposit as part
of this lease, which is included in other assets. The amount of rent expense
under these agreements aggregated to $683,600, $423,600 and $252,000 during the
years ended April 30, 2000, 1999, and 1998, respectively. These related entities
owed the Company $6,978 and $187,646 at April 30, 2000 and 1999, 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 is
constructing 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 $127,988 and $64,000 for the years ended April
30, 2000 and 1999, respectively. In June 1999, the Company paid $500,000 to the
related 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 will be 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 related party used for the purchase
of the land. This loan and the Company's construction loan are
cross-collateralized by the land being leased from the related company and by
the building improvement being constructed thereon by the Company. The
guaranteed loan is repayable over a five-year period following completion of the
building construction.
In connection with the lease of real estate in Miami, Florida, the Company has
guaranteed a $5.3 million five-year loan to the related company for the purchase
of the real estate being leased. The Company has restricted cash of $2,637,635
at April 30, 2000 as collateral under the loan guarantee.
Notes receivable, officers, directors and employees include amounts due from
officers and directors of $383,952 and $57,712 at April 30, 2000 and 1999,
respectively.
Substantially all of the Company's leasehold improvements are to properties
leased from related companies.
32
<PAGE>
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 7 o OPERATING LEASE COMMITMENTS
The Company occupies leased premises in Greensboro, North Carolina and Miami,
Florida. The Greensboro lease expires in July 2000. The Miami lease is with a
related party (see Note 6) beginning December 1999 and is for twenty 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, 2000 are as follows:
<TABLE>
<CAPTION>
Related Unrelated
Parties Parties Total
--------------- -------------- --------------
<S> <C> <C> <C>
2001 $ 847,992 $ 128,000 $ 975,992
2002 847,992 52,011 900,003
2003 847,992 -- 847,992
2004 847,992 -- 847,992
2005 847,992 -- 847,992
Thereafter 13,891,788 -- 13,891,788
--------------- -------------- --------------
Total future minimum lease payments $ 18,131,748 $ 180,011 $ 18,311,759
=============== ============== ==============
</TABLE>
NOTE 8 o INCOME TAXES
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Current tax provision
Federal $ 9,568,134 $ 7,713,716 $ 6,483,683
State 1,764,990 1,840,909 1,458,986
--------------- -------------- --------------
11,333,124 9,554,625 7,942,669
--------------- -------------- --------------
Deferred tax provision
Federal (225,875) (130,000) -
State (52,125) (30,000) -
--------------- -------------- --------------
(278,000) (160,000) -
--------------- -------------- --------------
Total income tax provision $ 11,055,124 $ 9,394,625 $ 7,942,669
=============== ============== ==============
</TABLE>
33
<PAGE>
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 8 o INCOME TAXES (CONTINUED)
A reconciliation of the statutory U.S. federal income tax rate and the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- ------
<S> <C> <C> <C>
Statutory U.S. federal rate 35.0% 35.0% 35.0%
State income tax, net of federal benefit 4.0 5.0 4.8
Effect of non-deductible expenses .9 .2 1.5
Other, net (1.6) (.4) 1.0
------- ------- ------
38.3% 39.8% 42.3%
======== ======= ======
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities as of April 30, 2000 and 1999 are as follows:
2000 1999
--------- ---------
Deferred tax assets
Accrued liabilities $ 404,000 $ 160,000
Deferred tax liabilities - -
--------- ---------
Net deferred tax assets $ 404,000 $ 160,000
========= =========
NOTE 9 o OTHER GENERAL AND ADMINISTRATIVE EXPENSES
For the years ended April 30, 2000, 1999 and 1998, Other General and
Administrative Expenses included the following items:
<TABLE>
<CAPTION>
2000 1999 1998
--------------- -------------- --------------
<S> <C> <C> <C>
Legal and professional fees $ 1,241,117 $ 1,305,221 $ 782,969
Insurance 844,534 626,108 429,468
Other taxes and licenses 624,634 458,155 386,779
Utilities 365,503 327,037 229,375
Other 2,738,533 1,875,698 1,155,498
--------------- -------------- --------------
$ 5,814,321 $ 4,592,219 $ 2,984,089
=============== ============== ==============
</TABLE>
34
<PAGE>
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
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
introduced 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, 2000
Product revenue from external customers $128,301,572 $ 7,663,691
Long-lived assets 9,256,303 --
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 --
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 30,2000 and 1999, and that the final resolution of this 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. The Company appealed the judgment on various grounds including
that the amounts awarded are not warranted by law. The Company is vigorously
pursuing the appeal. The outcome of this matter is not presently determinable.
35
<PAGE>
MARKET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 11 o CONTINGENCIES (CONTINUED)
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, results of operations or cash flows.
NOTE 12 o FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the balance sheets for cash and cash
equivalents, investments in available-for-sale securities, and notes receivable
approximate their respective fair values. The carrying value of long-term debt
approximates its fair value at April 30, 2000 and exceeds its estimated fair
value by approximately $7,000 at April 30, 1999. Fair values are based on quoted
market prices or 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 31.2%, 30.6% and 34.2% of the Company's total sales during
the years ended April 30, 2000, 1999 and 1998, 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 46.0%, 44.0% and 49.3% of the Company's total sales
during the years ended April 30, 2000, 1999 and 1998, 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, 2000, the Company paid $309,000 to purchase and retire
100,000 shares of its common stock.
36
<PAGE>
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 (incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 10-K with the Commission on July 29, 1999, Commission File
No. 000-23250)
10.2 Vendor Agreement between Market America, Inc. and Purity Technology Inc.
(formerly 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 (incorporated by reference to Exhibit 10.3 to the Company's Current
Report on Form 10-K filed with the Commission on July 29, 1999, Commission
File No. 000-23250)
37
<PAGE>
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
Current Report on Form 10-K 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 the Exhibit
10.5 to the Company's Current Report on Form 10-K 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
27* Financial Data Schedule
* Filed herewith.
38
