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 February 29, 2004
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 March 30, 2004: 13,268,969 shares
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
1
PART I.
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Financial Statements as of
February 29, 2004 and for the three months and six months ended February 29,
2004 and February 28, 2003 have been prepared by Market Central, Inc., a
Delaware corporation.
2
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 29, 2004 AUGUST 31, 2003
----------------- ---------------
(Unaudited) (Audited)
----------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 235,722 $ 337,953
Accounts receivable, net 1,547,985 1,905,316
Due from related parties 612,723 362,673
Inventory -- 9,678
Costs in excess of billings 15,601 50,446
Prepaid expenses and other current assets 243,955 66,013
------------ ------------
Total Current Assets 2,655,986 2,732,079
Furniture and fixtures 1,245,726 1,010,228
Computers and software 2,016,961 2,059,445
Leasehold improvements 1,227,905 1,227,905
Accumulated depreciation (3,323,706) (2,778,725)
------------ ------------
Property and equipment, net 1,166,886 1,518,853
Other assets:
Deposits 77,442 77,442
Patents and trademarks 97,319 97,319
Other 425 425
Goodwill 745,050 4,807,053
------------ ------------
Total other assets 920,236 4,982,239
Total assets $ 4,743,108 $ 9,233,171
============ ============
LIABILITIES AND DEFICIENCY IN
STOCKHOLDERS' EQUITY
Current Liabilities:
Cash disbursed in excess of available funds $ 61,428 $ 111,581
Accounts payable and accrued liabilities 7,557,123 7,522,282
Deferred revenue 65,248 432,448
Notes payable to related parties (Note C and F) 512,225 428,696
Notes payable, current portion (Note C) 3,120,377 2,097,761
Current portion of capital lease obligations 597,628 691,606
------------ ------------
Total current liabilities 11,914,029 11,284,374
Notes payable, long-term portion (Note C) 7,578 288,816
Capital lease obligations, long-term portion 89,629 113,439
------------ ------------
Total long-term liabilities 97,207 402,255
Total liabilities 12,011,236 11,686,629
COMMITMENTS AND CONTINGENCIES -- --
DEFICIENCY IN STOCKHOLDERS' EQUITY
Preferred stock - Series A 1,193 --
Common stock 13,269 13,269
Additional paid-in capital 23,754,384 21,876,847
Accumulated deficit (31,036,974) (24,343,574)
------------ ------------
Total deficiency in stockholders' equity (7,268,128) (2,453,458)
------------ ------------
$ 4,743,108 $ 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
FEBRUARY 29, 2004 FEBRUARY 28, 2003
----------------- -----------------
Revenues, net $ 2,505,475 $ 2,359,288
Cost of revenues 1,665,011 1,490,174
------------ ------------
Gross profit 840,464 869,114
Selling, general and administrative expenses 2,095,359 866,257
Impairment of goodwill (Note H) 4,062,003 --
Depreciation and amortization 280,192 248,603
------------ ------------
Total operating expenses 6,437,554 1,114,860
Loss from operations (5,597,090) (245,746)
Other income (expense):
Interest expenses (269,290) (26,362)
Professional fees (Note I) -- (161,021)
------------ ------------
Total other expenses (269,290) (187,383)
Net loss from operations, before
income taxes (5,866,380) (433,129)
Income (taxes) benefits -- --
Net loss (5,866,380) (433,129)
Cumulative Convertible Preferred Stock
Dividend Requirement (4,951) (10,200)
------------ ------------
Net loss attributable to common stockholders $ (5,871,331) $ (443,329)
============ ============
Weighted average common shares outstanding:
Basic and diluted 13,268,969 10,551,727
Net loss per share (basic and assuming dilution): $ (.44) $ (.04)
See accompanying notes to unaudited condensed consolidated financial statements
4
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
FEBRUARY 29, 2004 FEBRUARY 28, 2003
----------------- -----------------
Revenues, net $ 6,152,508 $ 4,834,338
Cost of revenues 4,134,047 2,917,050
------------ ------------
Gross profit 2,018,461 1,917,288
Selling, general and administrative expenses 3,701,303 1,643,055
Impairment of goodwill (Note H) 4,062,003 --
Depreciation and amortization 544,981 497,057
------------ ------------
Total operating expenses 8,308,287 2,140,112
Loss from operations (6,289,826) (222,824)
Other income (expense):
Interest expense (403,574) (177,876)
Professional fees (Note I) -- (161,021)
------------ ------------
Total other expenses (403,574) (338,897)
Net Loss from operations, before
income taxes (6,693,400) (561,721)
Income (taxes) benefits -- --
Net loss (6,693,400) (561,721)
Cumulative Convertible Preferred
Stock Dividend Requirement (4,951) (20,400)
------------ ------------
Net loss attributable to
common stockholders $ (6,698,351) $ (582,121)
============ ============
Weighted average common shares outstanding:
Basic and diluted 13,268,969 10,551,727
Net loss per share (basic and assuming dilution): $ (.50) $ (.05)
See accompanying notes to unaudited condensed consolidated financial statements
5
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
FEBRUARY 29, 2004 FEBRUARY 28, 2003
----------------- -----------------
Cash flows used in operating activities $(2,251,795) $ (736,652)
Cash flows used in investing activities (193,014) (18,306)
Cash flows provided by financing activities 2,342,578 767,358
----------- -----------
Net increase (decrease) in cash and
cash equivalents (102,231) 12,400
Cash and cash equivalents at beginning of period 337,953 (38,856)
----------- -----------
Cash and cash equivalents at end of period $ 235,722 $ (26,456)
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest $ 228,795 $ 167,781
Cash paid for income taxes -- --
Non cash investing and financing activities:
Accrual of preferred stock dividend 4,951 20,400
Preferred shares issued in exchange for debt 5,000,000
Common shares issued in exchange for debt -- 380,000
Stock options issued in exchange for
services rendered 7,787 --
Stock options issued in exchange for
previously incurred debt 167,500 --
Warrants issued in exchange for
financing costs 238,650 --
See accompanying notes to unaudited condensed consolidated financial statements
6
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
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
February 29, 2004 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, including data
capture, cleansing, mining, integration, search, and intelligent document
recognition; and Convergion provides systems design, integration, sales and
service of internal contact centers and is a reseller for MicroSoft's and other
communications vendors. 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 February 29, 2004. 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.
7
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
UNAUDITED
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 months ended For the six months ended
February 29, 2004 February 28, 2003 February 29, 2004 February 28, 2003
----------------- ----------------- ----------------- -----------------
Net loss - as reported $ (5,866,380) $ (433,129) $ (6,693,400) $ (561,721)
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) (16,687) (11,767) (28,350) (11,947)
------------ ---------- ------------ ----------
Net loss - Pro Forma $ (5,883,067) $ (444,896) $ (6,721,750) $ (573,668)
Net loss attributable to common
stockholders - Pro forma $ (5,888,018) $ (455,096) $ (6,726,701) $ (594,068)
Basic (and assuming dilution) loss
per share - as reported $ (0.44) $ (0.04) $ (0.50) $ (0.05)
Basic (and assuming dilution) loss
per share - Pro forma $ (0.44) $ (0.04) $ (0.50) $ (0.05)
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.
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.
8
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
UNAUDITED
NOTE B - BUSINESS COMBINATIONS (CONTINUED)
U.S. Convergion, Inc. (Continued)
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:
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.
For the Three Months Ended , For the Six Months Ended,
February 29, 2004 February 28, 2003 February 29, 2004 February 28, 2003
----------------- ----------------- ----------------- -----------------
Revenues $ 2,505,475 $ 4,900,338 $ 6,152,508 $ 11,941,061
Net loss attributable to common
shareholders $ (5,871,331) $ (1,802,398) $ (6,698,351) $ (3,240,177)
Weighted average common
shares outstanding:
Basic and diluted 13,268,969 10,551,727 13,268,969 10,551,727
Loss per share:
Basic and diluted $ (.44) $ (.17) $ (.50) $ (.31)
9
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
UNAUDITED
NOTE B - BUSINESS COMBINATIONS (CONTINUED)
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.
NOTE C - NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
Notes payable at February 29, 2004 and August 31, 2003 are as follows:
February 29, 2004 August 31, 2003
Note payable in monthly installments of a least $50,000 including interest at 6%
per annum; maturity date is August, 31, 2004; collateralized by 500,000 shares
held by a major stockholder and personal guarantees by two
stockholders. $854,644 $628,045
Note payable in monthly installments of $1,919 including interest at 7.34%
per annum; unsecured; maturity date is in May 2005. 30,487 40,787
Note payable in monthly installments of $2,813 including interest at 6% per
annum; unsecured; maturity date is in February 2005. 35,275 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 June 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) 172,225 275,954
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 $4,000,000 557,935 -
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. As of March 31,2 004, the notes have
not been repaid. The Company is currently in default under the terms of the
note agreement 41,133 41,133
----------- -----------
3,640,180 2,815,273
Less: current portion (3,632,602) (2,526,457)
----------- -----------
$ 7,578 $ 288,816
=========== ===========
Aggregate maturities of notes payable as of February 29, 2004 are as follows:
Fiscal Year Amount
----------- ------
2004 $3,632,602
2005 7,578
-----------
Total $ 3,640,180
===========
10
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
UNAUDITED
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 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. As of February 29, 2004, the Company has 13,268,969 shares of
common stock issued and outstanding.
In December 2003, the Company's Board of Directors designated 2,251,407 shares
of Series A Convertible Preferred Stock, par value $.001 per share (the "Series
A Preferred Stock") and 350,000 shares of Series B Convertible Preferred Stock,
par value $.001 per share (the "Series B Preferred Stock "). Both Series A
Preferred Stock and Series B Preferred Stock have a liquidation preference which
is senior to the Company's Common Stock. 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 February 29, 2004, the Company had issued an
aggregate of 1,193,146 shares of Series A Preferred Stock and received
$1,469,743 of proceeds from this offering, net of offering expenses of $120,257.
NOTE E - STOCK OPTIONS AND WARRANTS
Stock 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 February 29, 2004, 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
-------------- ----------- ------- -------------- ----------- --------------
$ .01 - $ 2.98 295,092 2.75 $ 1.67 183,092 $ 1.27
$ 7.00 - $ 9.50 20,000 1.10 $ 8.25 20,000 $ 8.25
$10.25 - $11.40 68,335 0.93 $ 10.26 68,335 $ 10.26
------- ---- ------- ------- -------
383,427 1.61 $ 3.43 271,427 $ 3.87
======= ==== ======= ======= =======
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 94,092 0.26
Exercised - -
Cancelled (12,875) 17.06
-------- --------
Outstanding at February 29, 2004 383,427 $ 3.43
======== ========
11
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
UNAUDITED
NOTE E - STOCK OPTIONS AND WARRANTS (CONTINUED)
Stock Options (Continued)
The weighted-average fair value of stock options granted to shareholders during
the periods ended February 29, 2004 and February 28, 2003 and the
weighted-average significant assumptions used to determine those fair values,
using a Black-Scholes option pricing model are as follows:
2004 2003
---- ----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 1.01% 1.95%
Expected stock price volatility 80% 23%
Expected dividend payout - -
Expected option life-years (a) 3.0 to 4.0 3.0 to 5.0
(a) The expected option life is based on contractual expiration dates.
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 February 29, 2004 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
---------------- ----------- ------- -------------- ------------------ --------------
Weighted Average
Number Contractual Life Weighted Average Weighted Average
Exercise Prices: Outstanding (Years) Exercise Price Number Exercisable Exercise Price
---------------- ----------- ------- -------------- ------------------ --------------
$ 1.33 - $ 7.81 4,176,156 3.59 $ 2.62 4,176,156 $ 2.62
$10.00 - $11.88 152,931 1.20 $11.20 152,931 $ 11.20
$12.81 - $17.50 21,350 1.72 $15.13 21,350 $ 15.13
$25.00 - $33.75 16,250 0.93 $25.67 16,250 $ 25.67
--------- ---- ------ --------- ------
4,366,887 3.48 $ 3.06 4,366,887 $ 3.06
========= ==== ====== ========= ======
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 270,464 1.94
Exercised - -
Cancelled (38,753) 22.54
--------- ---------
Outstanding at February 29, 2004 4,366,887 $ 3.06
========= =========
12
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
UNAUDITED
NOTE E - STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants (Continued)
The weighted-average fair value of stock warrants granted to shareholders during
the periods ended February 29, 2004 and February 28, 2003 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% 1.95%
Expected stock price volatility 80% 23%
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.
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 $6,721,750 and $(.50) in for the
period ended February 29, 2004 and $573,668 and $(.05) for the period ended
February 28, 2003, respectively (Note A). The estimated value of the options and
warrants 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 to consultants was $7,787 and $0 during the period
ended February 29, 2004 and February 28, 2003, respectively. The amount of the
expense charged to operations in connection with granting warrants in exchange
for financing costs for the issuance of Series A Preferred Stock amounted
$238,650 and $0 during the period ended February 29, 2004 and February 28, 2003,
respectively. In February 2004, the Company also granted an aggregate of 84,092
options in exchange for $167,500 of previously incurred debt.
NOTE F - RELATED PARTY TRANSACTIONS
During the six months and three month periods ended February 29, 2004, the
Company recognized $678,362 and $294,461 of sales in connection with services
provided Gibralter Publishing, Inc., and/or its successor entities ("Gibralter")
representing 11% and 12%, respectively of the Company's sales for each of these
periods. Gibralter was indebted to the Company for services in the amount of
$531,968 (net of allowance for doubtful account of $60,000) and $541,867 at
February 29, 2004 and February 28, 2003, respectively. Additionally, Gibralter
owes the Company $80,755 for certain administrative expenses that the Company
paid on its behalf in prior years. Gibralter was owned by the Company's officer,
director and significant shareholder.
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 a total of $336,643 and $132,091 of sales in connection with
services provided to J&C Nationwide, Inc. and Cheapseats, Inc., representing 6%
and 5%, respectively of the Company's sales for the six month and three month
periods ended February 29, 2004. J&C Nationwide, Inc. and Cheapseats, Inc. were
indebted to the Company for services in the amount of $0 and $13,351 at February
29, 2004 and February 28, 2003, respectively.
During the three month period ended February 29, 2004, 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
February 29, 2004, the amount due to the shareholders is $512,225 (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 February 29, 2004, 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.
13
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
UNAUDITED
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 two
quarters 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.
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.
The following table summarizes segment asset and operating balances by
reportable segment.
February 29, 2004 February 28, 2003
----------------- -----------------
Net Sales to External Customers:
Outsourced contact center services $ 3,997,404 $ 4,834,338
Systems design and integration 2,155,104 --
Corporate --
----------- -----------
Total Sales to External Customers $ 6,152,508 $ 4,834,338
=========== ===========
Depreciation and Amortization:
Outsourced contact center services $ 495,535 $ 497,057
Systems design and integration 49,446 --
Corporate -- --
----------- -----------
Total Depreciation and Amortization $ 544,981 $ 497,057
=========== ===========
General and Administrative Expense:
Outsourced contact center services $ 1,720,848 $ 1,262,854
Systems design and integration 927,340 --
Corporate 1,053,115 380,201
----------- -----------
Total General and Administrative Expense $ 3,701,303 $ 1,643,055
=========== ===========
Capital Expenditures:
Outsourced contact center services $ 193,014 $ 18,731
Systems design and integration -- --
Corporate -- --
----------- -----------
Total Capital Expenditures $ 193,014 $ 18,731
=========== ===========
Operating income (losses):
Outsourced contact center services $(5,370,216) $ (20,499)
Systems design and integration (270,069) --
Corporate (1,053,115) (541,222)
----------- -----------
Total Segment Operating Losses $(6,693,400) $ (561,721)
=========== ===========
14
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
UNAUDITED
NOTE G - SEGMENT INFORMATION (CONTINUED)
February 29, 2004 August 31, 2003
----------------- ---------------
Segment Assets:
Outsourced contact center services $3,971,301 $7,477,919
Systems design and integration 738,586 1,719,831
Corporate 33,221 35,421
---------- ----------
Total Segment Assets $4,743,108 $9,233,171
========== ==========
NOTE H. IMPAIRMENT OF GOODWILL
The Company has adopted Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" (SFAS No. 142). effective August 1, 2002.
SFAS No. 142 addresses how intangible assets that are acquired individually or
with a group of other assets should be accounted for in financial statements
upon their acquisition. This statement requires goodwill amortization to cease
and for goodwill to be periodically reviewed for impairment.
Under SFAS No. 142, goodwill impairment occurs if the net book value of a
reporting unit exceeds its estimated fair value. A majority of the Company's
goodwill is included in it's customer relationship management (CRM) services
reporting unit (" Convergion"), which is included in the outsourced contact
center solutions and customer Relationship Management (CRM) services segment.
The test completed in the second quarter indicated that the recorded book value
of this reporting unit exceeded its fair value, as determined by discounted cash
flows. The decrease in fair value is a result of :
o Significant operating losses during the past six months
o Unanticipated decline in revenues and profitability
o Loss of key personnel
As a result of these events and circumstances, Company management believes that
more likely than not the fair value of the reporting unit's goodwill has been
reduced below its carrying value. As a result, management performed an
evaluation of the reporting unit's tangible and intangible assets for purposes
of determining the implied fair value of goodwill at February 29, 2004. Upon
completion of the assessment, management recorded a non-cash impairment charge
of $4,062,003, net of tax, or $0.30 per share during the quarter ended February
29, 2004 to reduce the carrying value of goodwill in this reporting unit to its
estimated value of $ 0.
Considerable management judgment is necessary to estimate fair value.
Accordingly, actual results could vary significantly from managements'
estimates.
NOTE I. PROFESSIONAL FEES
Professional fees consist of legal fees related to the Company's sale of common
stock in February 2003. This sale of common stock resulted in a change in the
controlling interest of the Company and fees related to this transaction have
been shown as a cost of the period.
15
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
UNAUDITED
NOTE J. SUBSEQUENT EVENTS
The Company has continued to raise capital in connection with a private
placement of its Series A Convertible Preferred Stock. Since February 29, 2004,
an additional 761,351 shares have been sold which provided $1,014,500 in
proceeds to the Company.
On March 25, 2004, the Company entered into an agreement to issue to an
investment group 350,000 shares of its newly designated Series B Convertible
Preferred Stock, $.001 par value per Share, with a stated value of $10.00 per
share and an aggregate stated value of $3.5 million.
Prior to the deduction of commissions and other expenses, the issuance of such
shares is expected to generate $1.75 million of proceeds to the Company. The
transaction is expected to close on or about April 20, 2004, although there can
be no assurance that it will close on such date or at all.
The Series B Convertible Preferred Stock has liquidation preference of $10.00
per share, is non-voting and accrues no dividend, and is convertible into the
Company's Common Stock at any time with a conversion price that is based on 80%
of the lowest closing bid price for the Company's Common Stock during the 10
days prior to the conversion notice. Such conversion price has floor of $8.75
and a ceiling of $1.75, based on the stated value of $3.5 million. Additionally,
the investor will receive an option to acquire additional share of Company
Common Stock to the extent that such conversion results in the receipt of less
than 4,000,000 shares of Common Stock. Such option will have an exercise price
of $1.92, $.10 above the closing bid price on the effective date of the
agreement between the parties, and will be exercisable for a 30-day period
following the completion of the conversion of all shares of Preferred Stock. The
option is exercisable only upon the payment of the cash exercise price.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
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, including data
capture, cleansing, mining, integration, search, and intelligent document
recognition; and Convergion provides systems design, integration, sales and
service of internal contact centers and is a reseller for MicroSoft's and other
communications vendors. 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 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 February 29, 2004.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to the total revenues
of principal items contained in the Company's Condensed Consolidated Statements
of Operations for the three and six months ended February 28, 2004 and 2003,
respectively. The percentages discussed throughout this analysis are stated on
an approximate basis.
Three months Ended Six months Ended
February 29, February 28, February 29, February 28,
2004 2003 2003 2003
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
Total revenues 100% 100% 100% 100%
Cost of revenues 66.4% 63.2% 67.2% 60.3%
-------- -------- -------- --------
Gross profit 33.6% 36.8% 32.8% 39.7%
Operating expenses 256.9% 47.2% 135.0% 44.3%
-------- -------- -------- --------
Operating loss (223.43%) (10.4%) (102.2%) (4.6%)
Interest expense (10.8%) (1.1%) (6.6%) (3.7%)
Professional fees (-%) (6.8%) ( -%) (3.3%)
-------- -------- -------- --------
Net loss (234.1%) (18.3%) (108.8%) (11.6%)
-------- -------- -------- --------
17
COMPARISON OF THE THREE MONTHS ENDED FEBRUARY 29, 2004 TO THE THREE MONTHS ENDED
FEBRUARY 28, 2003
Revenues for the three months ended February 29, 2004 and February 28, 2003 were
$2,505,475 and $2,359,288, respectively, representing a 6.2% increase in sales.
This increase is due primarily to the acquisition of U.S. Convergion, Inc. in
April 2003. Revenue from Convergion for the three months ended February 29, 2004
was $537,689. Revenue from the Company's ECOM subsidiary declined from the three
months ended February 28, 2003 to February 29, 2004 by $396,007 or 16.8%. This
decline was due entirely to the reduction in the volume of the Gibralter
contract from $949,659 to $294,461 for the three months ended February 28, 2003
to February 29, 2004, respectively. This decline of $655,198 in the Gibralter
contract from the three months ended February 28, 2003 to February 29, 2004 was
partially offset by increases in Cheapseats, Inc. and J&C Nationwide, Inc.
volume of $118,740 and other third party contracts of $110,451.
Cost of revenues of $1,665,011 and $1,490,174, respectively for the three months
ended February 29, 2004 and February 28, 2003 were 66.4% and 63.2% of revenue
for the periods. The increase in cost of revenues and increase as a percentage
of revenue from the three months ended February 29, 2004 to February 28, 2003 is
due to slightly higher sales volume attributed totally to the Convergion
acquisition discussed in the preceding paragraph. Convergion's cost of revenue
is lower as a percentage of sales than the Company's ECOM subsidiary so the
overall percentage increase in cost of revenue is due to declining margins in
the ECOM subsidiary. From February 28, 2003 to February 29, 2004, ECOM
experienced an increase in cost of revenue and corresponding decline in gross
margin of approximately 5%. This 5% decline in gross margin at the ECOM
subsidiary accounts for approximately $100,000 of the increase in the cost of
revenue for the entire Company which is all of the percentage increase. This
increase is due to an overall increase in telephone expense while revenue
declined, and a reduction in ancillary charges related to the Company's contract
with Gibralter and successor entities. Correspondingly, gross profit declined
$28,650 or 3.3%, from February 28, 2003 to February 29, 2004.
Operating expenses, which include the impairment charge and depreciation and
amortization, have increased dramatically as percentage of revenue to 256.9%
from 47.2% for the three months ended February 29, 2004 and February 28, 2003,
respectively. This increase of $5,322,694 to $6,437,554 for the three months
ended February 29, 2004 is due primarily to the impairment charge of $4,062,003
related to the goodwill recorded in April 2003 for the purchase of Convergion.
The remaining balance of the increase in operating expenses, which totals
$1,260,691, is due primarily to costs of the Convergion subsidiary and the
Pliant division which had not been acquired in the three month period ended
February 28, 2003. The total increase related to these two factors accounted for
$578,376 of the increase. The balance of the increase in operating expenses
related to salaries and professional fee expenses that increased approximately
$247,175 from 2003 to 2004 and payment of $65,000 during the three months ended
February 29, 2004 for licensing of the Company's URL address.
Interest expense increased from $26,362 to $269,290 during the three months
ended February 28, 2003 as compared to the three months ended February 29, 2004.
As a percentage of revenue this increase is from 1.1% to 10.75% and is
attributable to increased borrowings during the three months ended February 29,
2004 compared to the same period in the prior year, following the purchase of
U.S. Convergion, Inc. and continued operating losses
Professional fees consist of legal fees related to the Company's sale of a
majority interest of its common stock in February 2003 and various other actions
related to the special shareholders meeting. These fees, shown as non-operating
expenses, are non-recurring in nature. These costs of $161,021 for the three
months ended February 28, 2003 are 6.8% of revenue. For the three months ended
February 29, 2004, no transaction of this nature was present.
Net loss for the three months ended February 29, 2004 and February 28, 2003 was
$5,866,380 and $433,129, respectively. This increase of $5,433,251 in the loss
from 2003 to 2004 represents a 1254% increase in net loss. This increase is due
primarily to the impairment charge related to the goodwill recorded in
conjunction with the purchase of the Company's Convergion subsidiary in April
2003. Under SFAS No. 142, goodwill impairment occurs if the net book value of a
reporting unit exceeds its estimated fair value. A majority of the Company's
goodwill is included in it's customer relationship management (CRM) services
reporting unit (" Convergion"), which is included in the outsourced contact
center solutions and customer Relationship Management (CRM) services segment.
The test completed in the second quarter indicated that the recorded book value
of this reporting unit exceeded its fair value, as determined by discounted cash
flows.
18
The decrease in fair value is a result of:
o Significant operating losses during the past six months
o Unanticipated decline in revenues and profitability
o Loss of key personnel
As a result of these events and circumstances, Company management believes that
more likely than not the fair value of the reporting unit's goodwill has been
reduced below its carrying value. As a result, management performed an
evaluation of the reporting unit's tangible and intangible assets for purposes
of determining the implied fair value of goodwill at February 29, 2004. Upon
completion of the assessment, management recorded a non-cash impairment charge
of $4,062,003, net of tax, or $0.30 per share during the quarter ended February
29, 2004 to reduce the carrying value of goodwill in this reporting unit to its
estimated value of $ 0. Considerable management judgment is necessary to
estimate fair value. Accordingly, actual results could vary significantly from
managements' estimates.
This charge of $4,062,003 and the other components of operating losses related
to the Company's Convergion subsidiary and costs related to the Pliant
Technologies division which incurred losses of $328,961 and $89,544,
respectively during the three months ended February 2004 are the primary factors
in the increase.
COMPARISON OF THE SIX MONTHS ENDED FEBRUARY 29, 2004 TO THE SIX MONTHS ENDED
FEBRUARY 28, 2003
Revenues for the six months ended February 29, 2004 and February 28, 2003 were
$6,152,508 and $4,834,338, respectively, representing a 27.2% increase in sales.
This increase of $1,318,170 is due to the acquisition of U.S. Convergion, Inc.
in April 2003. Revenue from Convergion for the six months ended February 29,
2004 was $2,155,104. Revenue from the Company's ECOM subsidiary declined from
the six months ended February 28, 2003 to February 29, 2004 by $836,934 or
17.3%. This decline was due entirely to the reduction in the volume of the
Gibralter contract from $2,021,034 to $678,362 for the six months ended February
28, 2003 to February 29, 2004, respectively. This decline of $1,342,672 in the
Gibralter contract from the six months ended February 28, 2003 to February 29,
2004 was partially offset by increases in Cheapseats, Inc. and J&C Nationwide,
Inc. volume of $323,292 and other third party contracts of approximately
$180,000.
Cost of revenues of $4,134,047 and $2,917,050, respectively for the six months
ended February 29, 2004 and February 28, 2003 were 67.2% and 60.3% of revenue
for the periods. The increase in cost of revenues and increase as a percentage
of revenue from the six months ended February 29, 2004 to February 28, 2003 is
due to higher sales volume attributed totally to the Convergion acquisition
discussed in the preceding paragraph. Convergion's cost of revenue is lower as a
percentage of sales than the Company's ECOM subsidiary so the overall percentage
increase in cost of revenue is due to declining margins in the ECOM subsidiary.
From February 28, 2003 to February 29, 2004, ECOM experienced an increase in
cost of revenue and corresponding decline in gross margin of approximately 9%.
This 9% decline in gross margin at the ECOM subsidiary accounts for
approximately $340,000 of the increase in the cost of revenue for the entire
Company which is substantially all of the percentage increase. This increase is
due to an overall increase in telephone expense while revenue declined, and a
reduction in ancillary charges related to the Company's contract with Gibralter
and successor entities.
Operating expenses of $8,308,287 and $2,140,112, respectively for the six months
ended February 29, 2004 and February 28, 2003 were 135.0% and 44.3% of revenue
for these periods. The increase of $6,168,175 from 2003 to 2004 is due primarily
to the impairment charge of $4,062,003 in 2004 related to the goodwill recorded
in April 2003 at the purchase of Convergion. The remaining balance of the
increase in operating expenses, which totals $2,106,172 is due primarily to
costs of the Convergion subsidiary and the Pliant division which had not been
acquired in the six month period ended February 28, 2003. The total increase
related to these two factors accounted for $1,154,789 of the increase. The
balance of the increase in operating expenses related to salaries and
professional fee expenses that increased approximately $306,284 from 2003 to
2004 and payment of $65,000 during the three months ended February 29, 2004 for
licensing of the Company's URL address.
19
Interest expense increased 127% from $177,876 to $403,574 from the six months
ended February 28, 2003 to the six months ended o February 29, 2004. As a
percentage of revenue, interest expense increased from 3.7% to 6.6% from the six
months ended February 28, 2003 to February 29, 2004. This increase is
attributable almost entirely to increased borrowings following the purchase of
U.S. Convergion, Inc. and continued operating losses.
Professional fees consist of legal fees related to the Company's sale of a
majority interest of its common stock in February 2003 and various other actions
related to the special shareholders meeting. These fees, shown as non-operating
expenses, are non-recurring in nature. These costs of $161,021 for the six
months ended February 28, 2003 are 3.3% of revenue. For the six months ended
February 29, 2004, no transaction of this nature was present.
Net loss for the six months ended February 29, 2004 and February 28, 2003 was
$6,693,400 and $561,721 respectively. This increase of $6,131,679 is due
primarily to the impairment charge taken in the six month period ended February
29, 2004 related to the goodwill recorded in conjunction with the purchase of
the Company's Convergion subsidiary in April 2003. Under SFAS No. 142, goodwill
impairment occurs if the net book value of a reporting unit exceeds its
estimated fair value. A majority of the Company's goodwill is included in it's
customer relationship management (CRM) services reporting unit (" Convergion"),
which is included in the outsourced contact center solutions and customer
Relationship Management (CRM) services segment. The test completed in the second
quarter indicated that the recorded book value of this reporting unit exceeded
its fair value, as determined by discounted cash flows. The decrease in fair
value is a result of :
o Significant operating losses during the past six months
o Unanticipated decline in revenues and profitability
o Loss of key personnel
As a result of these events and circumstances, Company management believes that
more likely than not the fair value of the reporting unit's goodwill has been
reduced below its carrying value. As a result, management performed an
evaluation of the reporting unit's tangible and intangible assets for purposes
of determining the implied fair value of goodwill at February 29, 2004. Upon
completion of the assessment, management recorded a non-cash impairment charge
of $4,062,003, net of tax, or $0.30 per share during the six months ended
February 29, 2004 to reduce the carrying value of goodwill in this reporting
unit to its estimated value of $ 0. Considerable management judgment is
necessary to estimate fair value. Accordingly, actual results could vary
significantly from managements' estimates.
This charge of $4,062,003 and the other components of operating losses related
to the Company's Convergion subsidiary and costs related to the Pliant
Technologies division which incurred losses of $270,069 and $167,652,
respectively during the six months ended February 2004 are the primary factors
in the increase
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. Sale of Series A Convertible Preferred shares since December 2003 has
resulted in approximately $2,600,000 in capital for the Company through April 2,
2004. This is a significant part of a funding plan to stabilize liquidity issues
at the Company. The Company is continuing to pursue other capital sources to
enable it to grow 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 February 29, 2004, these shareholders had
provided the Company with advances of $512,225. The Company expects that the
need to rely on these loans will be greatly diminished with the success of other
capital raising activities.
20
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 and six month periods ended
February 29, 2004, the Company obtained $5,970 and $486,678 in loans from
individuals who were principals in the February 2003 transaction described
above.
Cash used in operating activities was $2,251,795 for the six months ended
February 29, 2004. 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 $193,014 in computers and leasehold improvements during this
period. The Company met its cash requirements during the six months ended
February 29, 2004 mainly through the receipt of $1,469,743 in proceeds from its
sale of its Series A Preferred Stock, net of offering expenses of approximately
$120,000.
While the Company has continued to raise capital to meet its working capital
requirements, additional financing is required in order to meet future needs.
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.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain statements made in this report, and other written or oral statements
made by or on behalf of the Company may constitute "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. When used in this
report, the words "believes," "expects," "estimates," "intends," "will" and
similar expressions are intended to identify forward-looking statements.
Statements regarding future events and developments and our future performance,
as well as the Company's expectations, beliefs, plans, intentions, estimates or
projections relating to the future, are forward-looking statements within the
meaning of these laws. Examples of such statements in this report include the
Company's current plans for improving liquidity and its future acquisition
plans. 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 ability of the Company to
provide for its debt obligations and to provide for working capital needs from
operating revenue; general economic conditions; the ability to integrate
acquisitions successfully and without disruptions to normal operations; and
other risks detailed in the Company's periodic report filings with the
Securities and Exchange Commission. The Company believes that these
forward-looking statements are reasonable; however, you should not place undue
reliance on such statements. These statements are based on current expectations
and speak only as of the date of such statements. The Company undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of future events, new information or otherwise.
ITEM 3. CONTROLS AND PROCEDURES
(a) On February 29, 2004, 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
21
PART II
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
(a) None
(b) During the quarter ended February 29, 2004, the Company's Board of
Directors designated 2,251,407 shares of Series A Convertible
Preferred Stock, par value $.001 per share (the "Series A Preferred
Stock") and 350,000 shares of Series B Convertible Preferred Stock,
par value $.001 per share (the "Series B Preferred Stock "). The
Series A Preferred Stock accrues a four-percent annual dividend in
additional shares of Series A Preferred Stock, and has a liquidation
preference that is senior to the Company's Common Stock. The Series
B Preferred Stock has a liquidation preference which is senior to
the Company's Common Stock.
(c) During the three-month period ending February 29, 2004, the Company
approved a private placement offering of up to $3,000,000 of its
newly authorized Series A Preferred Stock. This Preferred Stock for
the Series A Preferred Stock is convertible into shares of the
Company's Common Stock on a one-for -one basis after on-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 February 29, 2004, the Company had issued
1,193,146 shares and received $1,469,743 of proceeds from this
offering, net of offering expenses of $120,257. The Company also
granted an aggregate of 170,464 warrants in exchange for $238,650 of
financing costs in connection with this offering.
The Shares of Series A Preferred Stock are being offered by a
registered broker dealer who receives a commission of 7% to the
gross proceeds for shares sold, together with one (1) warrant to
purchase one (1) share of Common Stock, upon the terms described
following, per seven (7) shares of Series A Preferred Stock sold.
The terms of the Warrant include the following:
(1) Exercise Price of $1.3325 per share of Common Stock;
(2) a 3 year tern;
(3) the holder is entitled to a cashless exercise of such
warrant; and
(4) the holder of such warrants is entitled to registration
rights identical to any such rights granted to holders
of the Company's Preferred Stock.
The offering is being made to accredited and unaccredited investors
pursuant to Section 4(2) of the Securities Act of 1933, as amended,
and Rule 506 Regulation D promulgated thereunder.
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on January 21,
2004.
22
(b) N/A
(c) None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description
4.1 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)
4.2 Certificate of Designation of the rights and preferences
of Series B 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 February 29,
2004.
The Company filed Form 8-K, dated December 3, 2003 under Items 7.
Financial Statements and Exhibits
The Company filed Form 8-K amendment, earliest event report dated
July 31, 2003 under Items 7. FINANCIAL STATEMENTS, PRO FORMA
FINANCIAL INFORMATION AND EXHIBITS
The Company filed Form 8-K amendment, earliest event report dated
April 3, 2003 under Items 7. FINANCIAL STATEMENTS, PRO FORMA
FINANCIAL INFORMATION AND EXHIBITS
23
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: April 15, 2004 By /s/ Terrence Leifheit
----------------------------
Terrence Leifheit
President
Date: April 15, 2004 By /s/ Clifford Clark
----------------------------
Clifford Clark
Chief Financial Officer
24
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: April 15, 2004
/s/ Terrence J. Leifheit
-----------------------------
Terrence J. Leifheit
President
25
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: April 15, 2004
/s/ Clifford A. Clark
-----------------------------
Clifford A. Clark
Chief Financial Officer (only to be consistent)
26