10-Q 1 b317192_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended January 31, 2002 Commission file number 000-23250 ------------------------ MARKET AMERICA, INC. (Exact name of registrant as specified in its charter) North Carolina 56-1784094 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1302 Pleasant Ridge Road Greensboro, North Carolina (Address of principal executive offices) 27409 (Zip Code) (336) 605-0040 (Registrant's Telephone Number, Including Area Code) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock as of March 16, 2002. 19,420,000 ================================================================================ PART I ITEM 1 Statement of Financial Position as of January 31, 2002 (Unaudited) and April 30, 2001 Statement of Operations for the Three and Nine-Month Periods Ended January 31, 2002 and 2001 (Unaudited) Statement of Changes in Stockholders' Equity for the Nine-Month Periods Ended January 31, 2002 and 2001 (Unaudited) Statement of Cash Flows for the Nine-Month Periods Ended January 31, 2002 and 2001 (Unaudited) Notes to Financial Statements as of January 31, 2002 (Unaudited) 2

The accompanying notes are an integral part of these financial statements. 3

The accompanying notes are an integral part of these financial statements. 4

The accompanying notes are an integral part of these financial statements. 5

The accompanying notes are an integral part of these financial statements 6

The accompanying notes are an integral part of these financial statements. 7

The accompanying notes are an integral part of these financial statements. 8 Notes to Financial Statements MARKET AMERICA, INC. January 31, 2002 (Unaudited) ------------------------------------------------------------------------------- Interim Financial Information The unaudited interim financial statements of Market America, Inc. (the "Company") as of January 31, 2002 and 2001 have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company's financial statements as of January 31, 2002 and for the three and nine-month periods ended January 31, 2002 and 2001. Management suggests that these financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's latest Annual Report on Form 10-K. The results of operations for the three and nine-month periods ended January 31, 2002 may not be indicative of the results that may be expected for the fiscal year ending April 30, 2002. Earnings Per Share The Company computes earnings per share ("EPS") based upon the requirements of Statement of Financial Accounting Standards No. 128. This statement specifies the calculation, presentation and disclosure requirements for both basic and diluted EPS. The Company does not present diluted EPS because it does not have any securities or contracts outstanding with dilutive potential for its common shares. Reclassifications Certain reclassifications have been made to prior period amounts to conform with the current period financial statements presentations. Reclassifications made had no effect on previously reported net income. Related Party Transactions In December 1999, the Company entered into an agreement with a company owned by Mr. and Mrs. James H. Ridinger, officers/stockholders of the Company, to lease real estate in Miami, Florida for direct sales training and education, as well as other corporate functions. The monthly rental is $60,000 and the lease has a 20-year term with a renewal option for an additional 20-year term. The Company has paid a $600,000 non-interest bearing damage deposit as part of this lease, which is included in other assets on the balance sheet. The amount of rent expense under this agreement aggregated $180,000 and $540,000 during each of the three and nine-month periods ended January 31, 2002 and 2001, respectively. In connection with this lease, the Company has guaranteed a $5.3 million five-year loan to the related company for the purchase of the real estate being leased. As of January 31, 2002, the guaranteed loan had an outstanding balance of $4,080,306. The Company had restricted cash of $2,560,000 as collateral under the loan guarantee as of January 31, 2002. In October 2001, the Company began construction of a $675,000 building on this leased property in order to further expand the meeting and training facilities in Miami, Florida. As of January 31, 2002, the Company had paid approximately $104,000 towards the construction of this facility. During the year ended April 30, 1999, the Company entered into a 33-year net ground lease with a company owned by Mr. and Mrs. James H. Ridinger, officers/stockholders of the Company, for the site on which the Company has constructed its new headquarters and warehouse facility in Greensboro, North Carolina at a cost of $4,593,133. Required rental payments are $17,000 per month since October 2000, and $10,666 per month prior to that date. The amount of rent expense under this agreement was $51,000 and $153,000 for the three-month and nine-month periods ended January 31, 2002, respectively. Rent expense for the three-month and nine-month periods ended January 31, 2001 was $51,000 and $121,330, respectively. In June 1999, the Company paid $500,000 to the Ridinger company for a Right of First Refusal on this site, which provides the Company with the opportunity to purchase the land, should it be offered for sale, before the land is offered for sale to other parties. The amount paid is included in other assets and is being amortized on a straight-line basis over the lease term. The unamortized balance will be applied to the purchase price of the land in the event the Company buys it. On June 28, 1999, the Company became guarantor of a $1.6 million bank loan to the Ridinger company used for the purchase of the land. The guaranteed loan had an outstanding balance of $1,040,450 at January 31, 2002. This loan and the Company's term loan are cross-collateralized by the land being leased from the Ridinger company and by the building improvement constructed thereon by the Company. The guaranteed loan is repayable over a five-year period. 9 Notes to Financial Statements MARKET AMERICA, INC. January 31, 2002 (Unaudited) ------------------------------------------------------------------------------- In June 2001, the Company purchased a facility in Miami, Florida from an unrelated party for $3,560,400. The Company had made an earnest money deposit of $1,100,000 on this facility during the fourth quarter of fiscal 2001 and paid the remaining $2,460,400 in cash upon closing. The Company will lease the land on which the facility sits from a company owned by Mr. and Mrs. James H. Ridinger, officers/stockholders of the Company, at an amount and period yet to be determined. The Company is in the process of obtaining an independent appraisal of the property in order to set the lease amount at fair value. The Company has paid $80,000 towards the lease of this property during the nine-months ended January 31, 2002. The building will be depreciated over the shorter of its estimated useful life or the term of the ground lease. The Company has estimated and recorded approximately $89,000 of depreciation expense on the building during the nine-months ended January 31, 2002. Substantially all of the Company's leasehold improvements are to properties leased from related companies. Related party transactions are more fully described in the Company's most recent Annual Report on Form 10-K. Management Buyout Offer On January 11, 2002, Market America Inc. ("Market America") issued a press release announcing that it had accepted a previously announced proposal to take the Company private at a price of $8.00 per share. The proposal is from a management group led by President and Chief Executive Officer, James H. Ridinger. The transaction is subject to the approval of a majority of the shares held by Market America's unaffiliated shareholders. Mr. Ridinger holds approximately 77% of Market America's common stock. The Board of Directors of Market America authorized the preparation of merger agreement and proxy materials for a special meeting of shareholders anticipated to be scheduled for June 2002 following clearance of such proxy materials by the Securities and Exchange Commission. 10 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Company had unrestricted and restricted cash on deposit with various financial institutions and available-for-sale debt securities totaling $80.2 million as of January 31, 2002 compared to $69.7 million as of April 30, 2001. The $80.2 million as of January 31, 2002 was comprised of $75.1 million of unrestricted cash, $2.8 million of restricted cash and $2.3 million of available-for-sale securities. The restricted cash consisted primarily of certificates of deposit, which were restricted for use as collateral under a guarantee of a $5.3 million loan extended by a financial institution to a related company controlled by Mr. and Mrs. James H. Ridinger, officers and stockholders of the Company, during fiscal 2000. The guaranteed loan had an outstanding balance of $4,080,306 as of January 31, 2002. The loan proceeds were used by the related company to purchase real estate in Miami, Florida. The Company is leasing this real estate under a twenty-year agreement. The real estate is used for direct sales training and education as well as other corporate functions (see Related Party Transactions in the Notes to Financial Statements above). During October 2001, the Company began construction of a $675,000 building on this leased real estate in order to further expand the training and meeting facilities in Miami, Florida. The costs of this facility will be funded from cash flows from operations. As of January 31, 2002, the Company had paid approximately $104,000 towards the construction of this facility. The available-for-sale securities consist of commercial paper. These securities were purchased in order to increase the Company's yield on assets pending use in the Company's business and can be converted into cash if the need arises. The Company has a five-year $2.1 million term loan related to its office and distribution facility in Greensboro, North Carolina. The loan contains an annual fixed interest rate of 7.625% and requires 59 monthly payments of $19,750, including interest, with a balloon payment of all outstanding principal plus interest due in June 2005. The building was constructed on land leased from a related company (see "Related Party Transactions" in the Notes to Financial Statements above). The Company is also a guarantor of a $1.6 million loan by a financial institution to a related company. The guaranteed loan had an outstanding balance of $1,040,450 as of January 31,2002. The proceeds of the loan were used by the related company to purchase the land on which the Company constructed its new office and distribution facility in Greensboro, North Carolina. This loan and the Company's building loan are cross-collateralized by the land being leased from the related company and by the building constructed thereon by the Company. The guaranteed loan is repayable over a five-year period. In June 2001, the Company purchased a facility in Miami, Florida for $3,560,400. The Company had made an earnest money deposit of $1,100,000 on this facility during the fourth quarter of fiscal 2001 and paid the remaining $2,460,400 in cash upon closing. See "Related Party Transactions" above for a further discussion of this transaction. Management believes that its current level of cash and cash equivalents and its cash provided by operations will provide sufficient resources for operations in the foreseeable future. In the event that the Company's operating environment becomes adverse, there can be no assurance that additional financing would not be required. Results of Operations The Company's sales continued to grow during the three and nine-month periods ended January 31, 2002. Net sales increased 16.4% to $37.9 million from $32.6 million for the quarter ended January 31, 2002 compared to the same period in 2001. Net sales increased by 13.5% to $115.0 million from $101.4 million for the nine-month period ended January 31, 2002 compared to the same period in 2001. 11 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Commission expense was $16.3 million and $14.1 million for the three-month periods ended January 31, 2002 and 2001, respectively. Commission expense was $49.0 million and $44.5 million for the nine-month periods ended January 31, 2002 and 2001, respectively. Commissions, as a percentage of sales, were 43.1% and 43.3% for the three-month periods ended January 31, 2002 and 2001, respectively, and 42.6% and 43.9% for the nine-month periods ended January 31, 2002 and 2001, respectively. The commission payout as a percentage of business volume earned through commissionable product sales has remained consistent during both the three and nine-month periods ended January 31, 2002 when compared to the same prior year periods. General and administrative expenses were $5.2 million and $4.3 million for the three-month periods ended January 31, 2002 and 2001, respectively, and $14.3 million and $12.2 million for the nine-month periods ended January 31, 2002 and 2001, respectively. As a percentage of sales, general and administrative expenses were 13.8% and 13.3% for the three-month periods ended January 31, 2002 and 2001, respectively, and 12.4% and 12.0% for the nine-month periods ended January 31, 2002 and 2001, respectively. For the three and nine-month periods ended January 31, 2002 and 2001, other general and administrative expenses included the following items:

The increase in salary expense for the fiscal 2002 periods is primarily a result of the timing of officer bonuses and an increase in the number of employees in the Company's Information Technology departments due to the expansion of the Company's internet presence over the past year. Depreciation and amortization expense increased in the fiscal 2002 periods due to the completion of the office and distribution facility in Greensboro, North Carolina during July 2000, renovation completions of the office and training center in Miami, Florida and the expansion of the training facilities in Miami, Florida. The facility in North Carolina is being depreciated over 33 years (ground lease term). The equipment and furnishings for these facilities are being depreciated over 10 years. The new meeting and training facility in Miami, Florida purchased during June 2001 will be depreciated over the shorter of it's estimated useful life or the term of the ground lease for the land upon which the facility sits. The Company has estimated and recorded approximately $42,500 and $89,000 of depreciation expense for this facility during the three and nine-month periods ended January 31, 2002, respectively. The Company incurred larger consulting expenses during the fiscal 2001 periods due to renovations of the leased corporate facility in Miami, Florida. 12 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONCLUDED Insurance expense increased during the fiscal 2002 periods due to higher health care costs incurred and number of employees covered under the Company's self-insured health insurance plan. The amount of expense incurred under the plan can vary from year to year depending upon the health and number of Company employees. The Company's health plan has a $50,000 annual stop limit per employee and an annual aggregate stop loss limit of approximately $889,000. The Company also incurred larger property insurance due to the completion of the Company's office and distribution facility in Greensboro, North Carolina during July 2000 and expansion of corporate facilities in Miami, Florida. Other taxes and licenses have increased as a result of the Company recognizing approximately $125,000 more in property taxes during the three and nine-month periods ended January 31, 2002 compared to same prior year periods. During fiscal 2002, property tax bills were paid early in order to receive a discount on the bills. Certain property taxes were included in the fourth quarter of fiscal 2001. The Company also incurred approximately $80,000 more in property taxes during the current year due to the expansion of corporate facilities in Miami, Florida and the completion of the new office and distribution facility in Greensboro, North Carolina during July 2000. The Company has also incurred larger payroll taxes during the current year due to the growth in the number of employees. The primary result of the increase in legal and professional fees during the current year is directly related to the proposed going private transaction (see Notes to Financial Statements - Management Buyout Offer above). Repairs and maintenance costs were lower during the fiscal 2002 periods due to larger expenditures associated with the Company's yacht and the Miami training and office facility during the prior year. Other operating expenses were 5.4% and 5.6% of sales for the three-month periods ended January 31, 2002 and 2001, respectively. Other operating expenses were 4.9% and 4.8% of sales for the nine-month periods ended January 31, 2002 and 2001, respectively. The effective income tax rate for the prior year periods was lower due to changes made during the prior year in the Company's multi-state allocation methodology. These changes resulted in the amendment of state income tax returns for fiscal years 1997, 1998 and 1999 during the prior year. Forward-Looking Information Statements in this report concerning the Company's business outlook for future economic performance, anticipated profitability, revenues, expenses or other financial items, together with other statements that are not historical facts, are "forward-looking statements" as that term is defined under federal securities laws. "Forward-looking statements" are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those stated in such statements. Such risks, uncertainties and factors include, but are not limited to, decreases in sales volume or number of distributors, unfavorable regulatory action, loss of key personnel, loss of key suppliers and general economic conditions. ITEM 3 QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISKS The Company has evaluated the disclosure requirements of Item 305 of S-K "Quantitative and Qualitative Disclosure about Market Risk," and has concluded that the Company has no market risk sensitive instruments for which these additional disclosures are required. 13 PART II ITEM 1 LEGAL PROCEEDINGS As a result of the proposed going-private transactions (see Notes to Financial Statements - Management Buyout Offer), Market America and its directors have been named as defendants in a class action lawsuit filed in Superior Court in Guilford County, State of North Carolina, on October 19, 2001. The plaintiff purports to represent a class of all of the public shareholders of Market America whose shares would be converted into the right to receive $8.00 in cash per share in connection with the Merger. The complaint asserts that the $8.00 per share price to be paid to public shareholders in connection with the Merger is inadequate. The complaint also alleges that the director defendants are engaged in self-dealing and are not acting in good faith toward the plaintiff and the other members of his class and that the directors have breached their fiduciary duties to plaintiff and the other members of the class. The complaint seeks an order certifying the class and remedies including injunctive relief that would, if granted, prevent the completion of the merger, as well as costs and certain unspecified monetary damages. On December 20, 2001, the defendants filed their answer, generally denying the allegations of the complaint. The Company is periodically involved in routine litigation incidental to its business, including litigation involving distributor terminations. Management believes that any such pending litigation will not have a material effect on the Company's financial position or results of operations. ITEM 2 CHANGES IN SECURITIES None ITEM 3 DEFAULTS UPON SENIOR SECURITIES None ITEM 4 SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5 OTHER INFORMATION None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The exhibits to this report are listed in the Exhibit Index, which is incorporated herein by reference. (b) REPORTS ON FORM 8-K On January 14, 2002, the Company filed Form 8-K with the Securities and Exchange Commission. The report explained that on January 11, 2002, the Company issued a press release announcing that it had accepted a previously announced proposal to take the Company private at a price of $8.00 per share. The proposal is from a management group led by President and Chief Executive Officer, James H. Ridinger. The transaction is subject to the approval of a majority of the shares held by Market America's unaffiliated shareholders. Mr. Ridinger holds approximately 77% of Market America's common stock. The Board of Directors of Market America authorized the preparation of merger agreement and proxy materials for a special meeting of shareholders anticipated to be scheduled for June 2002 following clearance of such proxy materials by the Securities and Exchange Commission. 14 -------------------------------------------------------------------------------- SIGNATURE -------------------------------------------------------------------------------- Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARKET AMERICA, INC. (Registrant) Date: March 17, 2002 \s\ James H. Ridinger ----------------------------------- ------------------------------------ James H. Ridinger, President and CEO (Principal Executive Officer and Principal Financial Officer) 15 EXHIBITS TO FORM 10-Q EXHIBIT INDEX Exhibit Number Identification ----------- -------------- 2.1 Agreement and Plan of Merger dated as of October 31, 1993 between Atlantis Ventures, Inc. and Market America, Inc. and Addendum (to same)dated October 1, 1993 (incorporated by reference to Exhibits 2.1 and 2.2, respectively, to the Company's Current Report on Form 8-K filed October 6, 1993, Commission File No. 000-23250) 3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Commission on November 3, 1993, Commission File No. 000-23250) 3.2 Articles of Amendment of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1996 filed with the Commission on July 30, 1996, Commission File No. 000-23250) 3.3 By-laws of the Company (incorporated by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1996 filed with the Commission on July 30, 1996, Commission File No. 000-23250) 10.2 Vendor agreement between Market America, Inc. and Isotonix (x) Corporation dated October 25, 1993 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended April 13, 1998 filed with the Commission on August 13, 1998, Commission File No. 000-23250) 10.4 Lease between Miracle Holdings LLC and Market America, Inc. dated November 1, 1998 (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1999 filed with the Commission on July 29, 1999, Commission File No. 000-23250) 10.5 Right of First Refusal agreement between Market America, Inc. and Miracle Holdings LLC dated May 20, 1999 (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1999 filed with the Commission on July 29, 1999, Commission File No. 000-23250) 10.6 Lease between Miracle Properties LLC and Market America, Inc. dated February 1, 2000 (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10K for the fiscal year ended April 30, 2000 filed with the Commission on July 28, 2000, Commission File No. 000-23250) 16

MARKET AMERICA INC 10-Q