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 May 31, 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)
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 July 13, 2004: 13,336,469 shares
Transitional Small Business Disclosure Format (check one): Yes|_| No |X|
PART I.
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Financial Statements as of May
31, 2004 and 2003 and for the three months and nine months ended May 31, 2004
and 2003, respectively have been prepared by Market Central, Inc., a Delaware
corporation.
2
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
MAY 31, 2004
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 947,367
Accounts receivable, net 1,125,598
Accounts receivable - related parties (Note F) 776,138
Inventory 10,768
Prepaid expenses and other assets 125,150
------------
Total Current Assets 2,985,021
Property and Equipment:
Furniture and fixtures 930,659
Computers and software 1,914,009
Leasehold improvement 1,223,278
------------
4,067,946
Less: accumulated depreciation 3,340,299
------------
Total Property and Equipment: 727,647
Other Assets:
Deposits 79,833
Patents and trademarks 97,319
Organization costs 425
Goodwill 745,050
------------
Total Other Assets 922,627
Total Assets $ 4,635,295
============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current Liabilities:
Cash disbursed in excess of available funds $ 13,423
Accounts payable and accrued liabilities 4,692,599
Accrued liabilities in connection with merger 335,136
Note payable to related parties (Note C) 533,745
Notes payable, current portion (Note C) 2,313,174
Accrued preferred stock dividend 30,828
Current portion of capital lease obligation 570,584
------------
Total Current Liabilities 8,489,489
Notes payable, long-term portion (Note C) 1,824
Capital lease obligation - long-term portion 67,203
Commitments and Contingencies (Note I) --
Deficiency in Stockholders' Equity (Note D):
Preferred stock, par value $.001 per share; 10,000,000 shares authorized;
Series A - 2,239,700 shares issued and outstanding at May 31, 2004 2,240
Series B - 350,000 shares issued and outstanding at May 31, 2004 350
Common stock, par value $.001 per share; 75,000,000 shares authorized;
13,336,469 shares issued and outstanding at May 31, 2004 13,336
Additional paid-in-capital 27,421,015
Preferred stock dividend (875,000)
Accumulated deficit (30,485,162)
------------
(3,923,221)
------------
Total Liabilities and Deficiency in Stockholders' Equity $ 4,635,295
============
See accompanying notes to unaudited condensed consolidated financial statements
3
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2004 AND 2003
For the three months ended For the nine months ended
May 31, May 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues, net $ 1,975,300 $ 2,132,299 $ 5,972,704 $ 6,966,637
Cost of sales 1,379,966 1,427,981 4,161,508 4,345,031
------------ ------------ ------------ ------------
Gross profit 595,334 704,318 1,811,196 2,621,606
Operating expenses:
Selling, general and administrative 1,687,096 995,518 4,461,059 2,638,573
Professional fees (Note H) -- -- -- 161,021
Impairment of goodwill (Note G) -- -- 4,062,003 --
Depreciation and amortization 258,091 248,454 753,626 745,511
------------ ------------ ------------ ------------
Total operating expenses 1,945,187 1,243,972 9,276,688 3,545,105
Loss from operations (1,349,853) (539,654) (7,465,492) (923,499)
Other income (expenses): -- -- -- --
Interest income (expenses) (190,307) (110,165) (593,881) (288,041)
------------ ------------ ------------ ------------
Total other expenses (190,307) (110,165) (593,881) (288,041)
Loss from continuing operations, before income
taxes and discontinued operations (1,540,160) (649,819) (8,059,373) (1,211,540)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Loss from continuing operations, before
discontinued operations (1,540,160) (649,819) (8,059,373) (1,211,540)
Loss from discontinued operations (Note B) (657,398) (623,620) (831,585) (623,620)
Gain from disposal of discontinued operations
(Note B) 2,749,370 -- 2,749,370 --
------------ ------------ ------------ ------------
Net income (loss) $ 551,812 $ (1,273,439) $ (6,141,588) $ (1,835,160)
============ ============ ============ ============
Preferred stock dividend - beneficial
conversion feature (Note D) (875,000) -- (875,000) --
Cumulative convertible preferred stock dividend
requirements (Note D) (25,877) -- (30,829) --
------------ ------------ ------------ ------------
Net loss attributable to common shareholders $ (349,065) $ (1,273,439) $ (7,047,417) $ (1,835,160)
============ ============ ============ ============
Net earnings (loss) per common share $ (0.03) $ (0.10) $ (0.53) $ (0.14)
Continuing operations:
Basic (0.18) (0.05) (0.67) (0.09)
Diluted (0.18) (0.05) (0.67) (0.09)
Discontinued operations:
Basic 0.15 (0.05) 0.14 (0.05)
Diluted 0.15 (0.05) 0.14 (0.05)
Weighted Average Shares Outstanding
Basic 13,299,676 13,040,618 13,279,279 13,040,618
Diluted 13,299,676 13,040,618 13,279,279 13,040,618
See accompanying notes to unaudited condensed consolidated financial statements
4
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
MAY 31,
2004 2003
Cash flows used in operating activities $(3,337,184) $(1,617,758)
Cash flows used in investing activities (250,755) (22,861)
Cash flows provided by financing activities 4,197,353 1,678,624
----------- -----------
Net increase in cash and
cash equivalents 609,414 38,005
Cash and cash equivalents at beginning of period 337,953 (38,856)
----------- -----------
Cash and cash equivalents at end of period $ 947,367 $ (851)
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest $ 328,805 $ 288,041
Cash paid during the period for income taxes -- --
Stock options and warrants issued in exchange for services rendered 662,587 --
Common stock issued for debts -- 380,000
Preferred stock issued in exchange for debts -- 5,000,000
Reversal of preferred stock dividend -- (221,000)
Disposal of US Convergion, Inc.: (Note B)
Sylvia common stock received 500 --
Assets disposed of (68,211) --
Debts assumed by buyer 2,967,081 --
Net gain on disposal of segment (2,749,370) --
----------- -----------
Net cash paid for disposition 150,000 --
=========== ===========
Acquisition of US Convergion, Inc.:
Assets acquired -- 2,588,152
Goodwill -- 4,062,003
Liabilities assumed -- (5,817,256)
Common stock issued -- (671,899)
----------- -----------
Net cash paid for acquisition -- 161,000
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
5
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 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 nine-month period ended May 31,
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. (the "Company") is a global technology management company
specializing in solutions that connect people and businesses with information.
The company holds multiple patents and patent-pending technologies and has
developed a suite of solutions that include software for next-generation search,
intelligent document recognition, data capture, cleansing, mining, and
integration.
The unaudited condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, ecom and U.S. Convergion, Inc.
("Convergion"). All significant inter-company transactions and balances have
been eliminated in consolidation. In May 2004, the Company sold Convergion to
Sylvia Holding Co., Inc. ("Sylvia"), a Nevada Corporation, in exchange for
500,000 shares of Sylvia's common stock, and other goods and valuable
consideration. The Convergion business segment is accounted for as a
discontinued operation, and accordingly, amounts in the financial statements,
and related notes for all periods shown have been restated to reflect
discontinued operations accounting. Summarized results of the discontinued
business are further described in Note B. The Company currently operates one
wholly-owned subsidiary, ecommerce support centers, inc. ("ecom"). ecom provides
outsourced contact center solutions.
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 change 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 adopt
the interim disclosure provisions for its financial reports for the subsequent
periods.
6
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
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 months ended For the nine months ended
May 31, May 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income (loss) - as reported $ 551,812 $(1,273,439) $(6,141,588) $(1,835,160)
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) (27,930) (146,413) (56,280) (158,360)
----------- ----------- ----------- -----------
Net income (loss) - Pro Forma $ 523,882 $(1,419,852) $(6,197,868) $(1,993,520)
=========== =========== =========== ===========
Net loss attributable to common
stockholders - Pro forma $ (376,995) $(1,419,852) $(7,103,697) $(1,993,520)
=========== =========== =========== ===========
Basic and diluted (loss) per share - as
reported $ (0.03) $ (0.10) $ (0.53) $ (0.14)
Basic and diluted (loss) per share - Pro
forma $ (0.03) $ (0.11) $ (0.53) $ (0.15)
Reclassification
Certain reclassifications were made to the prior periods' data so as to conform
to the current presentation. These reclassifications had no effect on reported
losses.
NOTE B - DISCONTINUED OPERATIONS
In May 2004, the Company sold its wholly owned subsidiary, US Convergion, Inc.
("Convergion") to Sylvia Holding Co., Inc. ("Sylvia") through a Stock Purchase
Agreement ("Agreement"). Pursuant to the Agreement, Sylvia acquired certain
assets and assumed certain liabilities of Convergion and agreed to issue to the
Company a total of 500,000 shares of its common stock valued at $0.001 per
share.
As a result of the sale of the Convergion business segment, the Company
accounted for the segment as a discontinued operation, and accordingly, the
amounts in the financial statements and related notes for all periods shown have
been restated to reflect discontinued operations accounting. The financial
statements reflect the operating results and balance sheet items of the
discontinued operations separately from continuing operations. Prior years have
been restated. Operating results for the discontinued operations for the period
ended May 31, 2004 and 2003 were:
7
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
UNAUDITED
NOTE B - DISCONTINUED OPERATIONS (CONTINUED)
For the three months For the nine months
ended May 31, ended May 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues $ 94,250 $ 1,041,073 $ 2,249,354 $ 1,041,073
Expenses (751,648) (1,664,693) (3,080,939) (1,664,693)
----------- ----------- ----------- -----------
Net (loss) $ (657,398) $ (623,620) $ (831,585) $ (623,620)
=========== =========== =========== ===========
The following summarizes the gain on the disposition of the Convergion business
segment:
Sylvia common stock $ 500
Debts assumed by Sylvia 2,967,081
Net assets disposed of (68,211)
Disposition costs (150,000)
-----------
Net gain on disposal of segment $ 2,749,370
===========
In connection with the Stock Purchase Agreement, the Company issued to Sylvia a
promissory note ("Note") in the amount of $500,000 to serve as security for the
obligations of the Company under the Stock Purchase Agreement. The Note shall
only become due and payable upon the demand of Sylvia upon an event of default
of the Stock Purchase Agreement. Additionally, the Company entered into a
Security Agreement with Sylvia. Pursuant to the Security Agreement, the Company
granted Sylvia a security interest in any and all existing or after acquired
assets of the Company, up to $3,000,000, securing the Company's obligations to
Sylvia under the Note (collectively the "Escrow Document"). The Escrow Document
is held by the legal counsel of Sylvia and shall be released to the Company when
all covenants, representation, and conditions in the Stock Purchase Agreement
are complied and satisfied.
In connection with the potential settlement of the litigation described in Note
I, the Company may be required to amend the Stock Purchase Agreement to comply
with the Court's Order. While remote, the amendment would include, but not be
limited to the rescission of the sale of U.S. Convergion, Inc.
NOTE C - NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
Notes Payable at May 31, 2004 are as follows:
May 31, 2004
------------
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. $ 601,134
Note payable in monthly installments of $1,919 including interest at 7.34% per annum; unsecured;
maturity date is in May 2005. 24,730
Note payable in monthly installments of $2,813 including interest at 6% per annum; unsecured;
maturity date is in February 2005. 27,288
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
Note payable on demand to a related party, interest payable at 6% per annum on repayment date;
unsecured. (Note F) 179,690
Note payable on demand to a related party, interest payable at 6% per annum on repayment date;
unsecured. (Note F) 234,056
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
8
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
UNAUDITED
NOTE C - NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES (CONTINUED)
(Continued)
-----------
Note payable revolving agreement secured by accounts receivable
with interest payable monthly at approximately 16%, maximum
borrowing capacity of $4,000,000 370,712
Note payable; liabilities assumed pursuant to Assets Purchase
Agreement with Pliant Technologies,Inc.; interest payable at
12% per annum, interest due and principal due in March 2004;
unsecured. The Company is currently in default under the terms
of the note agreement 41,133
-----------
2,848,743
Less: current portion (2,846,919)
-----------
Long-term portion $ 1,824
===========
Aggregate maturities of notes payable as of May 31, 2004 are as follows:
Fiscal Year Amount
- ----------- -----------
2004 $2,846,919
2005 1,824
-----------
Total $ 2,848,743
===========
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 affected 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 May 31, 2004, the Company has 13,336,469 shares of
common stock issued and outstanding.
During the period ended May 31, 2004, the Company issued an aggregate of 67,500
shares of its common stock to a consultant in exchange for stock options
exercised at $0.01 per share. The Company received $68 of proceeds. The Company
valued the stock options at the fair value of its common shares at the date the
options were granted. Compensation costs of $91,800 were charged to operations
during the period ended May 31, 2004 (Note E).
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 with
is senior to the Company's Common Stock.
9
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
UNAUDITED
NOTE D - CAPITAL STOCK (CONTINUED)
In December 2003, the Company approved a private placement offering of up to
$3,000,000 of its authorized Series A Preferred Stock at $1.3325 per share. The
Series A Preferred Stock 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 May 31, 2004, the Company had issued an
aggregate of 2,239,700 shares of Series A Preferred Stock and received
$2,757,085 of proceeds, net of offering costs and fees of $227,315. The Company
had accrued cumulative preferred stock dividends of $30,829 as of May 31, 2004.
During the quarter ended May 31, 2004 the Company issued an aggregate of 350,000
shares of Series B Preferred Stock and received a total proceeds of $1,282,912,
net of cots and fees of $367,339. The Series B Preferred Stock is convertible
into common stock at the lesser of $1.75 per share or 80% of the lowest bid
price for the common stock in the 10 business days preceding the conversion but
it cannot be less than 50% of the $1.75 or $.875. This results in the conversion
of a maximum of 4,000,000 shares and a minimum of 2,000,000 shares of the
Company's common stock. The Series B Preferred Stock holders also have an option
to acquire additional common shares in an amount to permit the conversion rights
plus this option to result in a total of 4,000,000 shares of the Company's
common stock.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Series B Convertible Preferred
Stock. The Company recognized and measured an aggregate of $875,000, which is
equal to the intrinsic value of the imbedded beneficial conversion feature, to
additional paid-in capital and a return to the Series B Preferred Stock holders.
Since the preferred shares were convertible at the date of issuance, the return
to the preferred shareholders attributed to the beneficial conversion feature
has been recognized in full at the date the Series B Preferred Stock was issued.
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 May 31, 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 - $2.98 512,592 2.51 $ 0.88 156,008 $ 2.51
$ 7.00 - $9.50 20,000 0.86 $ 8.25 20,000 $ 8.25
$10.25 -$11.40 68,335 0.67 $ 10.26 68,335 $ 10.26
------- ---- --------- ------- ---------
600,927 1.38 $ 2.06 244,343 $ 4.81
======= ==== ========= ======= =========
10
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
UNAUDITED
NOTE E - STOCK OPTIONS AND WARRANTS (CONTINUED)
Stock Options (Continued)
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 379,092 .94
Exercised (67,500) .01
Cancelled (12,875) 17.06
------- ---------
Outstanding at May 31, 2004 600,927 $ 2.06
======= =========
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 May 31, 2004 after giving effect to 1:10 reverse
split in common stock in February 2003.
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Weighted Average Weighted Weighted
Number Contractual Life Average Average
Exercise Prices: Outstanding (Years) Exercise Price Number Exercisable Exercise Price
- ---------------- ----------- ------- -------------- ------------------ --------------
$ 1.33- $ 7.81 4,327,522 3.34 $ 2.51 4,327,522 $ 2.51
$10.00- $11.88 122,931 1.21 $ 11.50 122,931 $ 11.50
$12.81- $17.50 21,350 1.47 $ 15.13 21,350 $ 15.13
$25.00 -$33.75 16,250 0.68 $ 25.67 16,250 $ 25.67
--------- ---- --------- --------- ---------
4,488,053 3.25 $ 2.90 4,488,053 $ 2.90
========= ==== ========= ========= =========
11
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
UNAUDITED
NOTE E - STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants (Continued)
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 421,630 1.73
Exercised -- --
Cancelled (68,753) 16.89
--------- ---------
Outstanding at May 31, 2004 4,488,053 $ 2.90
========= =========
The weighted-average fair value of stock options and warrants granted to
employees, consultants and shareholders during the periods ended May 31, 2004
and May 31, 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 1.00% 1.95%
Expected stock price volatility 74% 23%
Expected dividend payout -- --
Expected option life-years (a) 3.0 to 4.0 3.0 to 5.0
(a)The expected option/warrant life is
based on contractual expiration dates.
The amount of the expense charged to operations in connection with granting
stock options to consultants was $19,787 and $8,251 during the period ended May
31, 2004 and 2003, respectively. The amount of the expense charged to operations
in connection with granting warrants to consultants in exchange for financing
services was $413,200 and $30,593 during the period ended May 31, 2004 and 2003,
respectively. If the Company recognized compensation cost for the non-qualified
employee stock option plan in accordance with SFAS No. 123, the Company's pro
forma net loss and net loss per share would have been $(7,103,697) and $(0.53),
respectively for the nine-month period ended May 31, 2004 and $(1,993,520) and
$(0.14), respectively for the nine-month period ended May 31, 2003.
12
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
UNAUDITED
NOTE E - STOCK OPTIONS AND WARRANTS (CONTINUED)
Additionally, included in the total numbers of stock options outstanding were
144,092 stock options the Company granted to consultants in exchange for
services rendered, exercisable at $0.01 per share. The Company valued those
options at the fair market value of its common stock at the date the options
were granted. Compensation costs of $229,600 were charged to operations during
the period ended May 31, 2004. As of May 31, 2004, the Company received $68 of
proceeds for 67,500 stock options exercised (Note D).
NOTE F - RELATED PARTY TRANSACTIONS
During the nine months and three month periods ended May 31, 2004, the Company
recognized $974,953 and $296,590 of sales in connection with services provided
Gibralter Publishing, Inc., and/or its successor entities ("Gibralter")
representing 16% and 15%, respectively of the Company's sales for each of these
periods. Gibralter was indebted to the Company for services in the amount of
$648,559 (net of allowance for doubtful account of $60,000) and $535,172 at May
31, 2004 and 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.,
entities owned by a director and significant shareholder of the Company. The
Company recognized a total of $464,222 and $127,579 of sales in connection with
services provided to these two entities, representing 8% and 6%, respectively of
the Company's sales for the nine month and three month periods ended May 31,
2004. J&C Nationwide, Inc. and Cheapseats, Inc. were indebted to the Company for
services in the amount of $127,579 and $0 at May 31, 2004 and 2003,
respectively.
During the three month period ended May 31, 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 May 31, 2004,
the amount due to the shareholders is $413,746 (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 May 31, 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.
NOTE G - 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 its 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
13
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
UNAUDITED
NOTE G - IMPAIRMENT OF GOODWILL (CONTINUED)
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 on 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 H - 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.
NOTE I - COMMITMENT AND CONTINGENCIES
Litigation
In October 2003, Tweddle Litho Company ("Tweddle") filed a complaint against the
Company and Gibralter Publishing, Inc. ("Gibralter", the Company's predecessor),
in the United States District Court, Eastern District of North Carolina. The
complaint alleges that the Company and Gibralter had engaged in a fraudulent
conveyance in December 2002, at such time that Gilbralter released the Company
from two promissory notes totaling approximately $5 million in exchange for the
issuance of certain Company stock and warrants. The action in North Carolina
arose out of a judgment that Tweddle had obtained against Gibralter in Michigan
for approximately $400,000. As of May 31, 2004, the Company has accrued and
included in its accrued liabilities an aggregate of $400,000 of settlement fees
in connection with the litigation.
Subsequent to the Company's filing of an answer to the complaint, Tweddle filed
a motion for summary judgment. As a result of the failure of the Company's
counsel to receive notice of such motion, on May 13, 2004, the court entered a
judgment against the Company finding, among other things that the release of the
two promissory notes payable to Gibralter was a fraudulent conveyance, and
decreeing, among other things, that: (a) the Company assign the promissory notes
and the assets securing these notes to Tweddle; (b) the Company was enjoined
from transferring any of its assets out of the ordinary course of business
pending satisfaction of the Gibralter judgment in favor of Tweddle; and (c) the
December 10, 2002 transfer by Gibralter of its right to payment under the two
promissory notes in exchange for common stock and stock warrants of the Company
was null and void. On May 24, 2004, the company filled its Motion for New Trial
seeking to vacate the Order. Subsequently, on June 11, 2004, Tweddle filed its
Motion For Order to Show Cause Why Market Central, Inc. Should Not Be Held In
Contempt of Court. On July 15, 2004, the Court held a hearing at which time the
Company presented its arguments for the vacating of the summary judgment order.
The Court has scheduled a subsequent hearing to be held on September 10, 2004,
at which time it will hear additional arguments and, it is believed, will render
its decision.
In connection with the potential settlement of the litigation, the Company may
be required to amend the U.S. Convergion Inc. Stock Purchase Agreement (see Note
B) to comply with the May 13, 2004 Court's Order. While remote, the amendment
would include, but not be limited to the rescission of the sale of U.S.
Convergion, Inc.
The Company is actively seeking an acceptable settlement of the claims arising
from the litigation. Dependent upon the ultimate outcome of the matter, the
Company will vigorously pursue third parties for reimbursement of amounts, if
any, paid by the Company to settle the claim who may have liability with respect
to an unfavorable resolution of the litigation, by settlement or otherwise.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Market Central, Inc. (the "Company") is a global technology management company
specializing in solutions that connect people and businesses with information.
The company holds multiple patents and patent-pending technologies and has
developed a suite of solutions that include software for next-generation search,
intelligent document recognition, data capture, cleansing, mining, and
integration. During the three months ended May 31, 2004, the Company
discontinued operations of its U.S. Convergion, Inc. subsidiary and sold it to a
third party. All operations of Convergion have been shown in the accompanying
financial statements as discontinued operations. The discontinuation and sale of
the subsidiary resulted in a gain in the quarter ended May 31, 2004 because
Convergion's liabilities exceeded its assets at the time of sale.
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") and/or its successor, 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 $424,169 or 19.9% of the revenues for the three-month period ended
May 31, 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 nine months ended May 31, 2004 and 2003,
respectively.
Three months Ended Nine months Ended
May 31, May 31,
2004 2003 2004 2003
------------------- ------------------
(UNAUDITED) (UNAUDITED)
Total revenues 100% 100% 100% 100%
Cost of revenues 69.9% 66.9% 69.7% 62.4%
----- ----- ------ -----
Gross profit 30.1% 33.1% 30.3% 37.6%
Operating expenses 98.5% 58.3% 155.3% 50.9%
----- ----- ------ -----
Loss from operations (68.3%) (25.2%) (125%) (13.3%)
Interest expense (9.6%) (5.1%) (9.9%) (4.1%)
Net loss from continuing
operations, before income taxes
and discontinued operations (78.0%) (30.3%) (134.9%) (17.4%)
Income tax benefits -- -- -- --
----- ----- ------ -----
Loss from continuing
operations, before discontinued
operations (78.0%) (30.3%) (134.9%) (17.4%)
----- ----- ------ -----
Loss from discontinued
Operations (33.3%) (29.2%) (13.9%) (9.0%)
Income from disposal of
discontinued operations 139.2% -- 46.0% --
----- ----- ------ -----
Income (loss) from discontinued
operations 105.9% (29.2%) 32.1% (9.0%)
Net income (loss) 27.9% (59.7%) (102.8%) (26.3%)
----- ----- ------ -----
15
COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2004 TO THE THREE MONTHS ENDED MAY
31, 2003
Revenues for the three months ended May 31, 2004 and 2003 were $1,975,300 and
$2,132,299, respectively, representing a 7.3% decrease. This decrease of
$156,999 was due entirely to the decrease in revenue from the Gibralter
contract. The Company's revenue from Gibralter has declined a total of $546,714
from the three-month period ending May 31, 2004 compared to May 31, 2003.
Revenue from unrelated third parties has increased approximately $390,000 from
the three month period ended May 31, 2003 to May 31, 2004.
Cost of revenues were $1,379,966 and $1,427,981, for the three months ended May
31, 2004 and 2003, respectively which represents 69.9% and 66.9% of revenue for
the respective periods. The decrease in cost of revenues is due to the decline
in revenue for the period. The increase as a percentage of revenue of 3.0% was
due to slight pressures on margins. Gross profit decreased $108,984 or 15.5%,
from the three months ended May 31, 2003 to May 31, 2004 and the gross margin
declined from 33.1% to 30.1% during those periods. The decrease in gross profit
is due to the decrease in revenue while the decline in gross margin is due
primarily to the Company being unable to reduce costs related to operations as
quickly as the revenue declines are occurring. The semi-fixed nature of some of
the cost of revenue components will result in an erosion of gross margin at
lower revenue levels.
Operating expenses, including depreciation and amortization, increased to
$1,945,187 from $1,243,972 which represented 98.5% and 58.3% of revenue for the
three months ended May 31, 2004 and 2003, respectively. This increase of
$701,215 is the result of the Company's acquisition of certain assets of Pliant
Technologies, Inc. in July 2003 and the payroll costs associated with the
personnel that were hired by the Company in connection with the asset purchase.
During the three months ended May 31, 2004, operating expenses of $138,833 were
incurred relating to these employees as compared to none in the three months
ended May 31, 2003. Additionally, the Company granted stock options and warrants
to consultants in exchange for services rendered, the Company charged
compensation costs of approximately $361,000 to operations during the three
month ended May 31, 2004 in connection with the issuance of stock options and
warrants. The Company also accrued $400,000 of legal liabilities in connection
with a litigation filed by Tweddle Litho Company during the period ended May 31,
2004.
Interest expense increased from $110,165 to $190,307, for the three months ended
May 31, 2003 as compared to the three months ended May 31, 2004. As a percentage
of revenue this increase is from 5.1% to 9.6% and is attributable to increased
borrowings in the May 2004 quarter compared to the May 2003 quarter.
Income (loss) from discontinued operations relates to the Company's disposal of
its U.S. Convergion, Inc. subsidiary during the three-month period ended May 31,
2004. Operating results of Convergion for the three-month period ending May 31,
2003 have been reclassified to discontinued operations in the accompanying
financial statements. Losses from discontinued operations were $657,398 and
$623,620 for the quarter ended May 31, 2004 and 2003, respectively. The quarter
ended May 31, 2004 also included the gain of $2,749,370 attributable to the sale
of Convergion, this gain was due entirely to the excess of liabilities over
assets that existed at the time of disposal. In connection with the potential
settlement of the litigation, the Company may be required to amend the U.S.
Convergion, Inc. Stock Purchase Agreement to comply with the May 13, 2004
Court's Order. While remote, the amendment would include, but not be limited to
the rescission of the sale of U.S. Convergion, Inc.
Net income (loss) for the three-months ended May 31, 2004 and 2003 was $551,812
and $(1,273,439), respectively.
16
COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2004 TO THE NINE MONTHS ENDED MAY
31, 2003
Revenues for the nine months ended May 31, 2004 and 2003 were $5,972,704 and
$6,966,637, respectively, representing a $993,933 or 14.3% decrease. This
decrease was due entirely to the decrease in revenue from the Gibralter
contract. The Company's revenue from Gibralter has declined a total of
$1,889,386 from the nine-month period ending May 31, 2004 compared to May 31,
2003. Revenue from unrelated third parties has increased approximately $895,000
from the nine-month period ended May 31, 2003 to May 31, 2004.
Cost of revenues decreased to $4,161,508 from $4,345,031 for the nine months
ended May 31, 2004 and 2003, respectively, representing 69.7% and 62.4% of
revenue for those periods. The decrease in cost of revenues of $183,523 is due
to the decline in revenue for the period. The increase as a percentage of
revenue of 7.3% was due to increased telephone and payroll costs as a percentage
of revenue. Gross profit decreased $810,410 or 30.9%, from the nine months ended
May 31, 2003 to May 31, 2004 and the gross margin declined from 37.6% to 30.3%
during those periods. The decrease in gross profit is due to the decrease in
revenue while the decline in gross margin is due primarily to the Company being
unable to reduce costs related to operations as quickly as the revenue declines
are occurring. The semi-fixed nature of some of the cost of revenue components
will result in an erosion of gross margin at lower revenue levels.
Operating expenses, which include the impairment charge and depreciation and
amortization, have increased dramatically as percentage of revenue to 155.3%
from 50.9% for the nine months ended May 31, 2004 and May 31, 2003,
respectively. This increase of $5,731,583 to $9,276,688 for the nine months
ended May 31, 2004 is due primarily to the impairment charge of $4,062,003
related to the write off of goodwill recorded in April 2003 at the acquisition
of Convergion. The remaining increase of approximately $1,600,000 consists of
$314,000 of expenditures related to the Company's Pliant activities in the nine
months ended May 31, 2004 compared to none in the previous year's nine month
period. Consulting and legal costs have increased approximately $365,000 from
the nine month period ended May 31, 2003 to the nine month period ended May 31,
2004. Payroll costs have grown approximately $300,000 for the nine months ended
May 31, 2004 compared to the nine months ended May 31, 2003. Additionally, the
Company granted stock options and warrants to consultants in exchange for
services rendered, the Company charged compensation costs of approximately
$660,000 to operations during the nine month ended May 31, 2004 in connection
with the issuance of stock options and warrants. The Company also accrued
$400,000 of legal liabilities in connection with a litigation filed by Tweddle
Litho Company during the period ended May 31, 2004.
Interest expense increased from $288,041 to $593,881, for the nine months ended
May 31, 2003 as compared to the nine months ended May 31, 2004. As a percentage
of revenue this increase is from 4.1% to 9.9% and is attributable to increased
borrowings during the nine months ended May 2004 quarter compared to the nine
months ended May 2003.
Professional fees for the nine months ended May 31, 2003 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 its special shareholders
meeting. These fees are infrequently occurring items related to the sale of
stock of the Company that resulted in a change in control. These costs of
$161,021 for the nine-months ended May 31, 2003 are 2.3% of revenue. For the
nine months ended May 31, 2004, none of these types of transactions occurred and
no such costs were present.
Income (loss) from discontinued operations relates to the Company's disposal of
its U.S. Convergion, Inc. subsidiary during the nine-month period ended May 31,
2004. Operating results of Convergion for the nine-month period ending May 31,
2003 have been reclassified to discontinued operations in the accompanying
financial statements. Losses from discontinued operations were $831,585 and
$623,620 for the nine-month period ended May 31, 2004 and 2003, respectively.
The nine-month period ended May 31, 2004 also included the gain of $2,749,370
attributable to the sale of Convergion, this gain was due entirely to the excess
of liabilities over assets that existed at the time of disposal.
Net loss for the nine months ended May 31, 2004 and 2003 was $6,141,588 and
$1,835,160, respectively. This increase of $4,306,428 in the net loss from 2003
to 2004 represents a 234.7% increase in net loss.
17
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 $3,000,000 in capital for the Company through May 31,
2004. This is a significant part of a funding plan to stabilize liquidity issues
at the Company. During the three months ended May 31, 2004, the Company sold
Series B Convertible stock that resulted in approximately $1,300,000 in capital
for the Company. The Company is continuing 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 May 31, 2004, these shareholders had provided
the Company with net advances of $416,746. 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 and nine month periods ended May
31, 2004, the Company has not borrowed any additional funds from the individuals
who were principals in the February 2003 transaction described above.
Cash used in operating activities was $3,337,184 for the nine months ended May
31, 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
$250,755 in computers and leasehold improvements during this period. The Company
met its cash requirements during the nine months ended May 31, 2004 mainly
through the receipt of approximately $4,040,000 in proceeds from its sale of its
Preferred Stock and common stock, and approximately $150,000 of proceeds, net of
repayments, from issuance of notes payable and advances from related parties.
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.
18
ITEM 3. CONTROLS AND PROCEDURES
(a) On May 31, 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
PART II
ITEM 1. LEGAL PROCEEDINGS
TWEDDLE CASE
In an action originally filed against the Company and Gibralter Publishing, Inc.
("Gibralter") in October 2003, in the United States District Court, Eastern
District of North Carolina, Tweddle Litho Company ("Tweddle") alleged that the
Company and Gibralter had engaged in a fraudulent conveyance in December 2002,
at such time that Gilbralter released the Company from two promissory notes
totaling approximately $5 million in exchange for the issuance of certain
Company stock and warrants. The action in North Carolina arose out of a judgment
that Tweddle had obtained against Gibralter in Michigan for approximately
$400,000. Subsequent to the Company's filing of an answer to the complaint,
Tweddle filed a motion for summary judgment. As a result of the failure of the
Company's counsel to receive notice of such motion, on May 13, 2004, the court
entered a judgment against the Company finding, among other things that the
release of the two promissory notes payable to Gibralter was a fraudulent
conveyance, and decreeing, among other things, that: (a) the Company assign the
promissory notes and the assets securing these notes to Tweddle; (b) the Company
was enjoined from transferring any of its assets out of the ordinary course of
business pending satisfaction of the Gibralter judgment in favor of Tweddle; and
(c) the December 10, 2002 transfer by Gibralter of its right to payment under
the two promissory notes in exchange for common stock and stock warrants of the
Company was null and void. On May 24, 2004, the company filled its Motion for
New Trial seeking to vacate the Order. Subsequently, on June 11, 2004, Tweddle
filed its Motion For Order to Show Cause Why Market Central, Inc. Should Not Be
Held In Contempt of Court. On July 15, 2004, the Court held a hearing at which
time the Company presented its arguments for the vacating of the summary
judgment order. The Court has scheduled a subsequent hearing to be held on
September 10, 2004, at which time it will hear additional arguments and, it is
believed, will render its decision. In connection with the potential settlement
of the litigation, the Company may be required to amend the U.S. Convergion Inc.
Stock Purchase Agreement to comply with the May 13, 2004 Court's Order. While
remote, the amendment would include, but not be limited to the rescission of the
sale of U.S. Convergion, Inc.
The Company is actively seeking an acceptable settlement of the claims arising
from the litigation. Dependent upon the ultimate outcome of the matter, the
Company will vigorously pursue third parties for reimbursement of amounts, if
any, paid by the Company to settle the claim who may have liability with respect
to an unfavorable resolution of the litigation, by settlement or otherwise.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In December 2003, the Company approved a private placement offering of up to
$3,000,000 of its authorized Series A Preferred Stock at $1.3325 per share. The
Series A Preferred Stock 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 May 31, 2004, the Company had issued an
aggregate of 2,239,700 shares of Series A Preferred Stock and received
$2,757,085 of proceeds, net of offering costs and fees of $227,315. The Company
had accrued cumulative preferred stock dividends of $30,829 as of May 31, 2004.
19
During the quarter ended May 31, 2004 the Company issued an aggregate of 350,000
shares of Series B Preferred Stock and received a total proceeds of $1,282,912,
net of cots and fees of $367,339. The Series B Preferred Stock is convertible
into common stock at the lesser of $1.75 per share or 80% of the lowest bid
price for the common stock in the 10 business days preceding the conversion but
it cannot be less than 50% of the $1.75 or $.875. This results in the conversion
of a maximum of 4,000,000 shares and a minimum of 2,000,000 shares of the
Company's common stock. The Series B Preferred Stock holders also have an option
to acquire additional common shares in an amount to permit the conversion rights
plus this option to result in a total of 4,000,000 shares of the Company's
common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On April 19, 2004, Terrence J. Leifheit resigned as CEO and President of
the Company. On July 16, 2004 Mr. Leifheit resigned as a director of the
Company. As a result of an on-going internal investigation, the Company
has determined that certain actions taken by Mr. Leifheit may have
resulted in damages to the Company. The Company has entered into
negotiations with Mr. Leifheit with respect to the settlement of all
mutual claims between the Company and Mr. Leifheit. The Company expects
such negotiations to be completed in approximately thirty (30) days.
In April 2004, the Company signed a Letter of Intent to acquire the assets
of Convey Systems, Inc. from The TAG Group, Inc. Pursuant to this
agreement both parties are preparing its financial information for review.
Due to the preliminary stage there can be no assurance the transaction
will be successfully completed.
On April 1, 2004, I-Gate, Inc. filed a Complaint in the United States
District Court for the Eastern District of North Carolina, Southern
Division against Gibraltar Publishing, Inc. and the Company. In the
Complaint, I-Gate alleged that the release of the Company's alleged
obligations to Gibraltar in December, 2002, in exchange for the issuance
of 1,000,000 shares of Market Central, Inc.'s common stock and 10,000,000
in warrants for common stock (later reduced in a 10 to 1 reverse stock
split to 1,000,000 shares of common stock) was a fraudulent conveyance.
The Complaint seeks damages in excess of $800,000. The Company believes it
has meritorious defenses to these claims and intends to vigorously defend
itself against such claims.
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 referred Stock of Market Central, Inc.
(filed herewith)
31.1 Certification of Doyal G. Bryant 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) The Company filed a Form 8-K on April 29, 2004 under Item 5. Other Events
attaching three Press Releases
20
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: July 26, 2004 By /s/ Doyal G. Bryant
-------------------------------------
Doyal G. Bryant
President and Chief Executive Officer
Date: July 26, 2004 By /s/ Clifford Clark
-------------------------------------
Clifford Clark
Chief Financial Officer
21