`
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005 |
OR |
| [_] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 2-80891-NY
MODERN TECHNOLOGY CORP
(Exact name of registrant as specified in its charter)
Nevada | | 11-2620387 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer Identification No.) |
1420 N. Lamar Blvd.
Oxford, MS 38655
(Address of principal executive offices)
Registrant's telephone number, including area code: (662) 236-5928
Indicate by check mark whether the Registrant (1) has filed all reports required 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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class | | Outstanding at September 30, 2005 |
Common stock, $0.001 par value | | 32,605,631 |
MODERN TECHNOLOGY CORP.
Table of Contents
2
Item 1. Consolidated Financial Statements (unaudited)
PART I - FINANCIAL INFORMATION
MODERN TECHNOLOGY CORP.
Consolidated Balance Sheets
| | September 30, | | June 30, |
| | 2005 | | 2005 |
| | (unaudited) | | |
ASSETS | | | |
CURRENT ASSETS | | | |
| Cash and Cash Equivalents | $ 1,161,688 | | $ 190,963 |
| Investments, Trading Securities | 1,509,498 | | 1,509,498 |
| Accounts Receivable | 104,947 | | .- |
| Interest Receivable | 64,934 | | 64,934 |
| Prepaid Expenses | - | | 12,228 |
| Inventory | | | |
|
| | | | |
TOTAL CURRENT ASSETS | 4,833,159 | | 3,897,202 |
|
| | | | |
FIXED ASSETS |
�� | Buildings, Furniture, Fixtures (net) | | | 747,534 |
| | | | | |
|
TOTAL FIXED ASSETS | 775,435 | | 747,534 |
|
| | | | |
OTHER ASSETS | | | |
| Goodwill | 2,126,983 | | 2,126,983 |
| Software | 500,000 | | - |
| Accumulated Amortization | (28,279) | | - |
| InMarketing Deposit | 23,500 | | |
| Other Asset | 96,498 | | |
|
| | | | |
TOTAL OTHER ASSETS | 2,718,702 | | 2,216,434 |
|
| | | | |
TOTAL ASSETS | | | |
|
| | | | |
LIABILITIES AND STOCKHOLDER'S EQUITY | | | |
CURRENT LIABILITIES | | | |
| Accounts Payable | $ 670,413 | | $ 773,282 |
| Accounts Payable-Related Party | 39,719 | | 34,574 |
| Accrued Expenses | 137,425 | | 98,066 |
| Dividends Payable | 21,911 | | 21,910 |
| Current Portion-Notes Payable | 152,342 | | 102,362 |
| Shareholder Loan Payable | 1,123,056 | | 1,124,971 |
| Other Payables | | | |
| | | | |
|
TOTAL CURRENT LIABILITIES | 2,272,181 | | 2,189,047 |
|
| | | | |
LONG TERM LIABILITIES | | | |
| Notes Payable | 4,925,727 | | 3,309,042 |
| Notes Payable-Related Party | 91,315 | | 91,315 |
| | | | |
|
TOTAL LONG TERM LIABILITIES | 5,017,042 | | 3,400,357 |
|
| | | | |
| Minority Interests | 337,123 | | 337,123 |
| | | | |
STOCKHOLDER'S EQUITY |
Common Stock, Par Value $.001; 150,000,000 Shares Authorized; | | | |
32,605,631 and 17,145,631 respectively | | | |
| Common Stock | 32,606 | | 17,146 |
Preferred stock, Authorized: 20,000,000 shares | | | |
Issued and outstanding, 1,500 shares at $.0001 par value | | | |
Series A, 6% cumulative, liquidation value $1,500,000 | | | |
| Preferred Stock | 1 | | 1 |
| Paid-in Capital | 3,443,336 | | 2,938,235 |
| Capital Returned | (310,970) | | (310,970) |
| Deferred Compensation | (327,254) | | (355,957) |
| Retained Earnings (Deficit) | (2,136,769) | | (1,353,812) |
|
| | | | |
TOTAL STOCKHOLDER'S EQUITY | 700,950 | | 934,643 |
| | | | |
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | | | |
MODERN TECHNOLOGY CORP
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(unaudited)
NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS
Modern Technology Corp (Modern) is a Nevada Corporation.
We are engaged in aiding both private and public companies in the areas of business development, financing, product development, corporate strategy, corporate image and public relations, product distribution and marketing, and executive management consulting. We collectively refer to companies in which we own an equity position, our majority owned subsidiaries, corporate customers and clients as "portfolio companies". We charge for our services in cash or equity in the portfolio company. We may also exchange our services for revenue sharing of future sales of products or sharing of proceeds from the sale of licenses and technologies owned by our portfolio companies. We seek to grow through strategic acquisitions in addition to generating income from our services.
We seek to build revenues by a model continuous growth, strategic acquisitions, and commercialization of nascent technology. We seek to improve operating efficiencies among our portfolio companies through elimination of cost redundancies and realized synergy between subsidiaries. We also seek to commercialize new technology and provide to our portfolio companies and subsidiaries new product lines, operations infrastructure, and significant intellectual capital.
Modern's office was located in New York, but has been relocated to Mississippi, with its administrative offices being located in Jackson, Mississippi.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING POLICIES
Modern Technology Corp's accounting policies conform to U. S. generally accepted accounting principles. Significant policies followed are described below.
The consolidated financial statements include the accounts of the company and all of its subsidiaries in which a controlling interest is maintained. All consolidated financial statements have been prepared in United States Dollars.
On January 24, 2005, the Company purchased 51% of Sound City for $2,000,000 with an option to acquire the remaining 49%. The option is valid through December 31, 2009, and can be exercised for $3,500,000, which is payable in cash, stock or a combination of cash or stock. During the year ending June 30, 2005, the Company has filed current reports on Form 8-K, containing additional pro forma, historical financials and other exhibits.
The financial statements reflect various purchase price allocations. In accordance with SFAS No. 141, Business Combinations ("SFAS No. 141"), the total purchase price was allocated to the tangible and intangible assets of Sound City based upon their estimated fair values at the acquisition date with the excess purchase price allocated to goodwill. The purchase accounting adjustments made are based upon currently available information. Accordingly, the actual adjustment recorded in connection with the final purchase price allocation may be updated according to SFAS No. 141, and any such changes may be material.
Sound City accounts were properly included in the consolidated financial statements for the three months ended September 30, 2005.
STOCK BASED COMPENSATION
The Company has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with SFAS No. 123, Modern has elected the disclosure-only provisions related to employee stock options and follows the intrinsic value method in Accounting Principals Board Opinion (APB) No. 25 in accounting for stock options issued to employees. Under APB No. 25, compensation expense, if any, is recognized as the difference between the exercise price and the fair value of the common stock on the measurement date, which is typically the date of grant, and is recognized over the service period, which is typically the vesting period.
RECLASSIFICATIONS
Certain items from prior periods within the financial statements have been reclassified to conform to current period classifications.
CASH AND CASH EQUIVALENTS
Cash Equivalents consist of highly liquid, short-term investments with original maturities of 90 days or less. The carrying amount reported in the accompanying balance sheets approximates fair value.
ACCOUNTS RECEIVABLE
Accounts Receivable are judged as to collectibility and a reserve is established as necessary. As of September 30, 2005 and June 30, 2005, no reserve was considered necessary.
INVENTORY
Inventories are stated at the lower of cost or market using the first-in, first-out ("FIFO") method. The Company may write down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Inventory consists primarily of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of property and equipment is provided using straight-line and accelerated methods. The estimated useful lives are as follows:
Years
Furniture, fixtures and equipment 5 - 7
Transportation equipment 5
Leasehold improvements 31.5
Expenditures for major renewals and betterment that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation expense was $6,074 and $0.00 for 2005 and 2004, respectively.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U. S. generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" SFAS 109 has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that may have been recognized in the financial statements as measured by the provisions of the enacted tax laws.
Valuation allowances are established when necessary to reduce deferred tax assets to the estimated amount to be realized. Income tax expense represents the tax payable for the current period and the change during the period in the deferred tax assets and liabilities.
IMPACT OF NEW ACCOUNTING STANDARDS
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of Variable Interest Entities" (revised December 2003) - an interpretation of ARB No. 51. A variable interest entity ("VIE") is one where the contractual or ownership interest in an entity change with changes in the entity's net asset value. This interpretation requires the consolidation of a VIE by the primary beneficiary, and also requires disclosure about VIEs where an enterprise has a significant variable interest but is not the primary beneficiary. Sound City leases a facility from a Limited Liability Company ("LCC") owned by the minority shareholders. Under FIN 46R, the LLC is a VIE and the Company has consolidated the LLC in its consolidated financial statements. The consolidated of this VIE has added $616,049 of assets and $411,404 of liabilities to our consolidated balance sheet as of September 30, 2005.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company's financial position or results from operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, were accounted for as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company's financial position or results from operations.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which codifies, revises, and rescinds certain sections of SAB No. 101, "Revenue Recognition," in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes in SAB No. 104 did not have a material impact on the Company's financial position or results of operations.
On March 31, 2004, the FASB issued an exposure draft, "Share-Based Payment, an Amendment of SFAS No. 123 and 95." The exposure draft proposes to expense the fair value of share-based payments to employees beginning in 2005. We are currently evaluating the impact of this proposed standard on our financial statements.
REVENUE RECOGNITION
The Company generally recognizes revenue upon shipment when the collect-ability of the resulting receivable is reasonably assured. The Company allows credit for products returned within its policy terms. Such returns are estimated and an allowance for product returns is recorded at the time of sale, as necessary.
IMPAIRMENT OF LONG-LIVED ASSETS
The company regularly reviews long-lived assets for indicators of impairment. Management's judgments regarding the existence of impairment indicators are based on performance. Future events could cause management to conclude that impairment indicators exist and that the value of long-lived assets is impaired. When events or circumstances indicate that the carrying amount of an asset may not be recoverable, the fair value of the asset is compared to its carrying value. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its estimated fair value.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense for the three months ended September 30, 2005 was $22,990.00.
SHIPPING AND HANDLING COSTS
Amounts billed to customers for shipping costs resulting from a sales transaction are included in Revenues while costs incurred by the Company for shipping and handling are included in cost of goods sold.
INTERIM REPORTING
The accompanying unaudited consolidated financial statements for the three months ended September 30, 2005 and September 30, 2004, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals, unless otherwise indicated) considered necessary for a fair presentation of the results of operations for the indicated periods have been included. Certain amounts recorded in previous periods have been reclassified to conform to the current period presentation. Operating results for the three months ended September 30, 2005 are not necessarily indicative of the results for the full fiscal year.
NOTE 3: CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash.
NOTE 4: MARKETABLE SECURITIES
During the year ended June 30, 2003, the investment in 117,250 shares of common stock of MediCor Ltd. was considered a trading security in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115")" MediCor Ltd. shares are traded on the NASD over-the-counter bulletin board system. The cost of these shares is $82,520. The Company sold all the shares of MediCor Ltd. As of March 31, 2004, the Company recognized $41,714 realized gain. As of March 31, 2004, the Company had liquidated all of its marketable securities or written off all securities deemed worthless. During May 2004, Mr. Welch, CEO and President, contributed $57,677 of marketable securities investment pursuant to Modern's plan for reorganization.
On January 24, 2005, the Company entered into a Purchase Agreement whereby we purchased a $1,500,000 DeMarco Convertible Debenture. The Company follows SFAS No. 115 and has considered these securities to be trading securities. The debenture is convertible into shares of common stock of DeMarco. The convertible debentures bear interest at 10%, matured on March 25, 2003, and are convertible into shares of Demarco common stock, at the selling stockholders' option, at the lower of (i) $0.15 or (ii) 60% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 10 trading days before but not including the conversion date. During the quarter ended September 30,2005 the Company converted approximately $11,000 of DeMarco Convertible Debenture into 3,200,000 shares of DeMarco common stock.
NOTE 5: INVESTMENT EQUITY SECURITIES (AT COST)
As of June 30, 2004, the Company wrote off $1,431 of Daine Common Stock investment of 360,000 restricted shares to realized loss when Daine declared bankruptcy. As of June 30, 2004, all shares of Pharmavet were returned and cancelled. The costs of these shares ($5,000) were credited against Deferred Registration costs. The Company has established a valuation allowance of $100,000 against its investment in Interactive Medicine Inc. to reflect the uncertainty of the fair market value of the investment. The net investment value in Interactive Medicine Inc. is zero as of September 30, 2005.
NOTE 6: STOCK BASED COMPENSATION
During the 12 months ended June 30, 2005, the Company issued 2,067,000 shares of Modern Technology Corp. Common Stock for legal and consulting services rendered or to be rendered in the coming year. During the quarter ended September 30, 2005, the Company issued 1,490,000 shares of common stock for various consulting services. $327,254and $355,957 was shown as Deferred Compensation in the equity section of the balance sheet at September 30, 2005 and June 30, 2005, respectively. The amount expensed in the quarter ended September 30, 2005 was $182,402 as a result of all deferred compensation plans. During the twelve months ended June 30, 2005, the Company issued 13,000,000 shares of Common Stock to Anthony Welch pursuant to the Reorganization Agreement. The compensation portion of this agreement was valued at $1,300 and charged to expense. All stock based compensation is accounted for in accordance with SFAS No. 123.
NOTE 7: INCOME TAX EXPENSE (BENEFIT)
The provision for income taxes is comprised of the following:
09/30/05 09/30/04
Current $-0- $-0-
Deferred -0- -0-
$-0- $-0-
The provision for income taxes differs form the amount computed by applying the statutory federal income rate as follows:
09/30/05 09/30/04
Expected statutory amount $ -0- $ -0-
Net operating loss - -0- - -0-
State income taxes, net
Of federal benefit -0- -0-
$ -0- $ -0-
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities or financial reporting purposes and amounts used for income tax purposes and the impact of available net operating loss carryforwards.
The tax effects of significant temporary differences, which comprise the deferred tax assets, are as follows:
09/30/05 6/30/05
Deferred tax assets:
Net operating loss
Carryforwards $293,231 $293,231
Gross deferred tax assets 293,231 293,231
Valuation allowance (293,231) (293,231)
Net deferred tax assets $----0---- $----0----
The net operating loss of approximately $1,500,000 begins to expire in the year ended June 30, 2024. The tax benefits have been fully reserved due to a lack of consistent operating profitability and substantial losses.
NOTE 8: POSTRETIREMENT BENEFITS
The Company does not maintain any employee benefits currently. The Company does not maintain a plan for any Postretirement employee benefits; therefore, no provision was made under FAS's 106 and 112.
NOTE 9: RELATED PARTY TRANSACTIONS
Robert Church, our CFO, is also a Partner of Church, Devoe & Associates to which we expensed $43,315 in accounting fees during the three months ended September 30, 2005.
Our principal office at 1420 N. Lamar Blvd., Oxford, Mississippi 38655 is provided to us at no charge by Mr. Church, our CFO and Director. We lease 1,500 square feet of executive and administrative offices at 1237 State Rd 30 E, Oxford MS 38655, for $850 per month from Mr. Welch, our CEO.
On January 24, 2005, we utilized $1.5 million of financing we received from four institutional investors to purchase a $1.5 million convertible debenture in DeMarco Energy Systems of America, Inc. Anthony K. Welch, our Chief Executive Officer and majority shareholder, is the Chief Executive Officer and Chairman of the Board of Directors of DeMarco Energy Systems.
Sound City leases a facility from its shareholders. The lease expires June 30, 2014. Sound City is responsible for taxes and other expenses on an annual basis.
Rent expense under this related party lease for the three months ended September 30, 2005 totaled $2,550.00. Future minimum annual rent is as follows:
2006 192,000
2007 197,760
2008 203,693
2009 209,804
Thereafter 1,147,292
$ 1,950,549
At September 30, 2005, Sound City had a Demand Promissory Note (the "Note") payable to its shareholders in the amount of $ 1,123,056. The note is unsecured, subordinated, non-interest bearing and is payable upon demand. Sound City also had loans payable to related parties in the amount of $91,314. These loans are unsecured, subordinated, non-interest bearing and are payable demand. The loans payable to related parties are classified as non-current in the Balance Sheet at September 30, 2005, because repayment is not anticipated during the next year.
In the normal course of business, Sound City purchases from and sells to Sammans Electronics Inc (Sammans). Sammans is owned by a relative of Sound City's shareholders. For the six months ended June 30, 2005 (date of acquisition through the year ended June 30, 2005), purchases from Sammans totaled $5,370, and sales to Sammans totaled $17,365.
Pursuant to the stock sale agreement dated January 24, 2005, Sound City entered into an employment agreement with Kamel Yassin, President and Shareholder of Sound City, for a $200,000 annual salary for a five-year term.
NOTE 10: LETTER OF AGREEMENT
On March 10, 2004, prior management through its desire and plan to provide continuing value and future growth to shareholders executed a plan of reorganization. The Company entered into a Letter of Agreement with current President and CEO, Anthony Welch, wherein the Company's plans for reorganization and ongoing plans for operations would be realized through the subsequent actions of new management. The terms of this Agreement provided for the appointment of a new Board of Directors, marketable securities to be deposited in the Company's brokerage account, a Reverse split of the Company's Common Stock, an application for OTCBB listing, issuance of shares to Mr. Welch, and ongoing acquisitions and business development to pursue growth.
NOTE 11: OPERATIONS AND LIQUIDITY
The Company has incurred substantial losses in 2005 and 2004. Until such time that the Company's products and services can be successfully marketed the Company will continue to need to fulfill working capital requirements through the sale of stock and/or the issuance of debt. The inability of the Company to continue its operations as a going concern would impact the recoverability and classification of recorded asset amounts.
The ability of the company to continue in existence is dependent on its having sufficient financial resources to bring products and services to market for marketplace acceptance. As a result of its significant losses, negative cash flows from operations, and accumulated deficits for the periods ending September 30, 2005, there is doubt about the Company's ability to continue as a going concern.
Management believes that its current available working capital, anticipated revenues, further planned reductions in operating expenses, and subsequent sales of stock and/or placement of debt instruments will be sufficient to meet its projected expenditures for a period of at least twelve months from September 30, 2005.
NOTE 12: OTHER DEVELOPMENTS
InMarketing Acquisition
On August 10, 2005 we entered into a Letter of Intent to acquire 51% of InMarketing Group for an aggregate price of $2,000,000 under a Stock Purchase Agreement. No material relationship exists between the parties, other than in respect of the Agreement. The Purchase Price to be paid as follows: $1,000,000 to be paid in cash and $1,000,000 to be paid in the form of a Convertible Debenture. The purchase price will be adjusted on reasonable terms specified in the Definitive Agreement pursuant to a pro rata adjustment predicated on a profitable $11,000,000 in revenues for 2005 generated by the InMarketing subsidiary. We will have an option to purchase the remaining 49% of InMarketing as part of the agreement. This transaction is under final closing as of this filing. On August 15, 2005 we issued 500,000 common shares to the shareholders of InMarketing Group as a good faith non-refundable deposit towards the purchase price of InMarketing Group. This stock issuance was valued at $23,500 and is included in other assets at September 30, 2005. If we cannot come to a binding agreement with the shareholders of InMarketing Group regarding the purchase of their shares, we will expense the value of the shares that have been issued to them.
Capital Raise
On August 31, 2005, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $1,500,000.00 from the Holders of the Notes. The Notes each bear a Maturity Date of August 31, 2008, with interest accruing on any unpaid principal at 9% per annum from the date the Notes were issued, until due and payable on the Maturity Date. Any unpaid amounts after that date bear an interest of 15% per annum. Interest is payable quarterly and shall commence at September 30, 2005. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes. This transaction was filed under a Form 8-K on September 19, 2005 and is hereby incorporated by reference. The company issued 2,000,000 warrants to purchase common stock as part of the issuance of the Callable Secured Convertible Notes. The value of these warrants was determined to be $44,400 and recorded as a debt discount and amortized over the life of the notes.
NOTE 13: COMMON STOCK AND PREFERRED STOCK
Common Stock
March 2004 as part of our plan of reorganization and ongoing plan for operations we applied for listing of our Common Stock on the Over-The-Counter-Bulletin Board. We received approval on July 19, 2004 and trade under the symbol MOTG.
On July 31, 2004 as part of our plan of reorganization and ongoing plan for operations we effected a Reverse Split of the Company's Common Stock on a 1 for 15 Basis. These financial statements retroactively reflect the change to the Company's common stock as a result of the reverse split.
On August 17, 2004, 13 million shares were issued to Anthony Welch.
Preferred Stock
We are authorized to issue up to 20,000,000 shares of Preferred Stock, par value $.0001. As of September 30, 2005, there were 1,500 shares of preferred stock issued and outstanding.
SERIES A CONVERTIBLE PREFERRED STOCK
To obtain funding for our ongoing operations, we entered into a Securities Purchase Agreement with four accredited investors on January 24, 2005 for the sale of (i) $2,000,000 in secured convertible notes; (ii) 1,500 shares of series A convertible preferred stock at $1,000 per share and (iii) warrants to buy 3,000,000 shares of our common stock. Each share of series A convertible preferred stock is convertible into $1,000 of our common stock, at 85% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including the conversion date.
The holders of the series A preferred stock are entitled to receive, when, if and as declared by the Board of Directors, cumulative dividends in the amount of six percent (6%) per annum, payable quarterly in arrears. We are obligated to repurchase the shares of series A convertible preferred stock at 130% of the stated value, plus accrued but unpaid dividends, upon written notice from the holders of a majority of the series A convertible preferred stock upon the occurrence of any of the following events of default: our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, the assignment or appointment of a receiver to control a substantial part of our property or business, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against our company or the delisting of our common stock, if the default is not cured with the specified grace period.
All shares of series A convertible preferred stock issued and outstanding on January 24, 2008 shall automatically convert into shares of our common stock in accordance with the conversion price calculation.
NOTE 14: LONG-TERM DEBT
Long-term debt consists of the following: ; September 30, 2005
Note payable to Kamel Yassin in the
Original amount of $400,000 bearing
Interest at a rate of 5% per annum will
Be due and payable on December 31,
2006 &nbs p; 400,000
Note payable to Mervet Yassin in the
Original amount of $400,000 bearing
Interest at a rate of 5% per annum will
Be due and payable on December 31,
2006. &nb sp; 400,000
Note payable to Valley National Bank
in the original amount of $300,000,
payable in monthly installments of
$5,742.46 including interest at 5.5%.
The loan is secured by the personal
Guarantee of the shareholders and a
mortgage on property owned by the
shareholders. The note will be fully
paid May, 2008. ; 171,398
Note payable to BMW Financial in the
original amount of $20,741, payable
in monthly installments of $419.53
Including interest at 3.9%. The loan is
secured by transportation equipment. The
note will be fully paid May, 2008. &nbs p; 13,850
&n bsp; 985,248
Less: current portion ; 65,362
&n bsp; $919,886
NOTE 15: INVENTORY LINE OF CREDIT
As of March 31, 2005, Sound City had a $750,000 Inventory Security Agreement with GE Capital. Under the Agreement the Company may apply to GE Capital for an extension of credit to purchase inventory. Advances are repaid without interest 90 days after the Company receives the funds. Late payments are subject to finance charges. GE Capital has a security interest in all Company assets. The amount due as of September 30, 2005 was $177,856 and is included in accounts payable.
As of May 2, 2005 this line of credit has been reduced to $200,000.
NOTE 16: SECURITIES PURCHASE AGREEMENT
On January 24, 2005, the Company entered into a Securities Purchase Agreement with AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners II, LLC for the sale of (i) $2,000,000 in secured convertible notes and (ii) warrants to purchase 3,000,000 shares of our common stock and (iii) entered into a Purchase Agreement whereby we purchased a $1,500,000 DeMarco Convertible Debenture in exchange for 1,500 shares of our Series A Convertible Preferred Stock.
The secured convertible notes bear interest at 8%, mature two years from the date of issuance, and are convertible into Modern common stock, at the investors' option, at the lower of $0.44 or 40% of the average of the three lowest intraday trading prices for the common stock on the Over-The-Counter Bulletin Board for the 20 trading days before but not including the conversion date. The secured convertible notes are secured by the personal guarantee of the shareholder with a collateral of 5.5 million shares of Modern Technology common stock.
The warrants are exercisable until five years from the date of issuance at a purchase price of $0.40 per share. The investors may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement.
The DeMarco convertible debenture is fully matured and bears interest at a rate of 10% per annum with interest payments due quarterly. Modern has the option to convert any unpaid principal into shares of DeMarco common stock at any time after the original issue date.
NOTE 17: STOCK PURCHASE AGREEMENT
On January 24, 2005, the Company entered into a Stock Purchase Agreement with Sound City, Inc. The agreement is to purchase 51% of the issued and outstanding shares of common stock of Sound City, Inc. for an aggregate purchase price of $2,000,000 and to provide $700,000 in funding to Sound City, Inc. As part of the agreement, the Company also issued promissory notes in the amounts of $400,000 each to Kamel Yassin, President of Sound City and Mervet Yassin, CFO of Sound City. The promissory notes bear interest from the date of issuance at the rate of 5% per annum simple interest. Interest accrued to September 30, 2005 will be payable in full on September 30, 2005. Thereafter, interest accrued on the unpaid principal during the calendar quarter will be payable quarterly on the last day of each calendar quarter during the term of the note, with the first such quarterly interest payment being payable on September 30, 2005. The principal and accrued interest will be due and payable on December 31, 2006.
The following unaudited pro-forma financial information reflects the condensed consolidated results of operations of the Company as if the acquisition of Sound City, Inc had taken place on July 1, 2004. The pro-forma financial information is not necessarily indicative of the results of operations had the transaction been effected on July 1, 2004.
| | | For the Three Months Ended | |
| | | September 30, (unaudited) | |
| | | 2005 | | |
| Net sales | | $ | 1,904,523 | | |
| Net income (loss) | | | (122,046) | | |
| Diluted (loss) earnings per common share | | | (0.02) | | |
NOTE 18: EARNINGS PER SHARE
A reconciliation of weighted average shares outstanding, used to calculate basic loss per share, to weighted average shares outstanding assuming dilution, used to calculate diluted loss per share, follows:
| Quarter ended | Quarter ended |
| September 30, 2005 | September 30, 2004 |
|
| Income | Shares | Per-Share | Income | Shares | Per-Share |
| (Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount |
|
Net Income (Loss) | (758,177) | | | (12,261) | | |
before preferred stock dividends |
Less: preferred stock dividends | (47,465) | | | --- | | |
|
Basic EPS | (805,642) | 23,210,522 | (0.03) | (12,261) | 7,755,914 | NIL |
|
Effect of dilutive securities | --- | | | ---- | | |
|
Diluted EPS | $ (805,642) | 23,210,522 | (0.03) | $ (12,261) | 7,755,914 | NIL |
10,585,193 and 0 common equivalent shares have been excluded from the computation of diluted earnings per share because their effect would be anti-dilutive.
NOTE 19: COMMITMENTS AND CONTINGENCIES
Sound City guarantees the mortgage debt of Yassin & Company, LLC, a real estate holding company owned by the stockholders. The amount of outstanding mortgage debt at September 30, 2005 was $392,376.
In addition, Sound City also guarantees the mortgage debt of Kamel Yassin, President and Shareholder of Sound City, and Mervet Yassin, CFO and Shareholder of Sound City, on commercial property owned by them. The amount of outstanding mortgage at September 30, 2005 was approximately $348,000.
NOTE 20: ASSET ACQUISITION
H-NET
On July 10, 2005, Modern Technology Corp. ("MOTG") entered into an Asset Purchase Agreement ("Agreement") with Anton Stephens, Dba H-NET ("Hnet"). No material relationship exists between the parties, other than in respect of the Agreement. Under the terms of the Agreement, MOTG agreed to purchase all of the rights, title and interest in, to certain assets owned by Hnet. In exchange for assets delineated under the Agreement, consisting of software, Hnet will receive $500,000 payable in the form of 350,000 shares of MOTG restricted common stock and a Convertible Debenture in the amount of $400,000 payable to Anton Stephens. This transaction was filed under a Form 8-K on August 2, 2005 and is hereby incorporated by reference. MOTG has recorded $500,000 as software on the balance sheet at September 30, 2005 as a result of this asset acquisition. It is estimated that the software has a 5 year life and is being amortized ratably over its estimated useful life.
H-NET has no revenue at present and is not expected to have any revenue for the following nine months. It is anticipated that H-NET assets will be fully developed and revenue producing within the next twelve months.
NOTE 21: CONVERTIBLE NOTES
| Secured convertible notes payable to AJW Offshore, Ltd, AJW | | | |
| Qualified Partners, LLC, AJW Partners, LLC and New Millennium | | | |
| Capital Partners II, LLC in the amount of $2,000,000. | | | | |
| The notes were issued with Warrants to purchase 3,000,000 | | | |
| shares of our common stock. The secured conversion notes bear | | | |
| interest at 8% mature January 24, 2007 and are convertible into | | | |
| Modern common stock. | | | | | | $2,000,000 |
| | | | | | | | |
| Less conversions | | | | | | | (318,582) |
| | | | | | | | |
| TOTAL | | | | | | | $1,681,418 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| NOTE 22: MORTGAGE PAYABLE | | | | | |
| Mortgages payable consists of the following: | | | | | |
| | | | | | September 30 | |
| | | | | | 2005 | | |
| Mortgage payable to Valley National Bank | | | | | |
| in the amount of $535,000 payable in monthly | | | | |
| installments of $4,993.21 including interest | | | | | |
| at 5.5%. Pursuant to the loan agreement the | | | | |
| interest rate may change November 1, 2008. | | | | | |
| The loan is secured by Sound City's guarantee | | | | |
| and the personal guarantee of the members of | | | | |
| Yassin & Company and a mortgage on property | | | | |
| owned by the members. The note will be paid | | | | |
| on November 1, 2009. | | | | $ | 392,376 | | |
| | | | | | | | |
| Less current portion | | | | $ | (37,000) | | |
| | | | | | | | |
| | | | | $ | 355,376 | | |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-KSB, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation and up to the filing date of this Annual Report on Form 10-KSB. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding the Company's expectations, beliefs, intentions or future strategies that are signified by the words "expects," "anticipates," "intends," "believes," or similar language. These forward-looking statements, including those with respect to our operating results for 2004, are based upon current expectations and beliefs of the Company's management and are subject to risks and uncertainties that could cause results to differ materially from those indicated in the forward-looking statements. Some, but not all, of the factors, which could cause actual results to differ materially include those set forth in the risks discussed below under the subheading "Risk Factors" and elsewhere in this report. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements, or to explain why actual results differ. Readers should carefully review the risk factors described in this section below and in any reports subsequently filed with the Securities and Exchange Commission.
Overview
We were incorporated in Nevada in 1982 as a for-profit corporation. We have never experienced any bankruptcy or similar proceeding. We are engaged in aiding both private and public companies in the areas of business development, financing, product development, corporate strategy, corporate image and public relations, product distribution and marketing, and executive management consulting. We collectively refer to companies in which we own an equity position as well as our customers and clients as "portfolio companies". We charge for our services in cash or equity in the portfolio company. We may also exchange our services for revenue sharing of future sales of products or sharing of proceeds from the sale of licenses and technologies owned by our portfolio companies. We seek to grow through strategic acquisitions in addition to generating income from our services.
Our sources of revenue are primarily from:
* Consolidated revenues of our portfolio companies which we own in majority;
* Management and consulting fees we may charge our portfolio companies;
* Revenue sharing agreements we may have with our portfolio companies;
* Royalty and licensing proceeds from the sale of technology rights we may own in whole or in part with our portfolio companies;
* Proceeds from the sale of securities we may own in our portfolio companies;
* Proceeds from the interest and payment of debt we may hold in our portfolio companies; and
* Proceeds from the conversion of debt we may hold in our portfolio companies into marketable securities and subsequent sale of same.
OUR PORTFOLIO COMPANIES
Sound City
We presently own 51% of Sound City with an option to acquire the remaining 49%. The option is valid through December 31, 2009, and can be exercised for $3,500,000, which is payable in cash, stock or a combination of cash or stock. Sound City, Inc. is a consumer electronics company with customers across the U.S. Sound City markets audio and video solutions for home and mobile environments, including the HD-TV, Plasma TV and LCD TV market segments. As a full service dealer, Sound City provides a wide range of custom home installations addressing numerous applications. With a customer base of over 900,000 customers, Sound City is a large electronics mail order companies in the U.S., who distributes its products and solutions through its direct mail and Web site channels. Consumers can also find the latest audio, video, car stereo and home theatre products in Sound City's retail locations, including 12 custom showrooms. Sound City operates a web site at the following address: http://www.soundcity.com.
DeMarco Energy Systems of America, Inc.
We are the holder of an outstanding convertible debenture in the amount of $1,500,000 issued by DeMarco Energy Systems of America. The debenture is convertible into shares of common stock of DeMarco. The convertible debentures bear interest at 10%, matured on March 25, 2003, and are convertible into shares of Demarco common stock, at the selling stockholders' option, at the lower of (i) $0.15 or (ii) 60% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 10 trading days before but not including the conversion date. As of May 2, 2005, the $1,500,000 convertible debenture was convertible into 250,000,000 shares of DeMarco common stock.
We have no formal agreements with this portfolio company outside our being a holder of the convertible debenture. We have an informal agreement to assist them where practicable to further their plans and efforts, although there are no written agreements to this effect and we are not obligated to perform any services for them.
DeMarco Energy's primary mission is to provide energy efficient technologies to commercial and institutional markets through the application of the DeMarco 'Systems' patent. The company owns a systems patent that was granted on September 3, 1985, known as the Energy Miser System. The company is primarily focusing on providing heating and air conditioning powered by the thermal properties of managed water systems, which include gray-water, re-use water and potable water systems. DeMarco has exclusive rights to the patented technology.
Selecting Portfolio Companies
We may purchase an equity position, whether minority or majority, in various companies from time to time. We offer our services to new customers, also referred to as portfolio companies, for cash payment. We may elect to take equity in the portfolio company as payment for our services.
We also seek to grow our revenues and assets by acquisitions. We seek to obtain a majority equity position in any company we acquire. If we acquire a minority position in a company, we will seek to enter into agreement with that company whereby we will generate income from our services. If we acquire a minority position in a company, we value that equity using a good-faith estimation of its value based on generally accepted accounting principles combined with our internal judgment based on industry and economic factors not encompassed by traditional accounting principles.
We acquire majority or minority equity positions in portfolio companies by purchasing the equity with cash, debt, or purchasing the equity by issuing stock in our company. We may pay for the equity position with a combination of both cash and stock and debt.
When presented with a prospective acquisition, we make a good-faith valuation for the business to be acquired and its future prospects. If the assessment of the prospective acquisition appears to offer a good or reasonable chance to increase our revenues and assets both in the short-term and the long-term, we will seek to acquire the prospective company.
We find new customers and prospective companies to acquire through out network of relationships within the business community.
EMPLOYEES
We currently have three full time employees and three part-time employees, including two in management, two in business development, one in business advisory and one administrative position. In our subsidiary, Sound City, we currently have 33 full time and 2 part time employees, including eight in management three in administrative, 10 in sales, three in advertising, five in warehousing and six in installations. There exist no organized labor agreements or union agreements between our employees and us. We believe that our relations with our employees are good.
Results of Operations:
During the three months ended September 30, 2005, the Registrant had net loss applicable to common shareholders of $805,642, as compared with $12,261 for the three months ended September 30, 2004.
For the three months ended September 30, 2005, the Registrant had total gross margin of $369,546 as compared with total revenues of $6,784 for the three months period ended September 30, 2004.
The net loss for the three months ended September 30, 2005 is attributable primarily to expenses incurred as part of our reorganization efforts and activities related to locating and securing new portfolio companies.
During the three months ended September 30, 2005, expenses amounted to $1,127,723, attributable mainly to general and administrative expenses of $671,145, officers' salaries of $375,570, interest expenses of $81,008 and preferred stock dividends of $47,465. For the three months ended September 30, 2004, expenses amounted to $19,045 consisting of general and administrative expenses of $13,045 and officers' salaries of $6,000. General and administrative expenses for the three months ended September 30, 2004 can be attributed primarily to legal and accounting fees.
Liquidity and Capital Resources
The cash and cash equivalent balance of the Registrant was $1,161,688 and $190,963 as of September 30, 2005 and June 30, 2005, respectively.
The Company has incurred substantial losses through September 30, 2005. Until such time that the Company's products and services can be successfully marketed, the Company will continue to need to fulfill working capital requirements through the sale of stock and/or the issuance of debt. The inability of the Company to continue its operations as a going concern would impact the recoverability and classification of recorded asset amounts.
The ability of the company to continue in existence is dependent on its having sufficient financial resources to bring products and services to market for marketplace acceptance. As a result of its significant losses, negative cash flows from operations, and accumulated deficits for the periods ending September 30, 2005, there is doubt about the Company's ability to continue as a going concern.
Management believes that its current available working capital, anticipated revenues, further planned reductions in operating expenses, and subsequent sales of stock and/or placement of debt instruments will be sufficient to meet its projected expenditures for a period of at least twelve months from September 30, 2005.
Item 3. Controls and Procedures
Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits are incorporated herein by reference or are filed with this report as indicated below:
Exhibit
Number | | Description |
| | | |
| 31.1* | | Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated May 19, 2005. |
| 31.2* | | Certificate of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated May 19, 2005. |
| 32* | | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to section 18 U.S.C. section 1350 dated May 19, 2004. |
* Filed herewith.
b. Reports on Form 8-K:
On August 2, 2005, the Company filed a Current Report on Form 8-K.
On November 19, 2005, the Company filed a Current Report on Form 8-K.
Signatures
In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | MODERN TECHNOLOGY CORP. |
| | |
| | By: | |
| Dated: ________________________ | | Anthony K. Welch
Chairman and Chief Executive Officer |
| | | |
| | By: | |
| Dated: ________________________ | | Robert Church
Director and Chief Accounting Officer |
