UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-QSB

 

**[X]**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    SECURITIES EXCHANGE ACT OF 1934**For the quarterly period ended March 31, 2006**OR[_]**TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE    SECURITIES EXCHANGE ACT OF 1934**For the transition period from                 to                 ****Commission File Number 2-80891-NY****MODERN TECHNOLOGY CORP**
(Exact name ofregistrant as specified in its charter)

 
**Nevada **11-2620387
(State or other jurisdiction of    incorporation or organization) 
(I.R.S. Employer Identification No.)** 

1420 N. Lamar Blvd.Oxford, MS 38655**
(Address of principalexecutive offices)

Registrant's telephone number, including area code: **(662)236-5928**
 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days: Yes [X]   No [_] 

Indicate by check mark whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Exchange Act). Yes [X] No [_] 

Indicate the number of shares outstanding of each of the issuer's classes ofcommon stock, as of the latest practicable date. 
**Class
 **Outstanding at March 31, 2006
Common stock, $0.001 par value 
69,259,230
 

 
**MODERN TECHNOLOGY CORP.**
 
**Table of Contents**
 
**PART I.****FINANCIAL INFORMATION**
   
 Item 1.Consolidated Financial    Statements (unaudited)
  
    Consolidated Balance Sheets
  
    Consolidated Statements of Operations
  
    Consolidated Statements of Cash Flows
  
Notes to    Consolidated Financial Statements
     Item 2.    Management's Discussion and Analysis of Financial Condition and Results of    Operations
 Item 3.Controls    and Procedures
   
 **PART II.****OTHER    INFORMATION**
   
 Item 1.Legal    Proceedings
     Item 2.    Changes in Securities and Use of Proceeds
     Item 3.    Defaults Upon Senior Securities
     Item 4.    Submission of Matters to a Vote of Security Holders
 Item 5.Other    Information
     Item 6.    Exhibits and Reports on Form 8-K
  Signatures
 
 

2
**Item 1. Consolidated FinancialStatements (unaudited)**
**PART I -- FINANCIAL INFORMATION 

 

MODERN TECHNOLOGYCORP.

Consolidated Balance Sheet

The accompanying notes are an integral part of theseconsolidated financial statements.

 

 
**MODERN TECHNOLOGYCORP.

Consolidated Statements ofOperations

(unaudited)

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 
**MODERN TECHNOLOGYCORP.

ConsolidatedStatements of Operations**
(unaudited)

 

 

The accompanying notes are an integral part of theseconsolidated financial statements.

   
**MODERN TECHNOLOGYCORP.

Consolidated Statements of CashFlows

(unaudited)

 

The accompanying notes are an integral part of theseconsolidated financial statements

 

 

 

MODERN TECHNOLOGY CORP

NOTES TO THECONSOLIDATED INTERIM FINANCIAL STATEMENTS 

MARCH 31, 2006

(unaudited) 

NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS

Modern Technology Corp (Modern) is a Nevada Corporation. 

We are engaged in aiding both private and public companies in the areas ofbusiness development, financing, product development, corporate strategy,corporate image and public relations, product distribution and marketing, andexecutive management consulting. We collectively refer to companies in which weown an equity position, our majority owned subsidiaries, corporate customers andclients as "portfolio companies". We charge for our services in cash or equityin the portfolio company. We may also exchange our services for revenue sharingof future sales of products or sharing of proceeds from the sale of licenses andtechnologies owned by our portfolio companies. We seek to grow through strategicacquisitions in addition to generating income from our services.

We seek to build revenues by a model continuous growth, strategicacquisitions, and commercialization of nascent technology. We seek to improveoperating efficiencies among our portfolio companies through elimination of costredundancies and realized synergy between subsidiaries. We also seek tocommercialize new technology and provide to our portfolio companies andsubsidiaries new product lines, operations infrastructure, and significantintellectual capital.

Modern's office was located in New York, but has been relocated toMississippi, 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. generallyaccepted accounting principles. Significant policies followed are describedbelow. 

The consolidated financial statements include the accounts of the company andall of its subsidiaries in which a controlling interest is maintained. Allconsolidated financial statements have been prepared in United States Dollars.

On January 24, 2005, the Company purchased 51% of Sound City for $2,000,000with an option to acquire the remaining 49%. The option is valid throughDecember 31, 2009, and can be exercised for $3,500,000, which is payable incash, 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 additionalpro forma, historical financials and other exhibits.
The financial statements reflect various purchase price allocations.  Inaccordance with SFAS No. 141, Business Combinations ("SFAS No. 141"), the totalpurchase price was allocated to the tangible and intangible assets of Sound Citybased upon their estimated fair values at the acquisition date with the excesspurchase price allocated to goodwill. The purchase accounting adjustments madeare based upon currently available information.  Accordingly, the actualadjustment recorded in connection with the final purchase price allocation maybe updated according to SFAS No. 141, and any such changes may be material.

Sound City accounts were properly included in the consolidated financialstatements for the nine months ended March 31, 2006. 

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 ofthe Company, with an option to acquire the remaining 49%. The option is validthrough December 19, 2007.
In accordance with SFAS No. 141, Business Combinations ("SFAS No. 141"), thetotal purchase price was allocated to the tangible and intangible assets ofInMarketing Group based upon their estimated fair values at the acquisition datewith the excess purchase price allocated to goodwill. The purchase accountingadjustments made are based upon currently available information. Accordingly, the actual adjustment recorded in connection with the finalpurchase price allocation may be updated according to SFAS No. 141, and any suchchanges may be material.

InMarketing Group accounts for the period January 1, 2006 through March 31,2006 were properly included in the consolidated financial statements for thenine months ended March 31, 2006. 

 

STOCK BASED COMPENSATION

The Company has adopted the provisions of SFAS No. 123, "Accounting forStock-Based Compensation." In accordance with SFAS No. 123, Modern has electedthe disclosure-only provisions related to employee stock options and follows theintrinsic value method in Accounting Principals Board Opinion (APB) No. 25 inaccounting for stock options issued to employees. Under APB No. 25, compensationexpense, if any, is recognized as the difference between the exercise price andthe fair value of the common stock on the measurement date, which is typicallythe date of grant, and is recognized over the service period, which is typicallythe vesting period.

RECLASSIFICATIONS

Certain items from prior periods within the financial statements have beenreclassified to conform to current period classifications.     

CASH AND CASH EQUIVALENTS

Cash Equivalents consist of highly liquid, short-term investments withoriginal maturities of 90 days or less. The carrying amount reported in theaccompanying balance sheets approximates fair value.

INVENTORY

Inventory is stated at the lower of cost (first-in, first-out) or market (netrealized value) and consists principally of finished goods.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation of property andequipment is provided using straight-line and accelerated methods. The estimateduseful 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 livesof property and equipment are capitalized. Expenditures for maintenance andrepairs are charged to expense as incurred.

Depreciation expense for the nine months ended March 31, was $36,192 and$7,567 for 2006 and 2005, respectively.

ESTIMATES IN FINANCIAL STATEMENTS

The preparation of financial statements in conformity with U. S. generallyaccepted accounting principals requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates.

INCOME TAXES

The company accounts for income taxes in accordance with Statement ofFinancial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"SFAS 109 has as its basic objective the recognition of current and deferredincome tax assets and liabilities based upon all events that may have beenrecognized in the financial statements as measured by the provisions of theenacted tax laws. 

Valuation allowances are established when necessary to reduce deferred taxassets to the estimated amount to be realized. Income tax expense represents thetax payable for the current period and the change during the period in thedeferred tax assets and liabilities.

IMPACT OF NEW ACCOUNTING STANDARDS 

In December 2003, the FASB issued Interpretation No. 46R, "Consolidation ofVariable Interest Entities" (revised December 2003) - an interpretation of ARBNo. 51.  A variable interest entity ("VIE") is one where the contractual orownership interest in an entity change with changes in the entity's net assetvalue. This interpretation requires the consolidation of a VIE by the primarybeneficiary, and also requires disclosure about VIEs where an enterprise has asignificant variable interest but is not the primary beneficiary. Sound Cityleases a facility from a Limited Liability Company ("LCC") owned by the minorityshareholders.  The term of this lease is 10 years, commencing on July 1,2004 and ending June 30, 2014. Under FIN 46R, the LLC is a VIE and the Companyhas consolidated the LLC in its consolidated financial statements.  Theconsolidation of this VIE has added $597,920 of assets and $369,824 ofliabilities to our consolidated balance sheet as of March 31, 2006.

In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 onDerivative Instruments and Hedging Activities." SFAS 149 establishes accountingand reporting standards for derivative instruments and for hedging activities.This statement is effective for contracts entered into or modified after June30, 2003. The adoption of SFAS No. 149 did not have a material effect on theCompany's financial position or results from operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity." SFAS 150changes the accounting for certain financial instruments that, under previousguidance, were accounted for as equity. This statement is effective forfinancial instruments entered into or modified after May 31, 2003 and otherwiseis effective at the beginning of the first interim period beginning afterSeptember 15, 2003. The adoption of SFAS No. 150 did not have a material effecton 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 ofSAB No. 101, "Revenue Recognition," in order to make this interpretive guidanceconsistent with current authoritative accounting and auditing guidance and SECrules and regulations. The changes in SAB No. 104 did not have a material impacton 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 thefair value of share-based payments to employees beginning in 2005. We arecurrently evaluating the impact of this proposed standard on our financialstatements.

REVENUE RECOGNITION

The Company generally recognizes revenue upon shipment when thecollect-ability of the resulting receivable is reasonably assured. The Companyallows credit for products returned within its policy terms. Such returns areestimated 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 isentitled to utilize such rewards. The Company simultaneously records the costsof 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 arebased on performance. Future events could cause management to conclude thatimpairment indicators exist and that the value of long-lived assets is impaired.When events or circumstances indicate that the carrying amount of an asset maynot be recoverable, the fair value of the asset is compared to its carryingvalue. Impairment losses are measured as the amount by which the carrying valueof an asset exceeds its estimated fair value.

ADVERTISING

Advertising costs are expensed as incurred. Advertising expense for the threemonths and nine months ended March 31, 2006 was $(2,987) and $69,273.00.

SHIPPING AND HANDLING COSTS

Amounts billed to customers for shipping costs resulting from a salestransaction are included in Revenues, while costs incurred by the Company forshipping and handling are included in cost of goods sold.

INTERIM REPORTING

The accompanying unaudited consolidated financial statements for the ninemonths ended March 31, 2006 and March 31, 2005, have been prepared in accordancewith accounting principles generally accepted in the United States for interimfinancial information and with instructions to Form 10-QSB and Item 310 ofRegulation S-B.  Accordingly, they do not include all of the informationand footnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements.  In the opinion of management,all adjustments (consisting only of normal recurring accruals, unless otherwiseindicated) considered necessary for a fair presentation of the results ofoperations for the indicated periods have been included.  Certain amountsrecorded in previous periods have been reclassified to conform to the currentperiod presentation.  Operating results for the nine months ended March 31,2006 are not necessarily indicative of the results for the full fiscal year.

NOTE 3:  CONCENTRATIONS OF CREDIT RISK

The Company's financial instruments that are exposed to concentrations ofcredit risk consist primarily of cash. The Company does not require collateralor other security to support customer receivables of rewards programs. Theexposure to credit risk associated with the nonperformance of customers infulfilling their contractual obligations can be directly impacted by a declinein economic or industry conditions, which could impair the customer's ability tosatisfy its obligations. Credit procedures have been established wherebydetailed analyses are performed to control the granting of credit to high-riskcustomers of rewards programs.

NOTE 4:  MARKETABLE SECURITIES

During the year ended June 30, 2003, the investment in 117,250 shares ofcommon stock of MediCor Ltd. was considered a trading security in accordancewith SFAS No. 115, "Accounting for Certain Investments in Debt and EquitySecurities ("SFAS No. 115")" MediCor Ltd. shares are traded on the NASDover-the-counter bulletin board system. The cost of these shares is $82,520. TheCompany sold all the shares of MediCor Ltd. As of March 31, 2004, the Companyrecognized $41,714 realized gain. As of March 31, 2004, the Company hadliquidated all of its marketable securities or written off all securities deemedworthless. During May 2004, Mr. Welch, CEO and President, contributed $57,677 ofmarketable securities investment pursuant to Modern's plan for reorganization.

On January 24, 2005, the Company entered into a Purchase Agreement whereby wepurchased a $1,500,000 DeMarco Convertible Debenture. The Company follows SFASNo. 115 and has considered these securities to be trading securities. During thequarter ended September 30, 2005 the Company converted approximately $11,000 ofDeMarco Convertible Debenture into 3,200,000 shares of DeMarco common stock. OnJanuary 24, 2006 we sold these debentures to Shield Investments, Inc. for apurchase price of $500,000, payable in a promissory note bearing 5% annualinterest 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 Stockinvestment of 360,000 restricted shares to realized loss when Daine declaredbankruptcy. As of June 30, 2004, all shares of Pharmavet were returned andcancelled. The costs of these shares ($5,000) were credited against DeferredRegistration costs. The Company has established a valuation allowance of$100,000 against its investment in Interactive Medicine Inc. to reflect theuncertainty of the fair market value of the investment. The net investment valuein Interactive Medicine Inc. is zero as of March 31, 2006.

NOTE 6:  STOCK BASED COMPENSATION 

During the 12 months ended June 30, 2005, the Company issued 2,067,000 sharesof Modern Technology Corp. Common Stock for legal and consulting servicesrendered or to be rendered in the coming year. During the three months endedMarch 31, 2006, the Company issued 875,000 shares of common stock for variousconsulting services. During the 9 months ended March 31, 2006, the Companyissued 3,965,000 shares for consulting services. $142,634 was shown as DeferredCompensation in the equity section of the balance sheet at March 31, 2006. Theamount expensed in the three months and nine months ended March 31, 2006 was$157,469 and $475,448 respectively, as a result of all deferred compensationplans. During the twelve months ended June 30, 2005, the Company issued13,000,000 shares of Common Stock to Anthony Welch pursuant to theReorganization Agreement. The compensation portion of this agreement was valuedat $1,300 and charged to expense. All stock based compensation is accounted forin accordance with SFAS No. 123. 

NOTE 7:  INCOME TAX EXPENSE (BENEFIT)

The provision for income taxes is comprised of the following:

                                                               03/31/06                 03/31/05
         Current                                               $-0-                          $-0-

         Deferred                                              -0-                            -0-
                                                                      $-0-                           $-0-
 

The provision for income taxesdiffers form the amount computed by applying the statutory federal income rateas follows:

 

                                                                              03/31/06                    03/31/05 
 

Expected statutory amount                                  $ -0-                            $ -0-

Net operating loss                                                    -0-                               -0-

State income taxes, net

Of federal benefit                                                      -0-                                -0-
                                                                                  $ -0-                             $ -0-
Deferred income taxes reflect the net tax effects of temporary differencesbetween the carrying amounts of assets and liabilities or financial reportingpurposes and amounts used for income tax purposes and the impact of availablenet operating loss carryforwards.

The tax effects of significant temporary differences, which comprise thedeferred tax assets, are as follows:

                                                        03/31/2006                    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 theyear ended June 30, 2025. The tax benefits have been fully reserved due to alack of consistent operating profitability and substantial losses.

NOTE 8: POSTRETIREMENT BENEFITS

The Company does not maintain any employee benefits currently. The Companydoes not maintain a plan for any Postretirement employee benefits; therefore, noprovision was made under FAS's 106 and 112.

NOTE 9: RELATED PARTY TRANSACTIONS

Robert Church, our CFO, is also a Partner of Church, Devoe & Associates towhich we expensed $0 in accounting fees during the three months ended March 31,2006 and $43,314.59 during the nine months ended March 31, 2006.  

Our principal office at 1420 N. Lamar Blvd., Oxford, Mississippi 38655 isprovided to us at no charge by Mr. Church, our CFO and Director.  We lease 1,500square feet of executive and administrative offices at 1237 State Rd 30 E,Oxford MS 38655, for $850.00 per month from Mr. Welch, our CEO. Under the termsof this lease, we areresponsible for payment of allutilities furnished to the premises, as well as expenses for maintenance andrepairs.
During the three months and nine months ended March 31, 2006, we expensed$163,500 and $247,500, respectively, in consulting fees paid to Anthony Welchand $21,000 and $54,000, respectively, in consulting fees paid to Robert Church.

On January 24, 2005, we utilized $1.5 million of financing we received fromfour institutional investors to purchase a $1.5 million convertible debenture inDeMarco Energy Systems of America, Inc. Anthony K. Welch, our Chief ExecutiveOfficer and majority shareholder, is the Chief Executive Officer and Chairman ofthe Board of Directors of DeMarco Energy Systems.

Sound City leases a facility from its shareholders. The lease expires June30, 2014. Sound City is responsible for taxes and other expenses on an annualbasis.

Rent expense under this related party lease for the three months and ninemonths ended March 31, 2006 totaled $48,000.00 and $132,000. Future minimumannual rent payable to the minority shareholders of our Sound City Incsubsidiary is as follows:

2006                                           192,000

2007                                           197,760

2008                                           203,693

2009                                           209,804

Thereafter                              1,147,292
                                             $ 1,950,549
 

At March 31, 2006, Sound City had a Demand Promissory Note (the "Note")payable to its shareholders in the amount of $ 1,121,422. The note is unsecured,subordinated, non-interest bearing and is payable upon demand. Sound City alsohad loans payable to related parties in the amount of $91,314. These loans areunsecured, subordinated, non-interest bearing and are payable demand. The loanspayable to related parties are classified as non-current in the Balance Sheet atMarch 31,2006, because repayment is not anticipated during the next year.

In the normal course of business, Sound City purchases from, and sells toSammans Electronics Inc (Sammans). Sammans is owned by a relative of SoundCity's shareholders. For the three months and nine months ended March 31, 2006,purchases from Sammans totaled $0 and $9,986.40, and sales to Sammans totaled27,308 and $47,893.40 respectively. 

Pursuant to the stock sale agreement dated January 24, 2005, Sound Cityentered into an employment agreement with Kamel Yassin, President andShareholder 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 providecontinuing value and future growth to shareholders executed a plan ofreorganization. The Company entered into a Letter of Agreement with currentPresident and CEO, Anthony Welch, wherein the Company's plans for reorganizationand ongoing plans for operations would be realized through the subsequentactions of new management. The terms of this Agreement provided for theappointment of a new Board of Directors, marketable securities to be depositedin the Company's brokerage account, a Reverse split of the Company's CommonStock, an application for OTCBB listing, issuance of shares to Mr. Welch, andongoing acquisitions and business development to pursue growth. 

NOTE 11: OPERATIONS AND LIQUIDITY

The Company has incurred substantial losses in 2005 and 2004. Until such timethat the Company's products and services can be successfully marketed theCompany will continue to need to fulfill working capital requirements throughthe sale of stock and/or the issuance of debt. The inability of the Company tocontinue its operations as a going concern would impact the recoverability andclassification of recorded asset amounts. 

The ability of the company to continue in existence is dependent on itshaving sufficient financial resources to bring products and services to marketfor marketplace acceptance. As a result of its significant losses, negative cashflows from operations, and accumulated deficits for the periods ending March 31,2006, there is doubt about the Company's ability to continue as a going concern.

Management believes that its current available working capital, anticipatedrevenues, further planned reductions in operating expenses, and subsequent salesof stock and/or placement of debt instruments will be sufficient to meet itsprojected expenditures for a period of at least twelve months from March 31,2006. 

NOTE 12: OTHER DEVELOPMENTS
**Acquisitions

Sound City**
On January 24, 2005, the Company purchased 51% of Sound City for $2,000,000with an option to acquire the remaining 49%. The option is valid throughDecember 31, 2009, and can be exercised for $3,500,000, which is payable incash, 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 additionalpro forma, historical financials and other exhibits.**H-NET Acquisition**
On July 10, 2005, Modern Technology Corp. ("MOTG") entered into an AssetPurchase Agreement ("Agreement") with Anton Stephens, Dba H-NET ("Hnet"). Nomaterial relationship exists between the parties, other than in respect of theAgreement. Under the terms of the Agreement, MOTG agreed to purchase all of therights, title and interest in, to certain assets owned by Hnet. In exchange forassets delineated under the Agreement, Hnet will receive $500,000 payable in theform of 350,000 shares of MOTG restricted common stock and a ConvertibleDebenture in the amount of $400,000 payable to Anton Stephens. This transactionwas filed under a From 8-K on August 2, 2005 and is hereby incorporated byreference.
**INmarketing**
On December 20, 2005, the Company entered into and completed a Stock PurchaseAgreement (the "Agreement") with David Weiss and Andrew Perlmutter ("Sellers").Under the terms of the agreement, the company purchased 51% of the issued andoutstanding 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 ofSeries B Convertible Stock of the company. The company purchased 51 shares ofInMarketing, which represents 51% of the issued and outstanding stock, with anoption to purchase the additional 49%.. The option to purchase additional sharesof stock expires on December 19, 2007. As a result of the acquisition ofInMarketing Group Inc., the company recorded the following:

The following table summarizes the components of the total purchase price andthe preliminary allocation as of the date of acquisition: 

 

In accordance with SFAS No. 142, goodwill will not be amortized and will betested 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 thecondensed consolidated result of operations of the Company as if the acquisitionhad taken place on July 1, 2004. The pro-forma financial information is notnecessarily indicative of the results of operations had the transaction takenbeen effected on July 1, 2004.

                                                                                   For the 9 months ended

                                                                               March 31,2006                March 31, 2005

Net sales                                                                $ 13,386,590                      $ 9,273,599

Net Income (loss)                                                    (5,675,691)                          (526,501)

Diluted (loss) earnings per common share                    (.14)                                  (.04)

 
**Capital Raise**
On August 31, 2005, the Company, pursuant to a Securities Purchase Agreementof the same date, entered into Callable Secured Convertible Notes. Under theterms of the notes, the Company borrowed an aggregate of $1,500,000.00 from theHolders 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 theNotes were issued, until due and payable on the Maturity Date. Any unpaidamounts after that date bear an interest of 15% per annum. Interest is payablequarterly and shall commence at December 31, 2005. Holder has the right toconvert any amounts due to Common Stock, at its discretion, at the conversionprice, as set forth under the terms of the Notes. This transaction was filedunder 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 theissuance of the Callable Secured Convertible Notes.

On December 16, 2005, the Company, pursuant to a Securities PurchaseAgreement of the same date, entered into Callable Secured Convertible Notes.Under the terms of the notes, the Company borrowed an aggregate of $700,000 fromthe 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 thedate the Notes were issued, until due and payable on the Maturity date. Anyunpaid amounts after that date earn an interest of 15% per annum. Interest ispayable quarterly and shall commence at December 31, 2005. Holder has the rightto convert any amounts due to Common Stock, at its discretion, at the conversionprice, as set forth under the terms of the Notes.

On March 27, 2006, the Company, pursuant to a Securities Purchase Agreementof the same date, entered into Callable Secured Convertible Notes. Under theterms of the notes, the Company borrowed an aggregate of $350,000 from theHolders 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 thenotes were issued, until due and payable on the Maturity date. Any unpaidamounts after that date earn an interest of 15% per annum. Interest is payablequarterly and shall commence at June 30, 2006. Holder has the right to convertany amounts due to Common Stock, at its discretion, at the conversion price, asset forth under the terms of the Notes. The Company issued 20,000,000 warrantsto purchase common stock as part of the issuance of the Callable SecuredConvertible Notes.** 
 

NOTE 13: COMMON STOCK AND PREFERRED STOCK

Common Stock**
March 2004 as part of our plan of reorganization and ongoing plan foroperations we applied for listing of our Common Stock on theOver-The-Counter-Bulletin Board. We received approval on July 19, 2004 and tradeunder the symbol MOTG.

On July 31, 2004 as part of our plan of reorganization and ongoing plan foroperations we effected a Reverse Split of the Company's Common Stock on a 1 for15 Basis. These financial statements retroactively reflect the change to theCompany's common stock as a result of the reverse split.

On August 17, 2004, 13 million shares were issued to Anthony Welch.
**Preferred Stock**
We are authorized to issue up to 20,000,000 shares of Preferred Stock, parvalue $.0001. As of March 31, 2006, there were 1,500 shares of preferred stockissued and outstanding.
*SERIES A CONVERTIBLE PREFERRED STOCK*
To obtain funding for our ongoing operations, we entered into a SecuritiesPurchase Agreement with four accredited investors on January 24, 2005 for thesale of (i) $2,000,000 in secured convertible notes; (ii) 1,500 shares of seriesA convertible preferred stock at $1,000 per share and (iii) warrants to buy3,000,000 shares of our common stock. Each share of series A convertiblepreferred stock is convertible into $1,000 of our common stock, at 85% of theaverage of the three lowest intraday trading prices for the common stock on aprincipal market for the 20 trading days before but not including the conversiondate.

The holders of the series A preferred stock are entitled to receive, when, ifand as declared by the Board of Directors, cumulative dividends in the amount ofsix percent (6%) per annum, payable quarterly in arrears. We are obligated torepurchase the shares of series A convertible preferred stock at 130% of thestated value, plus accrued but unpaid dividends, upon written notice from theholders of a majority of the series A convertible preferred stock upon theoccurrence of any of the following events of default: our failure to issueshares of common stock upon conversion by the holder, our failure to timely filea registration statement or have such registration statement declared effective,the assignment or appointment of a receiver to control a substantial part of ourproperty or business, the commencement of a bankruptcy, insolvency,reorganization or liquidation proceeding against our company or the delisting ofour common stock, if the default is not cured with the specified grace period.

All shares of series A convertible preferred stock issued and outstanding onJanuary 24, 2008 shall automatically convert into shares of our common stock inaccordance with the conversion price calculation.
*SERIES B CONVERTIBLE PREFERRED STOCK*
As part of our acquisition of InMarketing Group we agreed to issue to thesellers 1,210,000 shares of Series B convertible preferred stock at $1 pershare. Each share of Series B convertible preferred stock is convertible into anumber of shares of our common stock according to the following calculation: 60%multiplied by the "Market Price" (the average of the three lowest intradaytrading prices for the common stock on a principle market for the 20 tradingdays before but not including the conversion date).

The holders of the Series B convertible preferred stock are entitled toreceive, when, if and as declared by the Board of Directors, cumulativedividends in the amount of four percent (4%) per annum, payable quarterly inarrears. As of March 31, 2006 these series B preferred shares had not beenissued.
**NOTE 14: LONG-TERM AND SHORT-TERM DEBT**
Long-term debt consists of thefollowing:                                                                                                     March 31, 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.                                                                                                                                                          141,387

 

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 loanis

secured by transportation equipment.The

note will be fully paid May, 2008.                                                                                                                            11,575

 

Note payable to Renasant Bank in the

Original amount of $38,334, payablein 

Monthly installments of $726.91including

Interest at 4.53% for 48 months. Theloan

Is secured by a Modern Certificate ofDeposit

In the amount of $40,000                                                                                                                                         33,134

 

                                                                                                                                                                                   186,096

Less: current portion                                                                                                                                                74,635
 

                                                                                                                                                                                 $111,461

 

Short-term debt consists of thefollowing:

 

Note payable to Kamel Yassin in the

Original amount of $400,000 bearing

Interest at a rate of 5% per annumwill

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 annumwill

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 Agreementwith GE Capital. Under the Agreement the Company may apply to GE Capital for anextension of credit to purchase inventory. Advances are repaid without interest90 days after the Company receives the funds. Late payments are subject tofinance charges. GE Capital has a security interest in all Company assets. As ofMay 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 Agreementwith AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and NewMillennium Capital Partners II, LLC for the sale of (i) $2,000,000 in securedconvertible notes and (ii) warrants to purchase 3,000,000 shares of our commonstock and (iii) entered into a Purchase Agreement whereby we purchased a$1,500,000 DeMarco Convertible Debenture in exchange for 1,500 shares of ourSeries A Convertible Preferred Stock. 

The secured convertible notes bear interest at 8%, mature two years from thedate of issuance, and are convertible into Modern common stock, at theinvestors' option, at the lower of $0.44 or 40% of the average of the threelowest intraday trading prices for the common stock on the Over-The-CounterBulletin Board for the 20 trading days before but not including the conversiondate. The secured convertible notes are secured by the personal guarantee of theshareholder with a collateral of 5.5 million shares of Modern Technology commonstock.

The warrants are exercisable until five years from the date of issuance at apurchase price of $0.40 per share. The investors may exercise the warrants on acashless basis if the shares of common stock underlying the warrants are notthen registered pursuant to an effective registration statement. 

The DeMarco convertible debenture is fully matured and bears interest at arate of 10% per annum with interest payments due quarterly. Modern has theoption to convert any unpaid principal into shares of DeMarco common stock atany 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 Agreementof the same date, entered into Callable Secured Convertible Notes. Under theterms of the notes, the Company borrowed an aggregate of $1,500,000.00 from theHolders 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 theNotes were issued, until due and payable on the Maturity Date. Any unpaidamounts after that date bear an interest of 15% per annum. Interest is payablequarterly and shall commence at December 31, 2005. Holder has the right toconvert any amounts due to Common Stock, at its discretion, at the conversionprice, as set forth under the terms of the Notes. This transaction was filedunder 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 theissuance of the Callable Secured Convertible Notes.

On December 16, 2005, the Company, pursuant to a Securities PurchaseAgreement of the same date, entered into Callable Secured Convertible Notes.Under the terms of the notes, the Company borrowed an aggregate of $700,000 fromthe 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 thedate the Notes were issued, until due and payable on the Maturity date. Anyunpaid amounts after that date earn an interest of 15% per annum. Interest ispayable quarterly and shall commence at December 31, 2005. Holder has the rightto convert any amounts due to Common Stock, at its discretion, at the conversionprice, as set forth under the terms of the Notes.

On March 27, 2006, the Company, pursuant to a Securities Purchase Agreementof the same date, entered into Callable Secured Convertible Notes. Under theterms of the notes, the Company borrowed an aggregate of $350,000 from theHolders 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 thenotes were issued, until due and payable on the Maturity date. Any unpaidamounts after that date earn an interest of 15% per annum. Interest is payablequarterly and shall commence at June 30, 2006. Holder has the right to convertany amounts due to Common Stock, at its discretion, at the conversion price, asset forth under the terms of the Notes. The Company issued 20,000,000 warrantsto purchase common stock as part of the issuance of the Callable SecuredConvertible Notes.
**NOTE 17: STOCK PURCHASE AGREEMENT**
On January 24, 2005, the Company entered into a Stock Purchase Agreement withSound City, Inc. The agreement is to purchase 51% of the issued and outstandingshares 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 theagreement, the Company also issued promissory notes in the amounts of $400,000each to Kamel Yassin, President of Sound City and Mervet Yassin, CFO of SoundCity. The promissory notes bear interest from the date of issuance at the rateof 5% per annum simple interest. Interest accrued to December 31, 2005 will bepayable in full on December 31, 2005. Thereafter, interest accrued on the unpaidprincipal during the calendar quarter will be payable quarterly on the last dayof each calendar quarter during the term of the note, with the first suchquarterly interest payment being payable on September 30, 2005. The principaland accrued interest will be due and payable on December 31, 2006. 

On December 20, 2005, the Company entered into and completed a Stock PurchaseAgreement (the "Agreement") with David Weiss and Andrew Perlmutter ("Sellers").Under the terms of the agreement, the company purchased 51% of the issued andoutstanding 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 ofSeries B Convertible Preferred Stock of the company. The company received 51shares of InMarketing, which represents 51% of the issued and outstanding stock.The option to purchase an additional amount of shares equally to 49% of theissued and outstanding stock. The option to purchase additional shares of stockexpires December 19, 2007.
**NOTE 18: EARNINGS PER SHARE**
A reconciliation of weighted average shares outstanding, used to calculatebasic loss per share, to weighted average shares outstanding assuming dilution,used to calculate diluted loss per share, follows:

 

74,976,804 and 9,085,193 common equivalent shares have been excluded from thecomputation of diluted earnings per share for the period ending 3/31/06 and3/31/05 respectively, because their effect would be anti-dilutive.
**NOTE 19: COMMITMENTS AND CONTINGENCIES**
Sound City guarantees the mortgage debt of Yassin & Company, LLC, a realestate holding company owned by the stockholders. The amount of outstandingmortgage debt at March 31, 2006 was $369,824.

In addition, Sound City also guarantees the mortgage debt of Kamel Yassin,President and Shareholder of Sound City, and Mervet Yassin, CFO and Shareholderof Sound City, on commercial property owned by them. The amount of outstandingmortgage at March 31, 2006 was approximately $141,387.

As part of our InMarketing Group, Inc acquisition (see Note 12), we areobligated to issue the sellers $1,210,000 in the form of series B convertiblepreferred stock of the company. As of March 31, 2006, this preferred stock hadnot been created.

InMarketing Group leases an office in Mahwah, New Jersey which expires onDecember 31, 2008 under an operating lease. The lease requires additional rentfor certain operating expenses as defined in the lease and is subject to futureminimum annual rental payments of $30,708. In addition, the Company rentsstorage 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 thelease is 5 years, beginning June 1, 2005 and expiring May 31, 2010. The fixedminimum rent is $51,000 annually.

Sound City also leases a 4,470 square foot retail store space with a 494square feet warehouse area in Franklin, NJ. The space is located in a shoppingcenter. The duration of the lease is 5 years and 2 months. It commenced on May1, 2005 and terminates on June 30, 2010. The annual rent for the initial 2months of the lease is 0. Annual rent for the next 30 months is $73,755increasing to $80,460 annually for the last 30 months of the lease. In addition,Sound City pays supplemental rent on taxes, insurance, and repairs andmaintenance on the building. This supplemental rent is based on the percentageof floor space leased in relation to the total rentable floor space of theshopping center.
**NOTE 20: ASSET ACQUISITION

 H-NET**
On July 10, 2005, Modern Technology Corp. ("MOTG") entered into an AssetPurchase Agreement ("Agreement") with Anton Stephens, Dba H-NET ("Hnet"). Nomaterial relationship exists between the parties, other than in respect of theAgreement. Under the terms of the Agreement, MOTG agreed to purchase all of therights, title and interest in, to certain assets owned by Hnet. In exchange forassets delineated under the Agreement, consisting of software, Hnet will receive$500,000 payable in the form of 350,000 shares of MOTG restricted common stockand 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 herebyincorporated by reference. MOTG has recorded $500,000 as software on the balancesheet at September 30, 2005 as a result of this asset acquisition. It isestimated that the software has a 5-year life and is being amortized ratablyover its estimated useful life. 

H-NET has no revenue at present and is not expected to have any revenue forthe following nine months. It is anticipated that H-NET assets will be fullydeveloped and revenue producing within the next twelve months. 
**NOTE 21: CONVERTIBLE NOTES
Secured convertible notes payable to AJW    Offshore, Ltd, AJWQualified Partners, LLC, AJW Partners, LLC and    New MillenniumCapital 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 bearinterest at 8% mature January 24, 2007 and are    convertible intoModern common stock.
$2,000,000 Less conversions
(1,012,809)    TOTAL
$ 987,191 Secured convertible notes payable to AJW    Offshore, Ltd, AJWQualified Partners, LLC, AJW Partners, LLC and    New MillenniumCapital Partners II, LLC in the amount of    $700,000. The securednotes bear interest at 9% and mature December    16, 2008 and areconvertible into Modern stock
$700,000 Less Conversions
0    TOTAL
$700,000 Secured convertible notes payable to AJW    Offshore, Ltd, AJWQualified Partners, LLC, AJW Partners, LLC and    New MilleniumCapital Partners II, LLC in the amount of    $1,500,000. The securednotes bear interest at 9%, mature 8/31/2007 and    are convertible intoModern stock. We issued 2,000,000 warrants as    part of the     issuance of this secured convertible note
$ 1,500,000Less Conversions
0    TOTAL
$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 upondemand.Less Conversions
0    TOTAL
$400,000 No    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
$ 100,000upon    demand.Less    Conversions
0    TOTAL
$ 100,000    Secured convertible notes payable to AJW Partners, AJW    Qualified, AJW Offshore, and New Millenium Capital Partnersin    the amount of $350,000. The secured notes bear interestat 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
$ 350,000Less    Conversions
0    TOTAL$ 350,000NOTE 22: MORTGAGE PAYABLEMortgages payable consists of the following:March 31
2006Mortgage payable to Valley National Bankin the amount of $535,000 payable in monthlyinstallments of $4,993.21 including interestat 5.5%. Pursuant to the loan agreement theinterest rate may change November 1, 2008.The loan is secured by Sound City's guaranteeand the personal guarantee of the members ofYassin & Company and a mortgage on propertyowned by the members. The note will be paidon November 1, 2009.
$
369,824Less current portion
$
(37,000)
$
332,824
NOTE 23: GOODWILL

The changes in the carrying amount of goodwill for the 9 months ended 3/31/06are 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 March 31, 2006                                        819,117

 

Due to working capital deficiencies and continuing losses, the goodwill ofour Sound City subsidiary appears to be permanently and totally impaired. As aresult, we are recognizing an impairment charge of $ 2,126,983 during thequarter ended March 31,2006. Until Sound City can be independently valued, weconsider the approach of writing down goodwill in the amount of $2,126,983 themost appropriate measure for this quarter's financial statement presentation.

NOTE 24: SUBSEQUENT EVENTS

On May 15, 2006 as part of our ongoing plan foroperations, we effected another Reverse Split of the Company's Common Stock on a1 for 20 basis. 

On June 5, 2006 we received a Termination Notice fromInMarketing Group alleging defaults under Sections 4.9 and 6.1 of the StockPurchase Agreement. The Company disputes that it is in default, and isresponding to the communication accordingly.
**Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**
None.
**Controls and Procedures**
Based on their evaluation as of a date within 90 days of the filing date ofthis Quarterly Report on Form 10-QSB, the Company's principal executive officerand principal financial officer have concluded that the Company's disclosurecontrols and procedures as defined in Rules 13a-14(c) and 15d-14(c) under theSecurities Exchange Act of 1934 (the Exchange Act) are effective to ensure thatinformation required to be disclosed by the Company in reports that it files orsubmits under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission rulesand forms.

There were no significant changes in the Company's internal controls or inother factors that could significantly affect these controls subsequent to thedate of their evaluation and up to the filing date of this Quarterly Report onForm 10-QSB. We received a letter from our auditor citing a material weakness inour internal accounting procedures and controls. Since receipt of this letter wehave improve and corrected our accounting procedures and controls through thefollowing measures: Increased education in accounting rules and requirementsarising from the new accounting requirements created through our acquisitionactivity, formal written procedures for monthly accounting consolidation fromour subsidiaries, advance drafting of SEC reports, and allocation of operationalresources to verify procedures are being followed and required information hasbeen obtained from all subsidiaries. Since our corrective measures , we believethere are no significant deficiencies or material weaknesses, and thereforethere were no corrective actions taken in this quarter. It should be noted thatany system of controls, however well designed and operated, can provide onlyreasonable, and not absolute, assurance that the objectives of the system aremet. In addition, the design of any control system is based in part upon certainassumptions about the likelihood of future events. Because of these and otherinherent limitations of control systems, there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.
**Item 2. Management's Discussionand Analysis of Financial Condition and Results of Operations***This Report contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, including, without limitation,statements regarding the Company's expectations, beliefs, intentions or futurestrategies that are signified by the words "expects," "anticipates," "intends,""believes," or similar language. These forward-looking statements, includingthose with respect to our operating results for 2004, are based upon currentexpectations and beliefs of the Company's management and are subject to risksand uncertainties that could cause results to differ materially from thoseindicated in the forward-looking statements. Some, but not all, of the factors,which could cause actual results to differ materially include those set forth inthe risks discussed below under the subheading "Risk Factors" and elsewhere inthis report. The Company undertakes no obligation to revise or publicly releasethe results of any revision to these forward-looking statements, or to explainwhy actual results differ. Readers should carefully review the risk factorsdescribed in this section below and in any reports subsequently filed with theSecurities and Exchange Commission.***Overview**
We were incorporated in Nevada in 1982 as a for-profitcorporation. We have never experienced any bankruptcy or similar proceeding. Weare engaged in aiding both private and public companies in the areas of businessdevelopment, financing, product development, corporate strategy, corporate imageand public relations, product distribution and marketing, and executivemanagement consulting. We collectively refer to companies in which we own anequity 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 mayalso exchange our services for revenue sharing of future sales of products orsharing of proceeds from the sale of licenses and technologies owned by ourportfolio companies. We seek to grow through strategic acquisitions in additionto generating income from our services.

Our sources of revenue are primarily from:

* Consolidated revenues of      our portfolio companies which we own in majority;

* Management and consulting      fees we may charge our portfolio companies;

* Revenue sharing agreements      we may have with our portfolio companies;

* Royalty and licensing      proceeds from the sale of technology rights we may own in whole or in part      with our portfolio companies;

* Proceeds from the sale of      securities we may own in our portfolio companies;

* Proceeds from the interest      and payment of debt we may hold in our portfolio companies; and

* Proceeds from the      conversion of debt we may hold in our portfolio companies into marketable      securities and subsequent sale of same.
** 

OUR PORTFOLIO COMPANIES

Sound City**
We presently own 51% of Sound City with an option to acquirethe remaining 49%. The option is valid through December 31, 2009, and can beexercised for $3,500,000, which is payable in cash, stock or a combination ofcash or stock. Sound City, Inc. is a consumer electronics company with customersacross the U.S. Sound City markets audio and video solutions for home and mobileenvironments, including the HD-TV, Plasma TV and LCD TV market segments. As afull service dealer, Sound City provides a wide range of custom homeinstallations addressing numerous applications. With a customer base of over900,000 customers, Sound City is a large electronics mail order companies in theU.S., who distributes its products and solutions through its direct mail and Website channels. Consumers can also find the latest audio, video, car stereo andhome theatre products in Sound City's retail locations, including 12 customshowrooms. Sound City operates a web site at the following address: http://www.soundcity.com.** 

INmarketing Group**
INmarketing is an Incentive Marketing Company creates and administerscustomized programs specifically designed to motivate and recognize corporate and client personnel for increased business related performances and rewardsachievement with selections of merchandise, services and travel opportunities.INmarketing operates a web site at the following address: http://www.inmarketinggroup.com

On December 20, 2005, the Company entered into a Stock Purchase Agreementwith David Weiss and Andrew Perlmutter ("Sellers'). Under the terms of the StockPurchase Agreement, the company purchased 51% of the issued and outstandingstock of InMarketing Group, Inc, a corporation organized and existing under thelaws of New Jersey, with an option to purchase an additional 49% of theoutstanding stock. 

On December 20, 2005, the Company entered into and completed a Stock PurchaseAgreement (the "Agreement") with David Weiss and Andrew Perlmutter ("Sellers").Under the terms of the agreement, the company purchased 51% of the issued andoutstanding 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 ofSeries B Convertible Stock of the company. The company received 51 shares ofInMarketing, which represents 51% of the issued and outstanding stock. We havethe option to purchase an additional amount of shares equal to 49% of the issuedand outstanding stock. The option to purchase additional shares of stock expiresDecember 19, 2007.
**H-NET**
H.NET is a global digital solutions provider for the Vision and Health Careindustry. With its multi-service Internet portal, web hosting services, businessapplications services and Internet-based transaction processing services, H-Netprovides products and services to hospitals, clinics, retail opticians, chainshome offices, Optometrists, Ophthalmologists and Optical Laboratories. For Moreinformation about H-Net visit www.h-net.net.

On July 10, 2005, Modern Technology Corp. ("MOTG") entered into an AssetPurchase Agreement ("Agreement") with Anton Stephens, Dba H-NET ("Hnet"). Nomaterial relationship exists between the parties, other than in respect of theAgreement. Under the terms of the Agreement, MOTG agreed to purchase all of therights, title and interest in, to certain assets owned by Hnet. In exchange forassets delineated under the Agreement, Hnet will receive $500,000 payable in theform of 350,000 shares of MOTG restricted common stock and a ConvertibleDebenture in the amount of $400,000 payable to Anton Stephens. This transactionwas filed under a From 8-K on August 2, 2005 and is hereby incorporated byreference.
** 

DeMarco Energy Systems of America, Inc.**
DeMarco Energy's primary mission is to provide energyefficient technologies to commercial and institutional markets through theapplication of the DeMarco 'Systems' patent. The company owns a systems patentthat was granted on September 3, 1985, known as the Energy Miser System. Thecompany is primarily focusing on providing heating and air conditioning poweredby the thermal properties of managed water systems, which include gray-water,re-use water and potable water systems. DeMarco has exclusive rights to thepatented technology.

We are the holder of an outstanding convertible debenture inthe amount of $1,500,000 issued by DeMarco Energy Systems of America. Thedebenture is convertible into shares of common stock of DeMarco. The convertibledebentures bear interest at 10%, matured on March 25, 2003, and are convertibleinto shares of Demarco common stock, at the selling stockholders' option, at thelower of (i) $0.15 or (ii) 60% of the average of the three lowest intradaytrading prices for the common stock on a principal market for the 10 tradingdays 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 ofDeMarco common stock.

We have no formal agreements with this portfolio companyoutside our being a holder of the convertible debenture. We have an informalagreement to assist them where practicable to further their plans and efforts,although there are no written agreements to this effect and we are not obligatedto perform any services for them.

We sold this debenture on January 24, 2006.
**Selecting Portfolio Companies**
We may purchase an equity position, whether minority ormajority, in various companies from time to time. We offer our services to newcustomers, also referred to as portfolio companies, for cash payment. We mayelect 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 weacquire a minority position in a company, we will seek to enter into agreementwith that company whereby we will generate income from our services. If weacquire a minority position in a company, we value that equity using agood-faith estimation of its value based on generally accepted accountingprinciples combined with our internal judgment based on industry and economicfactors not encompassed by traditional accounting principles.

We acquire majority or minority equity positions in portfoliocompanies by purchasing the equity with cash, debt, or purchasing the equity byissuing stock in our company. We may pay for the equity position with acombination of both cash and stock and debt.

When presented with a prospective acquisition, we make agood-faith valuation for the business to be acquired and its future prospects.If the assessment of the prospective acquisition appears to offer a good orreasonable chance to increase our revenues and assets both in the short-term andthe long-term, we will seek to acquire the prospective company.

We find new customers and prospective companies to acquirethrough out network of relationships within the business community.
**EMPLOYEES**
We currently have three full time employees and threepart-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, includingeight in management three in administrative, 10 in sales, three in advertising,five in warehousing and six in installations. In our subsidiary InMarketingGroup, we currently have 6 full time and three part-time employees, includingthree in management, one in sales, and five in administrative positions. Thereexist no organized labor agreements or union agreements between our employeesand us. We believe that our relations with our employees are good.
**Results of Operations:**
For the nine months ended March 31, 2006, the Registrant had total netrevenues of $7,871,185 as compared with total net revenues of $1,547,793 for thenine months period ended March 31, 2005. This increase is attributable to theexpansion of our subsidiary Sound City and the acquisition of our subsidiaryInMarketing Group.

For the nine months ended March 31, 2006, the Registrant had gross margin of$1,767,521 as compared with $503,304 for the nine months period ended March 31,2005. The gross margin increase is attributable to Sound City's expansion andour InMarketing Group purchase.

During the nine months ended March 31, 2006, the Registrant had net lossapplicable to common shareholders of $5,582,783 as compared with $572,869 forthe nine months ended March 31, 2005. 

 The net loss for the nine months ended March 31, 2006 isattributable primarily to expenses incurred as part of our acquisition efforts,activities related to locating and securing new portfolio companies, and theadjustment for Sound City goodwill impairment. 
During the nine months ended March 31, 2006, expenses amounted to $7,194,876,attributable to general and administrative expenses of $2,389,947, salaries andbenefits of $1,432,971, goodwill impairment of $2,126,983, investment losses of$989,000 and other expenses of $255,975. For the nine months ended March 31,2005, expenses amounted to $1,072,528 consisting of general and administrativeexpenses of $507,533, salaries of $386,138, and other expenses of $178,857. Theincrease in general and administrative expenses for the nine months ended3/31/06 can be attributed primarily to consulting expenses, rent, accounting andlegal fees, and expenses related to Sound City business expansion andInMarketing acquisition. Salary expenses increased primarily from theacquisition of InMarketing Group.
**Related Party Transactions**
We lease an administrative office from our CEO, Anthony Welch for $850 permonth.

Sound City leases a facility from its shareholders. This lease expires onJune 30, 2014. Sound City is responsible for taxes and other expenses on anannual basis. Rent expensed under this lease was $53,100 for the nine monthsended 3/31/06.

Our CFO, Robert Church is also a partner of Church, Devoe and Associates towhich we expensed $43,315 during the 9 months ended 3/31/06.
**Liquidity and Capital Resources**
The cash and cash equivalent balance of the Registrant was $511,139 and$262,609 as of March 31, 2006 and March 31,2005, respectively.

Sound City guarantees the mortgage debt of Yassin & Company, LLC, a realestate holding company owned by the stockholders. The amount of outstandingmortgage debt at March 31, 2006 was $369,824.

In addition, Sound City also guarantees the mortgage debt of Kamel Yassin,President and Shareholder of Sound City, and Mervet Yassin, CFO and Shareholderof Sound City, on commercial property owned by them. The amount of outstandingmortgage at March 31, 2006 was approximately $141,387.

As part of our InMarketing Group, Inc acquisition (see Note 12), we areobligated to issue the sellers $1,210,000 in the form of series B convertiblepreferred stock of the company. As of March 31, 2006, this preferred stock hadnot been created.

The Company has incurred substantial losses through March 31, 2006. Untilsuch time that the Company's products and services can be successfully marketed,the Company will continue to need to fulfill working capital requirementsthrough the sale of stock and/or the issuance of debt. The inability of theCompany to continue its operations as a going concern would impact therecoverability and classification of recorded asset amounts. 

The ability of the company to continue in existence is dependent on itshaving sufficient financial resources to bring products and services to marketfor marketplace acceptance. As a result of its significant losses, negative cashflows from operations, and accumulated deficits for the periods ending March 31,2006, there is doubt about the Company's ability to continue as a going concern.

Management believes that its current available working capital, anticipatedrevenues, further planned reductions in operating expenses, and subsequent salesof stock and/or placement of debt instruments will be sufficient to meet itsprojected expenditures for a period of at least twelve months from March 31,2006.
**Item 3.  Controls and Procedures****Disclosure Controls and Procedures.  The Company's management, withthe participation of the Company's Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of the Company's disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of theend of the period covered by this report.  Based on such evaluation, theCompany's Chief Executive Officer and Chief Financial Officer have concludedthat, as of the end of such period, the Company's disclosure controls andprocedures are effective in recording, processing, summarizing and reporting, ona timely basis, information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act.
**Internal Control Over Financial Reporting.  There have not been anychanges in the Company's internal control over financial reporting (as such termis defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during themost recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, the Company's internal control over financialreporting.
**PART II--OTHER INFORMATION****Item 1. Legal Proceedings**
From time to time, we may become involved in various lawsuitsand legal proceedings which arise in the ordinary course of business. However,litigation is subject to inherent uncertainties, and an adverse result in theseor other matters may arise from time to time that may harm our business. We arecurrently not aware of any such legal proceedings or claims that we believe willhave, individually or in the aggregate, a material adverse affect on ourbusiness, financial condition or operating results.
**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds**
None.
**Item 3. Defaults Upon SeniorSecurities**
None. 
**Item 4. Submission of Matters to aVote of Security Holders**
None. 
**Item 5. Other Information 

None. 
**Item 6. Exhibits and Reports onForm 8-K**
 

a.                                        Exhibits are incorporated herein by reference or are  filed with this report as indicated below: 
 
**Exhibit    Number**
 **Description   31.1* Certificate of Chief Executive    Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as    Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated May    19, 2005.31.2* Certificate of Chief Financial    Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as    Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated May    19, 2005.32* Certificate of Chief Executive    Officer and Chief Financial Officer pursuant to section 18 U.S.C.    section 1350 dated May 19, 2004.
 

*                                        Filed herewith. 
 

 

b.                                     Reports on Form 8-K: 
 On August 2, 2005, the Company filed a Current Report on Form 8-K.

On November 19, 2005, the Company filed a Current Report on Form 8-K.

 

 

 
**Signatures**
 

In accordance with the requirements of the Exchange Act, the Registrant hascaused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized. 

 
 MODERN TECHNOLOGY    CORP.    By:***/s/ Anthony K. Welch***Dated: June 7, 2006 Anthony K. Welch    Chairman and Chief Executive Officer     By:***/s/ Robert Church***Dated: June 7, 2006 Robert Church    Director and Chief Accounting Officer
 

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