` 

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 September 30, 2005
 
**OR**
 [_]**TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE    SECURITIES EXCHANGE ACT OF 1934
 
**For the transition period from                 to                 **
 
**Commission File Number 2-80891-NY**
 
**MODERN TECHNOLOGY CORP**
(Exact name 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 telephonenumber, 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 [_] No [X] 

  

 

Indicate the number of shares outstanding of each of the issuer's classes ofcommon stock, as of the latest practicable date. 

 
**Class
 **Outstanding at September 30, 2005
Common stock, $0.001 par value 
32,605,631
 
**MODERN TECHNOLOGY CORP.**
 
**Table of Contents**
 
**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 BalanceSheets

 

 
 
    September 30, 
 
    June 30,
 
 
    2005 
 
    2005

(unaudited)    

**ASSETS**
 
  
**CURRENT ASSETS**
 
  
 
Cash    and Cash Equivalents 
$    1,161,688 
 
$    190,963 
 
    Investments, Trading Securities 
    1,509,498 
 
    1,509,498 
 
    Accounts Receivable 
    104,947  
.-
 
    Interest Receivable 
    64,934 
 
    64,934 
 
    Prepaid Expenses 
-    
 
    12,228 
 
    Inventory 
      1,992,092
 
      2,119,579 

 
 
 
  
**TOTAL CURRENT ASSETS**
**4,833,159**
 
**3,897,202**

 
 
 
  
**FIXED ASSETS**
 
    Buildings, Furniture, Fixtures (net) 
      775,435 
 
    747,534      

**TOTAL FIXED ASSETS**
**775,435**
 
**747,534**

 
 
 
  
**OTHER ASSETS**
 
  
 
    Goodwill 
    2,126,983 
 
    2,126,983 
 
    Software 
    500,000 
 
-
 
    Accumulated Amortization 
    (28,279)
 
 -
 
    InMarketing Deposit 
    23,500
  
 
Other    Asset 
    96,498 
 
      89,451 

 
 
 
  
**TOTAL OTHER ASSETS**
**2,718,702**
 
**2,216,434**

 
 
 
  
**TOTAL ASSETS**
**$ 8,327,296**
 
**$ 6,861,170**

 
 
 
  
**LIABILITIES AND STOCKHOLDER'S EQUITY**
 
  
**CURRENT LIABILITIES**
 
  
 
    Accounts Payable 
$    670,413 
 
$    773,282 
 
    Accounts Payable-Related Party 
    39,719 
 
    34,574 
 
    Accrued Expenses 
    137,425 
 
    98,066 
 
    Dividends Payable 
    21,911 
 
    21,910 
 
    Current Portion-Notes Payable 
    152,342 
 
    102,362 
 
    Shareholder Loan Payable 
    1,123,056 
 
    1,124,971 
 
Other    Payables 
      127,315 
 
      33,882 

**TOTAL CURRENT LIABILITIES**
**2,272,181**
 
**2,189,047**

 
 
 
 
 
**LONG TERM LIABILITIES**
 
  
 
Notes    Payable 
    4,925,727  
    3,309,042 
 
Notes    Payable-Related Party 
    91,315 
 
    91,315 

**TOTAL LONG TERM LIABILITIES**
**5,017,042**
 
**3,400,357**

 
 
 
  
 
    Minority Interests 
**337,123**
 
**337,123**
 
 
 
  
**STOCKHOLDER'S EQUITY**
    Common Stock, Par Value $.001; 150,000,000 Shares Authorized;
 
  
    32,605,631 and 17,145,631 respectively
 
  
 
    Common Stock 
    32,606 
 
    17,146 
    Preferred stock, Authorized: 20,000,000 shares
 
  
    Issued and outstanding, 1,500 shares at $.0001 par value
 
  
    Series A, 6% cumulative, liquidation value $1,500,000
 
  
 
    Preferred Stock 
1
 
1    
 
    Paid-in Capital 
    3,443,336 
 
    2,938,235 
 
    Capital Returned 
    (310,970) 
 
    (310,970)
 
    Deferred Compensation 
    (327,254) 
 
    (355,957)
 
    Retained Earnings (Deficit) 
    (2,136,769) 
 
    (1,353,812)

 
 
 
  
**TOTAL STOCKHOLDER'S EQUITY**
**700,950**
 
**934,643**

**TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY**
**$ 8,327,296**
 
**$ 6,861,170**
 

 

MODERN TECHNOLOGY CORP

NOTES TO THECONSOLIDATED INTERIM FINANCIAL STATEMENTS 

SEPTEMBER 30, 2005

(unaudited) 

NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS

Modern Technology Corp (Modern) is a Nevada Corporation. 

We are engaged in aiding both private and public companies in the areas 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 three months ended September 30, 2005. 

 

 

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.

ACCOUNTS RECEIVABLE

Accounts Receivable are judged as to collectibility and a reserve isestablished as necessary. As of September 30, 2005 and June 30, 2005, no reservewas considered necessary.

 

INVENTORY

Inventories are stated at the lower of cost or market using the first-in,first-out ("FIFO") method. The Company may write down its inventory forestimated obsolescence or unmarketable inventory equal to the difference betweenthe cost of inventory and the estimated market value based upon assumptionsabout future demand and market conditions. Inventory consists primarily offinished 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                      31.5

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 was $6,074 and $0.00 for 2005 and 2004, respectively.

ESTIMATES IN FINANCIAL STATEMENTS

The preparation of financial statements in conformity with U. S. 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.  Under FIN 46R, the LLC is a VIE and the Company hasconsolidated the LLC in its consolidated financial statements.  Theconsolidated of this VIE has added $616,049 of assets and $411,404 ofliabilities to our consolidated balance sheet as of September 30, 2005.

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.

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 ended September 30, 2005 was $22,990.00.

 

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 threemonths ended September 30, 2005 and September 30, 2004, have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with instructions to Form 10-QSB and Item310 of Regulation S-B.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring accruals,unless otherwise indicated) considered necessary for a fair presentation of theresults of operations for the indicated periods have been included. Certain amounts recorded in previous periods have been reclassified to conformto the current period presentation.  Operating results for the three monthsended September 30, 2005 are not necessarily indicative of the results for thefull fiscal year.

 

 

NOTE 3:  CONCENTRATIONS OF CREDIT RISK

The Company's financial instruments that are exposed to concentrations ofcredit risk consist primarily of cash.

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. 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. During thequarter ended September 30,2005 the Company converted approximately $11,000 ofDeMarco Convertible Debenture into 3,200,000 shares of DeMarco common stock. 
NOTE 5:  INVESTMENT EQUITY SECURITIES (AT COST) 

As of June 30, 2004, the Company wrote off $1,431 of Daine Common 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 September 30, 2005.

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 quarter endedSeptember 30, 2005, the Company issued 1,490,000 shares of common stock forvarious consulting services. $327,254and $355,957 was shown as DeferredCompensation in the equity section of the balance sheet at September 30, 2005and June 30, 2005, respectively. The amount expensed in the quarter endedSeptember 30, 2005 was $182,402 as a result of all deferred compensation plans.During the twelve months ended June 30, 2005, the Company issued 13,000,000shares of Common Stock to Anthony Welch pursuant to the ReorganizationAgreement. The compensation portion of this agreement was valued at $1,300 andcharged to expense. All stock based compensation is accounted for in accordancewith SFAS No. 123. 

NOTE 7:  INCOME TAX EXPENSE (BENEFIT)

The provision for income taxes is comprised of the following:

                                                               09/30/05                 09/30/04
         Current                                               $-0-                          $-0-

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

 

 

The provision for income taxes differs form the amount computed by applyingthe statutory federal income rate as follows:

 

                                                                              09/30/05                    09/30/04 
 

Expected statutory amount                                       $ -0-                            $ -0-

Net operating loss                                                        -0-                               -0-

State income taxes, net

Of federal benefit                                                        -0-                                -0-
                                                                                    $ -0-                             $ -0-
Deferred income taxes reflect the net tax effects of temporary 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:

                                                        09/30/05                    6/30/05
Deferred tax assets:

       Net operating loss

       Carryforwards                     $293,231                     $293,231
       Gross deferred tax assets     293,231                   293,231

       Valuation allowance           (293,231)                    (293,231)
             Net deferred tax assets   $----0----                    $----0---- 
The net operating loss of approximately $**1,500,000** begins to expire inthe year ended June 30, 2024. 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 $43,315 in accounting fees during the three months endedSeptember 30, 2005.  

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 per month from Mr. Welch, our CEO.  

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 endedSeptember 30, 2005 totaled $2,550.00. Future minimum annual rent is as follows:

2006                                           192,000

2007                                           197,760

2008                                           203,693

2009                                           209,804

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

At September 30, 2005, Sound City had a Demand Promissory Note (the "Note")payable to its shareholders in the amount of $ 1,123,056. The note is unsecured,subordinated, non-interest bearing and is payable upon demand. Sound City 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 atSeptember 30, 2005, 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 six months ended June 30, 2005 (date of acquisitionthrough the year ended June 30, 2005), purchases from Sammans totaled $5,370,and sales to Sammans totaled $17,365. 

Pursuant to the stock sale agreement dated January 24, 2005, Sound 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 September30, 2005, there is doubt about the Company's ability to continue as a goingconcern.

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 September 30,2005. 

NOTE 12: OTHER DEVELOPMENTS
**InMarketing Acquisition**
On August 10, 2005 we entered into a Letter of Intent to acquire 51% ofInMarketing Group for an aggregate price of $2,000,000 under a Stock PurchaseAgreement. No material relationship exists between the parties, other than inrespect of the Agreement. The Purchase Price to be paid as follows: $1,000,000to be paid in cash and $1,000,000 to be paid in the form of a ConvertibleDebenture. The purchase price will be adjusted on reasonable terms specified inthe Definitive Agreement pursuant to a pro rata adjustment predicated on aprofitable $11,000,000 in revenues for 2005 generated by the InMarketingsubsidiary. We will have an option to purchase the remaining 49% of InMarketingas part of the agreement. This transaction is under final closing as of thisfiling. On August 15, 2005 we issued 500,000 common shares to the shareholdersof InMarketing Group as a good faith non-refundable deposit towards the purchaseprice of InMarketing Group. This stock issuance was valued at $23,500 and isincluded in other assets at September 30, 2005. If we cannot come to a bindingagreement with the shareholders of InMarketing Group regarding the purchase oftheir shares, we will expense the value of the shares that have been issued tothem.
** 

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 September 30, 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. The value of these warrantswas determined to be $44,400 and recorded as a debt discount and amortized overthe life of the notes.
** 

NOTE 13: COMMON STOCK AND PREFERRED STOCK

Common Stock**
March 2004 as part of our plan of reorganization and ongoing plan 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 September 30, 2005, there were 1,500 shares of preferredstock issued 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.
** 

 

NOTE 14: LONG-TERM DEBT**
Long-term debt consists of thefollowing:                                                                                                                                                                                         September 30, 2005
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

 

Note payable to Valley National Bank

in the original amount of $300,000,

payable in monthly installments of

$5,742.46 including interest at 5.5%.

The loan is secured by the personal

Guarantee of the shareholders and a

mortgage on property owned by the

shareholders. The note will be fully

paid May, 2008.                                                                                                                                                                                                                                                         171,398

Note payable to BMW Financial in the

original amount of $20,741, payable

in monthly installments of $419.53

Including interest at 3.9%. The loanis

secured by transportation equipment.The

note will be fully paid May, 2008.                                                                                                                                                                                                                            13,850
                                                                                                                                                                                                                                                                                    985,248

Less: current portion                                                                                                                                                                                                                                                 65,362
                                                                                                                                                                                                                                                                                  $919,886
                                                                                                                                               

 

 
**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. Theamount due as of September 30, 2005 was $177,856 and is included in accountspayable. 

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 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. 
**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 September 30, 2005 will bepayable in full on September 30, 2005. Thereafter, interest accrued on theunpaid principal during the calendar quarter will be payable quarterly on thelast day of each calendar quarter during the term of the note, with the firstsuch quarterly interest payment being payable on September 30, 2005. Theprincipal and accrued interest will be due and payable on December 31, 2006. 

 

The following unaudited pro-forma financial information reflects thecondensed consolidated results of operations of the Company as if theacquisition of Sound City, Inc had taken place on July 1, 2004.  Thepro-forma financial information is not necessarily indicative of the results ofoperations had the transaction been effected on July 1, 2004.
  
For the Three Months Ended   
September 30,

(unaudited)       
2005      Net sales         $
1,904,523      Net income (loss)          
(122,046)Diluted (loss) earnings per common share          
(0.02)
 
**NOTE 18: EARNINGS PER SHARE**
A reconciliation of weighted average shares outstanding, used to calculatebasic loss per share, to weighted average shares outstanding assuming dilution,used to calculate diluted loss per share, follows:

 
Quarter ended 
Quarter ended
 
September 30, 2005    

 
September 30, 2004

 

 
    Income 
    Shares 
    Per-Share 
    Income 
    Shares 
    Per-Share
 
    (Numerator) 
    (Denominator) 
    Amount 
    (Numerator) 
    (Denominator) 
    Amount

Net    Income (Loss) 
    (758,177) 
 
 
    (12,261)
 
 
        before preferred stock dividends 
Less:    preferred stock dividends 
    (47,465) 
 
 
    ---
 
 

Basic    EPS 
    (805,642) 
    23,210,522 
    (0.03) 
    (12,261) 
    7,755,914 
NIL    

    Effect of dilutive securities 
---        
 
 
----    
 
 

    Diluted EPS 
$    (805,642) 
    23,210,522 
    (0.03) 
$    (12,261) 
    7,755,914 
NIL    
 

10,585,193 and 0 common equivalent shares have been excluded from thecomputation of diluted earnings per share because their effect would beanti-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 September 30, 2005 was $392,376.

In addition, Sound City also guarantees the mortgage debt of Kamel Yassin,President and Shareholder of Sound City, and Mervet Yassin, CFO and Shareholderof Sound City, on commercial property owned by them. The amount of outstandingmortgage at September 30, 2005 was approximately $348,000.
** 

NOTE 20: ASSET ACQUISITION

 H-NET**
On July 10, 2005, Modern Technology Corp. ("MOTG") entered into an 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
(318,582)TOTAL
$1,681,418 NOTE 22: MORTGAGE PAYABLEMortgages payable consists of the following:September 30
2005Mortgage 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.
$
392,376Less current portion
$
(37,000)
$
355,376** 

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 Annual Report on Form 10-KSB, the Company's principal executive officer andprincipal 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 Annual Report on Form10-KSB. There were no significant deficiencies or material weaknesses, andtherefore there were no corrective actions taken. It should be noted that anysystem 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.** 

DeMarco Energy Systems of America, Inc.**
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.

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.

 
**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. There exist no organized laboragreements or union agreements between our employees and us. We believe that ourrelations with our employees are good.
**Results of Operations:**
 

During the three months ended September 30, 2005, the Registrant had net lossapplicable to common shareholders of $805,642, as compared with $12,261 for thethree months ended September 30, 2004. 

 

For the three months ended September 30, 2005, the Registrant had total grossmargin of $369,546 as compared with total revenues of $6,784 for the threemonths period ended September 30, 2004.The net loss for the three months ended September 30, 2005 isattributable primarily to expenses incurred as part of our reorganizationefforts and activities related to locating and securing new portfolio companies.
During the three months ended September 30, 2005, expenses amounted to$1,127,723, attributable mainly to general and administrative expenses of$671,145, officers' salaries of $375,570, interest expenses of $81,008 andpreferred stock dividends of $47,465. For the three months ended September 30,2004, expenses amounted to $19,045 consisting of general and administrativeexpenses of $13,045 and officers' salaries of $6,000. General and administrativeexpenses for the three months ended September 30, 2004 can be attributedprimarily to legal and accounting fees.
**Liquidity and Capital Resources**
 

The cash and cash equivalent balance of the Registrant was $1,161,688 and$190,963 as of September 30, 2005 and June 30, 2005, respectively.

 

The Company has incurred substantial losses through September 30, 2005. 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 September30, 2005, there is doubt about the Company's ability to continue as a goingconcern.

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 September 30,2005.

 
**Item 3.  Controls andProcedures**
 
**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:Dated: ________________________ Anthony K. Welch    Chairman and Chief Executive Officer     By: Dated: ________________________ Robert Church    Director and Chief Accounting Officer
 

 **************************