AI
Friday, October 27, 2006 2:51:58 PM
Part I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis of Results of Operations.
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matt
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
Item 14. Principal Accountant Fees and Services
SIGNATURES
EX-31 (CERTIFICATION)
EX-32 (CERTIFICATION)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACE OF 1934
For the fiscal year ended June 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File No. 2-80891-NY
MODERN TECHNOLOGY CORPORATION
(Name of small business issuer in its charter)
Nevada 11-2620387
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1420 N. Lamar Blvd., Oxford, M.S. 38655
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (662) 236-5928
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No [ ]
Part I
Item 1. Description of Business
We were incorporated in Nevada in 1982 as a for-profit corporation. We have never experienced any bankruptcy or similar proceeding. We have never by a party to a 'reverse merger' or similar transaction. We have engaged in business categorically similar to our present line of business since inception.
We are engaged in aiding both private and public companies in the areas of business development, financing, product development, corporate strategy, corporate image and public relations, product distribution and marketing, and executive management consulting. We collectively refer to companies in which we own an equity position, our majority owned subsidiaries, corporate customers and clients as "portfolio companies". We charge for our services in cash or equity in the portfolio company. We may also exchange our services for revenue sharing of future sales of products or sharing of proceeds from the sale of licenses and technologies owned by our portfolio companies. We seek to grow through strategic acquisitions in addition to generating income from our services.
We seek to build revenues by a model of continuous growth, strategic acquisitions, and commercialization of nascent technology. We seek to improve operating efficiencies among our portfolio companies through elimination of cost redundancies and realized synergy between subsidiaries. We also seek to commercialize new technology and provide to our portfolio companies and subsidiaries new product lines, operations infrastructure, and significant intellectual capital.
Our sources of revenue are primarily from:
Consolidated revenues of our portfolio companies which we own in majority;
Management and consulting fees we may charge our portfolio companies;
Revenue sharing agreements we may have with our portfolio companies;
Royalty and licensing proceeds from the sale of technology rights we may own in whole or in part with our portfolio companies;
Proceeds from the sale of securities we may own in our portfolio companies;
Proceeds from the interest and payment of debt we may hold in our portfolio companies; and
Proceeds from the conversion of debt we may hold in our portfolio companies into marketable securities and subsequent sale of same.
OUR PORTFOLIO COMPANIES
Sound City
We presently own 51% of Sound City with an option to acquire the remaining 49%. The option is valid through December 31, 2009, and can be exercised for $3,500,000, which is payable in cash, stock or a combination of cash or stock. Sound City, Inc. is a consumer electronics company with customers across the U.S. Sound City markets audio and video solutions for home and mobile environments, including the HD-TV, Plasma TV and LCD TV market segments. As a full service dealer, Sound City provides a wide range of custom home installations addressing numerous applications. With a customer base of over 900,000 customers, Sound City is a large electronics mail order companies in the U.S., who distributes its products and solutions through its direct mail and Web site channels. Consumers can also find the latest audio, video, car stereo and home theatre products in Sound City's retail locations, including 12 custom showrooms. Sound City operates a web site at the following address: http://www.soundcity.com.
DeMarco Energy Systems of America, Inc.
We are the holder of an outstanding convertible debenture in the amount of $1,500,000 issued by DeMarco Energy Systems of America. The debenture is convertible into shares of common stock of DeMarco. The convertible debentures bear interest at 10%, matured on March 25, 2003, and are convertible into shares of Demarco common stock, at the selling stockholders' option, at the lower of (i) $0.15 or (ii) 60% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 10 trading days before but not including the conversion date. As of May 2, 2005, the $1,500,000 convertible debenture was convertible into 250,000,000 shares of DeMarco common stock. During the year ended June 30, 2006, we sold these debentures for $500,000 to Shield Investments.
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. We have an informal agreement to assist them where practicable to further their plans and efforts, although there are no written agreements to this effect and we are not obligated to perform any services for them.
DeMarco Energy's primary mission is to provide energy efficient technologies to commercial and institutional markets through the application of the DeMarco 'Systems' patent. The company owns a systems patent that was granted on September 3, 1985, known as the Energy Miser System. The company is primarily focusing on providing heating and air conditioning powered by the thermal properties of managed water systems, which include gray-water, re-use water and potable water systems. DeMarco has exclusive rights to the patented technology.
INmarketing Group Inc.
On December 20, 2005 we acquired 51% of the outstanding common stock of INmarketing Group Inc. (IMG) for $1,000,000 in cash and $1,210,000 in the form of Series B 4% convertible preferred stock of the Company, with an option to acquire the remaining 49%. The option is valid through December 19, 2007.
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.
Item 2. Description of Property
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 filing.
Item 3. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
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 19th, 2004 and trade under the symbol MOTG.
Number of Shareholders- 380 shareholders of record as of June 30, 2006.
Dividends:
On March 13, 2004, the Registrant 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, the Registrant distributed the 403,000 shares it owned in Scientio to its shareholders. These 403,000 shares represent a dividend of equity investment stock of $178,864 for the year ended June 30, 2002. The Registrant has registered these shares with the Securities and Exchange Commission with the intention of distributing these shares to the Registrant's shareholders in the form of a dividend.
During the year ended June 30, 1999, the Registrant was involved in providing consulting services to Coral Development Corp. During December 1996, the Registrant purchased 403,000 shares of Coral Development Corp. ("Coral") for $30,300. The Registrant had registered these shares with the Securities and Exchange Commission with the intention of distributing these shares to the Registrants' shareholders in the form of a dividend. As of June 30, 1999, the Registrant declared a distribution to its shareholders in the form of all of the 403,000 shares of Omnicomm Systems Inc. ("Omnicomm") common stock that the Registrant owned.
Item 6. Management's Discussion and Analysis of Results of Operations.
General
The following information should be read in conjunction with the Consolidated Audited Financial Statements and Notes thereto and other information set forth in this report.
Forward-Looking Statements
Statements contained in this Form 10-K that are not historical fact are "forward looking statements". These statements can often be identified by the use of forward-looking terminology such as "estimate", "project", "believe", "expect", "may", "will", "should", "intends", or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements, such as statements relating to timing, costs and of the acquisition of, or investments in, existing business, the revenue or profitability levels of such businesses, and other matters contained in this Form 10-K regarding matters that are not historical facts, are only predictions.
No assurance can be given that plans for the future will be consummated or that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these plans and projections and other forward-looking statements are based upon a variety of assumptions, which we consider reasonable, but which nevertheless may not be realized. Because of the number and range of the assumptions underlying our projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond our reasonable control, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this Form 10-KSB. Therefore, our actual experience and results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected.
Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by us or any other person that these plans will be consummated or that estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. The Company does not undertake any obligation to update or revise any forward-looking statement made by it or on its behalf, whether as a result of new information, future events or otherwise.
Overview
We were incorporated in Nevada in 1982 as a for-profit corporation. We have never experienced any bankruptcy or similar proceeding. We have never by a party to a 'reverse merger' or similar transaction. We have engaged in business categorically similar to our present line of business since inception.
We are engaged in aiding both private and public companies in the areas of business development, financing, product development, corporate strategy, corporate image and public relations, product distribution and marketing, and executive management consulting. We collectively refer to companies in which we own an equity position, our majority owned subsidiaries, corporate customers and clients as "portfolio companies". We charge for our services in cash or equity in the portfolio company. We may also exchange our services for revenue sharing of future sales of products or sharing of proceeds from the sale of licenses and technologies owned by our portfolio companies. We seek to grow through strategic acquisitions in addition to generating income from our services.
We seek to build revenues by a model continuous growth, strategic acquisitions, and commercialization of nascent technology. We seek to improve operating efficiencies among our portfolio companies through elimination of cost redundancies and realized synergy between subsidiaries. We also seek to commercialize new technology and provide to our portfolio companies and subsidiaries new product lines, operations infrastructure, and significant intellectual capital.
Our sources of revenue are primarily from:
Consolidated revenues of our portfolio companies which we own in majority;
Management and consulting fees we may charge our portfolio companies;
Revenue sharing agreements we may have with our portfolio companies;
Royalty and licensing proceeds from the sale of technology rights we may own in whole or in part with our portfolio companies;
Proceeds from the sale of securities we may own in our portfolio companies;
Proceeds from the interest and payment of debt we may hold in our portfolio companies; and
Proceeds from the conversion of debt we may hold in our portfolio companies into marketable securities and subsequent sale of same.
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 19th, 2004 and trade under the symbol MODC.
On July 31, 2004 as part of our plan of reorganization and ongoing plan for operations we affected a reverse split of the Company's common stock on a 1 for 15 basis. On May 15, 2006 we affected a reverse split of the Company's common stock on a 1 for 20 basis.
Results of Operations
During the fiscal year ended June 30, 2006 we generated revenues of $11,472,254 versus $3,078,145 for the fiscal year ended June 30, 2005. Gross margin for the fiscal year ended June 30, 2006 was $1,145,264 versus $816,933 for the fiscal year ended June 30, 2005. The increase in sales of $8,394,109 and gross margin of $328,331 during the year ended June 30, 2006, respectively, can be attributed mainly to the acquisition of INmarketing Group Inc. (IMG) on December 20, 2005. During the year ended June 30, 2006, the company's inventory was reduced by $1,323,417 as a result of obsolescence.
In comparing fiscal year expense items for fiscal year 2006 with fiscal year 2005 items, the Registrant experienced increases in both operating and nonoperating expenses primarily due to the acquisitions of Sound City and IMG. Sound City was acquired on January 24, 2005 and IMG was acquired on December 20, 2005. Therefore, the expenses for Sound City were included in the full fiscal year of 2006 whereas they were only included for approximately six months during fiscal 2005. The expenses for IMG were only included in fiscal 2006 for approximately six months versus zero for fiscal 2005.
Non-operating expenses (income)
The decrease in interest income during fiscal 2006 of $58,356 is the result of the sale of the Demarco convertible debenture. Since it is was sold during fiscal 2006, no interest income was recorded during fiscal 2006. The increase in interest expense of $193,865 is due mainly to higher debt levels during fiscal 2006 and noncash interest expense of approximately $44,000related to the warrants issued. The loss on the sale of the Demarco loan is due to the sale of our investment for a note receivable of $500,000 from Shield Investments. The goodwill impairment of $2,126,983 is the result of our analysis of our Sound City's business and cash flows and our conclusion that the goodwill was totally impaired, resulting in the complete write off of goodwill related to Sound City.
Preferred stock dividends deemed decreased by $132,802 during fiscal 2006 as our convertible debt issuances during fiscal 2006 were mainly not "in the money", resulting in much lower deemed dividends.
Preferred stock dividends in arrears increased by $53,170 during fiscal 2006 as our series A preferred stock was outstanding for the entire year.
During the fiscal years ended June 30, 2006 and 2005, we generated net losses of $6,543,342 and $1,123,816, respectively. The increase in net loss is attributable to the expenses associated with acquisitions and related costs.
Liquidity and Capital Resources
At June 30, 2005, the Registrant's total assets amounted to $6,861,170 as compared with $31,827 at June 30, 2004. The change can be attributable to the acquisition of Sound City and related operations. During the fiscal year ended June 30, 2005, we have experienced negative cash flows and have relied primarily on the Registrant's cash balances to fund our operations. We are not currently bound by any long or short-term agreements for the purchase or lease of capital expenditures.
Our ability to continue in existence is dependent on our having sufficient financial resources to cover operating expenses. We believe we have enough cash and equivalents to cover operations for the next twelve month period.
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. Note 2 of Notes to the Consolidated
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 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.
Our Management believes 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.
Item 7. Financial Statements
See page F-1
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On September 6, 2006, Greenberg & Company LLC resigned as our auditors. On September 29, 2006, the company engaged Lawrence Scharfman & Co., CPA PC to audit its financial statements for the years ended June 30, 2006 and 2005. There were no disagreements with our previous auditor, Greenberg & Company LLC, on accounting and financial disclosure
Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-KSB, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation and up to the filing date of this Annual Report on Form 10-KSB. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
The executive officers and directors of the Registrant are as follows:
Name Age Title Term Expires
Anthony Welch 37 President, CEO CFO and Director Next Annual Meeting
Robert Church * 45 CFO and Director Next Annual Meeting
Anthony Welch and Robert Church were elected to their designated offices on March 15, 2004.
* Robert Church resigned as CFO on June 12, 2006.
ANTHONY K. WELCH.
Mr. Welch has been our 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. and trading on the OTCBB under the symbol "NMKT"). 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 [Uniform Investment Advisor Law]. Mr. Welch is completing his second-year as a law student in the Juris Doctor program at Concord School of Law.
Robert Church
Prior five years of professional activities: Owner/Partner of Church-Devoe, PLLC, a professional accountancy firm.
Mr. Church hold a BBA in Accountancy from the University of Mississippi received in 1980.
He holds the following certifications:
Certified Public Accountant (Texas and Mississippi) (CPA)
Certified Financial Planner (CFP)
Personal Financial Specialist (AICPA)
Qualified Financial Planner (IAQFP)
Certified Fraud Examiner (CFE)
Certified Divorce Planner (CDP)
Certified Divorce Specialist (CDS)
Certified Divorce Financial Analyst (CDFA)
Certified Valuation Analyst (CVA)
Chartered Business Administrator (CBA)
Certified Financial Consultant (CFC)
Chartered Trust and Estate Planner (CTEP)
Chartered Financial Management Analyst (CFMA)
Certified HealthCare Business Consultant (CHBC)
Certified Healthcare Consultant (CHC)
Diplomate American College of Forensic Examiners (DABFE)
Diplomate American College of Forensic Accountants (DABFA)
Fellow Institute of Financial Consultants (FIFC)
Certified Forensic Consultant (expected 12/04) (CFC)
Certified Forensic Accountant (expected 12/04) (Cr.FA)
Professional Associations:
American Institute of CPA's
Mississippi Society of CPA's
American College of Forensic Examiners
American College of Forensic Accountants
Financial Planning Association
National Association of Certified Valuation Analysts
Association of Certified Fraud Examiners
Institute of Financial Consultants
American Academy of Financial Management
Institute of Certified Professional Business Consultants
American Association of Healthcare Consultants
College of Divorce Specialists
Institute of Certified Healthcare Business Consultants
MENSA
Institute of Certified Divorce Planners
Financial Divorce Association
Code of Ethics: At this time, the Company has not adopted a Code of Ethics.
Item 10. Executive Compensation
During the fiscal years ended June 30, management compensation was as follows:
2006 2005
Anthony K. Welch $297,200 $91,100
Robert Church $ 99,750 $43,315
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
a. The following are known to Registrant to be beneficial owners of 5% or more of the Registrant's common stock.
Title of Class of Common Stock
Name of Beneficial Amount & Nature of Percentage
Owner Beneficial Ownership of Class
Anthony Welch
1420 N. Lamar Blvd
Oxford, MS 38655 825,000 22.5%
All Officers and
Directors as a Group (3) 825,000 22.5%
b. The shares owned by management are as follows:
Common Stock.
Name of Beneficial Amount & Nature of Percentage
Owner Beneficial Ownership of Class
Anthony Welch
1420 N. Lamar Blvd
Oxford, MS38655 825,000 22.5%
Robert Church
1420 N. Lamar Blvd
Oxford, MS 38655 0 0%
Item 12. Certain Relationships and Related Transactions
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.
Item 13. Exhibits and Reports on Form 8-K
Exhibits
Exhibit No. Document Location
Exhibit 31.1 Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Anthony Welch, CEO and CFO Included
Exhibit 32.1 Section 906 of the Sarbanes-Oxley Act of 2002 Certification of Anthony Welch, CEO and CFO Included
Reports on Form 8-K
: The following reports were filed on Form 8-K during the last quarter of the fiscal year ended June 30, 2005:
Current Report filed April 11, 2005, Item 9.01
Item 14. Principal Accountant Fees and Services
2006 2005
Audit Fees: $103,000 $62,800
Audit-Related Fees: $0
Tax Fees: $0
All Other Fees: $0
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MODERN TECHNOLOGY CORP
/s/ Anthony Welch
Anthony Welch, Chairman, CEO and CFO
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Anthony Welch
Anthony Welch, President, Chairman, CEO and CFO
Dated: October 24, 2006
Financial Statements
INDEPENDENT AUDITORS' REPORT
MODERN TECHNOLOGY CORP
C/O ANTHONY K WELCH
1420 N LAMAR BLVD OXFORD M.S.
THE BOARD OF DIRECTORS AND STOCKHOLDERS
We have audited the Balance Sheet of Modern Technology Corp and subsidiaries
as of June 30,2006 and the related statements of operations, stockholders
equity(deficit) and cash flows for the twelve months ended June 30.2006.
These statements are the responsibility of Company's Management.
Our responsibility is to express an opinion on these financial statements based
upon our audit.
We conducted our audit in accordance with 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 misstatements. An audit include 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 signif-
icant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe thtat our audit provides a reasonable basis for our
opinion.
The company has had difficulty in generating sufficient cash flow to meet its obligations,
and is dependent on management's ability to develop profitable operations. These
factors, among others may raise substantial doubt about their ability to
continue as a going concern.
In our opinion, the financial statements referred to above present fairly, in all material
respects the financial position of Modern Technology Corp. at June 30,2006
and the results of its operations and cash flows for the year then ended in
conformity with generally accepted accounting principles.
Lawrence Scharfman CPA
October 25,2006
NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS
Modern Technology Corp (Modern) is a Nevada Corporation.
We are engaged in aiding both private and public companies in the areas of business development, financing, product development, corporate strategy, corporate image and public relations, product distribution and marketing, and executive management consulting. We collectively refer to companies in which we own an equity position, our majority owned subsidiaries, corporate customers and clients as "portfolio companies". We charge for our services in cash or equity in the portfolio company. We may also exchange our services for revenue sharing of future sales of products or sharing of proceeds from the sale of licenses and technologies owned by our portfolio companies. We seek to grow through strategic acquisitions in addition to generating income from our services.
We seek to build revenues by a model continuous growth, strategic acquisitions, and commercialization of nascent technology. We seek to improve operating efficiencies among our portfolio companies through elimination of cost redundancies and realized synergy between subsidiaries. We also seek to commercialize new technology and provide to our portfolio companies and subsidiaries new product lines, operations infrastructure, and significant intellectual capital.
Modern's office was located in New York, but has been relocated to Mississippi, with its administrative offices being located in Jackson, Mississippi.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING POLICIES
Modern Technology Corp's accounting policies conform to U. S. generally accepted accounting principles. Significant policies followed are described below.
The consolidated financial statements include the accounts of the company and all of its subsidiaries in which a controlling interest is maintained. All consolidated financial statements have been prepared in United States Dollars.
On January 24, 2005, the Company purchased 51% of Sound City for $2,000,000 with an option to acquire the remaining 49%. The option is valid through December 31, 2009, and can be exercised for $3,500,000, which is payable in cash, stock or a combination of cash or stock. During the year ending June 30, 2005, the Company filed current reports on Form 8-K, containing additional pro forma, historical financials and other exhibits.
The financial statements reflect various purchase price allocations. In accordance with SFAS No. 141, Business Combinations ("SFAS No. 141"), the total purchase price was allocated to the tangible and intangible assets of Sound City based upon their estimated fair values at the acquisition date with the excess purchase price allocated to goodwill. The purchase accounting adjustments made are based upon currently available information. Accordingly, the actual adjustment recorded in connection with the final purchase price allocation may be updated according to SFAS No. 141, and any such changes may be material.
Sound City accounts were properly included in the consolidated financial statements since the acquisition date of January 24, 2005.
On December 20, 2005, the Company purchased 51% of INmarketing Group for $1,000,000 in cash and $1,210,000 in the form of Series B Convertible stock of the Company, with an option to acquire the remaining 49%. The option is valid through December 19, 2007.
In accordance with SFAS No. 141, Business Combinations ("SFAS No. 141"), the total purchase price was allocated to the tangible and intangible assets of INmarketing Group based upon their estimated fair values at the acquisition date with the excess purchase price allocated to goodwill. The purchase accounting adjustments made are based upon currently available information. Accordingly, the actual adjustment recorded in connection with the final purchase price allocation may be updated according to SFAS No. 141, and any such changes may be material.
INmarketing Group accounts for the period January 1, 2006 through June 30, 2006 were properly included in the consolidated financial statements for the year ended June 30, 2006.
STOCK BASED COMPENSATION
The Company has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with SFAS No. 123, Modern has elected the disclosure-only provisions related to employee stock options and follows the intrinsic value method in Accounting Principals Board Opinion (APB) No. 25 in accounting for stock options issued to employees. Under APB No. 25, compensation expense, if any, is recognized as the difference between the exercise price and the fair value of the common stock on the measurement date, which is typically the date of grant, and is recognized over the service period, which is typically the vesting period.
RECLASSIFICATIONS
Certain items from prior periods within the financial statements have been reclassified to conform to current period classifications.
CASH AND CASH EQUIVALENTS
Cash Equivalents consist of highly liquid, short-term investments with original maturities of 90 days or less. The carrying amount reported in the accompanying balance sheets approximates fair value.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market (net realized value) and consists principally of finished goods. During the year ended June 30, 2006, the Company has written down its inventory by $1,323,417 to reflect obsolescence.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of property and equipment is provided using straight-line and accelerated methods. The estimated useful lives are as follows:
Years
Furniture, fixtures and equipment 5 - 7
Transportation equipment 5
Leasehold improvements 8 - 10
Buildings 39
Expenditures for major renewals and betterment that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation expense for the years ended June 30, 2006 and 2005 was $23,734 and $11,795, respectively.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U. S. generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" SFAS 109 has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that may have been recognized in the financial statements as measured by the provisions of the enacted tax laws.
Valuation allowances are established when necessary to reduce deferred tax assets to the estimated amount to be realized. Income tax expense represents the tax payable for the current period and the change during the period in the deferred tax assets and liabilities.
IMPACT OF NEW ACCOUNTING STANDARDS
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of Variable Interest Entities" (revised December 2003) - an interpretation of ARB No. 51. A variable interest entity ("VIE") is one where the contractual or ownership interest in an entity change with changes in the entity's net asset value. This interpretation requires the consolidation of a VIE by the primary beneficiary, and also requires disclosure about VIEs where an enterprise has a significant variable interest but is not the primary beneficiary. Sound City leases a facility from a Limited Liability Company ("LCC") owned by the minority shareholders. The term of this lease is 10 years, commencing on July 1, 2004 and ending June 30, 2014. Under FIN 46R, the LLC was a VIE at June 30, 2005 and the Company had consolidated the LLC in its consolidated financial statements. The Company has decided to spin off its Sound City subsidiary and has not consolidated this subsidiary at June 30, 2006.
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.
REVENUE RECOGNITION
The Company generally recognizes revenue upon shipment when the collect-ability of the resulting receivable is reasonably assured. The Company allows credit for products returned within its policy terms. Such returns are estimated and an allowance for product returns is recorded at the time of sale, as necessary.
Revenues associated with rewards programs are recorded when the customer is entitled to utilize such rewards. The Company simultaneously records the costs of these rewards. Rewards can be used by customers for one year. After one year, unused rewards are recorded as revenue.
IMPAIRMENT OF LONG-LIVED ASSETS
The company regularly reviews long-lived assets for indicators of impairment. Management's judgments regarding the existence of impairment indicators are based on performance. Future events could cause management to conclude that impairment indicators exist and that the value of long-lived assets is impaired. When events or circumstances indicate that the carrying amount of an asset may not be recoverable, the fair value of the asset is compared to its carrying value. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its estimated fair value.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense for the years ended June 30, 2006 and 2005 was $63,037 and $25,872, respectively.
SHIPPING AND HANDLING COSTS
Amounts billed to customers for shipping costs resulting from a sales transaction are included in Revenues, while costs incurred by the Company for shipping and handling are included in cost of goods sold.
NOTE 3: CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash. The Company does not require collateral or other security to support customer receivables of rewards programs. The exposure to credit risk associated with the nonperformance of customers in fulfilling their contractual obligations can be directly impacted by a decline in economic or industry conditions, which could impair the customer's ability to satisfy its obligations. Credit procedures have been established whereby detailed analyses are performed to control the granting of credit to high-risk customers of rewards programs.
NOTE 4: MARKETABLE SECURITIES
During the year ended June 30, 2003, the investment in 117,250 shares of common stock of MediCor Ltd. was considered a trading security in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115")" MediCor Ltd. shares are traded on the NASD over-the-counter bulletin board system. The cost of these shares is $82,520. The Company sold all the shares of MediCor Ltd. As of March 31, 2004, the Company recognized $41,714 realized gain. As of March 31, 2004, the Company had liquidated all of its marketable securities or written off all securities deemed worthless. During May 2004, Mr. Welch, CEO and President, contributed $57,677 of marketable securities investment pursuant to Modern's plan for reorganization.
On January 24, 2005, the Company entered into a Purchase Agreement whereby we purchased a $1,500,000 DeMarco Convertible Debenture. The Company follows SFAS No. 115 and has considered these securities to be trading securities. During the quarter ended September 30, 2005 the Company converted approximately $11,000 of DeMarco Convertible Debenture into 3,200,000 shares of DeMarco common stock. On January 24, 2006 we sold these debentures to Shield Investments, Inc. for a purchase price of $500,000, payable in a promissory note bearing 5% annual interest and a term of 5 years.
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, 2006.
NOTE 6: STOCK BASED COMPENSATION
During the 12 months ended June 30, 2005, the Company issued 2,067,000 shares of Modern Technology Corp. Common Stock for legal and consulting services rendered or to be rendered in the coming year. During the year ended June 30, 2006, the Company issued 598,250 shares of common stock for various consulting services. The amount expensed for the year ended June 30, 2006 and 2005 was $617,433 and $91,473 respectively, as a result of all deferred compensation plans. All stock based compensation is accounted for in accordance with SFAS No. 123.
NOTE 7: INCOME TAX EXPENSE (BENEFIT)
The provision for income taxes is comprised of the following:
06/30/06 06/30/05
Current $5,540 $-0-
Deferred -0- -0-
$-0- $-0-
The provision for income taxes differs form the amount computed by applying the statutory federal income rate as follows:
06/30/06 06/30/05
Expected statutory amount $ 5,540 $ -0-
Net operating loss -0- -0-
State income taxes, net
Of federal benefit -0- -0-
$ 5,540 $ -0-
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities or financial reporting purposes and amounts used for income tax purposes and the impact of available net operating loss carryforwards.
The tax effects of significant temporary differences, which comprise the deferred tax assets, are as follows:
06/30/2006 6/30/05
Deferred tax assets:
Net operating loss
Carryforwards $ 2,317,635 $293,231
Gross deferred tax assets 2,317,635 293,231
Valuation allowance 2,317,635 (293,231)
Net deferred tax assets $ ----0---- $----0----
The net operating loss of approximately $6,229,940 begins to expire in the year ended June 30, 2025. The tax benefits have been fully reserved due to a lack of consistent operating profitability and substantial losses.
NOTE 8: POSTRETIREMENT BENEFITS
The Company does not maintain any employee benefits currently. The Company does not maintain a plan for any Postretirement employee benefits; therefore, no provision was made under FAS's 106 and 112.
NOTE 9: RELATED PARTY TRANSACTIONS
Robert Church, our previous CFO, is also a Partner of Church, Devoe & Associates to which we expensed $99,750 and $43,315 in accounting fees paid during the years ended June 30, 2006 and 2005, respectively.
Our principal office at 1420 N. Lamar Blvd., Oxford, Mississippi 38655 was provided to us at no charge by Mr. Church, our previous 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 and current CFO. Under the terms of this lease, we are responsible for payment of all utilities furnished to the premises, as well as expenses for maintenance and repairs. During the year ended June 30, 2006, we paid Mr. Welch $8,500 for this lease.
During the year ended June 30, 2006, we expensed $297,200 in consulting fees to Anthony Welch.
On January 24, 2005, we utilized $1.5 million of financing we received from four institutional investors to purchase a $1.5 million convertible debenture in DeMarco Energy Systems of America, Inc. Anthony K. Welch, our Chief Executive Officer and majority shareholder, is the Chief Executive Officer and Chairman of the Board of Directors of DeMarco Energy Systems.
Sound City leases a facility from its shareholders. The lease expires June 30, 2014. Sound City is responsible for taxes and other expenses on an annual basis.
Rent expense under this related party lease for the years ended June 30, 2006 and 2005 totaled $143,748 and $72,000, respectively. Future minimum annual rent payable to the minority shareholders of our Sound City Inc subsidiary is as follows:
2006 192,000
2007 197,760
2008 203,693
2009 209,804
Thereafter 1,147,292
$ 1,950,549
At June 30, 2006, Sound City had a Demand Promissory Note (the "Note") payable to its shareholders in the amount of $ 1,117,215. The note is unsecured, subordinated, non-interest bearing and is payable upon demand. Sound City also had loans payable to related parties in the amount of $91,314. These loans are unsecured, subordinated, non-interest bearing and are payable demand. The loans payable to related parties are classified as non-current in the Balance Sheet at June 30, 2006, because repayment is not anticipated during the next year.
In the normal course of business, Sound City purchases from, and sells to Sammans Electronics Inc (Sammans). Sammans is owned by a relative of Sound City's shareholders. For the years ended June 30, 2006 and 2005, purchases from Sammans totaled $19,151 and $9,986, and sales to Sammans totaled $61,954 and $47,893, respectively.
Pursuant to the stock sale agreement dated January 24, 2005, Sound City entered into an employment agreement with Kamel Yassin, President and Shareholder of Sound City, for a $200,000 annual salary for a five-year term.
NOTE 10: LETTER OF AGREEMENT
On March 10, 2004, prior management through its desire and plan to provide continuing value and future growth to shareholders executed a plan of reorganization. The Company entered into a Letter of Agreement with current President and CEO, Anthony Welch, wherein the Company's plans for reorganization and ongoing plans for operations would be realized through the subsequent actions of new management. The terms of this Agreement provided for the appointment of a new Board of Directors, marketable securities to be deposited in the Company's brokerage account, a Reverse split of the Company's Common Stock, an application for OTCBB listing, issuance of shares to Mr. Welch, and ongoing acquisitions and business development to pursue growth.
NOTE 11: OPERATIONS AND LIQUIDITY
The Company has incurred substantial losses in 2006 and 2005. Until such time that the Company's products and services can be successfully marketed the Company will continue to need to fulfill working capital requirements through the sale of stock and/or the issuance of debt. The inability of the Company to continue its operations as a going concern would impact the recoverability and classification of recorded asset amounts.
The ability of the company to continue in existence is dependent on its having sufficient financial resources to bring products and services to market for marketplace acceptance. As a result of its significant losses, negative cash flows from operations, and accumulated deficits for the periods ending June 30, 2006, 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, 2006.
NOTE 12: OTHER DEVELOPMENTS
Acquisitions
Sound City
On January 24, 2005, the Company purchased 51% of Sound City for $2,000,000 with an option to acquire the remaining 49%. The option is valid through December 31, 2009, and can be exercised for $3,500,000, which is payable in cash, stock or a combination of cash or stock. During the year ending June 30, 2005, the Company has filed current reports on Form 8-K, containing additional pro forma, historical financials and other exhibits.
H-NET Acquisition
On July 10, 2005, Modern Technology Corp. ("MOTG") entered into an Asset Purchase Agreement ("Agreement") with Anton Stephens, Dba H-NET ("Hnet"). No material relationship exists between the parties, other than in respect of the Agreement. Under the terms of the Agreement, MOTG agreed to purchase all of the rights, title and interest in, to certain assets owned by Hnet. In exchange for assets delineated under the Agreement, Hnet received $500,000 payable in the form of 350,000 shares of MOTG restricted common stock and a Convertible Debenture in the amount of $400,000 payable to Anton Stephens. This transaction was filed under a From 8-K on August 2, 2005 and is hereby incorporated by reference.
INmarketing
On December 20, 2005, the Company entered into and completed a Stock Purchase Agreement (the "Agreement") with David Weiss and Andrew Perlmutter ("Sellers"). Under the terms of the agreement, the company purchased 51% of the issued and outstanding shares of INmarketing Group, Inc. Under the terms of the Agreement, the Company paid to Sellers $1,000,000 in cash and $1,210,000 in the form of Series B Convertible Stock of the company. The company purchased 51 shares of INmarketing, which represents 51% of the issued and outstanding stock, with an option to purchase the additional 49%. The option to purchase additional shares of stock expires on December 19, 2007. As a result of the acquisition of INmarketing Group Inc., the company recorded the following:
The following table summarizes the components of the total purchase price and the preliminary allocation as of the date of acquisition:
Book Value of
Assets Acquired / Purchase Price Preliminary
Liabilities Assumed Adjustments Fair Value
Cash and cash equivalents $ 160,271 $ - $ 160,271
Accounts receivable 729,928 - 729,928
Total current assets 890,199 - 890,199
Property, plant and equipment 31,706 - 31,706
Goodwill - 2,028,619 (a) 2,028,619
Other long term assets 5,846 - 5,846
Total assets $ 927,751 $ 2,028,619 $ 2,956,372
Accounts payable 746,372 - 746,372
Shareholders' equity 181,381 (181,381) (a) -
2,210,000 (a) 2,210,000
-
Total Liabilities and Shareholders' equity $ 927,751 $ 2,028,619 $ 2,956,372
In accordance with SFAS No. 142, goodwill will not be amortized and will be tested for impairment at least annually.
The following adjustments have been reflected in the balance sheet.
(a) To reflect the purchase price and the elimination of previous owners' shareholders' equity
The following unaudited pro-forma financial information reflects the condensed consolidated result of operations of the Company as if the acquisition had taken place on July 1, 2004. The pro-forma financial information is not necessarily indicative of the results of operations had the transaction taken been effected on July 1, 2004.
For the years ended
June 30, 2006 June 30, 2005
Net sales $ 16,987,659 $ 13,638,603
Net (loss) $ (6,725,517) (849,169)
Diluted (loss) per common share $ (4.33) $ (1.27)
Sound City
On January 24, 2005, the Company purchased 51% of Sound City for $2,000,000 with an option to acquire the remaining 49%. The option is valid through December 31, 2009, and can be exercised for $3,500,000, which is payable in cash, stock or a combination of cash or stock. During the quarter ending March 31, 2005, the Company has filed a current report on Form 8-K, containing additional pro forma, historical financials and other exhibits.
The financial statements reflect various purchase price allocations. In accordance with SFAS No. 141, Business Combinations ("SFAS No. 141"), the total purchase price was allocated to the tangible and intangible assets of Sound City based upon their estimated fair values at the acquisition date with the excess purchase price allocated to goodwill. The purchase accounting adjustments made are based upon currently available information. Accordingly, the actual adjustment recorded in connection with the final purchase price allocation may be updated according to SFAS No. 141, and any such changes may be material.
The following table summarizes the components of the total purchase price and the allocation as of the date of acquisition
Book Value of Assets Acquired/Liabilities Assumed Purchase Price Adjustments Fair Value
Cash $ 286,530 $ 286,530
Accounts Receivable 7,978 7,978
Inventory 2,460,801 2,460,801
Other current assets 250 250
Total Current Assets 2,755,559 2,755,559
PP&E 123,878 123,878
Goodwill - 1,757,498 (a) 1,757,498
Other assets 62,009 - 62,009
Total Assets $ 2,941,446 $ 1,757,498 $ 4,698,944
Accounts Payable 912,499 912,499
Notes Payable 518,429 518,429
Accrued expenses 139,391 139,391
-
Total Current Liabilities 1,570,319 1,570,319
-
Shareholders' Loans 1,128,625 1,128,625
-
Total Liabilities 2,698,944 2,698,944
-
Shareholders' equity 242,502 1,757,498 (a) 2,000,000
-
Total Liabilities and Shareholders' Equity $ 2,941,446 $ 1,757,498 $ 4,698,944
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), goodwill will not be amortized and will be tested for impairment at least annually. The amounts contained in the purchase price allocation may change as additional information becomes available regarding the assets and liabilities acquired. Any change in the fair value of the net assets will change the amount of the purchase price allocable to goodwill.
The following adjustments have been reflected in the balance sheet.
(a) To reflect goodwill.
The following unaudited pro-forma financial information reflects the condensed consolidated results of operations of the Company as if the acquisition had taken place on July 1, 2004. The pro-forma financial information is not necessarily indicative of the results of operations had the transaction been effected on July 1, 2004.
For the year ended June 30, 2005
Net Sales $12,242,487
Net (loss) 951,278
Diluted (loss) per share $ (1.42)
Capital Raise
On August 31, 2005, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $1,500,000.00 from the Holders of the Notes. The Notes each bear a Maturity Date of August 31, 2008, with interest accruing on any unpaid principal at 9% per annum from the date the Notes were issued, until due and payable on the Maturity Date. Any unpaid amounts after that date bear an interest of 15% per annum. Interest is payable quarterly and shall commence at December 31, 2005. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes. This transaction was filed under a Form 8-K on September 19, 2005 and is hereby incorporated by reference. The company issued 2,000,000 warrants to purchase common stock as part of the issuance of the Callable Secured Convertible Notes.
On December 16, 2005, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $700,000 from the Holders of the notes. The notes each bear a maturity date of December 16, 2008, with interest accruing on any unpaid principal at 9% per annum from the date the Notes were issued, until due and payable on the Maturity date. Any unpaid amounts after that date earn an interest of 15% per annum. Interest is payable quarterly and shall commence at December 31, 2005. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes.
On March 27, 2006, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $350,000 from the Holders of the notes. The notes each bear a maturity date of March 27, 2009, with interest accruing on any unpaid principal at 6% per annum from the date the notes were issued, until due and payable on the Maturity date. Any unpaid amounts after that date earn an interest of 15% per annum. Interest is payable quarterly and shall commence at June 30, 2006. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes. The Company issued 20,000,000 warrants to purchase common stock as part of the issuance of the Callable Secured Convertible Notes.
NOTE 13: COMMON STOCK AND PREFERRED STOCK
Common Stock
March 2004 as part of our plan of reorganization and ongoing plan for operations we applied for listing of our Common Stock on the Over-The-Counter-Bulletin Board. We received approval on July 19, 2004 and trade under the symbol MOTG.
On May 15, 2006 we affected a Reverse Split of the Company's Common Stock on a 1 for 20 Basis. All share and per share amounts have been adjusted retroactively to reflect this change.
Preferred Stock
We are authorized to issue up to 20,000,000 shares of Preferred Stock, par value $.0001.
SERIES A CONVERTIBLE PREFERRED STOCK
To obtain funding for our ongoing operations, we entered into a Securities Purchase Agreement with four accredited investors on January 24, 2005 for the sale of (i) $2,000,000 in secured convertible notes; (ii) 1,500 shares of series A convertible preferred stock at $1,000 per share and (iii) warrants to buy 3,000,000 shares of our common stock. Each share of series A convertible preferred stock is convertible into $1,000 of our common stock, at 85% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including the conversion date.
The holders of the series A preferred stock are entitled to receive, when, if and as declared by the Board of Directors, cumulative dividends in the amount of six percent (6%) per annum, payable quarterly in arrears. We are obligated to repurchase the shares of series A convertible preferred stock at 130% of the stated value, plus accrued but unpaid dividends, upon written notice from the holders of a majority of the series A convertible preferred stock upon the occurrence of any of the following events of default: our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, the assignment or appointment of a receiver to control a substantial part of our property or business, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against our company or the delisting of our common stock, if the default is not cured with the specified grace period.
All shares of series A convertible preferred stock issued and outstanding on January 24, 2008 shall automatically convert into shares of our common stock in accordance with the conversion price calculation.
As of June 30, 2006, there were 1,500 shares issued and outstanding.
SERIES B CONVERTIBLE PREFERRED STOCK
As part of our acquisition of INmarketing Group we agreed to issue to the sellers 1,210,000 shares of Series B convertible preferred stock at $1 per share. Each share of Series B convertible preferred stock is convertible into a number of shares of our common stock according to the following calculation: 60% multiplied by the "Market Price" (the average of the three lowest intraday trading prices for the common stock on a principle market for the 20 trading days before but not including the conversion date).
The holders of the Series B convertible preferred stock are entitled to receive, when, if and as declared by the Board of Directors, cumulative dividends in the amount of four percent (4%) per annum, payable quarterly in arrears.
As of June 30, 2006, there were 1,210,000 shares issued and outstanding.
NOTE 14: LONG-TERM AND SHORT-TERM DEBT
Long-term debt consists of the following: June 30, 2006
Note payable to Valley National Bank
in the original amount of $300,000,
payable in monthly installments of
$5,742.46 including interest at 5.5%.
The loan is secured by the personal
Guarantee of the shareholders and a
mortgage on property owned by the
shareholders. The note will be fully
paid May, 2008. $ 124,098
Note payable to BMW Financial in the
original amount of $20,741, payable
in monthly installments of $419.53
Including interest at 3.9%. The loan is
secured by transportation equipment. The
note will be fully paid May, 2008. $ 9,265
Note payable to Renasant Bank in the
Original amount of $38,334, payable in
Monthly installments of $726.91 including
Interest at 4.53% for 48 months. The loan
is secured by a Modern Certificate of Deposit
In the amount of $40,000 $ 33,951
167,314
Less: current portion 74,635
Long term non-convertible debt $ 92,679
Short-term debt due to the sellers of Sound City consists of the following:
Note payable to Kamel Yassin in the
Original amount of $400,000 bearing
Interest at a rate of 5% per annum will
Be due and payable on December 31,
2006 400,000
Note payable to Mervet Yassin in the
Original amount of $400,000 bearing
Interest at a rate of 5% per annum will
Be due and payable on December 31,
2006. 400,000
$800,000
NOTE 15: INVENTORY LINE OF CREDIT
As of March 31, 2005, Sound City had a $750,000 Inventory Security Agreement with GE Capital. Under the Agreement the Company may apply to GE Capital for an extension of credit to purchase inventory. Advances are repaid without interest 90 days after the Company receives the funds. Late payments are subject to finance charges. GE Capital has a security interest in all Company assets. As of May 2, 2005 this line of credit has been reduced to $200,000.
NOTE 16: SECURITIES PURCHASE AGREEMENT
On January 24, 2005, the Company entered into a Securities Purchase Agreement with AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners II, LLC for the sale of (i) $2,000,000 in secured convertible notes and (ii) warrants to purchase 3,000,000 shares of our common stock and (iii) entered into a Purchase Agreement whereby we purchased a $1,500,000 DeMarco Convertible Debenture in exchange for 1,500 shares of our Series A Convertible Preferred Stock.
The secured convertible notes bear interest at 8%, mature two years from the date of issuance, and are convertible into Modern common stock, at the investors' option, at the lower of $0.44 or 40% of the average of the three lowest intraday trading prices for the common stock on the Over-The-Counter Bulletin Board for the 20 trading days before but not including the conversion date. The secured convertible notes are secured by the personal guarantee of the shareholder with a collateral of 5.5 million shares of Modern Technology common stock.
The warrants are exercisable until five years from the date of issuance at a purchase price of $0.40 per share. The investors may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement.
The DeMarco convertible debenture is fully matured and bears interest at a rate of 10% per annum with interest payments due quarterly. Modern has the option to convert any unpaid principal into shares of DeMarco common stock at any time after the original issue date. We sold this debenture on January 24, 2006 for a purchase price of $500,000.
On August 31, 2005, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $1,500,000.00 from the Holders of the Notes. The Notes each bear a Maturity Date of August 31, 2008, with interest accruing on any unpaid principal at 9% per annum from the date the Notes were issued, until due and payable on the Maturity Date. Any unpaid amounts after that date bear an interest of 15% per annum. Interest is payable quarterly and shall commence at December 31, 2005. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes. This transaction was filed under a Form 8-K on September 19, 2005 and is hereby incorporated by reference. The company issued 2,000,000 warrants to purchase common stock as part of the issuance of the Callable Secured Convertible Notes.
On December 16, 2005, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $700,000 from the Holders of the notes. The notes each bear a maturity date of December 16, 2008, with interest accruing on any unpaid principal at 9% per annum from the date the Notes were issued, until due and payable on the Maturity date. Any unpaid amounts after that date earn an interest of 15% per annum. Interest is payable quarterly and shall commence at December 31, 2005. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes.
On March 27, 2006, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $350,000 from the Holders of the notes. The notes each bear a maturity date of March 27, 2009, with interest accruing on any unpaid principal at 6% per annum from the date the notes were issued, until due and payable on the Maturity date. Any unpaid amounts after that date earn an interest of 15% per annum. Interest is payable quarterly and shall commence at June 30, 2006. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes. The Company issued 20,000,000 warrants to purchase common stock as part of the issuance of the Callable Secured Convertible Notes. These warrants were fair valued at $508,000 using the Black Scholes option pricing model using the following variables:
209% volatility, 4.67% risk free rate, $.05 strike price, $.026 stock price at grant, term of five years.
As a result of the warrant value of $508,000, a discount was applied and interest expense of $44,067 was amortized during the year ended June 30, 2006 using the effective interest method. The remaining balance of the discount of $463,933 was offset against the convertible notes.
NOTE 17: STOCK PURCHASE AGREEMENT
On January 24, 2005, the Company entered into a Stock Purchase Agreement with Sound City, Inc. The agreement is to purchase 51% of the issued and outstanding shares of common stock of Sound City, Inc. for an aggregate purchase price of $2,000,000 and to provide $700,000 in funding to Sound City, Inc. As part of the agreement, the Company also issued promissory notes in the amounts of $400,000 each to Kamel Yassin, President of Sound City and Mervet Yassin, CFO of Sound City. The promissory notes bear interest from the date of issuance at the rate of 5% per annum simple interest. Interest accrued to December 31, 2005 will be payable in full on December 31, 2005. Thereafter, interest accrued on the unpaid principal during the calendar quarter will be payable quarterly on the last day of each calendar quarter during the term of the note, with the first such quarterly interest payment being payable on September 30, 2005. The principal and accrued interest will be due and payable on December 31, 2006.
On December 20, 2005, the Company entered into and completed a Stock Purchase Agreement (the "Agreement") with David Weiss and Andrew Perlmutter ("Sellers"). Under the terms of the agreement, the company purchased 51% of the issued and outstanding shares of INmarketing Group, Inc. Under the terms of the Agreement, the Company paid to Sellers $1,000,000 in cash and $1,210,000 in the form of Series B Convertible Preferred Stock of the company. The company received 51 shares of INmarketing, which represents 51% of the issued and outstanding stock. The option to purchase an additional amount of shares equally to 49% of the issued and outstanding stock. The option to purchase additional shares of stock expires December 19, 2007.
NOTE 18: EARNINGS PER SHARE
A reconciliation of weighted average shares outstanding, used to calculate basic loss per share, to weighted average shares outstanding assuming dilution, used to calculate diluted loss per share for the years ended June 30 follows:
2006 2005
Loss Shares Per share Loss Shares Per share
(Numerator) (Denominator) amount (Numerator) (Denominator) amount
Net Loss before preferred dividends $ (6,440,533) $ (941,475)
Less: preferred dividends (102,709) (182,341)
Basic EPS $ (6,543,242) 1,552,328 $ (4.22) $ (1,123,816) 667,817 $ (1.68)
Effect of dilutive securities - - - -
Diluted EPS $ (6,543,242) 1,552,328 $ (4.22) $ (1,123,816) 667,817 $ (1.68)
74,976,804 and 9,085,193 common equivalent shares have been excluded from the computation of diluted earnings per share for the year ending June 30, 2006 and 2005 respectively, because their effect would be anti-dilutive.
NOTE 19: COMMITMENTS AND CONTINGENCIES
Sound City guarantees the mortgage debt of Yassin & Company, LLC, a real estate holding company owned by the stockholders. The amount of outstanding mortgage debt at June 30, 2006 was approximately $363,000.
In addition, Sound City also guarantees the mortgage debt of Kamel Yassin, President and Shareholder of Sound City, and Mervet Yassin, CFO and Shareholder of Sound City, on commercial property owned by them. The amount of the outstanding mortgage at June 30, 2006 was approximately $124,000.
INmarketing Group leases an office in Mahwah, New Jersey which expires on December 31, 2008 under an operating lease. The lease requires additional rent for certain operating expenses as defined in the lease and is subject to future minimum annual rental payments of $30,708. In addition, the Company rents storage space in a nearby facility on a month to month basis.
Sound City leases a 3,000 square foot building in Newton, NJ. The term of the lease is 5 years, beginning June 1, 2005 and expiring May 31, 2010. The fixed minimum rent is $51,000 annually.
Sound City also leases a 4,470 square foot retail store space with a 494 square feet warehouse area in Franklin, NJ. The space is located in a shopping center. The duration of the lease is 5 years and 2 months. It commenced on May 1, 2005 and terminates on June 30, 2010. The annual rent for the initial 2 months of the lease is 0. Annual rent for the next 30 months is $73,755 increasing to $80,460 annually for the last 30 months of the lease. In addition, Sound City pays supplemental rent on taxes, insurance, and repairs and maintenance on the building. This supplemental rent is based on the percentage of floor space leased in relation to the total rentable floor space of the shopping center.
NOTE 20: ASSET ACQUISITION
H-NET
On July 10, 2005, Modern Technology Corp. ("MOTG") entered into an Asset Purchase Agreement ("Agreement") with Anton Stephens, Dba H-NET ("Hnet"). No material relationship exists between the parties, other than in respect of the Agreement. Under the terms of the Agreement, MOTG agreed to purchase all of the rights, title and interest in, to certain assets owned by Hnet. In exchange for assets delineated under the Agreement, consisting of software, Hnet will receive $500,000 payable in the form of 350,000 shares of MOTG restricted common stock and a Convertible Debenture in the amount of $400,000 payable to Anton Stephens. This transaction was filed under a Form 8-K on August 2, 2005 and is hereby incorporated by reference. MOTG has recorded $500,000 as software on the balance sheet at September 30, 2005 as a result of this asset acquisition. It is estimated that the software has a 5-year life and is being amortized ratably over its estimated useful life.
H-NET has no revenue at present and is not expected to have any revenue for the following nine months. It is anticipated that H-NET assets will be fully developed and revenue producing within the next twelve months.
NOTE 21: CONVERTIBLE NOTES
Secured convertible notes payable to AJW Offshore, Ltd, AJW
Qualified Partners, LLC, AJW Partners, LLC and New Millennium
Capital Partners II, LLC in the amount of $2,000,000.
The notes were issued with Warrants to purchase 3,000,000
shares of our common stock. The secured conversion notes bear
interest at 8% mature January 24, 2007 and are convertible into
Modern common stock. $ 2,000,000
Less conversions into common stock (1,012,809)
BALANCE $ 987,191
Secured convertible notes payable to AJW Offshore, Ltd, AJW
Qualified Partners, LLC, AJW Partners, LLC and New Millennium
Capital Partners II, LLC in the amount of $700,000. The secured
notes bear interest at 9% and mature December 16, 2008 and are
convertible into Modern stock $ 700,000
Secured convertible notes payable to AJW Offshore, Ltd, AJW
Qualified Partners, LLC, AJW Partners, LLC and New Millenium
Capital Partners II, LLC in the amount of $1,500,000. The secured
notes bear interest at 9%, mature 8/31/2007 and are convertible into
Modern stock. We issued 2,000,000 warrants as part of the
issuance of this secured convertible note $ 1,500,000
Convertible note payable to Anton Stevens for the purchase of
HNET Software. Interest shall be at a rate of 4% per annum and $ 400,000
shall be due and payable pursuant to the conversion rights or,
at the election of MOTG, paid in cash. The note is due upon
demand.
Non interest bearing additional note payable to Anton
Stephens for the purchase of HNET software,
payable only in shares of Modern stock. The note is due $ 100,000
upon demand.
Secured convertible notes payable to AJW Partners, AJW
Qualified, AJW Offshore, and New Millenium Capital Partners
in the amount of $350,000. The secured notes bear interest
at a rate of 6%, mature 3/27/09 and are convertible into
Modern common stock. We issued 20,000,000 warrants to
purchase common stock as part of the issuance of these callable
secured convertible notes $ 350,000
Total Convertible Notes payable at June 30, 2006 $ 4,037,191
Less current portion: (2,287,191)
Long term convertible notes payable $ 1,750,000
NOTE 23: GOODWILL
The changes in the carrying amount of goodwill for the year ended June 30, 2006 is as follows:
Balance as of June 30, 2005 $2,126,983
Goodwill acquired during the 9 months 819,117
Impairment losses (2,126,983)
Balance as of June 30, 2006 $ 819,117
Due to working capital deficiencies and continuing losses, the goodwill of our Sound City subsidiary appears to be permanently and totally impaired. As a result, we recognized an impairment charge of $ 2,126,983 during the year ended June 30, 2006.
Exhibit 31
CERTIFICATION AS REQUIRED BY RULE 13a-15(e) OR RULE 15d-15(e)
I, Anthony K. Welch, certify that:
1. As of June 30, 2006, I have reviewed this annual report of Modern Technology Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
1. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design of operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Dated: October 25, 2006
/s/ Anthony K. Welch
Anthony K. Welch, CEO
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Anthony K. Welch, the Chief Executive Officer of Modern Technology Corp. (the "Company"), in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that the Company's Annual Report on Form 10-KSB for the period ended June 30, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: October 25, 2006
/s/ Anthony K. Welch
Anthony K. Welch, CEO
_______________________________________________
Created by 10KWizard www.10KWizard.comSource: MODERN TECHNOLOGY CO, 10KSB, October 27, 2006
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