MARKET CENTRAL, INC.
6701 CARMEL ROAD
SUITE 205
CHARLOTTE, NC 28226
August 24, 2005
VIA FAX AND EDGAR
Ms. Christine Davis Division of Corporate Finance U.S. Securities & Exchange
Commission Washington, D.C. 20549
Re: Market Central, Inc.
File No. 000-22969
Form 10-KSB for Year Ended August 31, 2004
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Forms 10-QSB for quarter ended May 31, 2005
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Dear Ms. Davis:
This will acknowledge receipt of your letter of comment dated August 11,
2005, with regard to the above referenced filings. Our responses reference your
comment numbers as follows:
Comment 1
The Company's activities related to Convey Systems, Inc. since April 2004 have
been insignificant and have no material impact on the Company's financial
condition or results of operations. As disclosed in all of the Company's
periodic reports, the Company entered into a letter of intent to acquire Convey
in April 2004. As of the date of our most recent filing, and through the date of
this letter, the Company has not consummated the transaction.
In connection with the anticipated acquisition, the Company agreed to provide
day-to-day management of Convey to assist in the transition because most
activities were being conducted by consultants. The Company has no equity
interest in Convey Systems, no seats on the Board of Directors and has no
representatives in executive positions or senior management. This day to day
management did not represent any material or significant time or effort by
Company personnel. We believe that consolidating Convey Systems, Inc. would have
been misleading and inappropriate treatment as well as not practicable without a
specific purchase price or definitive agreements.
The Company had no transactions with Ariel Way, Inc. as a licensee of Convey's
products.
If and when the Company consummates the acquisition of Convey, the Company shall
prepare and timely file a Current Report on Form 8-K.
As a result, the Company has no control over (directly or indirectly), nor any
power to control, Convey's activities.
The Registrant believes its policy accounting for consolidation is reasonable
and in accordance with U.S. generally accepted accounting principles.
Comment 2
Our registered independent accounting firm has advised us that certain audit
procedures in connection with the examination of the Company's August 31, 2004
financial statements were performed by members of its audit staff at the
Company's former corporate headquarters located in Jacksonville, North Carolina.
Rule 2-01 of Article 2 of SEC Regulation S-X, Qualification of Accountants,
requires the Company's accountant to be duly registered and in good standing
under the laws of his or her place of residence or principal business.
The SEC Accounting Disclosure Rules and Practices Manual, Qualifications of
Accountants states in part "The rule is silent as to whether or not the
accountant's state or country of licensure must coincide with the location of
the registrant's corporate offices or place where the registrant conducts it
principal operations." Further the SEC's staff interprets Rule 2-01 of
Regulation S-X to require the audit report on a domestic registrant's financial
statements to be rendered by an auditor licensed in the US.
The Company's accountant is licensed and in good standing in each of the states
in which the firm has offices, and accordingly has met the requirements of Rule
2-10 of Article 2 of SEC Regulation S-X.
The firm has advised us that they have complied with the applicable procedures
set forth by the North Carolina State Board of Certified Public Accountant
Examiners which permit licensed certified public accountants in other
jurisdictions who do not reside in the State to perform services for clients in
the State.
Comment 3
In order to fully disclose the disposal of the discontinued operations to the
reader of the financial statements, the Company believes the Statements of Cash
Flows should reconcile the significant components included in the statement of
losses. In connection with the reconciliation, the Company has disclosed to the
reader the reconciliation of the $773,422 gain on the disposal of the
discontinued operations by disclosing the nature of the consideration received
by the Company, in the form of the assumption of debts and transfer of assets to
the buyer. There were no cash proceeds received by the Company in connection
with the sale and the Company believes this presentation accurately and
completely reflects the transaction.
We considered the guidance provided by FAS 95 in that "enterprises are
encouraged to provide further breakdowns of these categories they consider
meaningful"(1) and interpreted the guidance to include sufficient disclosure to
allow the users of the financial statements to assess the Company's ability to
generate positive future cash flow from continuing operations. We believe this
presentation provides the reader with sufficient information to reconcile net
loss from all sources to net operating loss.
The preferred stock dividend represented an accrual of the beneficial conversion
feature associated with the Series B preferred stock along with a dividend
declared payable on the Company's Series A preferred stock, and not a cash
payment of dividends to the preferred shareholders. We disclosed the accrued
dividends in connection with reconciling the net loss attributable to common
shareholders to cash used in operations.
The change in restricted cash balances was a result of a tax liability and
reflected the cash effects of a transaction that entered into the determination
of net income. Accordingly the change in the balance was classified as cash flow
used in operating activities.(2)
Cash disbursed in excess of available funds represents the amount of Company
checks issued in excess of balances per the Company's general ledger of
accounts, or "book balances," and not bank overdrafts, or extension of bank
credit.
While the Company believes its policy accounting for and disclosing cash flow
transactions is reasonable, we will revise the statement in future filings to
begin with reconciling net income to cash flows from operating activities.
Comment 4
The Company entered into an asset purchase agreement in connection with the
Pliant transaction. In connection with the transaction, the Company acquired
substantially all the assets of Pliant. The Company based its conclusions that
the Pliant asset acquisition was a business based upon the attributes described
under Rule 11-01 (d) of Regulation S-X.
Comment 5
U.S. Convergion, Inc. was acquired for an amount substantially in excess of its
tangible assets which resulted in the goodwill that was booked. Within less than
a year after our purchase,
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(1) FAS 95, paragraph 29
(2) FAS 95, paragraph 23 (c)
competitive pressures within the telephone hardware business and the delays in
firm purchase commitments resulted in a situation where the Company's limited
capital could not sustain operations. Management concluded in the second quarter
of 2005 that the goodwill recorded at the time of purchase had been permanently
impaired. In the third quarter of 2005, the stock of this subsidiary was sold to
a buyer and the gain of $2.8 million resulted principally from liabilities in
excess of assets at the time of sale.
Comment 6
In connection with the sale of Convergion to Sylvia in May 2004, the Company
issued a $500,000 promissory note to the Buyer for the sole purpose of
indemnifying the owners or other principals of Sylvia in the event that they
incurred personal tax liability as a result of the ownership of Convergion. In
order to secure this limited indemnification obligation, the Buyer was granted a
security interest in the Company's assets.
The Company had no continuing involvement with Sylvia subsequent to the sale, as
evidenced by the following:
o No equity interest in Sylvia or Convergion other the receipt of
500,000 shares of Sylvia common stock, which represented less than
5% ownership of Sylvia
o No seats on the Sylvia or Convergion Board of Directors
o No representatives in Sylvia's or Convergion's senior management
o No input into management authority over Sylvia's or Convergion's
day-to-day operations, including but limited to personnel decisions,
financing and treasury functions, marketing , distribution and
product development
In summary, based upon the above facts and circumstances, the risks and rewards
of ownership of Convergion were transferred in their entirety to Sylvia with
sufficient certainty in order to account for the transaction as a divesture in
accordance with the interpretations described in question 1 of SAB Topic 5 E.
The Company believes its policy accounting for and disclosing divestitures is
reasonable and in accordance with U.S. generally accepted accounting principles.
Comment 7
Our inability to comply with certain covenants in connection with our existing
debt facilities has been fully disclosed and has had no impact on the Company's
ability to factor its receivables.
The Registrant believes its policy accounting for and disclosing its factoring
transactions are reasonable and in accordance with U.S. generally accepted
accounting principles.
Comment 8
On August 20, 2004, the Company completed its settlement with the Company's
former CEO and Board of Directors member Terrence J. Leifheit ("Leifheit").
Pursuant to the Settlement Agreement and Mutual Release ("Agreement") , Leifheit
agreed to sell to the Company 800,000 shares of the Company's common stock owned
by him for an aggregate of $1.00 plus other good and valuable consideration and
the shares were subsequently cancelled. Leifheit and the Company agreed to
certain releases of each other and certain affiliates, and Leifheit agreed not
to compete with the Company for a period of two (2) years in a specified area in
North Carolina. Additionally, Leifheit agreed not to sell or otherwise transfer
the remaining 351,173 shares of Company common stock owned by him until after
November 30, 2004. A copy of the Agreement was filed with the SEC on its Current
Report on Form 8-K.(3)
The Company considered the former CEO and the entities he controlled related
parties,(4) and accordingly accounted for the transaction as a capital
transaction.(5)
The entries necessary to record the various receivable and payables that were
satisfied are as follows:
Debit Credit
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Accrued salaries 176,146
Accrued interest 203,770
Accounts receivable 716,297
Allowance for doubtful accounts 60,000
Other assets 80,753
Common stock - receivable (Par value) 800
Additional paid in capital 356,334
The Registrant believes its policy accounting for and disclosing transactions
with related parties is reasonable and in accordance with U.S. generally
accepted accounting principles.
Comment 9
The Company acknowledges the certifications under 302 were not technically in
compliance with Item 601 (b) (31) of Regulation SB and should have stated:
4. The small business issuer's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the small business issuer, and have:
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(3) Current Report on Form 8-K dated August 31, 2004
(4) SFAS No 57, Appendix B paragraph 24(j)
(5) Accounting Principles Board No 26, footnote 1 to paragraph 20; SEC
Accounting Disclosure Rules and Practices Official Text Topic Seven: Related
Party Matters
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting.
The Registrant shall correct the disclosure in its future filings
Comment 10
During the quarter ended May 31, 2005, the Company issued to investors
Convertible Notes in the amount of $ 4,160,625. The accounting for the
transaction is more fully described in Note G to the interim May 31, 2005
financial statements. As requested, we have enclosed a copy of the Company's
working paper summarizing the accounting for the transaction.
The Company believes its policy accounting for and disclosing its convertible
debentures and related warrants is reasonable and in accordance with U.S.
generally accepted accounting principles.
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The Company acknowledges that:
The Company is responsible for the adequacy and accuracy of the disclosure
in the filing:
Staff comments or changes to disclosure in response to staff comments do
not foreclose the commission from taking any action with respect to the filing;
and
The Company may not assert staff comments as a defense in any proceedings
initiated by the commission or any person under the federal securities laws of
the United States.
We thank you in advance for your assistance in this matter. Since we are
in the process of preparing our Proxy Statement and the mailing of such proxy
statement has been delayed at the request of the SEC staff until the comments
set forth in your comment letter dated August 11, 2005, are resolved, we
respectfully request an expedited review of our responses. If you have any
questions or additional comments, please do not hesitate to contact me at
(704)837-0502.
Yours truly,
MARKET CENTRAL, INC.
By: /s/ Clifford A. Clark
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Clifford A. Clark
Chief Financial Officer
Scientigo - 6.4% Senior Convertible Notes
From Warrants # Issued Issue Date
inception (Issued to)
--------- -------- ----------
Noteholders 2,080,313 05/15/05
----------- --------- --------
2,080,313
Date Note Convertible FV of
Amount into # of Shares Stock
------ ---------------- -----
05/15/05 4,160,625 3,122,420 1.65
-------- --------- --------- ----
4,160,625 3,122,420
EITF 00-27 Issue 15:
fair value of common stock on commitment date: $ 5,151,993
proceeds allocated to common stock conversion option: 2,763,391 ***
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beneficial conversion feature: 2,388,603
upon conversion, the warrants would be recognized at: 1,397,234
To record Debt Discount:
Debt Discounts were calculated per EITF 00-27 Item 15:
Dr. Debt Discount - beneficial conversion feature $ 2,388,603
Dr. Debt Discount - warrant $ 1,397,234
Cr. APIC
Cr. APIC
Amortize interest expense (over 25 months):
Dr. Interest Expense $ 151,433
Cr. Debt Discount - beneficial conversion feature
Cr. Debt Discount - warrant
Expiration # in Days Average Exercise Volatility Interest Call Additional
Date Stock Price Price Rate Cost
---- --------- ------------ ------ ---------- ---- ---- ----
(FMV)
06/30/10 1,872 $ 1.54 $ 1.00 102% 2.03 1.2522 $ 2,604,967
-------- ----- ------ ------ ---- ---- ------ -----------
$ 2,604,967
FV of
Common stock
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5,151,993
$ 5,151,993
$ 2,388,603
$ 1,397,234
$ 95,544
$ 55,889
***
(total proceeds received x fair value of the common stock at the commitment date
/ total fair value of all instruments received by the holder upon conversion at
the commitment date).