As filed with the Securities and Exchange Commission on May 4, 2005
An Exhibit List can be found on page II-3.
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
MODERN TECHNOLOGY CORP
(Name of small business issuer in its charter)
NEVADA 8741 11-2620387
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
1420 N. LAMAR BLVD.
OXFORD, MISSISSIPPI 38655
(662) 236-5928
(Address and telephone number of principal executive offices and
principal place of business)
ANTHONY K. WELCH, CHIEF EXECUTIVE OFFICER
MODERN TECHNOLOGY CORP
1420 N. LAMAR BLVD.
OXFORD, MISSISSIPPI 38655
(662) 236-5928
(Name, address and telephone number of agent for service)
Copies to:
GREGORY SICHENZIA, ESQ.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS, 21ST FLR.
NEW YORK, NEW YORK 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
2
CALCULATION OF REGISTRATION FEE
- ------------------------------- -------------------- ---------------- ------------------ --------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) MAXIMUM MAXIMUM REGISTRATION FEE
OFFERING AGGREGATE
PRICE PER OFFERING PRICE
SHARE (2)
- ------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, $.0001 par 37,037,038 (3) $.20 $7,407,407.60 $871.85
value issuable upon
conversion of Secured
Convertible Notes
- ------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 6,000,000 (4) $.40 $2,400,000 $282.48
value issuable upon exercise
of Warrants
- ------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 19,607,844 (5) $.20 $3,921,568.80 $461.57
value issuable upon
conversion of Series A
Convertible Preferred Stock
- ------------------------------- -------------------- ---------------- ------------------ --------------------
Total 62,644,882 $13,728,976.40 $1,615.90
- ------------------------------- -------------------- ---------------- ------------------ --------------------
(1) Includes shares of our common stock, par value $0.0001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of secured convertible notes and the exercise of series A
convertible preferred stock and warrants held by the selling stockholders. In
addition to the shares set forth in the table, the amount to be registered
includes an indeterminate number of shares issuable upon conversion of the
secured convertible notes and exercise of the series A convertible preferred
stock and warrants, as such number may be adjusted as a result of stock splits,
stock dividends and similar transactions in accordance with Rule 416. The number
of shares of common stock registered hereunder represents a good faith estimate
by us of the number of shares of common stock issuable upon conversion of the
secured convertible notes and upon exercise of the series A convertible
preferred stock and warrants. For purposes of estimating the number of shares of
common stock to be included in this registration statement, we calculated a good
faith estimate of the number of shares of our common stock that we believe will
be issuable upon conversion of the secured convertible notes and upon exercise
of the series A convertible preferred stock and warrants to account for market
fluctuations, and antidilution and price protection adjustments, respectively.
Should the conversion ratio result in our having insufficient shares, we will
not rely upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares should that become necessary. In addition,
should a decrease in the exercise price as a result of an issuance or sale of
shares below the then current market price, result in our having insufficient
shares, we will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares should that become
necessary.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the Over-The-Counter
Bulletin Board on May 2, 2005, which was $.20 per share.
(3) Includes a good faith estimate of the shares underlying secured convertible
notes to account for market fluctuations.
(4) Includes a good faith estimate of the shares underlying warrants exercisable
at $.40 per share to account for antidilution protection adjustments.
(5) Includes a good faith estimate of the shares underlying series A convertible
preferred stock to account for market fluctuations.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
3
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 4, 2005
MODERN TECHNOLOGY CORP
62,644,882 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
62,644,882 shares of our common stock, including up to 37,037,038 shares of
common stock underlying secured convertible notes in a principal amount of
$2,000,000, up to 6,000,000 issuable upon the exercise of common stock purchase
warrants and up to 19,607,844 underlying series A convertible preferred stock.
The secured convertible notes are convertible into our common stock at the lower
of $0.44 or 60% 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. 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
selling stockholders may sell common stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions. The selling stockholders may be deemed underwriters of
the shares of common stock which they are offering. We will pay the expenses of
registering these shares.
Our common stock is registered under Section 15(d) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "MOTG". The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on May 2, 2005, was $.20.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______, 2005.
The information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
Modern Technology Corp with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
4
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the secured convertible notes to
the financial statements.
MODERN TECHNOLOGY CORP
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 refer to 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 additional to generating income from our services.
For the three months ended December 31, 2004, we generated $10,177 in
revenue and a net loss of $84,636. In addition, for the year ended June 30,
2004, we generated $1,170 in revenue and a net loss of $118,296. As a result of
recurring losses from operations and a net deficit in working capital, our
auditors, in their report dated September 21, 2004, have expressed substantial
doubt about our ability to continue as going concern.
Our principal offices are located at 1420 N. Lamar Blvd., Oxford,
Mississippi 38655, and our telephone number is (662) 236-5928. We are a Nevada
corporation. We maintain a website at www.moderntechnologycorp.com. The
information contained on that website is not deemed to be a part of this
prospectus.
The Offering
Common stock offered by selling stockholders...................Up to 62,644,882 shares, including the
following:
- up to 37,037,038 shares of common stock
underlying secured convertible notes in
the principal amount of $2,000,000
(includes a good faith estimate of the
shares underlying secured convertible
notes to account for market
fluctuations and antidilution
protection adjustments, respectively),
- up to 6,000,000 shares of common stock
issuable upon the exercise of common
stock purchase warrants at an exercise
price of $.40 per share (includes a
good faith estimate of the shares
underlying warrants to account for
antidilution protection adjustments);
and
- up to 19,607,844 shares of common stock
underlying 1,500 shares of series A
convertible preferred stock (includes a
good faith estimate of the shares
underlying series A convertible
preferred stock to account for market
fluctuations and antidilution
protection adjustments).
This number represents 80.60% of our
current outstanding stock.
5
Common stock to be outstanding after the offering...... Up to 77,723,513 shares
Use of proceeds........................................ We will notreceive anyproceeds from the sale
of the common stock. However, we will receive
the sale price of any common stock we sell to
the selling stockholders upon exercise of the
warrants. We expect to use the proceeds
received from the exercise of the warrants, if
any, for general working capital purposes.
However, the selling stockholders will be
entitled to 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. In the event that the
selling stockholders exercise the warrants on
a cashless basis, then we will not receive any
proceeds from the exercise of those warrants.
Over-The-Counter Bulletin Board Symbol................. MOTG
The above information regarding common stock to be outstanding after the
offering is based on 15,078,631 shares of common stock outstanding as of May 2,
2005 and assumes the subsequent conversion of our issued secured convertible
notes and series A convertible preferred stock and exercise of warrants by our
selling stockholders.
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.
This prospectus relates to the resale of the common stock underlying these
secured convertible notes, series A convertible preferred stock and warrants.
The secured convertible notes bear interest at 8%, mature two years from the
date of issuance, and are convertible into our common stock, at the selling
stockholders' option, at the lower of (i) $0.44 or (ii) 60% 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.
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. Accordingly, there is in fact no limit on
the number of shares into which the secured convertible notes or series A
convertible preferred stock may be converted. As of May 2, 2005, the average of
the three lowest intraday trading prices for our common stock during the
preceding 20 trading days as reported on the Over-The-Counter Bulletin Board was
$.18 and, therefore, the conversion price for the secured convertible notes was
$.108 and $.153 for the series A convertible preferred stock. Based on this
conversion price, the $2,000,000 secured convertible notes, excluding interest,
were convertible into 18,518,519 shares of our common stock and the 1,500 shares
of series A convertible preferred stock were convertible into 9,803,922 shares
of our common stock.
The selling stockholders have contractually agreed to restrict their
ability to convert or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock.
See the "Selling Stockholders" and "Risk Factors" sections for a complete
description of the secured convertible notes and series A convertible preferred
stock.
6
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
RISKS RELATING TO OUR BUSINESS:
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE, WHICH MAY NEGATIVELY IMPACT OUR
ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.
We incurred net losses of $118,296 for the year ended June 30, 2004 and
$197,549 for the year ended June 30, 2003. For the three months ended December
31, 2004, we incurred a net loss of $84,636. We cannot assure you that we can
achieve or sustain profitability on a quarterly or annual basis in the future.
Our operations are subject to the risks and competition inherent in the ongoing
operations of a business enterprise. There can be no assurance that future
operations will be profitable. Revenues and profits, if any, will depend upon
various factors, including whether we will be able to continue expansion of our
revenue. We may not achieve our business objectives and the failure to achieve
such goals would have an adverse impact on us.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING OUR BUSINESS OPERATIONS WILL BE
HARMED AND IF WE DO OBTAIN ADDITIONAL FINANCING OUR THEN EXISTING SHAREHOLDERS
MAY SUFFER SUBSTANTIAL DILUTION.
We may require additional funds to sustain and expand our operational
activities. We anticipate that if needed, we will require up to approximately
$500,000 to fund our continued operations for the next twelve months, depending
on revenue from operations. Additional capital will be required to effectively
support the operations and to otherwise implement our overall business strategy.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our marketing and development plans and
possibly cease our operations. Any additional equity financing may involve
substantial dilution to our then existing shareholders.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
FINANCING.
In their report dated September 21, 2004, our independent auditors stated
that our financial statements for the year ended June 30, 2004 were prepared
assuming that we would continue as a going concern. Our ability to continue as a
going concern is an issue raised as a result of substantial losses for the years
ended June 30, 2004 and 2003. We continue to experience net operating losses.
Our ability to continue as a going concern is subject to our ability to generate
a profit and/or obtain necessary funding from outside sources, including
obtaining additional funding from the sale of our securities, increasing sales
or obtaining loans and grants from various financial institutions where
possible. Our continued net operating losses increases the difficulty in meeting
such goals and there can be no assurances that such methods will prove
successful.
IF WE ARE UNABLE TO RETAIN THE SERVICES OF MESSRS. WELCH OR CHURCH, OR IF WE ARE
UNABLE TO SUCCESSFULLY RECRUIT QUALIFIED PERSONNEL HAVING EXPERIENCE IN
BUSINESS, WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS.
Our success depends to a significant extent upon the continued service of
Mr. Anthony K. Welch, our Chief Executive Officer and Mr. Robert Church, our
Chief Financial Officer. Loss of the services of Messrs. Welch or Church could
have a material adverse effect on our growth, revenues, and prospective
business. We do not maintain key-man insurance on the life of Mr. Church. In
addition, in order to successfully implement and manage our business plan, we
will be dependent upon, among other things, successfully recruiting qualified
managerial personnel having experience in business. Competition for qualified
individuals is intense. There can be no assurance that we will be able to find,
attract and retain existing employees or that we will be able to find, attract
and retain qualified personnel on acceptable terms.
7
MANY OF OUR COMPETITORS ARE LARGER AND HAVE GREATER FINANCIAL AND OTHER
RESOURCES THAN WE DO AND THOSE ADVANTAGES COULD MAKE IT DIFFICULT FOR US TO
COMPETE WITH THEM.
The mergers and acquisitions and business development industry is
extremely competitive and includes several companies that have achieved
substantially greater market shares than we have, and have longer operating
histories, have larger customer bases, and have substantially greater financial,
development and marketing resources than we do. If overall demand for our
products should decrease it could have a materially adverse affect on our
operating results.
OUR TRADEMARK AND OTHER INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATELY
PROTECTED OUTSIDE THE UNITED STATES, RESULTING IN LOSS OF REVENUE.
We believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of our international expansion, we may, however, experience conflict
with various third parties who acquire or claim ownership rights in certain
trademarks. We cannot assure that the actions we have taken to establish and
protect these trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent, as do the laws of the United States.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT:
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SECURED CONVERTIBLE NOTES,
SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS THAT MAY BE AVAILABLE FOR
FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK.
As of May 2, 2005, we had 15,078,631 shares of common stock issued and
outstanding, secured convertible notes outstanding that may be converted into an
estimated 18,518,519 shares of common stock at current market prices, series A
convertible preferred stock convertible into an estimated 9,803,922 shares of
common stock, and outstanding warrants to purchase 3,000,000 shares of common
stock. In addition, the number of shares of common stock issuable upon
conversion of the outstanding secured convertible notes and series A convertible
preferred stock may increase if the market price of our stock declines. All of
the shares, including all of the shares issuable upon conversion of the notes
and preferred stock and upon exercise of our warrants, may be sold without
restriction. The sale of these shares may adversely affect the market price of
our common stock.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES AND SERIES A CONVERTIBLE PREFERRED STOCK COULD REQUIRE US TO ISSUE A
SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH WILL CAUSE DILUTION TO OUR
EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our secured convertible
notes and series A convertible preferred stock is essentially limitless. The
following is an example of the amount of shares of our common stock that are
issuable, upon conversion of our secured convertible notes (excluding accrued
interest) and series A convertible preferred stock, based on market prices 25%,
50% and 75% below the market price, as of May 2, 2005 of $0.20.
SECURED CONVERTIBLE NOTES
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 40% Issuable Stock
- ------ ----- ------ -------- -----
25% $.15 $.09 22,222,223 59.58%
50% $.10 $.06 33,333,334 68.85%
75% $.05 $.03 66,666,667 81.55%
8
SERIES A CONVERTIBLE PREFERRED STOCK
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 15% Issuable Stock
- ------ ----- ------ -------- -----
25% $.15 $.1275 11,764,706 43.83%
50% $.10 $.085 17,647,059 53.92%
75% $.05 $.0425 35,294,118 70.07%
As illustrated, the number of shares of common stock issuable upon
conversion of our secured convertible notes and series A convertible preferred
stock will increase if the market price of our stock declines, which will cause
dilution to our existing stockholders.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES AND SERIES A CONVERTIBLE PREFERRED STOCK MAY HAVE A DEPRESSIVE EFFECT ON
THE PRICE OF OUR COMMON STOCK.
The secured convertible notes are convertible into shares of our common
stock at a 40% discount to the trading price of the common stock prior to the
conversion. The series A convertible preferred stock are convertible into shares
of our common stock at a 15% discount to the trading price of the common stock
prior to the conversion. The significant downward pressure on the price of the
common stock as the selling stockholders convert and sell material amounts of
common stock could have an adverse effect on our stock price. In addition, not
only the sale of shares issued upon conversion or exercise of secured
convertible notes, series A convertible preferred stock and warrants, but also
the mere perception that these sales could occur, may adversely affect the
market price of the common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND
SERIES A CONVERTIBLE PREFERRED STOCK AND EXERCISE OF OUTSTANDING WARRANTS MAY
CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the secured convertible notes
and series A convertible preferred stock and exercise of warrants may result in
substantial dilution to the interests of other stockholders since the selling
stockholders may ultimately convert and sell the full amount issuable on
conversion. Although the selling stockholders may not convert their secured
convertible notes and/or exercise their warrants if such conversion or exercise
would cause them to own more than 4.9% of our outstanding common stock, this
restriction does not prevent the selling stockholders from converting and/or
exercising some of their holdings and then converting the rest of their
holdings. In this way, the selling stockholders could sell more than this limit
while never holding more than this limit. There is no upper limit on the number
of shares that may be issued which will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock,
including investors in this offering.
IN THE EVENT THAT OUR STOCK PRICE DECLINES, THE SHARES OF COMMON STOCK ALLOCATED
FOR CONVERSION OF THE SECURED CONVERTIBLE NOTES AND SERIES A CONVERTIBLE
PREFERRED STOCK AND REGISTERED PURSUANT TO THIS PROSPECTUS MAY NOT BE ADEQUATE
AND WE MAY BE REQUIRED TO FILE A SUBSEQUENT REGISTRATION STATEMENT COVERING
ADDITIONAL SHARES. IF THE SHARES WE HAVE ALLOCATED AND ARE REGISTERING HEREWITH
ARE NOT ADEQUATE AND WE ARE REQUIRED TO FILE AN ADDITIONAL REGISTRATION
STATEMENT, WE MAY INCUR SUBSTANTIAL COSTS IN CONNECTION THEREWITH.
Based on our current market price and the potential decrease in our market
price as a result of the issuance of shares upon conversion of the secured
convertible notes, we have made a good faith estimate as to the amount of shares
of common stock that we are required to register and allocate for conversion of
the secured convertible notes and series A convertible preferred stock.
Accordingly, we have allocated and registered 37,037,038 shares to cover the
conversion of the secured convertible notes and 19,607,844 shares to cover the
conversion of the series A convertible preferred stock. In the event that our
9
stock price decreases, the shares of common stock we have allocated for
conversion of the secured convertible notes and the series A convertible
preferred stock and are registering hereunder may not be adequate. If the shares
we have allocated to the registration statement are not adequate and we are
required to file an additional registration statement, we may incur substantial
costs in connection with the preparation and filing of such registration
statement.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES OR REDEEM OUR SERIES A CONVERTIBLE PREFERRED STOCK, WE WOULD BE REQUIRED
TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR
FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN
LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
In January 2005, we entered into a Securities Purchase Agreement for the
sale of an aggregate of $2,000,000 principal amount of secured convertible notes
and $1,500,000 in series A convertible preferred stock. The secured convertible
notes are due and payable, with 8% interest, two years from the date of
issuance, unless sooner converted into shares of our common stock. The series A
convertible preferred stock automatically covert into shares of our common stock
four years after issuance, unless sooner converted. In addition, any event of
default such as our failure to repay the principal or interest when due, 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, breach of any covenant, representation or warranty
in the Securities Purchase Agreement or related convertible note, the assignment
or appointment of a receiver to control a substantial part of our property or
business, the filing of a money judgment, writ or similar process against our
company in excess of $50,000, the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against our company and the delisting
of our common stock could require the early repayment of the secured convertible
notes and redemption of our series A convertible preferred stock, including a
default interest rate of 15% on the outstanding principal balance of the notes
if the default is not cured with the specified grace period. We anticipate that
the full amount of the secured convertible notes will be converted into shares
of our common stock, in accordance with the terms of the secured convertible
notes. If we were required to repay the secured convertible notes or redeem the
series A convertible preferred stock, we would be required to use our limited
working capital and raise additional funds. If we were unable to repay the
secured convertible notes or redeem the series A convertible preferred stock
when required, the note and stock holders could commence legal action against us
and foreclose on all of our assets to recover the amounts due. Any such action
would require us to curtail or cease operations.
RISKS RELATING TO OUR COMMON STOCK:
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
10
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
11
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholders upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes. However, the selling stockholders will be entitled to 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. In the event that the selling stockholders exercise the warrants on a
cashless basis, then we will not receive any proceeds from the exercise of those
warrants.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"MOTG".
For the periods indicated, the following table sets forth the high and low
bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
High($) Low ($)
------- -------
Year ended June 30, 2005
Second Quarter (1) 0.40 0.30
Third Quarter 0.40 0.18
Fourth Quarter (2) 0.36 0.18
(1) Our stock first traded on October 22, 2004.
(2) As of May 2, 2005.
HOLDERS
As of May 2, 2005, we had approximately 372 holders of our common stock.
The number of record holders was determined from the records of our transfer
agent and does not include beneficial owners of common stock whose shares are
held in the names of various security brokers, dealers, and registered clearing
agencies. The transfer agent of our common stock is Jersey Transfer & Trust Co.,
201 Bloomfield Ave., Verona, New Jersey 07044.
DIVIDENDS
On March 13, 2004, we declared a cash dividend of $0.01543 per share for
shareholders of record as of March 14, 2004. Distribution was completed the week
of March 16, 2004. During October 2001, we distributed the 403,000 shares we
owned in Scientio to our shareholders. These 403,000 shares represented a
dividend of equity investment stock of $178,864 for the year ended June 30,
2002. As of June 30, 1999, we declared a distribution to our shareholders in the
form of all of the 403,000 shares of Omnicomm Systems Inc. common stock that we
owned.
We anticipate continuing to pay cash and/or stock dividends to our
stockholders when practicable. In addition, any future determination to pay cash
or stock dividends will be at the discretion of the Board of Directors and will
be dependent upon our financial condition, results of operations, capital
requirements, and such other factors as the Board of Directors deem relevant.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there
may be events in the future that we are not able to accurately predict or over
which we have no control. Our actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
OVERVIEW
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 refer to 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 additional to generating income from our services.
On March 10, 2004, prior management executed a plan of reorganization. We
entered into a letter of agreement with our present Chairman and CEO, Anthony
Welch, wherein our plans for reorganization and ongoing plans for operations
would be realized through the subsequent actions of new management. Under the
terms of the agreement, a new Board of Directors was appointed, marketable
securities were deposited into our brokerage account, a reverse split of our
common stock occurred, we applied for listing on the Over-the-Counter Bulletin
Board, issued shares of common stock to Mr. Welch, and are pursuing growth
through ongoing acquisitions and business development.
In March 2004 and 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 our common stock on a 1 for 15
basis.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported.
Financial Statements describes the significant accounting policies used in
the preparation of the consolidated financial statements. Certain of these
significant accounting policies are considered to be critical accounting
policies, as defined below.
A critical accounting policy is defined as one that is both material to
the presentation of our financial statements and requires management to make
difficult, subjective or complex judgments that could have a material effect on
our financial condition and results of operations. Specifically, critical
13
accounting estimates have the following attributes: 1) we are required to make
assumptions about matters that are highly uncertain at the time of the estimate;
and 2) different estimates we could reasonably have used, or changes in the
estimate that are reasonably likely to occur, would have a material effect on
our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be
determined with certainty. We base our estimates on historical experience and on
various other assumptions believed to be applicable and reasonable under the
circumstances. These estimates may change as new events occur, as additional
information is obtained and as our operating environment changes. These changes
have historically been minor and have been included in the consolidated
financial statements as soon as they became known. In addition, our Management
is periodically faced with uncertainties, the outcomes of which are not within
our control and will not be known for prolonged periods of time.
Based on a critical assessment of its accounting policies and the
underlying judgments and uncertainties affecting the application of those
policies, our Management believes that our consolidated financial statements are
fairly stated in accordance with accounting principles generally accepted in the
United States (GAAP), and present a meaningful presentation of our financial
condition and results of operations.
We believe that the following are our critical accounting policies:
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles 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 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.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2004 COMPARED TO THE YEAR ENDED JUNE 30, 2003
During the fiscal year ended June 30, 2004, we incurred a net loss of
$118,296. Our revenues for the year ended June 30, 2004 were derived from
interest income of $1,170. Our expenses consisted of officers' salaries of
$24,364, general and administrative expenses of $50,940, the principal items
consisting of legal and accounting fees, telephone and insurance expenses, a
realized gain of $41,714 related to sales of securities which consisted
primarily of MediCor, Ltd securities, an unrealized loss from the decline in
stock price of our remaining marketable securities of $33,922, a $7,830 loss on
write down of investment and a $19,307 loss on write down of worthless loan with
an overall loss of $24,817 related to our decision to discontinue the operations
of our Pharmavet subsidiary.
In comparing fiscal year expense items for fiscal year 2004 with fiscal
year 2003 items, we experienced declines in officer's salaries from $33,374 in
2003 to $24,364 in 2004 and a decline in general and administrative expenses
from $63,264 in 2003 to $50,940 in 2004. The reason for the decline was a
reduction of business activity for the period.
For revenue items, we had $1,170 in interest income and experienced a
decline of $2,884 in our interest income account during fiscal year 2004 as
compared with interest income generated during fiscal year 2003 of $4,054. This
decline can be attributable to lower interest rates available along with a lower
cash balance experienced during fiscal year 2004.
14
During the fiscal year ended June 30, 2004, we generated a net loss of
$118,296 compared to a net loss of $197,549 for the fiscal year ending June 30,
2003. The decrease in net loss is attributable to the proceeds derived from the
sale of securities and a reduction in expenses.
During the fiscal year, income tax expenses amounted to $0.
SIX MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
2003
During the six months ended December 31, 2004, we had net loss of $96,897,
as compared with $33,060 for the six months ended December 31, 2003.
For the six months ended December 31, 2004, we had total revenues of
$16,961 as compared with revenues of $111,979 for the six months period ended
December 31, 2003. The net loss for the six months ended December 31, 2004 is
attributable primarily to expenses incurred as part of our reorganization
efforts and activities related to locating and securing new portfolio companies.
During the six months ended December 31, 2004, expenses amounted to
$113,858, attributable mainly to general and administrative expenses of $99,858
and officers' salaries of $14,000. For the six months ended December 31, 2003,
expenses amounted to $143,729 consisting of officers salaries of $16,625,
general and administrative expenses of $62,408, realized loss of $30,940 and
unrealized loss of $33,756. General and administrative expenses can be
attributed primarily to legal and accounting fees.
LIQUIDITY AND CAPITAL RESOURCES
We have historically experienced negative cash flows and have relied
primarily on the proceeds from the sale of debt and equity securities to fund
our operations. Cash and cash equivalents decreased by $287,290 from $287,290 at
December 31, 2003, to $0 at December 31, 2004. This was the result of cash
provided by financing activities of $8,123 offset by cash used in operating
activities of approximately $16,205. The significant components of the activity
include a loss from operations of approximately $96,897offset by non-cash
expenses of $57,899 and increases in cash of $22,793 from changes in working
capital accounts.
We are not currently bound by any long or short-term agreements for the
purchase or lease of capital expenditures. Any amounts expended for capital
expenditures would be the result of an increase in the capacity needed to
adequately service any increase in our business. To date we have paid for any
needed additions to our capital equipment infrastructure from working capital
funds and anticipate this being the case in the future. We do not presently have
any commitment for capital expenditures.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required in order to meet our current
and projected cash flow deficits from operations and development.
By adjusting our operations and development to the level of
capitalization, we believe we have sufficient capital resources to meet
projected cash flow deficits through the next twelve months. However, if
thereafter, we are not successful in generating sufficient liquidity from
operations or in raising sufficient capital resources, on terms acceptable to
us, this could have a material adverse effect on our business, results of
operations, liquidity and financial condition.
As a result of our significant losses, negative cash flows from
operations, and accumulated deficits for the periods ending December 31, 2003,
there is doubt about our ability to continue as a going concern. Our independent
registered certified public accountants have stated in their report included in
our June 30, 2004 Form 10-KSB, as amended, that we have incurred operating
losses and that we are dependent upon management's ability to develop profitable
operations. These factors among others may raise substantial doubt about our
ability to continue as a going concern.
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
15
A convertible preferred stock at $1,000 per share and (iii) warrants to buy
3,000,000 shares of our common stock. The proceeds received from the sale of the
secured convertible notes will be used for business development purposes,
working capital needs, pre-payment of interest, payment of consulting and legal
fees and purchasing inventory.
The secured convertible notes bear interest at 8%, mature two years from
the date of issuance, and are convertible into our common stock, at the selling
stockholders' option, at the lower of (i) $0.44 or (ii) 60% 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.
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 full principal amount of the secured
convertible notes is due upon default under the terms of secured convertible
notes. The warrants are exercisable until five years from the date of issuance
at a purchase price of $0.40 per share. In addition, the conversion price of the
secured convertible notes and series A convertible preferred stock and the
exercise price of the warrants will be adjusted in the event that we issue
common stock at a price below the fixed conversion price, below market price,
with the exception of any securities issued in connection with the Securities
Purchase Agreement. The conversion price of the secured convertible notes and
series A convertible preferred stock and the exercise price of the warrants may
be adjusted in certain circumstances such as if we pay a stock dividend,
subdivide or combine outstanding shares of common stock into a greater or lesser
number of shares, or take such other actions as would otherwise result in
dilution of the selling stockholder's position. The selling stockholders have
contractually agreed to restrict their ability to convert or exercise their
warrants and receive shares of our common stock such that the number of shares
of common stock held by them and their affiliates after such conversion or
exercise does not exceed 4.9% of the then issued and outstanding shares of
common stock. In addition, we have granted the investors a security interest in
substantially all of our assets and intellectual property and registration
rights.
Since the conversion price will be less than the market price of the
common stock at the time the secured convertible notes and series A convertible
preferred stock were issued, we anticipate recognizing a charge relating to the
beneficial conversion feature of the secured convertible notes and series A
convertible preferred stock during the quarter in which they are issued,
including the third quarter of fiscal 2005 when $2,000,000 of secured
convertible notes and $1,500,000 of series A convertible preferred stock were
issued.
We will still need additional investments in order to continue operations
to cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations
again.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities". 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. At the effective date, the Company has not entered into any VIEs.
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.
16
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.
17
BUSINESS
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:
o Consolidated revenues of our portfolio companies which we own in
majority;
o Management and consulting fees we may charge our portfolio
companies;
o Revenue sharing agreements we may have with our portfolio companies;
o Royalty and licensing proceeds from the sale of technology rights we
may own in whole or in part with our portfolio companies;
o Proceeds from the sale of securities we may own in our portfolio
companies;
o Proceeds from the interest and payment of debt we may hold in our
portfolio companies; and
o Proceeds from the conversion of debt we may hold in our portfolio
companies into marketable securities and subsequent sale of same.
PLAN OF REORGANIZATION
On March 10, 2004, prior management executed a plan of reorganization. We
entered into a letter of agreement with our present Chairman and CEO, Anthony
Welch, wherein our plan for reorganization and ongoing plan for operations would
be realized through the subsequent actions of new management. Under the terms of
the agreement, a new Board of Directors was appointed, consisting of Mr. Welch
and Robert Church, marketable securities were deposited into our brokerage
account, a reverse split of our common stock occurred, we applied for listing on
the Over-the-Counter Bulletin Board, issued shares of common stock to Mr. Welch,
and are pursuing growth through ongoing acquisitions and business development.
Prior to the plan of reorganization, we were engaged in aiding prospective
clients in obtaining financing and in providing managerial services to client
companies.
In March 2004 and 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 our common stock
on a 1 for 15 basis.
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 a the following address:
http://www.soundcity.com.
18
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 Energy System of America. The
convertible debentures bear interest at 10%, matured on March 25, 2003, and are
convertible into shares of DeMarco Energy System of America 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 4, 2005, the $1,500,000 convertible debenture was convertible
into 250,000,000 shares of DeMarco Energy System of America common stock.
We have no formal agreements with this portfolio company outside our being
a holder of the convertible debenture, although our chairman, Anthony K. Welch,
is also the chairman of DeMarco Energy System of America. 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 System of America's primary mission is to provide energy
efficient technologies to commercial and institutional markets through the
application of the DeMarco "Systems" patent. DeMarco Energy System of America
owns a systems patent that was granted on September 3, 1985, known as the Energy
Miser System. DeMarco Energy System of America 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 Energy System of America 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.
INTELLECTUAL PROPERTY
We do not own any patents, trademarks, licenses, franchises, concessions
or royalty agreements.
19
GOVERNMENTAL REGULATION
We do not believe we are effected by government regulation of our
principal products and services except as where those activities involve
securities.
RESEARCH AND DEVELOPMENT
During the last two fiscal years, we have not spent any appreciable time
or financial resources on research and development activities, nor do we intend
to do so in the next 12 months.
ENVIRONMENTAL REGULATION
We are not subject to environmental laws as a consequence of our products
or services.
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.
DESCRIPTION OF PROPERTIES
We maintain our principal office at 1420 N. Lamar Blvd., Oxford,
Mississippi 38655. Our telephone number at that office is (662) 236-5928 and our
facsimile number is (662) 236-7663. This space is provided to us at no charge by
Mr. Church, our CFO and Director. We lease 1500 square feet of executive and
administrative offices at 1237 State Rd 30 E, Oxford MS 38655. The lease expires
on January 30, 2006. This office space is rented to us for $850 per month by Mr.
Welch, our CEO. We believe that our current office space and facilities are
sufficient to meet our present needs and do not anticipate any difficulty
securing alternative or additional space, as needed, on terms acceptable to us.
We maintain a website at www.moderntechnologycorp.com. The information contained
on that website is not deemed to be a part of this prospectus.
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position
- --------------------------------------------------------------------------------
Anthony K. Welch 37 President, Chief Executive Officer and Chairman
Robert Church 46 Chief Financial Officer and Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Currently
there are two seats on our board of directors.
Currently, our Directors are not compensated for their services. Officers
are elected by the Board of Directors and serve until their successors are
appointed by the Board of Directors. Biographical resumes of each officer and
director are set forth below.
ANTHONY K. WELCH. Mr. Welch has been our President, Chief Executive
Officer and Chairman since March 15, 2004. From October 1999 to October 2003,
Mr. Welch was the founder of, and served as Director and Executive Vice
President and consultant to IPVoice Communications, Inc. (currently called
NewMarket Technology, Inc.). From April 2002 to April 2004, Mr. Welch through
his professional advisory firm, Maxim Advisors, LLC and in a personal capacity,
advised various corporate and private clients on mergers, acquisitions, public
listing processes, financing, and strategic consulting. Mr. Welch attended the
University of Mississippi school of Electrical Engineering from 1986 to 1988. He
holds a NASD Series 65 License [Registered Investment Advisor]. Mr. Welch is a
second-year law student in the Juris Doctor program at Concord School of Law.
ROBERT CHURCH. Mr. Church has been our Chief Financial Officer and a
Director since March 15, 2004. During the last five years, Mr. Church has also
been a partner in Church-Devoe, PLLC, a professional accounting firm. Mr. Church
hold a BBA in Accountancy from the University of Mississippi received in 1980.
21
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and
each of our most highly-compensated executive officers whose total annual salary
and bonus for the fiscal years ending June 30, 2004, 2003 and 2002 exceeded
$100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
- ------------------------ ------- ------------ ------------ ------------ -------------- ----------- ----------- --------------
Anthony K. Welch 2004 (1) 24,364 0 0 -- -- -- --
President & CEO 2003 -- -- -- -- -- -- --
2002 -- -- -- -- -- -- --
- ------------------------ ------- ------------ ------------ ------------ -------------- ----------- ----------- --------------
Arthur Seidenfeld 2004 (2) -- -- -- -- -- -- --
President 2003 31,574 0 0 -- -- -- --
2002 31,574 0 0 -- -- -- --
- ------------------------ ------- ------------ ------------ ------------ -------------- ----------- ----------- --------------
(1) Mr. Welch became the President and Chief Executive Officer on March
15, 2004.
(2) Mr. Seidenfeld was the President until March 15, 2004.
22
OPTION/SAR GRANTS IN LAST FISCAL YEAR
None.
STOCK OPTION PLANS
None.
EMPLOYMENT AGREEMENTS
We have entered into a five-year employment agreement with Kamel Yassin to
serve as President of Sound City, Inc. Pursuant to the employment agreement, Mr.
Yassin will receive an annual salary of $200,000 and stock-based commissions.
23
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Pharmavet was formed on April 15, 2003 to commercialize the agreement we
signed with Centrovet to represent Centrovet as a sales representative. We
invested $7,830 and orally agreed to advance up to $100,000 to cover Pharmvet's
working capital needs for the twelve months through June 30, 2004 and to cover
the costs related to filing of the registration statement. As of December 31,
2003 and June 30, 2003, our previous president, Arthur Seidenfeld, who was also
president of Pharmavet, advanced $2,594 and $1,848 respectively to Pharmavet to
cover certain operational expenses. For the investment of $7,830, we were issued
403,000 shares of Pharmavet. At March 31, 2004, the investment in Pharmavet was
terminated and appropriate write downs effected.
Robert Church, our CFO, is also a Partner of Church, DeVoe & Associates to
which we expensed $13,668 in accounting fees during the six months ended
December 31, 2004.
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.
We have no policy regarding entering into transactions with affiliated
parties.
24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our stock as of May 2, 2005:
o by each person who is known by us to beneficially own more than 5%
of any class of our stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
PERCENTAGE OF PERCENTAGE OF
CLASS CLASS
NAME AND ADDRESS NUMBER OF PRIOR TO AFTER
OF OWNER TITLE OF CLASS SHARES OWNED(1) OFFERING(2) OFFERING(3)
- -----------------------------------------------------------------------------------------------------
Anthony K. Welch Common Stock 13,000,000 86.21% 19.82%
1420 N. Lamar Blvd.
Oxford, MS 38655
Robert Church Common Stock 0 0% 0%
1420 N. Lamar Blvd.
Oxford, MS 38655
All Officers and Directors Common Stock 13,000,000 86.21% 19.82%
As a Group (2 persons)
===============================================
AJW Partners, LLC Preferred A 225 15.00% 15.00%
1044 Northern Blvd.
Suite 302
Roslyn, NY 11576
AJW Offshore, Ltd. Preferred A 675 45.00% 45.00%
PO Box 32021 SMB
Grand Cayman, Cayman Islands
British West Indies
AJW Qualified Partners, LLC Preferred A 570 38.00% 38.00%
1044 Northern Blvd.
Suite 302
Roslyn, NY 11576
===============================================
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of May 2, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Based upon 15,078,631 shares issued and outstanding on May 2, 2005.
(3) Percentage based on 77,723,513 shares of common stock outstanding after the
offering, which assumes that all shares registered will be sold.
25
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 150,000,000 shares of common stock, par
value $.0001. As of May 2, 2005, there were 15,078,631 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged Jersey Transfer & Trust Co., located in Verona, New
Jersey, as independent transfer agent or registrar.
PREFERRED STOCK
We are authorized to issue up to 20,000,000 shares of Preferred Stock, par
value $.0001. As of May 2, 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. This prospectus relates to the resale of
the common stock underlying these secured convertible notes, series A
convertible preferred stock and warrants.
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.
OPTIONS
None.
WARRANTS
In connection with a Securities Purchase Agreement dated January 24, 2005,
we have issued 3,000,000 warrants to purchase shares of common stock. The
warrants are exercisable until five years from the date of issuance at a
purchase price of $0.40 per share.
26
CONVERTIBLE SECURITIES
Not including approximately 10,869,566 shares of common stock issuable
upon conversion of outstanding series A convertible preferred stock and
3,000,000 shares of common stock issuable upon exercise of outstanding warrants,
approximately 14,492,754 shares of common stock are issuable upon conversion of
outstanding secured convertible notes issued pursuant to the Securities Purchase
Agreement dated January 24, 2005.
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. This prospectus relates to the resale of
the common stock underlying these secured convertible notes, series A
convertible preferred stock and warrants.
The notes bear interest at 8%, mature two years from the date of issuance,
and are convertible into our common stock, at the investors' option, at the
lower of:
o $0.44; or
o 60% 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 full principal amount of the secured convertible notes are due upon
default under the terms of secured convertible notes and the series A
convertible preferret 6 0 d stock is redeemable upon a default under the terms
of the series A convertible preferred s The warrants are exercisable until five
years from the date of issuance at a purchase price of $0.40 per share. In
addition, we have granted the investors a security interest in substantially all
of our assets and intellectual property and registration rights.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
27
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of
any state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
28
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
29
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants unless the selling stockholders
exercise the warrants on a cashless basis. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Total Shares of Total
Common Stock Percentage Percentage
Issuable Upon of Common Shares of Beneficial of Common
Conversion of Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Notes, Assuming Included in Ownership Common Stock After the After
Name Preferred Stock Full Prospectus Before the Owned Before Offering Offering
and/or Warrants* Conversion (1) Offering** Offering** (4) (4)
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Offshore, Ltd. 14,095,099 48.31% Up to 776,922 (2) 4.9% -- --
(3) 28,190,197
shares of
common stock
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Qualified 11,902,528 44.11% Up to 776,922 (2) 4.9% -- --
Partners, LLC (3) 23,805,055
shares of
common stock
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Partners, LLC 4,698,366 23.76% Up to 776,922 (2) 4.9% -- --
(3) 9,396,732
shares of
common stock
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
New Millennium 626,449 3.99% Up to 626,449 4.0% -- --
Capital Partners 1,252,897
II, LLC (3) shares of
common stock
* This column represents an estimated number based on a conversion price as of a
recent date of May 2, 2005 of $.108 for the secured convertible notes and $.153
for the series A convertible preferred stock, divided into the principal amount.
** These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.9% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes and series A convertible preferred
stock is subject to adjustment depending on, among other factors, the future
market price of the common stock, and could be materially less or more than the
number estimated in the table.
30
(1) Includes a good faith estimate of the shares issuable upon conversion of
the secured convertible notes and series A convertible preferred stock and
exercise of warrants, based on current market prices. Because the number of
shares of common stock issuable upon conversion of the secured convertible notes
and series A convertible preferred stock is dependent in part upon the market
price of the common stock prior to a conversion, the actual number of shares of
common stock that will be issued upon conversion will fluctuate daily and cannot
be determined at this time. Under the terms of the secured convertible notes, if
the secured convertible notes had actually been converted on May 2, 2005, the
conversion price would have been $.108. Under the terms of the series A
convertible preferred stock, if the series A convertible preferred stock had
actually been converted on May 2, 2005, the conversion price would have been
$.153.
(2) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
issuable upon conversion of the secured convertible notes and series A
convertible preferred stock and exercise of the related warrants by reason of
any stock split, stock dividend or similar transaction involving the common
stock, in accordance with Rule 416 under the Securities Act of 1933. However the
selling stockholders have contractually agreed to restrict their ability to
convert their secured convertible notes and series A convertible preferred stock
or exercise their warrants and receive shares of our common stock such that the
number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for the selling stockholders exceeds the number of
shares of common stock that the selling stockholders could own beneficially at
any given time through their ownership of the secured convertible notes, series
A convertible preferred stock and the warrants. In that regard, the beneficial
ownership of the common stock by the selling stockholder set forth in the table
is not determined in accordance with Rule 13d-3 under the Securities Exchange
Act of 1934, as amended.
(3) The selling stockholders are affiliates of each other because they are under
common control. AJW Partners, LLC is a private investment fund that is owned by
its investors and managed by SMS Group, LLC. SMS Group, LLC, of which Mr. Corey
S. Ribotsky is the fund manager, has voting and investment control over the
shares listed below owned by AJW Partners, LLC. AJW Offshore, Ltd. is a private
investment fund that is owned by its investors and managed by First Street
Manager II, LLC. First Street Manager II, LLC, of which Corey S. Ribotsky is the
fund manager, has voting and investment control over the shares owned by AJW
Offshore, Ltd. AJW Qualified Partners, LLC is a private investment fund that is
owned by its investors and managed by AJW Manager, LLC, of which Corey S.
Ribotsky and Lloyd A. Groveman are the fund managers, have voting and investment
control over the shares listed below owned by AJW Qualified Partners, LLC. New
Millennium Capital Partners II, LLC, is a private investment fund that is owned
by its investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Corey S. Ribotsky is the fund manager, has voting and
investment control over the shares owned by New Millennium Capital Partners II,
LLC. We have been notified by the selling stockholders that they are not
broker-dealers or affiliates of broker-dealers and that they believe they are
not required to be broker-dealers.
(4) Assumes that all securities registered will be sold.
TERMS OF SECURED CONVERTIBLE NOTES AND 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.
The notes bear interest at 8%, mature two years from the date of issuance,
and are convertible into our common stock, at the investors' option, at the
lower of:
o $0.44; or
o 60% 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.
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.
31
The full principal amount of the secured convertible notes are due upon
default under the terms of secured convertible notes and the series A
convertible preferred stock is redeemable upon a default under the terms of the
series A convertible preferred stock. In addition, we have granted the investors
a security interest in substantially all of our assets and intellectual property
and registration rights. We are liable for breach of any covenant,
representation or warranty contained in the Securities Purchase Agreement for a
period of two years from January 24, 2005. In the event that we breach any
representation or warranty regarding the condition of our company as set forth
in the Securities Purchase Agreement, we are liable to pay liquidated damages in
shares or cash, at the election of the investors, equal to three percent of the
outstanding amount of the secured convertible notes per month plus accrued and
unpaid interest. In the event that we breach any covenant as set forth in the
Securities Purchase Agreement, including the failure to comply with blue sky
laws, timely file all public reports, use the proceeds from the sale of the
secured convertible notes and series A convertible preferred stock in the agreed
upon manner, obtain written consent from the investors to negotiate or contract
with a party to for additional financing, reserve and have authorized the
required number of shares of common stock or the maintenance of our shares of
common stock on an exchange or automated quotation system, then we are liable to
pay liquidated damages in shares or cash, at the election of the investors,
equal to three percent of the outstanding amount of the secured convertible
notes per month plus accrued and unpaid interest.
The warrants are exercisable until five years from the date of issuance at
a purchase price of $0.40 per share. The selling stockholders will be entitled
to 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. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the secured
convertible notes and series A convertible preferred stock issued pursuant to
the Securities Purchase Agreement, dated January 24, 2005.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd., and
New Millennium Partners II, LLC have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them in the aggregate and their affiliates after such conversion
or exercise does not exceed 4.9% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreement and related documents
are filed with the SEC as exhibits to our Form SB-2 relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the
secured convertible notes is determined by dividing that portion of the
principal of the secured convertible notes to be converted and interest, if any,
by the conversion price. For example, assuming conversion of $2,000,000 of notes
on May 2, 2005, a conversion price of $0.108 per share, the number of shares
issuable upon conversion would be:
$2,000,000/$.108 = 18,518,519 shares
32
The number of shares of common stock issuable upon conversion of the
series A convertible preferred stock is determined by multiplying the number of
shares of series A convertible preferred stock to be converted by $1,000, and
then dividing by the conversion price. For example, assuming conversion of 1,500
shares of series A convertible preferred stock on May 2, 2005, a conversion
price of $0.153 per share, the number of shares issuable upon conversion would
be:
(1,500*$1,000)/$.153 = 9,803,922 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes and all shares of our series A convertible preferred stock,
based on market prices 25%, 50% and 75% below the market price, as of May 2,
2005 of $0.20.
SECURED CONVERTIBLE NOTES
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 40% Issuable Stock
- ------ ----- ------ -------- -----
25% $.15 $.09 22,222,223 59.58%
50% $.10 $.06 33,333,334 68.85%
75% $.05 $.03 66,666,667 81.55%
SERIES A CONVERTIBLE PREFERRED STOCK
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 15% Issuable Stock
- ------ ----- ------ -------- -----
25% $.15 $.1275 11,764,706 43.83%
50% $.10 $.085 17,647,059 53.92%
75% $.05 $.0425 35,294,118 70.07%
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Greenberg & Company LLC, independent registered public accounting firm,
have audited, as set forth in their report thereon appearing elsewhere herein,
our financial statements at June 30, 2004 and 2003 and for the years then ended
that appear in the prospectus. The financial statements referred to above are
included in this prospectus with reliance upon the independent registered public
accounting firm's opinion based on their expertise in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Modern Technology Corp, filed as part
of the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
33
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
34
INDEX TO FINANCIAL STATEMENTS
MODERN TECHNOLOGY CORP
INDEX TO FINANCIAL STATEMENTS
For the Years Ended June 30, 2004 and June 30, 2003
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statement of Operations F-4
Consolidated Statement of Cash Flows F-5
Consolidated Statement of Stockholders' Equity F-6
Notes to Consolidated Financial Statements F-7 to
F-11
For the Six Months Ended December 31, 2004 and December 31, 2003
Consolidated Balance Sheets December 31, 2004 (Unaudited)
and June 30, 2004 F-12
Consolidated Statements of Operations for the six months
ended December 31, 2004 and 2003 (Unaudited) F-13
Consolidated Statements of Operations for the three
months ended December 31, 2004 and 2003 (Unaudited) F-14
Consolidated Statements of Cash Flows For the six months
ended December 31, 2004 and 2003 (Unaudited) F-15
Notes to the Consolidated Financial Statements (Unaudited) F-16 to
F-21
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
MODERN TECHNOLOGY CORP.
Oxford, Mississippi
We have audited the accompanying consolidated balance sheet of MODERN TECHNOLOGY
CORP. (the "Company") as of June 30, 2004, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of June 30, 2004, and the results of its operations and its cash
flows for each of the two years in the period ended June 30, 2004, in conformity
with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 11 to
the consolidated financial statements, the Company has incurred losses and
negative cash flows from operations in recent years through June 30, 2004 and
these conditions are expected to continue through June 30, 2005, raising
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 11.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ GREENBERG & COMPANY LLC
Springfield, New Jersey
September 21, 2004
F-1
MODERN TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
2004
---------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 8,082
Investments, Trading Securities 23,745
---------
31,827
---------
TOTAL ASSETS $ 31,827
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued Expenses $ 5,430
Account Payable, Related Parties 12,520
---------
Total Current Liabilities 17,950
---------
STOCKHOLDERS' EQUITY
Common Stock Par Value $.0001
Authorized: 150,000,000 Shares
Issued and Outstanding: 20,150,000
Shares 2,015
Paid-in-Capital 552,828
Capital Returned (310,970)
Retained Earnings (Deficit) (229,996)
---------
13,877
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,827
=========
See accompanying summary of accounting policies and
notes to financial statements.
F-2
MODERN TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
June 30,
2003
------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 302,517
Investments, Trading Securities 82,520
------------
385,037
------------
EQUIPMENT - At Cost 17,436
Less: Accumulated Depreciation (14,280)
------------
3,156
------------
OTHER ASSETS
Deferred Registration Costs 25,000
Investments, At Cost 2,331
------------
27,331
------------
TOTAL ASSETS $ 415,524
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued Expenses $ 23,200
Account Payable, Related Parties 1,848
------------
Total Current Liabilities 25,048
------------
MINORITY INTEREST 5,000
------------
STOCKHOLDERS' EQUITY
Common Stock Par Value $.0001
Authorized: 150,000,000 Shares
Issued and Outstanding: 20,150,000
Shares 2,015
Paid-In Capital 495,161
Retained Earnings (Deficit) (111,700)
------------
385,476
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 415,524
============
See accompanying summary of accounting policies and
notes to financial statements.
F-3
MODERN TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
----------------------------
2004 2003
------------ ------------
REVENUE
Interest Income $ 1,170 $ 4,054
------------ ------------
EXPENSES
Officers' Salaries 24,364 $ 33,374
General and Administrative Expenses 50,940 63,264
Realized (Gain) Loss (41,714) 9,831
Unrealized (Gain) Loss 33,922 102,344
Loss on Write-down of Investment 7,830 --
Loss on Write-down of Worthless Loan 19,307 --
------------ ------------
94,649 208,813
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES (BENEFIT) (93,479) (204,759)
Income Tax Expense (Benefit) -- (7,210)
------------ ------------
INCOME FROM CONTINUING OPERATIONS (93,479) (197,549)
------------ ------------
DISCONTINUED OPERATIONS
Income (Loss) from Operations of Discontinued Pharmavet
(Applicable income tax benefit is $9,352, which is fully reserved.) (24,817) --
------------ ------------
NET INCOME (LOSS) $ (118,296) $ (197,549)
------------ ------------
INCOME (LOSS) PER SHARE--BASIC AND DILUTED $ (0.01) $ (0.01)
------------ ------------
NUMBER OF WEIGHTED AVERAGE SHARES OUTSTANDING 20,150,000 20,150,000
------------ ------------
See accompanying summary of accounting policies and
notes to financial statements.
F-4
MODERN TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
----------------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(118,296) $(197,549)
Adjustments to Reconcile Net Income
to Net Cash Provided by (Used In)
Operating Activities:
Depreciation and Amortization 3,156 1,144
Realized (Gain) Loss (41,714) 9,831
Unrealized (Gain) Loss 33,922 102,344
Writeoff of Investments 2,331 --
Writeoff of Deferred Registration Costs 25,000 --
Proceeds from Sale of Investments 124,234 --
Return of Common Stock of Subsidiary and Retired (5,000) --
Issuance of Stock for Service Received -- 5,000
Changes in Assets and Liabilities:
(Increase) Decrease in Deferred Registration Costs -- (25,000)
(Decrease) Increase in Accrued Expenses (17,770) 20,000
(Decrease) Increase in Account Payable-Related Party 10,672 1,848
--------- ---------
Net Cash Provided by (Used In) Operating Activities 16,535 (82,382)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures -- (1,776)
(Purchase) Sale of Securities -- 10,908
Purchase of Investment at Equity (2,789) --
--------- ---------
Net Cash Provided by (Used In) Investing Activities 6,343 --
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends Paid (310,970) --
--------- ---------
Net Cash Provided By (Used In) Financing Activities (310,970) --
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (294,435) (76,039)
Cash and Cash Equivalents,
Beginning of Period 302,517 378,556
--------- ---------
Cash and Cash Equivalents,
End of Period $ 8,082 $ 302,517
--------- ---------
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period for:
Taxes $ -- $ --
Interest $ -- $ --
Noncash Investing and Financing Transactions:
Issuance of Stock for Service Received $ -- $ 5,000
Receipt of Investment Security for Issuing of Common Stock 57,667 --
See accompanying summary of accounting policies and
notes to financial statements.
F-5
MODERN TECHNOLOGY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Period July 1, 2002 through June 30, 2004
COMMON STOCK RETAINED TOTAL
NUMBER OF PAR VALUE PAID-IN CAPITAL EARNINGS STOCKHOLDER'S
SHARES $0.0001 CAPITAL RETURNED (DEFICIT) EQUITY
----------- ----------- ----------- ----------- ----------- -----------
Balances @ July 1, 2002 $ 2,015 $ 495,161 $ -- $ 85,849 $ 583,025
Net Income (Loss)
FYE June 30, 2003 -- -- -- -- (197,549) (197,549)
----------- ----------- ----------- ----------- ----------- -----------
Balances @ June 30, 2003 20,150,000 2,015 495,161 -- (111,700) 385,476
Dividend of Equity -- -- -- (310,970) -- (310,970)
Additional Investment -- -- 57,667 -- -- 57,667
Net Income (Loss)
FYE June 30, 2004 -- -- -- -- (118,296) (118,296)
----------- ----------- ----------- ----------- ----------- -----------
Balances @ June 30, 2004 20,150,000 2,015 552,828 (310,970) (229,996) 13,877
----------- ----------- ----------- ----------- ----------- -----------
See accompanying summary of accounting policies and
notes to financial statements.
F-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS
Modern Technology Corp. (Modern) is a Nevada Corporation. Modern is engaged in
aiding prospective clients in obtaining financing and in providing managerial
services to client companies. Modern's office was located in New York, but has
been relocated to 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.
BASIS OF PRESENTATION
In April 2003 the Company formed a subsidiary named Pharmavet Inc. (Pharmavet).
Pharmavet accounts are included in the consolidated financial statements at June
30, 2004. On June 30, 2003 Modern owned 97.6% of Pharmavet. Gerald Kaufman
(Modern's Director and legal counsel for both Modern and Pharmavet) owned 2.4%
of Pharmavet. During the quarter of December 31, 2003, Gerald Kaufman decided to
return and cancel all shares of Pharmavet Inc. to Modern. Pharmavet was no
longer operating as of March 31, 2004. Pharmavet accounts were properly included
in the consolidated financial statements.
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.
PROPERTY AND EQUIPMENT
Renewals and betterments are capitalized; maintenance and repairs are expensed
as incurred. Depreciation is calculated using the straight-line method over the
asset's estimated useful life, which generally approximates five years.
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.
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont')
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 January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities". 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. At the effective date, the Company has not entered into any VIEs.
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.
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, 2004, the investment in 117,250 shares of common
stock of MediCor Ltd. was considered a trading security in accordance with
Financial Accounting Standard (FAS) 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 June 30, 2004,
the Company recognized $47,678 realized gain. During May 2004, Mr. Welch, CEO
and President, contributed $57,677 of marketable securities investment pursuant
to Modern's plan for reorganization. As of June 30, 2004, the company reported
$33,922 unrealized loss.
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
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 June 30, 2004.
NOTE 6: STOCK BASED COMPENSATION
On April 15, 2003, Pharmavet agreed to pay $10,000 and 10,000 shares of
Pharmavet Inc. for legal services provided for filing of Form SB-2. This service
is valued at fair market value at approximately $15,000. This entire amount was
charged to Deferred Registration Costs. This stock based compensation plan is
accounted for in accordance with SFAS No. 123. During the quarter of December
31, 2003, 10,000 shares were returned and cancelled. The costs of these shares
were credited against Deferred Registration Costs.
NOTE 7: INCOME TAX EXPENSE (BENEFIT)
The provision for income taxes is comprised of the following:
06/30/04 06/30/03
------- -------
Current $ -0- $(7,210)
Deferred -0- -0-
------- -------
$ -0- $(7,210)
------- -------
The provision for income taxes differs form the amount computed by applying the
statutory federal income rate as follows:
06/30/04 06/30/03
-------- -------
Expected statutory amount $ -0- $ -0-
Net operating loss -0- -0-
State income taxes, net
Of federal benefit -0- (7,210)
-------- -------
$ -0- $(7,210)
-------- -------
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:
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
NOTE 7: INCOME TAX EXPENSE (BENEFIT) (cont')
06/30/04 06/30/03
--------- ---------
Deferred tax assets:
Net operating loss
Carryforwards $ 129,070 $ 106,426
--------- ---------
Gross deferred tax assets 129,070 106,426
Valuation allowance (129,070) (106,426)
--------- ---------
Net deferred tax assets $ -0- $ -0-
--------- ---------
The net operating loss of approximately $345,000 expires in the year
ended June 30, 2022. The tax benefits have been fully reserved due to a
lack of consistent operating profitability.
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
Arthur Seidenfeld, President and a director of the Company until March 15, 2004,
owned 47.9% of the outstanding shares of Modern Technology Corp. Anne
Seidenfeld, Treasurer, Secretary and a director of the Company until March 15,
2004, owned approximately 12% of the outstanding shares of Modern Technology
Corp on June 30, 2004. Anne Seidenfeld is Arthur Seidenfeld's mother. There were
no related party transactions.
Pharmavet was formed on April 15, 2003 to commercialize the agreement Modern
signed with Centrovet to represent Centrovet as a sales representative. Modern
invested $7,830 and orally agreed to advance up to $100,000 to cover Pharmvet's
working capital needs for the twelve months through June 30, 2004 and to cover
the costs related to filing of the registration statement. As of December 31,
2003 and June 30, 2003, Modern's previous president, Arthur Seidenfeld, who was
also president of Pharmavet, advanced $2,594 and $1,848 respectively to
Pharmavet to cover certain operational expenses. For the investment of $7,830,
Modern was issued 403,000 shares of Pharmavet. At March 31, 2004, the investment
in Pharmavet was terminated and appropriate write downs effected.
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.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
NOTE 11: OPERATIONS AND LIQUIDITY
The Company has incurred substantial losses in 2004 and 2003. 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 June 30,
2004, 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 June 30,
2004.
NOTE 12: SUBSEQUENT EVENTS
In 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.
On August 17, 2004, 13 million shares were issued to Anthony Welch and he became
a 90.6% shareholder.
F-11
MODERN TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 JUNE 30, 2004
(UNAUDITED)
--------- ---------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ -- $ 8,082
Investments, Trading Securities 40,706 23,745
--------- ---------
TOTAL CURRENT ASSETS $ 40,706 $ 31,827
--------- ---------
TOTAL ASSETS $ 40,706 $ 31,827
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Cash Overdraft $ 8,123 $ --
Accrued Expenses 16,555 5,430
Account Payable, Related Parties 24,188 12,520
--------- ---------
TOTAL CURRENT LIABILITIES $ 48,866 $ 17,950
--------- ---------
STOCKHOLDERS' EQUITY
Common Stock, Par Value $.0001; 150,000,000 Shares Authorized;
15,078,631 and 1,343,631 Shares Issued and Outstanding, respectively: $ 1,508 $ 134
Paid-in Capital 725,935 554,709
Deferred Compensation (97,740) --
Capital Returned (310,970) (310,970)
Retained Earnings (Deficit) (326,893) (229,996)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) $ (8,160) $ 13,877
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 40,706 $ 31,827
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-12
MODERN TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE 6 MONTHS ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
REVENUE
Interest Income $ -- $ 1,036
Unrealized Gain - Trading Securities 16,961 110,943
------------ ------------
TOTAL REVENUES $ 16,961 $ 111,979
------------ ------------
EXPENSES
Officers' Salaries $ 14,000 $ 16,625
General and Administrative Expenses 99,858 62,408
Realized Loss - Trading Securities -- 30,940
Unrealized Loss - Trading Securities -- 32,325
Unrealized Loss - Investment, at Cost -- 1,431
------------ ------------
TOTAL EXPENSES $ 113,858 $ 143,729
------------ ------------
INCOME (LOSS) BEFORE TAXES (BENEFIT) $ (96,897) $ (31,750)
Income Tax Expense (Benefit) -- 1,310
------------ ------------
NET INCOME (LOSS) $ (96,897) $ (33,060)
============ ============
INCOME (LOSS) PER SHARE--BASIC AND DILUTED (0.01) (0.02)
============ ============
NUMBER OF WEIGHTED AVERAGE SHARES OUTSTANDING 11,329,120 1,343,631
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-13
MODERN TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE 3 MONTHS ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
REVENUE
Interest Income $ -- $ 482
Unrealized Gain - Trading Securities 10,177 --
------------ ------------
TOTAL REVENUES $ 10,177 $ 482
------------ ------------
EXPENSES
Officers' Salaries $ 8,000 $ 8,473
General and Administrative Expenses 86,813 28,124
Realized Loss - Trading Securities -- 30,940
Unrealized Loss - Trading Securities -- 32,325
------------ ------------
TOTAL EXPENSES $ 94,813 $ 99,862
------------ ------------
NET INCOME (LOSS) $ (84,636) $ (99,380)
============ ============
INCOME (LOSS) PER SHARE--BASIC AND DILUTED (0.01) (0.07)
============ ============
NUMBER OF WEIGHTED AVERAGE SHARES OUTSTANDING 14,902,327 1,343,631
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-14
MODERN TECHNOLOGY CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (96,897) $ (33,060)
Adjustments to Reconcile Net Income
to Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization -- 750
Unrealized (Gain) Loss - Trading Securities (16,961) (78,618)
Realized Loss - Trading Securities -- 30,940
Unrealized (Gain) Loss - Investment at Cost -- 1,431
Deferred Registration Costs -- 20,000
Issuance of Stock for Service Received 74,860 --
Changes in Assets and Liabilities:
(Decrease) Increase in Accrued Expenses 11,125 (13,266)
(Decrease) Increase in Account Payable - Related Party 11,668 746
--------- ---------
Net Cash Provided by (Used In) Operating Activities (16,205) (71,077)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment -- 55,850
--------- ---------
Net Cash Provided by (Used in) Investing Activities -- 55,850
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in Cash Overdraft 8,123 --
--------- ---------
Net Cash Provided by (Used in) Financing Activities 8,123 --
--------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents $ (8,082) $ (15,227)
Cash and Cash Equivalents - Beginning $ 8,082 $ 302,517
--------- ---------
Cash and Cash Equivalents - Ending $ 0 $ 287,290
========= =========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period for:
Taxes $ -- 1,310
Interest -- --
Noncash Investing and Financial Transactions:
Issuance of Stock for Services Received $ 172,600 --
The accompanying notes are an integral part of these
consolidated financial statements.
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 AND DECEMBER 31,2003
(UNAUDITED)
NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS
Modern Technology Corp. ("The Registrant") is engaged in aiding both
privately-held and publicly-traded 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 refer to 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. Our long-term strategy is to increase
shareholder equity through ownership in many growing companies and build a
strong recurring revenue stream earned from agreements with our portfolio
companies.
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.
BASIS OF PRESENTATION
In April 2003, the Company formed a subsidiary named Pharmavet Inc. (Pharmavet).
Pharmavet accounts are included in the consolidated financial statements at
December 31, 2004. On September 30, 2003 Modern owned 97.6% of Pharmavet. Gerald
Kaufman (Modern's Director and legal counsel for both Modern and Pharmavet)
owned 2.4% of Pharmavet. During the quarter of December 31, 2003, Gerald Kaufman
decided to return and cancel all shares of Pharmavet Inc. to Modern. Pharmavet
was no longer operating as of March 31, 2004. Pharmavet accounts were properly
included in the consolidated financial statements at June 30, 2004.
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.
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.
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 AND DECEMBER 31,2003
(UNAUDITED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont')
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 January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". 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. At the effective date, the Company has not entered into any VIEs.
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.
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
Statement of Financial Accounting Standard (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." 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 June
30, 2004, the Company recognized $41,714 realized gain. During May 2004, Mr.
Welch, CEO and President, contributed $57,677 of marketable securities
investment pursuant to Modern's plan for reorganization. As of June 30, 2004,
the Company reported $33,922 unrealized loss. As of December 31, 2004, the
Company recognized $16,961 unrealized gain. The Company follows SFAS 115 and has
considered these securities to be trading securities.
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 AND DECEMBER 31,2003
(UNAUDITED)
NOTE 5: INVESTMENT EQUITY SECURITIES (AT COST)
During the quarter ended September 30, 2003, the Company recognized an
unrealized loss of $1,431 on its investment in Daine Industries. As of June 30,
2004, the Company wrote off $1,431 of Daine Common Stock investment of 360,000
restricted shares to realized loss. 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 as of June
30, 2003. The net investment value in Interactive Medicine Inc. is zero as of
December 31, 2004.
NOTE 6: STOCK BASED COMPENSATION
On April 15, 2003, Pharmavet agreed to pay $10,000 and 10,000 shares of
Pharmavet Inc. for legal services provided for filing of Form SB-2. This service
is valued at fair market value at approximately $15,000. This entire amount was
charged to Deferred Registration Costs. This stock based compensation plan is
accounted for in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation". During the quarter of December 31, 2003, 10,000 shares were
returned and cancelled. The costs of these shares were credited against Deferred
Registration Costs.
During the six months ended December 31, 2004, the Company issued 735,000 shares
of Modern Technology Corp. Common Stock for legal and consulting services
rendered or to be rendered in the coming year. $97,740 was charged to Deferred
Compensation relating to these shares. During the six months ended December 31,
2004, 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. This 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:
12/31/04 12/31/03
------- -------
Current $ -0- $ 1,310
Deferred -0- -0-
------- -------
$ -0- $ 1,310
------- -------
The provision for income taxes differs from the amount computed by
applying the statutory federal income rate as follows:
12/31/04 12/31/03
-------- -------
Expected statutory amount $ -0- $ -0-
Net operating loss -0- -0-
State income taxes, net
Of federal benefit -0- 1,310
-------- -------
$ -0- $ 1,310
-------- -------
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 AND DECEMBER 31,2003
(UNAUDITED)
NOTE 7: INCOME TAX EXPENSE (BENEFIT) (cont')
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:
12/31/04 06/30/04
--------- ---------
Deferred tax assets:
Net operating loss
Carryforwards $ 147,595 $ 129,070
Gross deferred tax assets 147,595 129,070
Valuation allowance (147,595) (129,070)
Net deferred tax assets $ -0- $ -0-
--------- ---------
The net operating loss of approximately $345,000 expires in the year ended June
30, 2024. The tax benefits have been fully reserved due to a lack of consistent
operating profitability.
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, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and 112, "Employers' Accounting for Postemployment
Benefits-an amendment of FASB Statements No.5 and 43".
NOTE 9: RELATED PARTY TRANSACTIONS
Arthur Seidenfeld, President and a director of the Company until March 15, 2004,
owned 47.9% of the outstanding shares of Modern Technology Corp on June 30,
2004. Anne Seidenfeld, Treasurer, Secretary and a director of the Company until
March 15, 2004, owned approximately 12% of the outstanding shares of Modern
Technology Corp on June 30, 2004. Anne Seidenfeld is Arthur Seidenfeld's mother.
There were no related party transactions.
Pharmavet was formed on April 15, 2003 to commercialize the agreement Modern
signed with Centrovet to represent Centrovet as a sales representative. Modern
invested $7,830 and orally agreed to advance up to $100,000 to cover Pharmvet's
working capital needs for the twelve months through June 30, 2004 and to cover
the costs related to filing of the registration statement. As of December 31,
2003 and June 30, 2003, Modern's previous president, Arthur Seidenfeld, who was
also president of Pharmavet, advanced $2,594 and $1,848 respectively to
Pharmavet to cover certain operational expenses. For the investment of $7,830,
Modern was issued 403,000 shares of Pharmavet. At March 31, 2004, the investment
in Pharmavet was terminated and appropriate write downs effected.
Robert Church, CFO of the Company, is also a Partner of Church, DeVoe &
Associates to which the Company expensed $13,668 in accounting fees during the
six months ended December 31, 2004.
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 AND DECEMBER 31,2003
(UNAUDITED)
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.
In 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. The retroactive effect of the Reverse Stock Split is reflected in the
change in the number of shares outstanding on July 1, 2003.
On August 17, 2004, 13 million shares were issued to Anthony Welch and he became
a 90.6% shareholder.
NOTE 11: OPERATIONS AND LIQUIDITY
The Company has incurred substantial losses in 2004 and 2003. 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 December
31, 2004, 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 December 31,
2004.
NOTE 12: INTERIM REPORTING
The accompanying unaudited consolidated financial statement for the six months
ended December 31, 2004 and December 31, 2003 have been prepared in accordance
with the 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 for the six months ended December 31, 2004 are not necessarily
indicative of the results for the full fiscal year.
NOTE 13: SUBSEQUENT EVENTS
On January 24, 2005, the Company entered into an agreement with four
institutional investors, who provided the Company with $3.5 million in financing
through the sale of $2 million in 8% Senior Secured Convertible Redeemable Notes
F-20
and $1.5 million in Series A Preferred Stock. The investors also received three
million warrants. The Company utilized $1.5 million of the financing to purchase
a $1.5 million Convertible Debenture in DeMarco Energy Systems of America, Inc.
The Company also used part of the funding obtained above to acquire 51% of Sound
City Inc. for $2 million paid in a combination of cash and Convertible Notes.
F-21
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our right and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in its Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 1,615.90
Accounting fees and expenses 10,000.00*
Legal fees and expenses 40,000.00*
Miscellaneous 3,384.10
----------
TOTAL $55,000.00*
==========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On July 31, 2004 as part of our plan of reorganization and ongoing plan
for operations we effected a reverse split of our common stock on a 1 for 15
basis.
On August 17, 2004, we issued 13 million shares to Anthony K. Welch in
exchange for marketable securities and executive and business development
services provided and to be provided in the coming year.
On September 20, 2004, we issued 250,000 shares of restricted common stock
to Kamel Yassin for business development services to be performed in the coming
year.
On November 10, 2004, we issued 250,000 shares of restricted common stock
to The Research Works, Inc. for ongoing analysis and coverage and publication of
research reports regarding our company for the coming year..
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners II, LLC 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.
The secured convertible notes bear interest at 8%, mature two years from
the date of issuance, and are convertible into our common stock, at the selling
stockholders' option, at the lower of (i) $0.44 or (ii) 60% 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.
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 full principal amount of the secured
convertible notes are due upon default under the terms of secured convertible
notes and the series A convertible preferred stock is redeemable upon default
under the terms of the series A convertible preferred stock. In addition, we
have granted the investors a security interest in substantially all of our
assets and intellectual property and registration rights. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.40 per share. In addition the warrants exercise price gets adjusted in the
event we issue common stock at a price below market, with the exception of any
securities issued as of the date of this warrant.
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of Modern Technology or executive
officers of Modern Technology, and transfer was restricted by Modern Technology
Corp. in accordance with the requirements of the Securities Act of 1933. In
addition to representations by the above-referenced persons, we have made
independent determinations that all of the above-referenced persons were
accredited or sophisticated investors, and that they were capable of analyzing
the merits and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
II-2
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean Modern Technology Corp, a Nevada
corporation.
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation, dated as of July 27, 1982,
previously filed with the Commission and incorporated herein
by reference.
3.2 Certificate of Amendment to the Articles of Incorporation,
creating a series of preferred stock, filed with the Nevada
Secretary of State on January 24, 2005.
3.3 Certificate of Designation of Series A Convertible Preferred
Stock
3.4 By-laws of the Company, previously filed with the Commission
and incorporated herein by reference.
4.1 Securities Purchase Agreement, dated as of January 24, 2005,
by and among Modern Technology Corp, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 31,
2005 and incorporated herein by reference.
4.2 Secured Convertible Note issued to AJW Offshore, Ltd., dated
January 24, 2005, filed as an exhibit to the current report on
Form 8-K filed with the Commission on January 31, 2005 and
incorporated herein by reference.
4.3 Secured Convertible Note issued to AJW Qualified Partners,
LLC, dated January 24, 2005, filed as an exhibit to the
current report on Form 8-K filed with the Commission on
January 31, 2005 and incorporated herein by reference.
4.4 Secured Convertible Note issued to AJW Partners, LLC, dated
January 24, 2005, filed as an exhibit to the current report on
Form 8-K filed with the Commission on January 31, 2005 and
incorporated herein by reference.
4.5 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC, dated January 24, 2005, filed as an exhibit
to the current report on Form 8-K filed with the Commission on
January 31, 2005 and incorporated herein by reference.
4.6 Common Stock Purchase Warrant issued to AJW Offshore, Ltd.,
dated January 24, 2005, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 31,
2005 and incorporated herein by reference.
4.7 Common Stock Purchase Warrant with AJW Qualified Partners,
LLC, dated January 24, 2005, filed as an exhibit to the
current report on Form 8-K filed with the Commission on
January 31, 2005 and incorporated herein by reference.
4.8 Common Stock Purchase Warrant with AJW Partners, LLC, dated
January 24, 2005, filed as an exhibit to the current report on
Form 8-K filed with the Commission on January 31, 2005 and
incorporated herein by reference.
4.9 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated January 24, 2005, filed as an exhibit
to the current report on Form 8-K filed with the Commission on
January 31, 2005 and incorporated herein by reference.
II-3
4.10 Registration Rights Agreement, dated as of January 24, 2005,
by and among Modern Technology Corp, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 31,
2005 and incorporated herein by reference.
4.11 Security Agreement, dated as of January 24, 2005, by and among
Modern Technology Corp, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC, filed as an exhibit to the current report on
Form 8-K filed with the Commission on January 31, 2005 and
incorporated herein by reference.
4.12 Intellectual Property Security Agreement, dated as of January
24, 2005, by and among Modern Technology Corp, AJW Partners,
LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Capital Partners II, LLC, filed as an exhibit to
the current report on Form 8-K filed with the Commission on
January 31, 2005 and incorporated herein by reference.
4.13 Guaranty and Pledge Agreement, dated as of January 24, 2005,
by and among Modern Technology Corp, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., New Millennium
Capital Partners II, LLC and Anthony K. Welch, filed as an
exhibit to the current report on Form 8-K filed with the
Commission on January 31, 2005 and incorporated herein by
reference.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed
herewith)
10.1 Stock Purchase Agreement, dated January 24, 2005, by and among
Modern Technology Corp and Sound City, Inc., filed as an
exhibit to the current report on Form 8-K filed with the
Commission on January 31, 2005 and incorporated herein by
reference.
10.2 Employment Agreement, dated as of January 24, 2005, by and
among Modern Technology Corp, Sound City, Inc., and Kamel
Yassin, filed as an exhibit to the current report on Form 8-K
filed with the Commission on January 31, 2005 and incorporated
herein by reference.
10.3 Purchase Agreement for DeMarco Convertible Debenture, dated
January 24, 2005 by and Modern Technology Corp, AJW Offshore,
Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC, filed as an exhibit to
the current report on Form 8-K filed with the Commission on
January 31, 2005 and incorporated herein by reference.
23.1 Consent of Greenberg & Company LLC (filed herewith).
23.2 Consent of legal counsel (see Exhibit 5.1).
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
II-4
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Oxford,
State of Mississippi, on May 4, 2005.
MODERN TECHNOLOGY CORP
By: /s/ ANTHONY K. WELCH
-----------------------------------------------------------
Anthony K. Welch, President, Chief Executive Officer
(Principal Executive Officer) and Director
By: /s/ ROBERT CHURCH
-----------------------------------------------------------
Robert Church, Chief Financial Officer (Principal Financial
Officer), Principal Accounting Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ ANTHONY K. WELCH President, Chief Executive Officer and May 4, 2005
- ------------------------ Director
Anthony K. Welch
/s/ ROBERT CHURCH Chief Financial Officer and Director May 4, 2005
- ------------------------
Robert Church
II-6