U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 0-26073
MODERNGROOVE ENTERTAINMENT, INC.
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(Name of small business issuer in its charter)
Nevada 86-0881193
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
No.)
1801 E. Tropicana, Suite 9, Las Vegas, Nevada 89119
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(Address of principal executive offices) (Zip Code)
(702) 893-2556
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class registered: None Name of each exchange on which
registered: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001
-----------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer is a software development and research company.
Based on the average if the closing bid and asked prices of the issuer's
common stock on December 31, 2000, the aggregate market value of the voting
stock held by non-affiliates of the registrant on that date was $637,909.
As of December 31, 2001, the issuer had 30,650,700 shares of common
stock outstanding.
Documents incorporated by reference: See Item 13. Exhibits and Reports
on Form 8-K in Part III.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
CONTENTS
PAGE
PART I
Item 1. Description of Business......................................3
Item 2. Description of Property.....................................13
Item 3. Legal Proceedings...........................................13
Item 4. Submission of Matters to a Vote of Security Holders.........13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....14
Item 6. Management's Discussion and Analysis or Plan of Operation...15
Item 7. Financial Statements........................................18
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................20
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act..21
Item 10. Executive Compensation......................................23
Item 11. Security Ownership of Certain Beneficial Owners and
Management..................................................24
Item 12. Certain Relationships and Related Transactions..............25
Item 13. Exhibits and Reports on Form 8-K............................26
SIGNATURES...............................................................28
Forward-Looking Statements
This report contains forward-looking statements. The forward-looking
Statements include all statements that are not statements of historical
fact. The forward-looking statements are often identifiable by their use of
words such as "may," "expect," "believe," "anticipate," "intend," "could,"
"estimate," or "continue," "Plans" or the negative or other variations of
those or comparable terms. Our actual results could differ materially from
the anticipated results described in the forward-looking statements. Factors
that could affect our results include, but are not limited to, those
discussed in Item 6, "Management's Discussion and Analysis or Plan of
Operation" and included elsewhere in this report.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT, ORGANIZATION AND ACQUISITION ACTIVITIES
ModernGroove Entertainment, Inc, formerly called Barrington Laboratories, Inc.,
a developmental stage company, hereinafter referred to as ("the Company") or
("ModernGroove") or ("MODG"), was organized by the filing of Articles of
Incorporation with the Secretary of State of the State of Nevada on August
6, 1998. The original articles of the Company authorized the issuance of
twenty-five million (20,000,000) shares of Common Stock at par value of
$0.001 per share and five million (5,000,000) shares of Preferred Stock at
par value of $0.001.
On December 18, 2000, the company held its annual shareholders' meeting. At
this meeting, the shareholders of the Company approved a company name change
from Barrington Laboratories, Inc., to ModernGroove Entertainment, Inc. This
name change reflects the board of directors' decision to expand the Company's
business focus. The shareholders also approved an increase in the number
of authorized common shares, from 20,000,000 to 200,000,000 having a par
value of $0.001. The amended Articles to reflect the name change and increase
in authorized shares were filed with the Nevada Secretary of State, on
December 18, 2000.
On December 18, 2000, the board of directors announced the Company entered
into a Share Exchange agreement with ModernGroove International, Inc., a
separate Nevada Corporation, whereby all of the issued and outstanding
shares of ModernGroove Entertainment International, Inc., will be exchanged
for 26,000,000 restricted common shares of the company's stock, effective
January 1, 2001.
Modern Groove Entertainment, Inc., in Vancouver, British Columbia, Canada,
has been active for approximately two developing software for interactive
entertainment for personal computers and the next generation of videogame
consoles.
Furthermore, ModernGroove worked on developing a stream cache system that
would bypasses the overcrowded Internet to deliver content without
interruption even at peak hours, a necessary precondition for the
establishment of any successful web broadcasting enterprise.
Due to excessive research expenses in developing this software, the Company
has run out of working capital. It operations are on hold, until the
Company can either find more funding, build a strategic alliance or find
a positive cash flow acquisition.
3
1) Principal Products and Services and Principal Markets
OVERVIEW
ModernGroove Entertainment, Inc., has been working on building an
interactive music and television network that consumers will access through
next-generation videogame consoles.
These consoles are high-powered PCs that sit in the living room and anchor
the home entertainment systems of the future. They have better graphics
than their predecessors, play DVD movies, and access the Internet at high
speed - ultimately making new forms of entertainment possible.
The company's videogame industry veterans have been working with music
labels and entertainment studios to develop brand-lead entertainment titles
for next-generation videogame consoles. Music titles for videogame consoles
constitute a relatively untapped market: less than 10 notable titles
currently exist across all platforms, though recent titles have sold over a
million units each.
Popular titles that are updated and re-released annually are called
franchises, providing videogame developers and publishers with reliable
income streams (e.g. Electronic Arts' Sports "NBA Live" and "NHL" series).
Perpetual market demand for new music could assist ModernGroove's development
of initial music titles into franchises.
Via these online components, the Company hoped to deliver entertainment from
partner music labels and entertainment studios. Consumers could browse the
network using the net-accessing browser that ships with our packaged product
and entertainment is delivered to the consumer via their next-generation
videogame console's high-speed modem. This would be the basis of an
interactive music and television network.
Since the Company inception, it accrued $2,983,546 in operating expenses,
Against no revenues, in developing their business plan. As such, the Company
has run out of working capital. It operations are on hold, until the
Company can either find more funding, build a strategic alliance or find
a positive cash flow acquisition.
4
RISK FACTORS
MODG has devoted much of its time and resources in developing software in
which no market has developed for its products. MODG is evaluating its
future plans, business opportunities and developing a business strategy to
be a going concern. That being the case, its lack of working capital has
severely hampered its future growth and any change for further earnings.
The company's competitors have larger research staffs, greater financial
resources, and industry contacts than MODG. This places the competition at
a significant advantage. MODG does not have many resources at this time,
and it is questionable if the Company can remain a going concern.
(a) Limited Operating History
The Company was first incorporated in the State of Nevada on August 6, 1998.
Accordingly, the Company has a limited operating history upon which an
evaluation of the Company, its current software development business and
its prospects can be based, each of which must be considered in light of
the risks, expenses and problems frequently encountered by all companies in
the early stages of development. The Company's prospects must be considered
in light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development.
(b) Anticipated Losses for the Foreseeable Future
The Company has not achieved profitability to date, and the Company
anticipates that it will continue to incur net losses for the foreseeable
future. The extent of these losses will depend, in part, on the amount of
Company's growth. As of December 31, 2001, the Company had an accumulated
deficit of two million nine hundred eight-three thousand five hundred
forty-six ($2,983,546) dollars. The Company's operations are on hold
until it can develop a strategy to generate revenues to achieve
profitability. To the extent that increases in its operating expenses
precede or are not subsequently followed by commensurate increases in
revenues, or that the Company is unable to adjust operating expense levels
accordingly, the Company's business, results of operations and financial
condition would be materially and adversely affected. There can be no
assurances that the Company can achieve or sustain profitability or that
the Company's operating losses will not increase in the future.
5
(c) Developing New Business Strategies
The Company is currently assessing various options and strategies to become
a profitable corporation. This includes, but is not limited to an analysis
of new businesses opportunities and evaluating new business strategies. In
analyzing prospective businesses opportunities, the Company's management
will consider, to the extent applicable, the available technical, financial
and managerial resources of any given business venture. Management will also
consider the nature of present and expected competition; potential advances
in research and development or exploration; the potential for growth and
expansion; the likelihood of sustaining a profit within given time frames;
the perceived public recognition or acceptance of products, services, trade
or service marks; name identification; and other relevant factors. The
Company anticipates that the results of operations of a specific business
venture may not necessarily be indicative of the potential for future
earnings, which may be impacted by a change in marketing strategies, business
expansion, modifying product emphasis, changing or substantially augmenting
management, and other factors.
The Company will analyze all relevant factors and make a determination based
On a composite of available information, without reliance on any single factor.
The period within which the Company will decide to participate in a given
business venture cannot be predicted and will depend on certain factors,
including the time involved in identifying businesses, the time required for
the Company to complete its analysis of such businesses, the time required
to prepare appropriate documentation and other circumstances.
(d) Evaluating a Business Combination
The Company has not yet determined if it plans to seek or identify a business
combination with a private entity whose business presents an opportunity for
Company shareholders. Before this decision can be made the Company's
management needs to review and evaluate business ventures for possible
mergers or acquisitions. The Company has not entered into any agreement, nor
does it have any commitment or understanding to enter into or become engaged
in a transaction, as of the date of this filing. Further, the business
objectives discussed herein are extremely general and are not intended to
restrict the discretion of the Company's management.
A decision to participate in a specific business opportunity will be made based
upon a Company analysis of the quality of the prospective business opportunity's
management and personnel, asset base, the anticipated acceptability of business'
products or marketing concepts, the merit of a business plan, and numerous other
factors which are difficult, if not impossible, to analyze using any objective
criteria.
6
(e) Selection of a Business Opportunity
Should the company pursue other potential business opportunities, it
anticipates they will be referred from various sources, including its
officers and directors, professional advisors, and its shareholders, who may
present unsolicited proposals. The Company does not plan to engage in any
general solicitation or advertising for a business opportunity, and would rely
upon personal contacts of its officers, as well as indirect associations with
other business and professional people. Management's reliance on "word of
mouth" may limit the number of potential business opportunities identified.
While it is not presently anticipated that the Company will engage unaffiliated
professional firms specializing in business acquisitions or reorganizations,
such firms may be retained if management deems it in the best interest of the
Company. As of the filing date there have been no discussions, agreements or
understandings with any professional advisors, financial consultants, broker-
dealers or venture capitalists. The Company's present intentions are to rely
upon its president to effect those services normally provided by professional
advisors or financial consultants.
The Company will not restrict its search to any particular business, industry,
or geographical location. Management reserves the right to evaluate and enter
into any type of business in any location. In seeking a business venture, the
decision of management will not be controlled by an attempt to take advantage of
any anticipated or perceived appeal of a specific industry, management group,
product, or industry, but will be based on the business objective of seeking
long-term capital appreciation. The Company may participate in a newly
organized business venture or in a more established business. Participation
in a new business venture entails greater risks since, in many instances,
management of such a venture may not have a proven track record; the eventual
market for such venture's product or services will likely not be established;
and the profitability of the venture will be untested and impossible to
accurately forecast. Should the Company participate in a more established
venture that is experiencing financial difficulty, risks may stem from the
Company's inability to generate sufficient funds to manage or reverse the
circumstances causing such financial problems.
(f) Operation of Business After Acquisition
If management decides to pursue a merger or acquisition, the Company will be
dependent on the nature of the business and the interest acquired. The
Company is unable to determine at this time whether the Company will be in
control of the business or whether present management will be in control of the
Company following the acquisition. It may be expected that the business will
present various risks, which cannot be predicted at the present time.
(g) Risks Associated with Acquisitions
If appropriate opportunities present themselves, the Company would acquire
businesses, technologies, services or product(s) that the Company believes
are strategic.
7
The Company currently has no understandings, commitments or agreements with
respect to any other material acquisition and no other material acquisition
is currently being pursued. There can be no assurance that the Company will
be able to identify, negotiate or finance future acquisitions successfully,
or to integrate such acquisitions with its current business. The process of
integrating an acquired business, technology, service or product(s) into the
Company may result in unforeseen operating difficulties and expenditures and
may absorb significant management attention that would otherwise be available
for ongoing development of the Company's business. Moreover, there can be no
assurance that the anticipated benefits of any acquisition will be realized.
Future acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities and/or
amortization expenses related to goodwill and other intangible assets, which
could materially adversely affect the Company's business, results of
operations and financial condition. Any future acquisitions of other
businesses, technologies, services or product(s) might require the Company to
obtain additional equity or debt financing, which might not be available on
terms favorable to the Company, or at all, and such financing, if available,
might be dilutive.
(h) Competition
The Company has been involved in intense competition with other business
entities, who produce computer software. Many of these competitive businesses
have an edge over the Company by virtue of their stronger financial resources
and prior experience in business. There is no assurance that the Company will
be successful in identifying and executing suitable business opportunities.
(i) Risks Associated With New Services, Features and Functions
As the Company develops its new business strategies, there can be no assurance
that the Company would be able to expand its operations in a cost-effective or
timely manner or that any such efforts would maintain or increase overall
market acceptance. Furthermore, any new business launched by the Company that
is not favorably received by consumers could damage the Company's reputation.
Expansion of the Company's operations in this manner would also
require significant additional expenses and development, Company's management,
financial and operational resources. The lack of market acceptance of the
Company's products would result in the Company's inability to generate
satisfactory revenues and its inability to offset their costs could have a
material adverse effect on the Company's business, results of operations
and financial condition.
(j) Potential Fluctuations in Operating Results; Quarterly Fluctuations
The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside the Company's
control. See "--Limited Operating History." As a strategic response to
changes in the competitive environment, the Company may from time to time
have to make certain pricing, marketing decisions or acquisitions that could
have a material short-term or long-term adverse effect on the Company's
business, results of operations and financial condition.
8
There can be no assurance that such patterns will not have a material adverse
effect on the Company's business, results of operations and financial
condition. There can be no assurance that the Company will receive any
material amount of revenue as it pursues new business strategies in the
future. The foregoing factors, in some future quarters, may lead the
Company's operating results to fall below the expectations.
2) Status of Any Announced New Product or Service
The Company does not have any announced new product or service. If the
Company can find a supplier to market their products through the Company's
Internet site, then these would be considered new products marketed by the
company. The Company, however, has yet to announce any new products and has
not announced any other recent additions or services.
3) Customers
The target market for MODG software products are people born after 1965,
initially those who relate to the broad category called modern music:
featuring European club music comprising House, Techno/Trance, and HipHop.
More specifically, ModernGroove is targeted existing game-console owners.
This group of consumers represents: 78% between the ages of 18-44; 83% are
male; and 42% are college students; 32% earn over $60,000 a year annually.
The Company believes that establishing and maintaining brand identity for
its proprietary software products is a critical aspect of its efforts to find
new customers. The Company intends to make a commitment to the creation and
maintenance of its proprietary software brands.
There can be no assurance that brand promotion activities will yield
increased revenues or that any such revenues would offset the expenses
incurred by the Company in building its brands. Further, there can be no
assurance that any new users attracted to MODG will conduct transactions
with MODG on a regular basis. If the Company fails to promote and
maintain its brand or incurs substantial expenses in an attempt to promote
and maintain its brand or if the Company's existing or future strategic
relationships fail to promote the Company's brand or increase brand
awareness, the Company's business, results of operations and financial
condition would be materially adversely affected.
9
4) Patents, Trademarks, Licenses, Franchises, Concessions, Royalty
Agreements, or Labor Contracts
The Company regards substantial elements of its future software and
underlying infrastructure and technology as proprietary and attempts to
protect them by relying on trademark, service mark, copyright and trade
secret laws and restrictions on disclosure and transferring title and other
methods. The Company plans to enter into confidentiality agreements with
its future employees, future suppliers and future consultants and in
connection with its license agreements with third parties and generally
seeks to control access to and distribution of its technology, documentation
and other proprietary information. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
proprietary information without authorization or to develop similar
technology independently.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any of the Company's proprietary rights. There can be
no assurance that the steps taken by the Company will prevent
misappropriation or infringement of its proprietary information, which could
have a material adverse effect on the Company's business, results of
operations and financial condition. Litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation might result in substantial
costs and diversion of resources and management attention. Furthermore,
there can be no assurance that the Company's business activities will not
infringe upon the proprietary rights of others, or that other parties will
not assert infringement claims against the Company, including claims that by
directly or indirectly providing hyperlink text links to Web sites operated
by third parties. Moreover, from time to time, the Company may be subject
to claims of alleged infringement by the Company or service marks and other
intellectual property rights of third parties. Such claims and any
resultant litigation, should it occur, might subject the Company to
significant liability for damages, might result in invalidation of the
Company's proprietary rights and, even if not meritorious, could result in
substantial costs and diversion of resources and management attention and
could have a material adverse effect on the Company's business, results of
operations and financial condition.
10
5) Government Regulation
It is impossible to anticipate government regulations, if any, to which the
Company may be subject until it defines its business strategies. The use of
assets to conduct a business which the Company may acquire could subject it
to environmental, public health and safety, land use, trade, or other
governmental regulations and state or local taxation. In selecting a business
in which to acquire an interest, management will endeavor to ascertain, to the
extent of the limited resources of the Company, the effects of such government
regulation on the prospective business of the Company. In certain
circumstances, however, such as the acquisition of an interest in a new or
start-up business activity, it may not be possible to predict with any degree
of accuracy the impact of government regulation. The inability to ascertain
the effect of government regulation on a prospective business activity presents
a risk to the Company.
6) Effect of Existing or Probable Government Regulations
Currently there is no absolute standard of government regulation that would
effect ModernGroove's business; however, the issues raised by copyrights,
royalties, and the controversies that have amassed around Napster and the
exchange of MP3 files may result in such regulations and must be addressed
by any company seriously considering the future of the industry.
Internet sites are shut down on a regular basis because of their failure to
obtain proper licensing arrangements with the artists whose work they are
distributing. This contributes to time wasted searching for product and the
general frustration with the current online companies, not to mention the
legitimate grievances of the artists. Some sites do choose to license
artists, negating the risk of legal action but therefore limiting the
product selection of the site.
Beyond this issue of copyrights and royalties to artists/distributors, some
government legislation has been proposed that imposes liability for or
prohibits the transmission over the Internet of certain types of
information. The imposition upon the Company and other online providers of
potential liability for information carried on or disseminated through their
services could require the Company to implement measures to reduce its
exposure to such liability, which may require the Company to expend
substantial resources and/or to discontinue certain service offerings.
11
The Company does not believe that such regulations, which were adopted prior
to the advent of the Internet, govern the operations of the Company's
business nor have any claims been filed by any state implying that the
Company is subject to such legislation. There can be no assurance, however,
that State government will not attempt to impose these regulations upon the
Company in the future or that such imposition will not have a material
adverse effect on the Company's business, results of operations and
financial condition. Several states have also proposed legislation that
would limit the uses of personal user information gathered online or require
online services to establish privacy policies. The Federal Trade Commission
has also recently settled a proceeding with one online service regarding the
manner in which personal information is collected from users and provided to
third parties. Changes to existing laws or the passage of new legislation,
could create uncertainty in the marketplace that could reduce demand for the
services of the Company or increase the cost of doing business as a result
of litigation costs or increased service delivery costs, or could in some
other manner have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, because the
Company's services are accessible worldwide, and the Company may facilitate
sales of goods to users worldwide, other jurisdictions may claim that the
Company is required to qualify to do business as foreign corporation in
particular state or foreign country.
Company is subject to such legislation. There can be no assurance, however,
that State government will not attempt to impose these regulations upon the
Company in the future or that such imposition will not have a material
adverse effect on the Company's business, results of operations and
financial condition.
6) Research and Development Activities
The Company needs to develop and identify products that achieve market
acceptance by its users. There can be no assurance that MODG, will be able
to identify such products or achieve market acceptance. Accordingly, no
assurance can be given that the Company's future business model will be
successful or that it can sustain revenue growth or be profitable. Therefore,
if the Company develops a product line which does not achieve or sustain
market acceptance, the Company's business, results of operation may be
materially and adversely affected.
There can be no assurances the Company will be successful in accomplishing
all of these things, and the failure to do so could have a material adverse
effect on the company's business, results of operations and financial
condition.
7) Impact of Environmental Laws
The Company is not aware of any federal, state or local environmental laws
that would effect is operations.
12
8) Employees
The Company currently has two (2) employees: one President and Corporate
Secretary, who serve as Officers of the Company. The Company has no
intention at this time to add employees.
(i) The Company's performance and success is dependent on management's
ability to develop, create and execute strategies for the company.
(ii) The Company does not carry key person life insurance on any of its
personnel. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the business, results of
operations and financial condition of the Company. The Company's future
success also depends on its ability to retain and attract highly qualified
technical and managerial personnel.
(iii) There can be no assurance that the Company will be able to retain its
key managerial and technical personnel or that it will be able to attract and
retain additional highly qualified technical and managerial personnel in the
future. The inability to attract and retain the technical and managerial
personnel necessary to support the growth of the Company's business, due to,
among other things, a large increase in the wages demanded by such personnel,
could have a material adverse effect upon the Company's business, results of
operations and financial condition.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's maintains a U.S. based office at 1801 E. Tropicana, Suite 9,
Las Vegas, NV 89119. Company phone number: (702) 893-2556. In a cost
savings effort, during the calendar year, the Company closed its offices
in Vancouver, British Columbia, Canada.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, ModernGroove Entertainment, Inc. is not a party to
any material legal proceedings, and none are known to be contemplated
against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fiscal
year ended December 31, 2001.
13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
------------------
On September 14, 1999, the Company's common stock was cleared for trading
on the OTC Bulletin Board system under the symbol BRRT. At the Company's
2000 annual shareholder meeting, the shareholders approved a name change for
the Company to ModernGroove Entertainment, Inc., and the Company subsequently
changed its name and trading symbol to: MODG. A limited market exists for
the trading of the Company's common stock.
The table below sets forth the high and low bid prices of our common stock
for each quarter shown, as provided by the Nasdaq Trading and Market
Services Research Unit. Quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
FISCAL 1999 HIGH LOW
-------------------------------- ---- ----
Quarter Ended March 31, 1999 N/A N/A
Quarter Ended June 30, 1999 N/A N/A
Quarter Ended September 30, 1999 N/A N/A
Quarter ended December 31, 1999 0.50 0.25
FISCAL 2000 HIGH LOW
-------------------------------- ---- ----
Quarter Ended March 31, 2000 10.25 1.62
Quarter Ended June 30, 2000 3.00 0.75
Quarter Ended September 30, 2000 1.74 0.37
Quarter ended December 31, 2000 2.25 0.47
FISCAL 2001 HIGH LOW
-------------------------------- ---- ----
Quarter Ended March 31, 2000 0.20 0.03
Quarter Ended June 30, 2000 0.55 0.12
Quarter Ended September 30, 2000 0.72 0.28
Quarter ended December 31, 2000 4.38 0.50
Holders
-------
The approximate number of holders of record of common stock as of December
31, 2001 was 198.
14
Dividends
---------
Holders of common stock are entitled to receive such dividends as the board
of directors may from time to time declare out of funds legally available
for the payment of dividends. No dividends have been paid on our common
stock, and we do not anticipate paying any dividends on our common stock in
the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
General
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The development of entertainment titles for next-generation videogame
consoles represented the core business of ModernGroove Entertainment, Inc.
These titles, to be sold in retail outlets, would have included a net-
accessing device that would steer consumers to an interactive music.
During the twelve month operating period ended December 31, 2001, the
Company generated no revenues and incurred a net loss of $(1,233,719), or a
loss of $0.04 per share. The majority of this loss was a result of Costs
of services and operating expenses. Since the Company inception, it accrued
$2,983,546 in operating expenses, against no revenues, in developing its
business plan. As of December 31, 2001, the Company had no cash reserves
and accounts receivable of $3,992.
The Company's ability to continue as a going concern is contingent upon the
successful completion of additional financing arrangements, the development
of its interactive entertainment products and its ability to achieve and
maintain profitable operations. Management plans to raise equity capital
to finance the operating and capital requirements of the Company. It is
management's intention to raise new equity financing of approximately
$3,000,000 within the upcoming year. Amounts raised will be used to
further development of the Company's products, to provide financing for
marketing and promotion, to secure additional property and equipment and
for other working capital purposes. While the Company is expending its
best efforts to achieve the above plans, there is no assurance that any
such activity will generate funds that will be available for operations.
15
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The Company's financial statements do not
include any adjustments related to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities
that may be necessary should the Company be unable to continue in
existence. (See "Financial Footnote 1.")
The Company has a limited operating history upon which an evaluation of the
Company, its current business and its prospects can be based. The Company's
prospects must be considered in light of the risks, uncertainties, expenses
and difficulties frequently encountered by companies in their early stages
of development. Such risks include, the company's inability to anticipate and
adapt to a developing market, the failure of the company's infrastructure,
changes in laws that adversely affect the company's business, the ability of
the Company to manage its operations, including the amount and timing of
capital expenditures and other costs relating to the expansion of the
company's operations, the introduction and development of different or more
extensive communities by direct and indirect competitors of the Company,
including those with greater financial, technical and marketing resources,
the inability of the Company to attract, retain and motivate qualified
personnel and general economic conditions.
Results of Operations
---------------------
As a development stage Company, the Company has yet to generate any revenues.
During calendar year ended December 31, 2001, the Company experienced net
losses of $(1,233,719) or a net loss of $(0.04) per share. For the calendar
year, the Company incurred costs of services and operating expenses which
amounted to $1,219,648. Since the Company inception, it accrued $2,983,546
in operating expenses, against no revenues, in developing its business plan.
This includes $233,640 in property and equipment and $701,974 in software
development costs. As of December 31, 2001, the Company had no cash reserves
and accounts receivable of $3,992. As such, the Company has run out of working
capital. It operations are on hold, until the Company can either find more
funding, build a strategic alliance or find a positive cash flow acquisition.
16
Liquidity and Capital Resources
-------------------------------
An original stock offering was made pursuant to Nevada Revised Statues
Chapter 90.490 (hereinafter referred to as the "Offering"). This Offering
was made in reliance upon an exemption from the registration provisions of
Section 5 of the Securities Act of 1993 (the "Act"), as amended, pursuant to
Regulation D, Rule 504 of the Act. On August 7, 1998, founding shareholders
purchased three million (3,000,000) shares of the Company's authorized but
unissued treasury stock for cash. Additionally, the Company sold seven
hundred fifty thousand seven hundred (750,700) shares of Common Stock of
the Company during the offering to approximately sixty-seven (67)
shareholders in the State of Nevada. The offering was closed February 28,
1999.
On December 18, 2000, the Company entered into a Share Exchange agreement with
ModernGroove Entertainment International, Inc., a separate Nevada Corporation,
whereby all of the issued and outstanding shares of ModernGroove
International, Inc., was exchanged for 26,000,000 restricted common shares
of the company's stock, effective January 1, 2001.
On November 22, 2000, the Company issued 350,000 shares in exchange for
services. The 350,000 shares issued in December, 2000 in connection with a
Form S-8 filed the U.S. Securities and Exchange Commission have been valued
at their fair market value of $306,250.
On March 1, 2001, the Company issued 550,000 shares of its $0.001 par value
common stock for consulting services valued at $583,000, this common stock
was registered on Form S-8 filed the U.S. Securities and Exchange Commission.
LOANS PAYABLE AND LINE OF CREDIT
On January 6, 2001, the operating loan outstanding at December 31, 2000 in
the amount of $83,463 was repaid in full.
Subsequently, a $314,475 operating line of credit was secured with Canadian
Imperial Bank of Commerce. The credit facility is renewable in one-year
increments at prime plus 3.0% with interest only payments of $6,000 per
month for the first year. The line of credit is collateralized by all
present and future assets of the Company and various guarantees provided by
stockholders of the Company. Principal of $127,988 has been paid as of
December 31, 2001.
Also in 2001, the Company received non-interest bearing advances of $451,995
from a stockholder. The notes payable are unsecured without specific
repayment terms.
17
ITEM 7. FINANCIAL STATEMENTS.
MODERNGROOVE ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AS OF
DECEMBER 31, 2001
AND
STATEMENTS OF INCOME,
STOCKHOLDERS' EQUITY, AND
CASH FLOWS
YEAR ENDED
DECEMBER 31, 2001
18
TABLE OF CONTENTS
TABLE OF CONTENTS
PAGE
Independent Auditor's Report F-1
Balance Sheet F-2
Income Statement F-3
Statement of Stockholders' Equity F-4
Statement of Cash Flows F-5
Footnotes F-6-16
19
G. BRAD BECKSTEAD
---------------------------
CERTIFIED PUBLIC ACCOUNTANT
330 E. Warm Springs
Las Vegas, NV 89119
702.257.1984
702.362.0540 (fax)
INDEPENDENT AUDITOR'S REPORT
April 4, 2002
Board of Directors
Moderngroove Entertainment, Inc.
Las Vegas, NV
I have audited the Balance Sheet of Moderngroove Entertainment, Inc. (the
"Company") (a Development Stage Company), as of December 31, 2001, and the
related Statements of Operations, Stockholders' Equity, and Cash Flows for the
year then ended. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that I plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statement presentation. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. I believe that my
audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the Balance Sheet of Moderngroove Entertainment, Inc. as
of December 31, 2001, and its related statements of operations, equity and cash
flows for the year then ended, in conformity with generally accepted accounting
principles in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has had limited operations and have not commenced
planned principal operations. This raises substantial doubt about its ability
to continue as a going concern. Management's plan in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ G. Brad Beckstead
-----------------------
G. Brad Beckstead, CPA
F-1
MODERNGROOVE ENTERTAINMENT, INC.
(FORMERLY BARRINGTON LABORATORIES, INC.)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
(Expressed in US Dollars)
BALANCE SHEET
December 31,
2001
-------------
ASSETS
Current assets:
Cash and equivalents $ -
Receivables 3,992
Prepaid consulting fees 291,499
Prepaid expenses 116,104
-------------
Total current assets 411,595
Property and equipment, net 233,640
Software development costs, net 701,974
-------------
$ 1,347,209
=============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Bank overdraft $ 4,555
Line of credit 186,477
Loan payable - related party 451,995
Accounts payable 307,047
Accrued liabilities 454,488
-------------
Total current liabilities 1,404,562
-------------
Commitments -
-------------
Stockholders' (Deficit):
Common stock, $0.001 par value, 200,000,000 shares
authorized, 30,650,700 shares issued and outstanding 30,651
Additional paid-in capital 3,033,042
Stock subscriptions receivable (120,000)
(Deficit) accumulated during development stage (2,997,617)
Accumulated other comprehensive income-
foreign exchange translation losses (3,429)
-------------
(57,353)
-------------
$ 1,347,209
=============
See accompanying notes to financial statements.
F-2
MODERNGROOVE ENTERTAINMENT, INC.
(FORMERLY BARRINGTON LABORATORIES, INC.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
AND FOR THE PERIOD SEPTEMBER 20, 1999 (INCEPTION) TO DECEMBER 31, 2001
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
September 20,
1999
Year ended (inception) to
December 31, December 31,
2001 2001
------------ --------------
(cumulative)
Revenue $ - $ -
------------ -------------
Costs of services and operating expenses:
Advertising and promotion 208,149 243,494
Contractor fees 291,501 342,509
Depreciation and amortization 128,119 307,049
Research and development 40,533 376,136
General and administrative 551,346 1,714,358
------------ -------------
1,219,648 2,983,546
------------ -------------
Other (expenses):
Interest expense (14,071) (14,071)
------------ -------------
(14,071) (14,071)
------------ -------------
Net (loss) $(1,233,719) $ (2,997,617)
============ =============
Weighted average number of
common shares outstanding - basic and fully
diluted 30,471,418
============
Net (loss) per share - basic and fully diluted $ (0.04)
============
See accompanying notes to financial statements.
F-3
MODERNGROOVE ENTERTAINMENT, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Expressed in US Dollars)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Deficit)
Accumulated Accumulted Total
Common Stock Additional During Other Stock-
------------------ Paid-in Subscriptions Development Comprehen. holders'
Shares Amount Capital Receivable Stage Income Equity
(Deficit)
---------- ------- ---------- ---------- ------------ -------- ----------
Sept. 20,
1999
Shares
issued
on
inco-
rpor-
ation 1 $ - $ - $ - $ - $ - $ -
Net
(loss)
for
the
period (119,265) (119,265)
Foreign
exchange
trans-
lation
losses (1,865) (1,865)
---------- ------- ---------- ---------- ------------ -------- ----------
Balance
Dec 31,
1999 1 - - - (119,265) (1,865) (121,130)
Recap-
itali-
zation
of shares
issued
to fo-
under 6,249,999 6,250 56,250 (62,500) 0
Feb 1,
2000
Shares
issued
for
compe-
nsati-
on 5,750,000 5,750 173,937 (57,500) 122,187
Feb 1,
2000
Shares
issued
for
cash 8,000,000 8,000 242,000 250,000
Donated
Capital 1,775,259 1,775,259
Net
(loss)
for
the
year (1,644,633) (1,644,633)
Foreign
exchange
trans-
lation
losses (1,004) (1,004)
---------- ------- ---------- ---------- ------------ -------- ----------
Balance
Dec 31,
2000 20,000,000 20,000 2,247,446 (120,000) (1,763,898) (2,869) 380,679
Jan 2,
2001
recapitalization
pursuant to
reverse
merger 9,750,000 9,750 (9,750)
Mar 1,
2001
Shares
issued
for
consulting
servi-
ces 550,000 550 582,450 583,000
Sep 15,
2001
Shares
issued
for
consulting
services 350,700 351 212,896 213,247
Net
(loss)
for
the
year (1,233,719) (1,233,719)
Foreign
exchange
trans-
lation
losses (560) (560)
---------- ------- ---------- ---------- ------------ -------- ----------
Balance
Dec 31,
2001 30,650,700 $30,651 $3,033,042 $(120,000) $(2,997,617) $(3,429) $ (57,353)
========== ======= ========== ========== ============ ======== ==========
See accompanying notes to financial statements.
F-5
MODERNGROOVE ENTERTAINMENT, INC.
(FORMERLY BARRINGTON LABORATORIES, INC.)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
AND FOR THE PERIOD SEPTEMBER 20, 1999 (INCEPTION) TO DECEMBER 31, 2001
(Expressed in US Dollars)
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Sept. 20,
1999
Year ended (inception) to
December 31, December 31,
2001 2001
------------ -------------
(cumulative)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(1,233,719) $ (2,997,617)
Depreciation and amortization expense 128,119 307,049
Shares issued for consulting services 583,000 583,000
Adjustments to reconcile net (loss) to
net cash (used) by operating activities:
(Increase) decrease in receivables 5,117 (3,992)
(Increase) decrease in prepaid expenses (107,481) (116,104)
Increase (decrease) in accounts payable 78,930 307,047
Increase (decrease) in other accrued liabilities 435,292 454,488
------------ -------------
Net cash (used) by operating activities (110,742) (1,466,129)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired upon reverse acquisition 18,923 18,923
Purchase of fixed assets (12,436) (606,854)
Software development costs (463,247) (701,974)
------------ -------------
Net cash (used) by investing activities (456,760) (1,289,905)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - 250,000
Contributions by stockholder - 1,864,195
Bank overdraft 4,555 4,555
Line of credit 108,759 186,477
Loan payable - related party 364,015 451,995
------------ -------------
Net cash provided by financing activities 477,329 2,757,222
------------ -------------
Net (decrease) increase in cash (90,173) 1,188
Foreign exchange effect on cash (1,281) (1,188)
Cash - beginning 100,155 -
------------ -------------
Cash - ending $ - $ -
============ =============
Supplemental disclosures:
Interest paid $ - $ -
============ ==============
Income taxes paid $ - $ -
============ ==============
Non-cash transactions:
Shares issued for prepaid consulting services
less $291,501 charged to expense during the
period $ 291,499 $ 291,499
============ ==============
See accompanying notes to financial statements.
F-6
MODERN GROOVE ENTERTAINMENT INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 2001
BASIS OF PRESENTATION These consolidated financial statements are
prepared in accordance with accounting principles
generally accepted in the United States and
include the accounts of the Company and its
wholly-owned subsidiary, Modern Groove
Entertainment, Inc. All significant intercompany
balances and transactions have been eliminated on
consolidation. The Company is considered a
development stage company in accordance with
Statement of Financial Accounting Standards
("SFAS") No. 7.
The Company has selected December 31 as its fiscal
year end.
FOREIGN CURRENCY TRANSLATION The Company's functional currency is the Canadian
dollar as all operations to date have been
conducted through the Company's Canadian
subsidiary. These consolidated financial
statements are stated in US dollars as the Company
was incorporated in the United States and for
comparison purposes with other industry
competitors registered with the Securities and
Exchange Commission ("SEC") in the United States.
Assets and liabilities denominated in Canadian
dollars are translated to US dollars using the
exchange rate in effect at the period end date.
Revenue and expenses are translated to US dollars
using the average rate of exchange for the
respective period. Gains and losses on exchange
are recorded as comprehensive income (loss) and
are reported separately in Stockholders' Equity
FINANCIAL INSTRUMENTS The Company's financial assets and liabilities
consist of cash, cash in trust, receivables, bank
overdraft, accounts payable, accrued liabilities
and loans payable. Unless otherwise noted, it is
management's opinion that the Company is not
exposed to significant interest, currency or
credit risks arising from these financial
instruments. The fair values of these financial
instruments approximate their carrying values due
to the short term or demand nature of these assets
and liabilities.
F-7
MODERN GROOVE ENTERTAINMENT INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT Property and equipment is stated at cost less
accumulated depreciation. Depreciation based on
the estimated useful life of the asset is
calculated at the following rates:
Computer equipment - 30% diminishing-balance
basis
Computer software - 50% diminishing-balance
basis
Office equipment - 20% diminishing-balance
basis
Audio and sound
equipment - 20% diminishing-balance
basis
Leasehold improvements are depreciated over the
remaining term of the underlying premises lease
which approximates its estimated useful life.
F-8
MODERN GROOVE ENTERTAINMENT INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 2001
PROPERTY AND EQUIPMENT
CONTINUED Direct costs associated with the development of
the features, content and functionality of the
Company's website incurred during the application
development stage are capitalized and will be
amortized over the estimated useful life of 3
years once development is complete.
SOFTWARE DEVELOPMENT COSTS In accordance with SFAS No. 86 "Accounting for the
Cost of Computer Software to be Sold, Leased or
Otherwise Marketed" software development costs are
expensed as incurred until technological
feasibility in the form of a working model has
been established. Deferred software development
costs will be amortized over the estimated
economic life of the software once the product is
available for general release to customers.
Annual amortization, thereafter, will be the
greater of the amount computed using (a) the ratio
of current revenues to current and anticipated
gross revenues for the product and (b) the
straight-line method over the product's economic
life.
IMPAIRMENT OF LONG-LIVED
ASSETS On a quarterly basis, the Company evaluates the
future recoverability of its property and
equipment and deferred software development costs
in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets to be Disposed
of". SFAS No. 121 requires recognition of
impairment of long-lived assets in the event the
net book value of such assets exceeds the
estimated undiscounted future cash flows
attributable to such assets or the business to
which such assets relate. No impairment was
required to be recognized during the periods
presented in these financial statements.
F-8
MODERN GROOVE ENTERTAINMENT INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES The preparation of financial statements in
accordance with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts
of assets and liabilities and disclosures of
contingent assets and liabilities at the date of
the financial statements and the reported amounts
of revenues and expenses during the reporting
period. Actual results could materially differ
from these estimates. The assets which required
management to make significant estimates and
assumptions in determining carrying values
included property and equipment and deferred
software and website development costs.
INCOME TAXES The Company follows the provisions of SFAS No.
109, "Accounting for Income Taxes", which
requires the Company to recognize deferred tax
liabilities and assets for the expected future tax
consequences of events that have been recognized
in the Company's financial statements or tax
returns using the liability method. Under this
method, deferred tax liabilities and assets are
determined based on the temporary differences
between the financial statement carrying amounts
and tax bases of assets and liabilities using
enacted rates in effect in the years in which the
differences are expected to reverse.
LOSS PER SHARE Loss per share is computed in accordance with SFAS
No. 128, "Earnings Per Share". Basic loss per
share is calculated by dividing the net loss
available to common stockholders by the weighted
average number of common shares outstanding for
the period. Diluted earnings per share reflects
the potential dilution of securities that could
share in earnings of an entity. In loss periods,
dilutive common equivalent shares are excluded as
the effect would be anti-dilutive.
For the period from September 20, 1999 (date of
inception) to December 31, 2001 there were no
common equivalent shares granted or outstanding.
F-9
MODERN GROOVE ENTERTAINMENT INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADVERTISING The Company follows the provisions of Statement of
Position 93-7 in accounting for the costs of
advertising. Advertising costs are charged to
expense in the period incurred.
CASH AND EQUIVALENTS The Company considers all highly liquid
investments with an original maturity of three
months or less to be cash equivalents.
NEW ACCOUNTING
PRONOUNCEMENT In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was
issued. SFAS No. 133 required companies to
recognize all derivatives contracts as either
assets or liabilities on the balance sheet and to
measure them at fair value. If certain conditions
are met, a derivative may be specifically
designated as a hedge, the objective of which is
to match the timing of gain or loss recognition on
the hedging derivative with the recognition of (i)
the changes in the fair value of the hedged asset
or liability that are attributable to the hedged
risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or
loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15,
2000.
Historically, the Company has not entered into
derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly,
the Company does not expect adoption of the new
standards on January 1, 2001 to affect its
financial statements.
F-10
MODERN GROOVE ENTERTAINMENT INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2001
1. Nature of Business and Continuing Operations
The Company, a development stage company, was incorporated under the laws
of the State of Nevada on September 20, 1999 and carries on operations
through its wholly-owned British Columbia subsidiary, moderngroove
entertainment, inc. The Company is developing an interactive music and
television network that consumers will access through next-generation
videogame consoles. In January 2001, the Company's stockholders completed
a share exchange agreement with Barrington Laboratories, Inc.
("Barrington", Note 9), an inactive Nevada company, which resulted in the
Company becoming a wholly-owned subsidiary of Barrington. The common stock
of Barrington is traded on the National Association of Securities Dealers
Over-the-Counter Bulletin Board and was registered with the Securities and
Exchange Commission in the United States.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles applicable to a going concern
which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. As at
December 31, 2001, the Company has not recognized revenue to date and has
accumulated operating losses of approximately $3.0 million since inception.
The Company's ability to continue as a going concern is contingent upon the
successful completion of additional financing arrangements, the development
of its interactive entertainment products and its ability to achieve and
maintain profitable operations. Management plans to raise equity capital
to finance the operating and capital requirements of the Company. It is
management's intention to raise new equity financing of approximately
$3,000,000 within the upcoming year. Amounts raised will be used to
further development of the Company's products, to provide financing for
marketing and promotion, to secure additional property and equipment and
for other working capital purposes. While the Company is expending its
best efforts to achieve the above plans, there is no assurance that any
such activity will generate funds that will be available for operations.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The Company's financial statements do not
include any adjustments related to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities
that may be necessary should the Company be unable to continue in
existence.
F-11
MODERN GROOVE ENTERTAINMENT INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2. LOANS PAYABLE AND LINE OF CREDIT
a) On January 6, 2001, the operating loan outstanding at December 31, 2000
in the amount of $83,463 was repaid in full.
b) Subsequently, a $314,475 operating line of credit was secured with
Canadian Imperial Bank of Commerce. The credit facility is renewable in
one-year increments at prime plus 3.0% with interest only payments of
$6,000 per month for the first year. The line of credit is
collateralized by all present and future assets of the Company and
various guarantees provided by stockholders of the Company. Principal
of $127,988 has been paid as of December 31, 2001.
c) Also in 2001, the Company received non-interest bearing advances of
$451,995 from a stockholder. The notes payable are unsecured without
specific repayment terms.
3. PROPERTY AND EQUIPMENT
2001 2000
----------------------------------------------
ACCUMULATED Accumulated
COST DEPRECIATION Cost Depreciation
--------- ------------ --------- ------------
Computer equipment $336,126 $155,632 $326,370 $101,482
Leasehold improvements 75,307 59,547 75,307 26,799
Computer software 73,592 65,744 72,560 36,816
Office equipment 33,303 20,159 32,249 6,554
Audio and sound equipment 26,697 10,877 26,697 5,558
Website development costs 48,446 48,446 48,446 -
--------- ------------ --------- ------------
594,065 360,425 581,629 177,209
===============================================
Net book value $233,640 $404,420
====================================
-------------------------------------------------------------------------------
F-12
MODERN GROOVE ENTERTAINMENT INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
4. SOFTWARE DEVELOPMENT COSTS
2000 2000
--------------------------
Salaries and employee benefits $ 295,212
209,667
Consulting fees - 29,060
--------------------------
$ 295,212 $238,727
==========================
------------------------------------------------------------------------------
5. SHARE CAPITAL
The Company was incorporated on September 20, 1999 in the State of Nevada
with the issuance of one share of common stock and has been the sole
stockholder of its subsidiary (Modern Groove Entertainment Inc.) since that
date. The Company's founder recapitalized the Company whereby his
shareholdings were increased to 6,250,000 shares of common stock at $0.01
per share being the estimated fair value of the Company at incorporation.
The recapitalized shares were not issued until February 1, 2000. Also on
February 1, 2000, certain key employees of the Company's subsidiary
subscribed for a total of 5,750,000 shares of common stock at $0.01 per
share. The estimated fair value of the shares of the Company on that date
was $0.03125 per share. Accordingly, compensation expense totalling
$122,187 has been recognized in respect of shares issued to these
employees. Such amount was included in Salaries and employee benefits in
the Statement of Operations in the year ended December 31, 2000.
Consideration for the shares issued on recapitalization and to employees
was the receipt of promissory notes totalling $120,000. The notes are
unsecured, non-interest bearing and repayable on demand. The underlying
common stock, and the Barrington common stock subsequently exchanged, is
held in trust by the Company as collateral against the notes receivable.
Also on February 1, 2000, the Company issued 8,000,000 shares of common
stock to a Canadian company in exchange for total proceeds of $250,000 and
an agreement to provide the Company with $2 million of working capital
financing on a non-interest bearing basis. Repayment of amounts advanced
would only occur if the Company did not go public. To December 31, 2000
the Company received $1,775,259 under this agreement. Upon closing the
share exchange agreement with Barrington (Note 9), the advances have been
classified as additional paid-in capital.
F-13
MODERN GROOVE ENTERTAINMENT INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On January 2, 2001, the Company issued 26 million shares of its $0.001 par
value common stock pursuant to a "reverse-merger" agreement with Modern
Groove Entertainment International, Inc. (Note 6).
On March 1, 2001, the Company issued 550,000 shares of its $0.001 par value
common stock for consulting services valued at $583,000, based on the
trading price of the Company's common stock on that date. The consulting
services are being amortized on a straight-line basis over the nine-month
term of the contract. During the year ended December 31, 2001, $291,501
was charged to expense as contractor fees, leaving $291,499 recorded as
prepaid expense at December 31, 2001.
------------------------------------------------------------------------------
F-14
MODERN GROOVE ENTERTAINMENT INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
6. RESEARCH AND DEVELOPMENT
The Company expensed the following software research and development costs
during the period:
Period from
September 20, 1999
YEAR ENDED (date of inception)
DECEMBER 31 to December 31
2001 2001
-------------------------------
Salaries and employee benefits $ 40,533 $ 231,486
Consulting fees - 84,784
-------------------------------
$ 40,533 $ 316,270
===============================
-------------------------------------------------------------------------------
7. INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which
requires use of the liability method. SFAS No. 109 provides that deferred
tax assets and liabilities are recorded based on the differences between the
tax bases of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as temporary differences. Deferred tax assets
and liabilities at the end of each period are determined using the currently
enacted tax rates applied to taxable income in the periods in which the
deferred tax assets and liabilities are expected to be settled or realized.
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes.
The sources and tax effects of the differences are as follows:
U.S federal statutory rate (34.0%)
Valuation reserve 34.0%
-------
Total -%
=======
F-15
MODERN GROOVE ENTERTAINMENT INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As of December 31, 2001, the Company has a net operating loss carryforward of
approximately $3,000,000 for tax purposes, which will be available to offset
future taxable income. If not used, this carryforward will expire in 2021. The
deferred tax asset relating to the operating loss carryforward has been fully
reserved at December 31, 2001.
8. REVERSE ACQUISITION WITH BARRINGTON ...
On December 18, 2000, the Company entered into an agreement with
Barrington Laboratories, Inc. whereby Barrington would acquire all the
issued and outstanding common stock of the Company in exchange for
26 million voting shares of Barrington common stock. Barrington was
incorporated in the State of Nevada on August 6, 1998 and was inactive
from incorporation to the acquisition date. The acquisition closed and
the shares were exchanged on January 2, 2001. (Note 5)
F-16
-----------------------------------------------------------------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Pursuant to Section 31(a)(1) the Investment Company Act of 1940 "Accountants
and Auditors," due to the death of the Company's auditor, the Company's board
of directors held a special meeting and voted to replace its auditor, until
the Company's new auditor can be ratified by the majority of the Company's
shareholders. The Company filed a Current Report with the SEC on March 7,
2001 to Change Auditors for the coming fiscal year.
Barry L. Friedman, CPA, was the Company's original auditor, and has been the
Company's auditor since the Company was founded on August 6, 1998 through
December 31, 2000. Mr. Friedman died on January 27, 2001.
In connection with its audit for the most recent fiscal years and through
December 31, 2000, there has been no disagreements with Barry L. Friedman,
CPA, on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Barry L. Friedman, CPA would have caused him
to make reference thereto in his report on the financial statements for such
years.
During the two most recent fiscal years and any subsequent interim period
preceding the replacement of Barry Friedman, CPA, its former accountant,
there were no disagreements between the Company and Barry Friedman, CPA on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement(s), if not
resolved to the satisfaction of the former accountant, would have caused it
to make reference to the subject matter of the disagreements(s) in connection
with its reports.
On March 15, 2000 the Registrant engaged G. Brad Beckstead, CPA as its
principal accountant to audit the Registrant's financial statements as
successor to David Coffey. During the Registrant's two most recent fiscal
years or subsequent interim period, the Registrant has not consulted G. Brad
Beckstead, CPA regarding the application of accounting principles to a
specific transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Registrant's financial statements,
nor did G. Brad Beckstead, CPA provide advice to the Registrant, either
written or oral, that was an important factor considered by the Registrant
in reaching a decision as to the accounting, auditing or financial
reporting issue. Further, during the Registrant's two most recent fiscal
years or subsequent interim period, the Registrant has not consulted
G. Brad Beckstead, CPA on any matter that was the subject of a disagreement
or a reportable event.
20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth the current officers and directors of
ModernGroove Entertainment, Inc. as of December 31, 2001.
Name Age Title
--------------------------------------------------------------
John Stroppa 33 President/CEO
Duties, Responsibilities and Experience:
John Stroppa, President/CEO
John Stroppa, born in Seattle, WA, in 1968 and moved to Vancouver, B.C. with
his Canadian parents in 1970.
1992-1993 - Gold Merchant Management, currency trader
1993-1994 - Xerox Canada, Sales
1995-1996 - Axion Internet, Inc., Canada, sales coordination
1997-1998 - Hitmen-Pioneer Studio at Electronic Arts (Canada), Inc.,
Assistant Producer
1998-1999 - Radical Entertainment Limited, Project Manager, Producer, Director
of Business Development. Radical Entertainment Limited is the
largest privately owned developers of interactive entertainment
titles and 3D graphics software
1999- Pres. - Founder/President, of ModernGroove Entertainment, Inc.
In 1990, he received his Bachelor of Arts in Economics from University of
Waterloo, and, in 1992, he received his Master of Arts in Economics from
Queen's University at Kingston.
21
DIRECTOR COMPENSATION
Directors shall receive no cash compensation for their services to
Mercado as directors, but are reimbursed for expenses actually incurred
in connection with attending meetings of the Board of Directors.
Directors are elected in accordance with our bylaws to serve until the next
annual stockholders meeting. Barrington Laboratories does not currently pay
compensation to directors for services in that capacity.
Officers are elected by the board of directors and hold office until their
successors are chosen and qualified, until their death or until they resign
or have been removed from office. All corporate officers serve at the
discretion of the board of directors. There are no family relationships
between any director or executive officer and any other director or
executive officer of Modern Groove Entertainment, Inc.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
And executive officers, and persons who beneficially own more than ten
percent of a registered class of our equity securities (referred to as
"reporting persons"), to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of common
stock and other equity securities. Reporting persons are required by
Commission regulations to furnish us with copies of all Section 16(a) forms
they file.
To the Company's knowledge, all Section 16(a) filing requirements applicable
to our directors, executive officers and greater than ten percent beneficial
owners during such period were satisfied.
22
ITEM 10. EXECUTIVE COMPENSATION.
As a result of the Company's current limited available cash, the sole
Company officer/director did not receive any compensation during the fiscal
year ended December 31, 2001.
Summary Compensation Table
Name and Principal Position -- Annual Compensation
--------------------------- --------------------
Number of Shares
Underlying
Name Position Salary Bonus Options (#)
---- -------- -------- ----------------------
John Stroppa President None None None
23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the beneficial
ownership of our outstanding common stock as of December 31, 2001, by each
person known by the Company to own beneficially more than 5% of the
outstanding common stock, by each of our directors and officer and by
all of our directors and officers as a group. Unless otherwise indicated
below, all persons listed below have sole voting and investment power with
respect to their shares of common stock.
Amount of Common Percent of
Stock Common Stock
Beneficially Beneficially
Name Position Owned Owned (6)
-----------------------------------------------------------------------------
John Stroppa (1) President/CEO 8,686,000 27.6%
Keith Laker (2) Shareholder 3,126,903 10.2%
ModernGroove Entertainment,
Inc., Employee Stock Fund (3) Shareholder 2,799,600 9.1%
Adrian Crook (4) Shareholder 1,600,000 5.2%
Steven Zur (5) Shareholder 1,680,000 5.2%
---------- -----
TOTALS: 17,892,503 57.3%
All Executive Officers and
Directors as a Group (1 person) 8,686,000 27.6%
1) John Stroppa, 303-280 Nelson Street, Vancouver, B.C.
2) The 3,126,903 shares of Common Stock beneficially owned by Willow
Trust, 1 Pier Steps St., Peter Port, Guernsey, UK, are controlled by
Keith Laker.
3) ModernGroove Entertainment, Inc., 1685 West 5th Avenue, Vancouver, B.C.
4) Adrian Crook, 2302, 1008 Cambie Street, Vancouver, B.C.
5) Steven Zur, 507, 610 Jervis Street, Vancouver, B.C.
6) Based upon 30,650,700 outstanding shares of common stock (subsequent to
the share exchange agreement).
24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Through a Board Resolution, the Company hired the professional services of
G. Brad Beckstead, Certified Public Accountant, to perform audited
financials for the Company. Mr. Beckstead owns no stock in the Company.
He is paid on a fee for service basis.
The officers and directors are involved in other business activities
and may, in the future become involved in other business opportunities.
If a specific business opportunity becomes available, such persons may
face a conflict in selecting between the Company and their other business
interests. The Company has not formulated a policy for the resolution of
such conflicts.
25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
The following documents are included or incorporated by reference as exhibits
to this report:
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- ---------------------------------------------------------------------
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.1 Articles of Incorporation of the Company Filed August 6, 1998(1)
3.2 By-Laws of the Company adopted September 23, 1998(1)
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Facsimile of specimen common stock certificate (2)
(23) CONSENT OF EXPERTS AND COUNSEL
23.1 Letter of Consent from Barry L. Friedman, CPA (1)
23.2 Letter of Consent from Barry L. Friedman, CPA (3)
23.3 Letter of Consent from G. Brad Beckstead, CPA (4)
(27) FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule
(29) ADDITIONAL EXHIBITS -- State Registration Statements
29.1 Agent of the Issuer Registration(1)
29.2 Notice of Effectiveness(1)
----------
(1) Previously filed as an exhibit to our registration statement on
Form 10-SB (the "Registration Statement"), which was filed on
May 14, 1999, and incorporated herein by reference.
(2) Previously filed as an exhibit to our annual report on Form 10KSB,
which was filed on March 8, 2000, and incorporated herein by
reference.
(3) Previously filed as an exhibit to our annual report on Form 10KSB,
which was filed on March 27, 2001, and incorporated herein by
reference.
(4) Filed herewith.
26
(b) REPORTS ON FORM 8-K
ModernGroove filed one Current Report during the fiscal year ended December 31,
2000, dated December 18, 2000, on Form 8-K containing information pursuant to
Item 5 ("Other Materially Important Events"); Item 6 ("Resignations of
Registrant's Directors"); and Item 7 ("Financial Statements and Exhibits")
entitled "Share Exchange Agreement."
The Company filed a Current Report on Form 8-K, dated February 20, 2001,
containing information pursuant to Item 1 ("Changes in Control of
Registrant"); Item 2 ("Acquisition or Disposition of Assets"); Item 6
("Resignations of Registrant's Directors"); and Item 7 ("Financial
Statements") entitled "ModernGroove Entertainment International, Inc.
Audited Consolidated Financial Statements and Unaudited Pro Forma
Consolidated Financial Information." This Current Report was subsequently
amended on Form 8-K, and filed on April 6, 2001.
The Company filed a Current Report on Form 8-K, dated March 7, 2001 containing
information pursuant to Item 4 ("Changes in Accountants") entitled "Changes
in Registrant's Certifying Account." (See Item 8 above, entitled, "Changes in
and Disagreements with Accountants on Accounting and Financial Disclosure."
This Current Report was subsequently amended on Form 8-K, and filed on
April 3, 2001.
The Company filed a Current Report on Form 8-K, dated March 27, 2001
containing information pursuant to Item 1 ("Changes in Control of Registrant")
entitled "Changes in Corporate Directors."
27
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: April 5, 2002 ModernGroove Entertainment, Inc.
--------------------------------
Registrant
By: /s/ Arthur W. Skagen
-----------------------
Arthur W. Skagen
Solicitor
28