UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended November 30, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ________________
Commission File Number 0-22969
Market Central, Inc.
(Name of Small Business Issuer in its Charter)
Delaware 59-3562953
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650A Gum Branch Road, Jacksonville, NC 28540
(Address of Principal Executive Offices)
910-478-0097
(Issuer's Telephone Number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
.
Check 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 [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class: Common Stock, $.001 par value
Outstanding as of December 31, 2003: 13,268,969 shares
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I.
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Financial Statements for the
three months ended November 30, 2003 and November 30, 2002 have been prepared by
Market Central, Inc. a Delaware corporation.
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2003 AUGUST 31, 2003
----------------- ---------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 206,130 $ 337,953
Accounts receivable, net 2,023,813 1,905,316
Due from related parties 565,823 362,673
Inventory 30,045 9,678
Costs in excess of billings 57,870 50,446
Prepaid expenses and other current assets 308,558 66,013
------------ ------------
Total Current Assets 3,192,239 2,732,079
Furniture and fixtures 1,022,344 1,010,228
Computers and software 2,050,870 2,059,445
Leasehold improvements 1,227,905 1,227,905
Accumulated depreciation (3,043,514) (2,778,725)
------------ ------------
Property and equipment, net 1,257,605 1,518,853
Other assets:
Deposits 77,442 77,442
Patents and trademarks 97,319 97,319
Other 425 425
Goodwill 4,807,053 4,807,053
------------ ------------
Total other assets 4,982,239 4,982,239
Total assets $ 9,432,083 $ 9,233,171
============ ============
LIABILITIES AND DEFICIENCY IN
STOCKHOLDERS' EQUITY
Current Liabilities:
Cash disbursed in excess of available funds $ -- $ 111,581
Accounts payable and accrued liabilities 7,521,114 7,522,282
Deferred revenue 210,025 432,448
Notes payable to related parties (Note C and F) 1,034,724 428,696
Notes payable, current portion (Note C) 3,020,535 2,097,761
Current portion of capital lease obligations 642,370 691,606
------------ ------------
Total current liabilities 12,428,767 11,284,374
Notes payable, long-term portion (Note C) 189,575 288,816
Capital lease obligations, long-term portion 91,053 113,439
------------ ------------
Total long-term liabilities 280,628 402,255
Total liabilities 12,709,395 11,686,629
COMMITMENTS AND CONTINGENCIES -- --
DEFICIENCY IN STOCKHOLDERS' EQUITY
Common stock 13,269 13,269
Additional paid-in capital 21,880,013 21,876,847
Accumulated deficit (25,170,594) (24,343,574)
------------ ------------
Total deficiency in stockholders' equity (3,277,312) (2,453,458)
------------ ------------
$ 9,432,083 $ 9,233,171
============ ============
See accompanying notes to unaudited condensed consolidated financial statements
3
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
NOVEMBER 30,
2003 2002
------------ ------------
Revenues, net $ 3,647,033 $ 2,475,050
Cost of Revenues 2,469,036 1,426,876
------------ ------------
Gross Profit 1,177,997 1,048,174
Selling, general and administrative expenses 1,605,944 776,798
Depreciation and amortization 264,789 248,454
------------ ------------
Total operating expense 1,870,733 1,025,252
Income (loss) from operations (692,736) 22,922
Other income (expense):
Interest expense (134,284) (151,514)
------------ ------------
Loss from operations, before
income taxes (827,020) (128,592)
Income (taxes) benefits -- --
------------ ------------
Net loss (827,020) (128,592)
Cumulative convertible preferred
stock dividend requirement -- (10,200)
------------ ------------
Net loss attributable to common stockholders $ (827,020) $ (138,792)
============ ============
Weighted average common shares outstanding:
Basic 13,268,969 1,670,935
Diluted 13,268,969 1,670,935
Earnings (loss) per share:
Basic $ (.06) $ (.08)
Diluted $ (.06) $ (.08)
See accompanying notes to unaudited condensed consolidated financial statements
4
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
NOVEMBER 30,
2003 2002
----------- -----------
Cash flows used in operating activities $(1,486,222) $ (99,405)
Cash flows provided by (used in) investing activities (3,541) (12,671)
Cash flows provided by financing activities 1,357,939 284,119
----------- -----------
Net increase (decrease) in cash and
cash equivalents (131,824) 172,043
Cash and cash equivalents at beginning of period 337,953 --
-----------
Cash and cash equivalents at end of period $ 206,129 $ 172,043
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest $ 117,584 $ 151,514
Non cash investing and financing activities:
Accrual of preferred stock dividend -- 10,200
Stock options issued in exchange for
services rendered 3,166 --
See accompanying notes to unaudited condensed consolidated financial statements
5
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2003
UNAUDITED
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB, and therefore, do not
include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Accordingly, the results from operations for the three-month period ended
November 30, 2003 are not necessarily indicative of the results that may be
expected for the year ended August 31, 2004. The unaudited consolidated
financial statements should be read in conjunction with the consolidated August
31, 2003 financial statements and footnotes thereto included in the Company's
SEC Form 10-KSB.
Business and Basis of Presentation
Market Central, Inc. (formerly Paladyne Corp.) (the "Company") operates two
wholly owned subsidiaries, ecommerce support centers, inc.("ecom") and U.S.
Convergion, Inc. ("Convergion"). ecom provides outsourced contact center
solutions and Customer Relationship Management (CRM) services, and Convergion
provides systems design, integration, sales and service of internal contact
centers and is a reseller for MicroSoft's MS CRM solution. Combined, the
subsidiaries provide inbound technical support, sales, and customer service;
outbound pre-sales and sales; data mining; campaign management; CRM Integration
(contact center systems design, sales, integration and life-cycle support).
The unaudited condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, ecom and Convergion. The
Company's acquisition of Convergion occurred on April 3, 2003, and, accordingly,
the financial statements included herein include the results of operations of
Convergion during the quarter ended November 30, 2003. All significant
inter-company transactions and balances have been eliminated.
In February 2003, the Company effected a one-for-ten reverse stock split of its
outstanding shares of common stock. All references in the condensed consolidated
financial statements and notes to financial statements, numbers of shares and
share amounts have been restated to reflect the reverse split.
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary charge to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended August 31, 2003 and for the
subsequent periods.
6
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2003
UNAUDITED
NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)
Stock Based Compensation (Continued)
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note E):
For the three month ended
November 30,
2003 2002
--------- ---------
Net loss - as reported $(827,020) $(128,592)
Add: Total stock based employee compensation expense as reported
under intrinsic value method (APB. No. 25) -- --
Deduct: Total stock based employee compensation expense as reported
under fair value based method (SFAS No. 123) (11,663) (207)
--------- ---------
Net loss - Pro Forma $(838,683) $(128,799)
Net loss attributable to common stockholders - Pro forma $(838,683) $(138,999)
Basic (and assuming dilution) loss per share - as reported $ (0.06) $ (0.08)
Basic (and assuming dilution) loss per share - Pro forma $ (0.06) $ (0.08)
Reclassification
Certain reclassifications have been made to conform to prior periods' data to
the current presentation. These reclassifications had no effect on reported
losses.
New Accounting Pronouncements
In December 2003, the FASB issued SFAS No. 132 (revised), EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB
STATEMENTS NO. 87, 88, AND 106. This statement retains the disclosure
requirements contained in FASB statement no. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which it replaces. It requires
additional disclosures to those in the original statement 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. The required
information should be provided separately for pension plans and for other
postretirement benefit plans. The revision applies for the first fiscal or
annual interim period ending after December 15, 2003 for domestic pension plans
and June 15, 2004 for foreign pension plans and requires certain new disclosures
related to such plans. The adoption of this statement will not have a material
impact on the Company's results of operations or financial positions.
NOTE B - BUSINESS COMBINATIONS
U.S. Convergion, Inc.
On April 3, 2003, the Company acquired all of the issued and outstanding common
shares of U.S. Convergion, Inc. ("Convergion"), through an Agreement and Plan of
Exchange ("Agreement"). Pursuant to the Agreement, the Company acquired
Convergion, in exchange for $671,899 consisting of 374,630 shares of the
Company's restricted common stock in a transaction accounted for using the
purchase method of accounting.
7
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2003
UNAUDITED
NOTE B - BUSINESS COMBINATIONS (Contineud)
U.S. Convergion, Inc. (Contineud)
The following summarizes the acquisition of Convergion:
Assets acquired $ 2,588,152
Liabilities assumed (5,817,256)
Goodwill 4,062,003
Acquisition costs (161,000)
-------------
$ (671,899)
The Company valued the common stock issued to the Convergion shareholders at
$1.79 per share, which approximated the fair value of the Company's common stock
at the date of acquisition. The Company has recorded the carryover basis of the
net assets acquired, which did not differ materially from their fair value and
its operating results have been included in the Company's consolidated financial
statements since the date of purchase.
Pliant Technologies, Inc.
In July 2003, the Company acquired certain assets from Pliant Technologies, Inc.
("Pliant") in a transaction accounted for using the purchase method of
accounting.
The following summarizes the asset purchase agreement with Pliant:
Assets acquired $ 128,358
Liabilities assumed (872,408)
Goodwill 745,050
---------
Cash paid $ (1,000)
=========
The Company has recorded the carryover basis of the net assets acquired, which
did not differ materially from their fair value and its operating results have
been included in the Company's consolidated financial statements since the date
of purchase.
Pursuant to a separate agreement between the Company and the holders of Pliant's
previously incurred debt assumed by the Company, the Company issued an aggregate
of 228,351 shares of its restricted common stock and warrants to purchase an
aggregate of 182,681 shares of its common stock in exchange for the discharge
and cancellation of $830,150 of assumed liabilities. The remaining amount
($42,258) of the assumed debt remains outstanding and is secured by a lien on
the purchased assets.
The unaudited pro-forma combined historical results, as if Convergion and Pliant
had been acquired on September 1, 2002, are estimated to be:
For the Three Months Ended
November 30,
2003 2002
----------- -----------
Revenues $ 3,647,036 $ 7,040,722
Net loss attributable to common shareholders $ (823,854) $(1,437,779)
Loss per share:
Basic and diluted $ (.06) $ (.86)
The unaudited proforma information has been prepared for comparative purposes
only and do not purport to be indicative of what would have occurred had the
acquisition actually been made at such a date, nor is it necessarily indicative
of future operating results.
8
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2003
UNAUDITED
NOTE C - NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
Notes payable at November 30, 2003 and August 31, 2003 are as follows:
November 30, August 31,
2003 2003
----------- -----------
Note payable in monthly installments of $33,333 including interest at 6% per
annum; maturity date is in March 2005; collateralized by 500,000 shares held
by a major stockholder and personal guarantees by two stockholders $ 536,770 $ 628,045
Note payable in monthly installments of $1,919 including interest at 7.34%
per annum; unsecured; maturity date is in May 2005 36,733 40,787
Note payable in monthly installments of $2,813 including interest at 6% per
annum; unsecured; maturity date is in February 2005 43,134 48,298
Note payable in weekly installments of $17,500, including interest at 4.15%
per annum; unsecured; maturity date is in April 2003; the Company is
currently in default under the terms of the note agreement 238,481 238,481
Note payable to Bank in monthly installments of interest only at LIBOR daily
floating rate; maturity date is February 9, 2004; collateralized by Company
furniture and equipment 1,250,000 1,000,000
Note payable on demand to a related party, interest payable at 6% per annum
on repayment date; unsecured. (Note F) 574,724 275,954
Note payable on demand to a related party, interest payable at 6% per annum
on repayment date; unsecured. (Note F) 340,000 32,742
Note payable on demand to a related party, non-interest bearing; unsecured;
maturity date is in May 2004; the Company shall repay the note with Company
common stock. (Note F) 120,000 120,000
Note payable to Bank in monthly payments; interest rate is at bank's prime
lending rate plus 4.5%, secured by Company accounts receivable -- 389,833
Note payable revolving agreement secured by accounts receivable with interest
payable monthly at approximately 16%, maximum borrowing capacity of $2,000,000 1,063,859 --
Note payable; liabilities assumed pursuant to Assets Purchase Agreement with
Pliant (see Note B); interest payable at 12% per annum, interest due and
principal due in March 2004; unsecured 41,133 41,133
----------- -----------
4,244,834 2,815,273
Less: current portion (4,055,259) (2,526,457)
----------- -----------
$ 189,575 $ 288,816
=========== ===========
Aggregate maturities of notes payable as of November 30, 2003 are as follows:
Year Amount
---- ----------
2004 $4,055,259
2005 189,575
----------
Total $4,244,834
==========
NOTE D - CAPITAL STOCK
The Company is authorized to issue 75,000,000 shares of common stock with $.001
par value per share and 10,000,000 shares of preferred stock with $.001 par
value per share. In July 2001, the Board of Directors designated 1,800,000
shares as 8% Cumulative Convertible Series C Preferred Stock and 1,050,000
shares as 8% Cumulative Convertible Series D Preferred Stock. In February 2003,
the Company effected a one-for-ten reverse stock split of its outstanding shares
of common stock. The Company's 75,000,000 authorized shares of common stock with
$.001 par value remained unchanged. All references in consolidated financial
statements and notes to financial statements, numbers of shares and share
amounts have been restated to reflect the reverse split.
9
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2003
UNAUDITED
NOTE D - CAPITAL STOCK (Continued)
As of November 30, 2003, the Company has 13,268,969 shares of common stock
issued and outstanding. No preferred stock was issued and outstanding at
November 30, 2003.
NOTE E - STOCK OPTIONS AND WARRANTS
Options
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees,
consultants and shareholders at November 30, 2003, after giving effect to 1:10
reverse split in common stock in February 2003:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average
Number Contractual Life Weighted Average Number Weighted Average
Exercise Price Outstanding (Years) Exercise Price Exercisable Exercise Price
-------------- ----------- ------- -------------- ----------- --------------
$ 2.00 - $ 2.98 201,000 3.00 $ 2.45 75,667 $ 2.48
$ 7.00 - $ 9.50 20,000 1.10 $ 8.25 20,000 $ 8.25
$10.25 - $11.40 68,335 1.17 $ 10.26 68,335 $ 10.26
$15.60 - $25.00 6,375 0.10 $ 25.00 6,375 $ 25.00
-------- ---- ------- ----- -------
295,710 1.67 $ 5.13 170,377 $ 7.12
======== ==== ======= ======= =======
Transactions involving the Company's options issuance are summarized as follows:
Number Weighted Average
of shares Exercise Price
--------- --------------
Outstanding at August 31, 2001 210,693 $11.60
Granted 16,000 .10
Exercised -- --
Cancelled (18,950) 24.80
-------- ------
Outstanding at August 31, 2002 207,743 9.00
======== ======
Granted 185,000 2.30
Exercised -- --
Cancelled (90,533) 3.66
-------- ------
Outstanding at August 31, 2003 302,210 $ 5.22
======== ======
Granted -- --
Exercised -- --
Cancelled (6,500) 4.11
-------- ------
Outstanding at November 30, 2003 295,710 $ 5.13
======== ======
The weighted-average fair value of stock options granted to shareholders during
the periods ended November 30, 2003 and 2002 and the weighted-average
significant assumptions used to determine those fair values, using a
Black-Scholes option pricing model are as follows:
2003 2002
---- ----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 1.01% 1.28%
Expected stock price volatility 38% 38%
Expected dividend payout - -
Expected option life-years (a) 3.0 to 4.0 3.0 to 4.0
(a)The expected option life is based on contractual expiration dates.
10
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2003
UNAUDITED
NOTE E - STOCK OPTIONS AND WARRANTS (Continued)
Warrants
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to employees,
consultants and shareholders at November 30, 2003 after giving effect to 1:10
reverse split in common stock in February 2003.
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Weighted Average
Number Contractual Life Weighted Average Weighted Average
Exercise Prices: Outstanding (Years) Exercise Price Number Exercisable Exercise Price
- ---------------- ----------- ------- -------------- ------------------ --------------
$ 2.20 - $ 7.81 3,905,892 3.90 $ 2.79 3,905,892 $ 2.79
$10.00 - $11.88 163,183 1.32 $11.26 163,183 $ 11.26
$12.81 - $17.50 21,350 1.97 $15.13 21,350 $ 15.13
$25.00 - $33.75 32,851 0.60 $27.86 32,851 $ 28.14
--------- ---- ------ --------- -------
4,123,276 3.76 $ 3.39 4,123,276 $ 3.39
========= ==== ====== ========= =======
Transactions involving the Company's warrants issuance are summarized as
follows:
Number Weighted Average
of shares Exercise Price
--------- --------------
Outstanding at August 31, 2001 868,056 $25.60
Granted -- 0.00
Exercised -- 0.00
Cancelled (265,622) 12.50
---------- ------
Outstanding at August 31, 2002 602,434 $17.00
========== ======
Granted 3,891,014 2.83
Exercised -- --
Cancelled (358,272) 7.94
---------- ------
Outstanding at August 31, 2003 4,135,176 $ 3.43
========== ======
Granted -- --
Exercised -- --
Cancelled (11,900) 19.24
---------- ------
Outstanding at November 30, 2003 4,123,276 $ 3.39
========== ======
The weighted-average fair value of stock warrants granted to shareholders during
the periods ended November 30, 2003 and 2002 and the weighted-average
significant assumptions used to determine those fair values, using a
Black-Scholes option pricing model are as follows:
2003 2002
---- ----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 1.01% 1.28%
Expected stock price volatility 38% 38%
Expected dividend payout - -
Expected warrant life-years (a) 3.0 to 4.0 3.0 to 4.0
(a)The expected warrant life is based on contractual expiration dates.
11
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2003
UNAUDITED
NOTE E - STOCK OPTIONS AND WARRANTS (Continued)
If the Company recognized compensation cost for the non-qualified stock option
and warrant plan in accordance with SFAS No. 123, the Company's pro forma net
loss and net loss per share would have been $838,683 and $(.06) in for the
period ended November 30, 2003 and $128,799 and $(.08) for the period ended
November 30, 2002, respectively. The estimated value of the options granted to
consultants was in lieu of cash compensation for services performed. The amount
of the expense charged to operations in connection with granting the stock
options and warrants was $3,166 and $0 during the period ended November 30, 2003
and 2002, respectively.
NOTE F - RELATED PARTY TRANSACTIONS
During the three month periods ended November 30, 2003 and 2002, the Company
recognized $409,546 and $1,071,375 of sales in connection with services provided
Gibraltar Publishing, Inc., ("Gibraltar") representing 11% and 43% of the
Company's sales for the three months ended November 30, 2003 and 2002,
respectively. Gibraltar was indebted to the Company for services in the amount
of $295,679 (net of allowance for doubtful account of $60,000) and $592,208 at
November 30, 2003 and 2002, respectively. An individual that is an officer,
director and significant shareholder of the Company owns Gibraltar.
The Company also provides services to J&C Nationwide, Inc. and Cheapseats, Inc.,
companies owned by a director and significant shareholder of the Company. The
Company recognized $215,108 of sales in connection with services provided J&C
Nationwide, Inc. and Cheapseats, Inc., representing 6% of the Company's sales
for the three month period ended November 30, 2003. J&C Nationwide, Inc. and
Cheapseats, Inc. were indebted to the Company for services in the amount of
$270,144 at November 30, 2003.
During the three month period ended November 30, 2003, two of the Company's
principal shareholders advanced funds in the form of unsecured notes, interest
payable at 6% per annum, to the Company for working capital purposes. As of
November 30, 2003, the amount due to the shareholders is $914,724 (Note C).
Additionally, a Company principal shareholder advanced funds in the form of an
unsecured, non-interest bearing note to the Company for working capital
purposes. As of November 30, 2003, the amount due to the shareholder is $120,000
(Note C). The Company shall repay the note with common stock at the rate of
100,000 shares of common stock per $120,000 of advances.
NOTE G - SEGMENT INFORMATION
The Company's two reportable segments are managed separately based on
fundamental differences in their operations. During 2003 and the first quarter
of 2004, the Company operated in the following two reportable segments:
o Outsourced contact center solutions and Customer Relationship
Management (CRM) services to customers primarily in the United
States of America.
o Systems design, integration, sales and service of internal
contact centers and reselling MicroSoft's MS CRM solution
primarily in the United States of America.
During 2002, the Company's sole reportable business segment was the outsourced
contact center solutions and CRM services
Segment operating income is total segment revenue reduced by operating expenses
identifiable with the business segment. Corporate includes general corporate
administrative costs.
The Company evaluates performance and allocates resources based upon operating
income. The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies. There are no inter-segment
sales.
12
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2003
UNAUDITED
NOTE G - SEGMENT INFORMATION (Continued)
The following table summarizes segment asset and operating balances by
reportable segment.
November 30, 2003 November 30, 2002
----------------- -----------------
Net Sales to External Customers:
Outsourced contact center services $ 2,029,618 $ 2,475,050
Systems design and integration 1,617,415 --
Corporate -- --
----------- -----------
Total Sales to External Customers $ 3,647,033 $ 2,475,050
=========== ===========
Depreciation and Amortization:
Outsourced contact center services $ 240,066 $ 248,454
Systems design and integration 24,723 --
Corporate -- --
----------- -----------
Total Depreciation and Amortization $ 264,789 $ 248,454
=========== ===========
General and Administrative Expense:
Outsourced contact center services $ 776,563 $ 589,367
Systems design and integration 466,505 --
Corporate 362,876 187,431
----------- -----------
Total General and Administrative Expense $ 1,605,944 $ 776,798
=========== ===========
Capital Expenditures:
Outsourced contact center services $ 3,541 $ 12,671
Systems design and integration -- --
Corporate -- --
----------- -----------
Total Capital Expenditures $ 3,541 $ 12,671
=========== ===========
Operating income (losses):
Outsourced contact center services $ (523,036) $ 58,839
Systems design and integration 58,892 --
Corporate (362,876) (187,431)
----------- -----------
Total Segment Operating Losses $ (827,020) $ (128,592)
=========== ===========
November 30, 2003 August 31, 2003
----------------- ---------------
Segment Assets:
Outsourced contact center services $7,241,394 $7,477,919
Systems design and integration 2,157,468 1,719,831
Corporate 33,221 35,421
---------- ----------
Total Segment Assets $9,432,083 $9,233,171
========== ==========
NOTE H - SUBSEQUENT EVENTS
In December 2003, the Company approved a private placement offering of up to
$3,000,000 of its newly authorized Series A Convertible Preferred Stock. This
offering, at a share price of $1.3325 per share for the Series A Preferred is
convertible into one share of the Company's common stock after a one-year period
from the date of issuance. The Series A Preferred Stock provides for a 4% annual
cumulative dividend, that is payable when declared by the Company's Board of
Directors and is payable in shares of the Series A Preferred Stock. As of
December 31, 2003, the Company had received $175,000 of proceeds from this
offering.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Market Central, Inc. is a full service Customer Relationship Management (CRM)
provider. The Company has developed a next-generation suite of CRM solutions
that include proprietary, patented software for data capture, cleansing, mining,
integration, search, and intelligent document recognition. The Company is also a
Microsoft development partner for MS CRM solutions. Market Central provides
other CRM services, such as campaign management, and operates a 900-seat contact
center to support the software line of business and provide outsourced contact
center services to select clients as part of their overall CRM effort. Through
its wholly owned subsidiary, US Convergion, the Company offers in-house contact
center design, sales, implementation and service for clients that seek an
internal support function for their CRM program.
The Company's unaudited condensed consolidated financial statements are
presented on a going concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. As with any
new venture, concerns must be considered in light of the normal problems,
expenses and complications encountered by entrance into established markets and
the competitive environment in which the Company operates. The unaudited
condensed consolidated financial statements do not include, nor does management
feel it necessary, any adjustments to reflect any possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the possible inability of the Company to
continue as a going concern.
The Company maintains business relationships with three related businesses,
Gibralter Publishing, Inc. ("Gibralter"), Cheapseats, Inc. and J&C Nationwide,
Inc. Each of these companies has call center contracts with the Company's ecom
subsidiary and is owned or controlled by an officer and/or board member of the
Company. These three related companies accounted for approximately $624,654 or
17% of the revenues for the three-month period ended November 30, 2003.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to the total revenues
of principal items contained in the Company's Unaudited Condensed Consolidated
Statements of Operations for the three months ended November 30, 2003 and
November 30, 2002, respectively. The percentages discussed throughout this
analysis are stated on an approximate basis.
Three months Ended
November 30,
2003 2002
(UNAUDITED)
Total revenues 100% 100%
Cost of revenues 67.6% 57.7%
----- -----
Gross profit 32.4% 42.3%
Operating expenses 51.4% 41.4%
----- -----
Operating income (loss) (19.0%) .9%
Interest expense 3.7% 6.1%
----- -----
Net loss (22.7%) (5.2%)
----- -----
14
COMPARISON OF THE THREE MONTHS ENDED NOVEMBER 30, 2003 TO THE THREE MONTHS ENDED
NOVEMBER 30, 2002
Revenue for the three months ended November 30, 2003 and 2002 were $3,647,033,
and $2,475,050, respectively; this represents an increase of 47.3% in sales.
This increase of $1,171,983 is due entirely to the acquisition of U.S.
Convergion, Inc. in April 2003. Revenue from Convergion for the three months
ended November 30, 2003 was $1,617,415. Revenue from the Company's ecom
subsidiary declined from the three months ended November 30, 2002 to 2003 by
$445,432 or 18.0%. This decline was due entirely to the reduction in the volume
of the Gibralter contract from $1,071,375 to $409,546 for the three months ended
November 2002 and 2003, respectively. This decline of $662,129 in the Gibralter
contract from the three months ended November 2002 to 2003 is offset by
increases in Cheapseats, Inc. and J&C Nationwide, Inc. volume of $215,108 and
other third party contracts of $5,365.
Cost of revenues of $2,469,036 and $1,426,876, respectively for the three months
ended November 30, 2003 and 2002 were 67.6% and 57.7% of revenue for the
periods. The increase in cost of sales of $1,042,160 or 73% from 2002 to 2003 is
attributable primarily to the acquisition of U.S. Convergion, Inc. in April 2003
which accounted for $1,028,562 of the cost of revenues increase and the ecom
subsidiary accounting for $13,598 of the increase. The percentage increase in
cost of revenue when compared to revenue amounted to 9.9% from 57.7% to 67.6%
for the three months ended November 2002 and 2003, respectively. This growth in
cost of revenue, and corresponding decline in gross profit percent is due to
several factors. The cost of revenue for sales from the Company's Convergion
subsidiary amounted to 63% of revenue resulting in a gross profit of 37% from
this subsidiary's revenues. Convergion's revenue accounted for 44% of total
revenue for the quarter ended November 2003 so this contributed to the increase
in cost of revenue and corresponding decline in gross profit as a percentage of
revenue from the quarter ended November 30, 2002 to 2003. Convergion's cost of
revenue and gross profit at 63% and 37% respectively, accounts for approximately
2.3% of the 9.9% increase in cost of revenue.
In addition to the effect of Convergion, the ecom subsidiary's cost of revenue
increased significantly as a percentage of revenue. Cost of revenue, as a
percentage of sales at ecom increased from 57.7% to 71.7% for the three months
ended November 30, 2002 and 2003, respectively. This increase is responsible for
7.6% of the 9.9% increase in cost of revenue. This increase in cost of revenue,
and corresponding decline in gross profit at ecom is due primarily to changes in
the Gibralter contract and increased phone costs during the three months ended
November 30, 2003 compared to the same period in 2002. Gibralter's contract
volume has declined significantly from 2002 to 2003 and the effectiveness of
ecom's execution of Gibralter's campaign has declined for general economic
reasons. This situation resulted in changes in Gibralter contract that have
reduced revenue thereby increasing the cost of revenue when compared to revenue
totals. The reduction in charges to Gibralter accounted for approximately 5% of
the 9.9% increase in cost of revenue. Increased telephone costs for all
campaigns accounted for approximately 2.6% of the total Company increase of
9.9%.
Gross profit was $1,177,997 and $1,048,174, respectively for the three months
ended November 30, 2003 and 2002 and was 32.4% and 42.3% of revenue for the
periods. The decrease in gross profit percentage is due to the increases in
costs of revenue discussed above.
Operating expenses, including depreciation and amortization, have increased from
$1,025,252 to $1,870,733, respectively for the three months ended November 30,
2003 and 2002. This increase of $845,481 is due primarily to Convergion's
inclusion in the 2003 quarter. Convergion accounted for $491,228 of the
increase, the remaining increase of $354,253 is due to increased payroll,
benefits and travel within the ecom subsidiary and general corporate operations.
The increase as a percentage of revenue was from 41.4% for the three months
ended November 30, 2002 to 51.4% for the three months ended November 30, 2003.
This increase, as a percentage of revenue, is due primarily to sales growth not
keeping pace with the increased payroll, benefit and travel costs incurred in
2003.
Interest expense, as percentage of revenue, decreased from 6.1% to 3.7% during
the three months ended November 30, 2002 as compared to the three months ended
November 30,2003. The decrease from $151,514 to $134,284 is due primarily to the
conversion of the $5,000,000 of notes payable to Gibralter which were converted
into capital stock in December 2002. Additional borrowings since December 2002
have significantly offset the decline as a result of the Gibralter note
conversion.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company is not currently generating positive cash flow and its cash
resources on hand are insufficient for its long term needs. As a result, certain
vendor payables, capital leases and other obligations are in arrears and in
default. This situation has been present for a period of time, and together with
the anticipated need for additional working capital for the Company to increase
its marketing and revenue base, the Board of Directors continues to take actions
intended to stabilize the Company and enhance its operations going forward.
The Company's two principal shareholders (who took control of the Company in the
February 2003 transaction) have also consistently provided the Company with
additional capital in the form of loans throughout the year, on a discretionary
basis. Advances have been in response to a pressing need to meet a critical
obligation of the Company. As of November 30, 2003, these shareholders had
provided the Company with advances of $914,724. The Company expects that the
need to rely on these loans will be greatly diminished with the success of other
capital raising activities.
The Company's principal cash requirements are for selling, general and
administrative expenses, employee costs, funding of accounts receivable and
capital expenditures. During the three month period ended November 30, 2003, the
Company obtained $606,028 in loans from individuals who were principals in the
proposed transaction described above.
Cash used in operating activities was $1,486,222 for the three months ended
November 30, 2003. This was due primarily as a result of operating losses,
caused by the revenue levels that are at less than a breakeven volume.
Increasing revenues or further cost cutting will be required in the future. The
Company invested $3,541 in computers and leasehold improvements during this
period. The Company met its cash requirements during the three months ended
November 30, 2003 mainly through the receipt of $1,520,614 in loan proceeds from
its accounts receivable financing and advances from the two principal
shareholders.
While the Company has raised capital to meet its working capital requirements in
the past, additional financing is required in order to meet current and
projected cash flow deficits from operations. The Company is seeking financing
in the form of equity through a private placement of its preferred stock. There
are no assurances the Company will be successful in raising the funds required
and any equity raised would be substantially dilutive to existing shareholders.
INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
RISK FACTORS AND CAUTIONARY STATEMENTS
Forward-looking statements in this report are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The Company
wishes to advise readers that actual results may differ substantially from such
forward-looking statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by the statements, including, but not limited to, the
following: the ability of the Company to provide for its debt obligations and to
provide for working capital needs from operating revenue, and other risks
detailed in the Company's periodic report filings with the Securities and
Exchange Commission.
16
ITEM 3. CONTROLS AND PROCEDURES
(a) On November 30, 2003, we made an evaluation of our disclosure controls and
procedures. In our opinion, the disclosure controls and procedures are adequate
because the systems of controls and procedures are designed to assure, among
other items, that 1) recorded transactions are valid; 2) valid transactions are
recorded; and 3) transactions are recorded in the proper period in a timely
manner to produce financial statements which present fairly the financial
condition, results of operations and cash flows for the respective periods being
presented. Moreover, the evaluation did not reveal any significant deficiencies
or material weaknesses in our disclosure controls and procedures.
(b) There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls since the last
evaluation.
17
PART II
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits No. Description
4 Certificate of Designations, Powers, Preferences and
Relative, Participating, Optional and Other Special
Rights of the Series A Convertible Preferred Stock of
Market Central, Inc. (filed herewith)
31.1 Certification of Terrence Leifheit Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith). 31.2 Certification of Clifford A. Clark
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
(b) Reports on Form 8-K filed during the three months ended
November 30, 2003.
None
ITEM 6. OTHER INFORMATION
None
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MARKET CENTRAL, INC.
Date: January 15, 2004 By /s/ Terrence Leifheit
-------------------------
Terrence Leifheit
President
Date: January 15, 2004 By /s/ Clifford Clark
--------------------------
Clifford Clark
Chief Financial Officer
19
CERTIFICATION
I, Terrence Leifheit, certify that:
1. I have reviewed this quarterly report on Form 10QSB of Market
Central, Inc.,
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls an procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors:
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls, and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: January 15, 2004
/s/ Terrence J. Leifheit
-----------------------------
Terrence J. Leifheit
President
20
CERTIFICATION
I, Clifford A. Clark, certify that:
1. I have reviewed this quarterly report on Form 10QSB of Market
Central, Inc.,
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls an procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors:
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls, and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: January 15, 2004
/s/ Clifford A. Clark
-----------------------------
Clifford A. Clark
Chief Financial Officer
(only to be consistent)
21