UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
___________________________________________
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to _____________
Commission file number:000-29209
_________
21ST CENTURY TECHNOLOGIES, INC.
______________________________________________
(Name of small business issuer in its charter)
NEVADA 48-111056
_______________________________ ____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2700 W. Sahara Blvd., Suite 440, Las Vegas, NV 89102
________________________________________________________________
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (702) 248-1588
______________
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
$0.001 PAR VALUE COMMON VOTING STOCK
________________________________________________________________________________
(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. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to ITEM 405 OF
REGULATION S-B is not 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-K
or any amendment to this Form 10-K. [X]
State issuer's revenues for its most recent fiscal year.
$2,243,635
- -----------------------------------
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.)
NOTE: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date. 493,100,811 ISSUED
COMMON SHARES AS OF March 29, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
NOT APPLICABLE.
Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [X]
PART I
ITEM 1.
BUSINESS
GENERAL
As a business development company, we provide long-term debt and equity
investment capital to support the expansion of companies in a variety of
industries. We generally invest in illiquid securities through privately
negotiated transactions. We generally invest in private small to middle market
companies though, from time to time, we may invest in public companies that lack
access to public capital or whose securities may not be marginable. Today, our
investment and lending activity is generally focused in private finance.
Our investment portfolio consists primarily of secured loans with or without
equity features, equity investments in companies, which may or may not
constitute a controlling equity interest, preferred shares in collateralized
debt obligations, and commercial mortgage loans. At December 31, 2003, our
investment portfolio totaled $10,439,075 at fair value. Our investment objective
is to achieve current income and capital gains.
CORPORATE HISTORY
21st Century Technologies, Inc. ("the Company") is a Nevada corporation. The
Company merged into a "public shell" (formerly First National Holding
Corporation) after acquiring certain assets of Innovative Weaponry, Inc., a
debtor in bankruptcy, and commenced trading on June 1, 1995. The name of the
Company was changed from Innovative Weaponry, Inc. to 21st Century Technologies,
Inc. on September 25, 1995. Effective October 1, 2003, the Company converted to
a Business Development Company under the Investment Company Act of 1940.
PORTFOLIO INVESTMENTS
The Company had investments in nine controlled (portfolio) corporations at the
end of the reporting fiscal year:
1. INNOVATIVE WEAPONRY INC.
Innovative Weaponry is a manufacturer of night sights utilizing tritium, a
radioactive isotope of hydrogen. Products are available to both public entities
and private gun owners. Encapsulated in phosphor-lined glass sight inserts, the
tritium causes the phosphors to glow, making the sights useful in low-light and
no-light conditions. The Innovative Weaponry products feature multi-color
tritium sights with the front sight brighter than the rear sight thereby
enhancing low light sighting. Innovative Weaponry products have been sold to
original equipment manufacturers, members of the United States military
(including Navy Seal Teams, United States Customs, Drug Enforcement agencies,
Fish and Game departments, and numerous state and local police departments
nationwide).
Innovative Weaponry sells under the federal trade mark protected name "PT Night
Sights (TM) a multi-color 3-dot night sight using the radioactive isotope
tritium in encapsulated form to provide light in low light and no light
situations. Innovative Weaponry's domestic competition is: (1) Trijicon (2)
Meprolight (3) Trilux. (4) Truglo. Each of these companies is private and no
public sales figures are available.
Tritium is a radioactive product that is regulated by the U.S. Nuclear
Regulatory Commission ("NRC") and the Texas Department of Health (TDH).
Innovative Weaponry is licensed with the NRC and TDH to import tritium in
connection with the manufacture of its night sights and low-light sights. IWI's
licensing by the NRC is currently under review to expand legal applications of
different configurations of PT NIGHT SIGHTS (TM). Innovative Weaponry is a New
Mexico corporation and is owned 100% by the Company.
2. TRIDENT TECHNOLOGIES, INC.
Trident Technologies, Inc. ("Trident") manufactures a series of products based
upon permanent magnets, which use patented technology employing rare earths and
sophisticated circuitry. Trident is a Nevada corporation and is owned 100% by
the Company. The magnets are used to attach leak-sealing devices to ferrous
surfaces. The devices are made in several configurations. One series is
engineered for maritime applications and is known in its various configurations
as "SeaPatch." The series engineered for land-based applications is known in its
various configurations as "ProMag."
The magnetic force exerted by the adhesion magnets employed by SeaPatch and
ProMag is so powerful that a cam-lever device is required to detach the devices
once they are deployed on ferrous surfaces. This technique is known as "cam-on
cam-off". The SeaPatch and ProMag have applications in both the disaster and
environmental markets. The technology is based on a patented magnetic means of
implementing emergency ship, storage container, pipeline and other repairs where
surface integrity has been breached as in the case of a rip or tear to a ship's
hull or a ruptured railroad tank car. The technology utilizes the rare-earth
magnetic pack and cam-on/cam-off technology to attach a compression patch to
tears, stress fractures and punctures in a ship's hull above or below the
waterline, or any of many various applications for the stopping of land-based
leaks, as occur in pipelines, storage tanks, tank cars and numerous other
ferrous-based containers of liquids or gases.
This technology provides a new approach to resolving a problem having high
public visibility due to the extensive environmental focus on potentially
hazardous chemical and oil spills from pipelines, storage containers, railroad
cars and marine transport vessels.
Trident markets its products to private industry, including the maritime and
salvage industries, as well as governmental entities.
3. GRIFFON USA, INC.
Griffon USA, Inc. ("Griffon"), was an importer of .45 caliber semi-automatic
pistols from Continental Weapons (Pty) located in South Africa. It no longer
engages in business of any kind
4. NET CONSTRUCTION, INC.
On June 19, 2001, the name of CQB Armor, Inc., a 100% owned subsidiary of the
Company, was changed to Net Construction, Inc. CQB Armor had been an inactive
subsidiary since its formation due to the failure of a planned acquisition to
close. The name was changed in order to effect the acquisition of Net
Construction, a telecommunications and networking company originally founded in
1999. It was the Company's intent to offer through Net Construction a variety of
telecommunications services. Due to higher than anticipated overhead expense,
the Company discontinued operations of Net Construction.
5. TRADE PARTNERS INTERNATIONAL, INC.
Trade Partners International, Inc. ("Trade Partners") did not engage in business
activities during the year 2003.
6. HALLMARK HUMAN RESOURCES, INC.
Hallmark Human Resources, Inc. ("Hallmark"), a wholly owned subsidiary of the
Company, did not engage in business during the year 2003.
7. MINIATURE MACHINE CORPORATION, INC.
In March 2001, the Company acquired the stock of Miniature Machine Corporation,
Inc. {"MMC"}, a manufacturer and distributor of gun sights. The primary
difference between the products is that Innovative Weaponry markets fixed
sights, while MMC sights are adjustable. The subject of precision machining, the
open sights offered by MMC are favorites of gun enthusiasts and serious
hobbyists. The manufacture and sale of MMC sights has been integrated smoothly
into the manufacture and sale of PT Night Sights offered by Innovative Weaponry,
Inc. MMC has subsequently been merged into IWI.
8. U.S. OPTICS TECHNOLOGIES, INC.
This Company had no business activity during 2003.
9. PARAMOUNT MULTISERVICES, INC.
Paramount was acquired at year-end 2003 from an investment group in which a
former member of the Board of Directors and current General Manager of
operations had an ownership interest. The Company acquired 100% ownership of
this company in an exchange of common stock and changed the name to Paramount
MultiServices, Inc. Paramount was valued by an independent business valuation
consultant. The Company exchanged a non-interest bearing note which will be paid
over 3 years with common stock.
Paramount has facilities located in Alliance, Nebraska; Corpus Christi, Texas;
and Duncanville, Texas and currently employs approximately 125 people in
positions with administrative, management, and telemarketing responsibilities.
Approximately 65% of Paramount's business relates to outbound telemarketing
calls, and the remaining 35% of sales relate to inbound calls. Outbound
telemarketing calls relate to attempts by financial services companies to sell
add-on services to existing customers. Inbound calls primarily relate to service
requests for insurance companies.
10. PRIZEWISE, INC.
PrizeWise is an online trading platform in which anyone can post and sell
anything of value, like eBay. Unlike eBay, items on PrizeWise are raffled off
rather than auctioned off. The seller sets the raffle price and PrizeWise takes
17% commission on the total sale. Buyers chance winning items for nearly
nothing, and sellers get higher sale prices. Instead of simple selling raffle
tickets for a dollar a piece, PrizeWise sells coupons to which the raffle
tickets are incidental, and which PrizeWise actually gets paid to distribute. It
is anticipated that the trading platform will be live during the second quarter
of 2004.
RESEARCH AND DEVELOPMENT.
The Company currently has no research and development group. Periodically, our
portfolio companies make refinements to their products on a line production
basis. AVAILABLE INFORMATION Our Internet address is
www.21stcenturytechnologies.com. We are in process of making available free of
charge on our website our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. Information contained on our website is not incorporated
by reference into this annual report on Form 10-K and you should not consider
information contained on our website to be part of this annual report on Form
10-K. Additionally, there will be a copy of our Corporate Code of Ethics posted
on the web site.
PRIVATE FINANCE
We participate in the private equity business by providing privately negotiated
long-term debt and equity investment capital. Our private finance investment
activity is generally focused on providing capital in the form of debt with or
without equity features, such as warrants or options, often referred to as
mezzanine financing. In certain situations, we may also take a controlling
equity position in a company. Our private financing is generally used to fund
growth, buyouts, acquisitions, recapitalizations, note purchases, and bridge
financings. We generally invest in private companies though, from time to time,
we may invest in public companies that lack access to public capital or whose
securities may not be marginable.
At December 31, 2003, 16.2% of the private finance portfolio consisted of loans
and debt securities, 61.6% consisted of equity securities and 22.2% consisted of
investments in and advances to controlled companies.. Our private finance
portfolio includes investments in a wide variety of industries, including
homeland security products, business services, financial services, light
industrial products, retail, internet activities, and firearms and homeland
security related products.
We fund new investments using cash, through the issuance of our common equity,
the reinvestment of previously accrued interest and dividends in debt or equity
securities, or the current reinvestment of interest and dividend income through
the receipt of a debt or equity security (payment-in-kind income). From time to
time, we may also opt to reinvest accrued interest receivable in a new debt or
equity security, in lieu of receiving such interest in cash and providing a
subsequent investment. When we acquire a controlling interest in a company, we
may have the opportunity to acquire the company's equity with our common stock.
The issuance of our stock as consideration may provide us with the benefit of
raising equity without having to access the public markets in an underwritten
offering, including the added benefit of the elimination of any underwriter
commissions.
As a business development company, we are required to make significant
managerial assistance available to the companies in our investment portfolio. In
addition to the interest and dividends received from our private finance
investments, we will often generate additional fee income for the structuring,
diligence, transaction and management services and guarantees we provide to our
portfolio companies.
There is no one methodology to determine enterprise value and, in fact, for any
one portfolio company, enterprise value is best expressed as a range of fair
values, from which we derive a single estimate of enterprise value. To determine
the enterprise value of a portfolio company, we analyze its historical and
projected financial results. We generally require portfolio companies to provide
annual audited and monthly unaudited financial statements, as well as annual
projections for the upcoming fiscal year. Typically in the private equity
business, companies are bought and sold based upon multiples of EBITDA, cash
flow, net income, revenues or, in limited instances, book value. The private
equity industry uses financial measures such as EBITDA or EBITDAM (Earnings
Before Interest, Taxes, Depreciation, Amortization and, in some instances,
Management fees) in order to assess a portfolio company's financial performance
and to value a portfolio company. EBITDA and EBITDAM are not intended to
represent cash flow from operations as defined by accounting principles
generally accepted in the United States of America and such information should
not be considered as an alternative to net income, cash flow from operations, or
any other measure of performance prescribed by accounting principles generally
accepted in the United States of America. When using EBITDA to determine
enterprise value, we may adjust EBITDA for non-recurring items. Such adjustments
are intended to normalize EBITDA to reflect the portfolio company's earnings
power. Adjustments to EBITDA may include compensation to previous owners,
acquisition, recapitalization, or restructuring related items or one-time
non-recurring income or expense items.
In determining a multiple to use for valuation purposes, we look to private
merger and acquisition statistics, discounted public trading multiples or
industry practices. In estimating a reasonable multiple, we consider not only
the fact that our portfolio company may be a private company relative to a peer
group of public comparables, but we also consider the size and scope of our
portfolio company and its specific strengths and weaknesses. In some cases, the
best valuation methodology may be a discounted cash flow analysis based on
future projections. If a portfolio company is distressed, a liquidation analysis
may provide the best indication of enterprise value.
If there is adequate enterprise value to support the repayment of our debt, the
fair value of our loan or debt security normally corresponds to cost unless the
borrower's condition or other factors lead to a determination of fair value at a
different amount. The fair value of equity interests in portfolio companies are
determined based on various factors, including the enterprise value remaining
for equity holders after the repayment of the portfolio company's debt and other
pertinent factors such as recent offers to purchase a portfolio company's equity
interest or other potential liquidity events. The determined equity values are
generally discounted when we have a minority position, restrictions on resale,
specific concerns about the receptivity of the capital markets to a specific
company at a certain time, or other factors.
VALUATION PROCESS.
Upon conversion to a business development company, we employed independent
business valuation experts to value our portfolio companies, (formerly wholly
owned subsidiaries), inactive shell corporations, significant acquisitions,
(Paramount MultiServices, Inc.) and certain portfolio investments(HCIA Preferred
Stock). The portfolio companies were valued effective September 30, 2003 and
December 31, 2003. Acquisitions and portfolio investments were valued as of
December 31, 2003. The result of these evaluations is shown as unrealized
appreciation (depreciation) on investments in the balance sheet and as
cumulative effect of conversion to business development corporation on the
statement of operations.
The following is a description of the steps we will take in future quarters to
determine the value of our portfolio:
o Our quarterly valuation process begins with each portfolio company or
investment being initially valued by the investment professionals responsible
for the portfolio investment.
o Preliminary valuation conclusions are then discussed and documented in a
valuation write-up and/ or worksheet and then discussed with our portfolio
management team under the supervision of the Chief Financial Officer.
o The investment committee, consisting of our Independent Directors, meets to
discuss valuations as preliminarily determined and documented by our
investment professionals, questions the valuation data and conclusions, and
arrives at an investment committee view of valuation.
o The investment committee provides comments on the preliminary valuation and
the deal team and portfolio management team respond and supplement the
documentation based upon those comments.
o The valuation documentation is updated and distributed to our board of
directors and the audit committee of the board of directors.
o The audit committee meets in advance of the board of directors to discuss the
valuations and supporting documentation.
o The board of directors meets to discuss valuations and review the input of
the audit committee and management.
o To the extent changes or additional information is deemed necessary, a
follow-up board meeting, executive committee meeting or audit committee
meeting may take place.
o The board of directors determines the fair value of the portfolio in good
faith.
CERTAIN GOVERNMENT REGULATIONS
We operate in a highly regulated environment. The following discussion generally
summarizes certain government regulations.
BUSINESS DEVELOPMENT COMPANY. A business development company is defined and
regulated by the 1940 Act. A business development company must be organized in
the United States for the purpose of investing in or lending to primarily
private companies and making managerial assistance available to them. A business
development company may use capital provided by public shareholders and from
other sources to invest in long-term, private investments in businesses. A
business development company provides shareholders the ability to retain the
liquidity of a publicly traded stock, while sharing in the possible benefits, if
any, of investing in primarily privately owned companies.
As a business development company, we may not acquire any asset other than
"qualifying assets" unless, at the time we make the acquisition, the value of
our qualifying assets represent at least 70% of the value of our total assets.
The principal categories of qualifying assets relevant to our business are:
o Securities purchased in transactions not involving any public offering, the
issuer of which is an eligible portfolio company;
o Securities received in exchange for or distributed with respect to securities
described in the bullet above or pursuant to the exercise of options,
warrants or rights relating to such securities; and
o Cash, cash items, government securities or high quality debt securities
(within the meaning of the 1940 Act), maturing in one year or less from the
time of investment.
An eligible portfolio company is generally a domestic company that is not an
investment company (other than a small business investment company wholly owned
by a business development company), and that:
o does not have a class of securities registered on an exchange or a class of
securities with respect to which a broker may extend margin credit;
o is actively controlled by the business development company and has an
affiliate of a business development company on its board of directors; or
o meets such other criteria as may be established by the SEC.
Control under the 1940 Act is presumed to exist where a business development
company beneficially owns more than 25% of the outstanding voting securities of
the portfolio company.
To include certain securities described above as qualifying assets for the
purpose of the 70% test, a business development company must make available to
the issuer of those securities significant managerial assistance such as
providing significant guidance and counsel concerning the management,
operations, or business objectives and policies of a portfolio company or making
loans to a portfolio company. We offer to provide managerial assistance to each
of our portfolio companies.
As a business development company, we are entitled to issue senior securities in
the form of stock or senior securities representing indebtedness, including debt
securities and preferred stock, as long as each class of senior security has an
asset coverage of at least 200% immediately after each such issuance.
We may also be prohibited under the 1940 Act from knowingly participating in
certain transactions with our affiliates without the prior approval of our board
of directors who are not interested persons and, in some cases, prior approval
by the SEC.
We are periodically examined by the SEC for compliance with the 1940 Act. As of
the date of this filing we have not been examined by the SEC and have not been
notified of a pending examination.
As with other companies regulated by the 1940 Act, a business development
company must adhere to certain substantive regulatory requirements. A majority
of our directors must be persons who are not interested persons, as that term is
defined in the 1940 Act. Additionally, we are required to provide and maintain a
bond issued by a reputable fidelity insurance company to protect us against
larceny and embezzlement. Furthermore, as a business development company, we are
prohibited from protecting any director or officer against any liability to the
Company or our shareholders arising from willful malfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office.
We maintain a code of ethics that establishes procedures for personal investment
and restricts certain transactions by our personnel. Our code of ethics
generally does not permit investment by our employees in securities that may be
purchased or held by us. The code of ethics is filed as an exhibit to this 10K
which will be on file at the SEC. You may read and copy the code of ethics at
the SEC's Public Reference Room in Washington, D.C. You may obtain information
on operations of the Public Reference Room by calling the SEC at (202) 942-8090.
In addition, the code of ethics is available on the EDGAR Database on the SEC
Internet site at http://www.sec.gov. You may obtain copies of the code of
ethics, after paying a duplicating fee, by electronic request at the following
email address: publicinfo@sec.gov, or by writing to the SEC's Public Reference
Section, 450 5th Street, NW, Washington, D.C. 20549. Additionally, the code of
ethics will be posted on our corporate website, www.21stcenturytechnologies.com.
As a business development company under the 1940 Act, we are entitled to provide
loans to our employees in connection with the exercise of options. However, as a
result of provisions of the Sarbanes-Oxley Act of 2002, we are prohibited from
making new loans to, or materially modifying existing loans with, our executive
officers in the future.
We may not change the nature of our business so as to cease to be, or withdraw
our election as, a business development company unless authorized by vote of a
"majority of the outstanding voting securities," as defined in the 1940 Act, of
our shares. A majority of the outstanding voting securities of a company is
defined under the 1940 Act as the lesser of: (i) 67% or more of such company's
shares present at a meeting if more than 50% of the outstanding shares of such
company are present and represented by proxy or (ii) more than 50% of the
outstanding shares of such company. Since we made our business development
company election, we have not made any substantial change in the nature of our
business.
REGULATED INVESTMENT COMPANY STATUS. We have not elected to be taxed as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986.
COMPLIANCE WITH THE SARBANES-OXLEY ACT OF 2002 AND NYSE CORPORATE GOVERNANCE
REGULATIONS. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley
Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act imposes a wide
variety of new regulatory requirements on publicly-held companies and their
insiders. Many of these requirements will affect us. For example:
o Our chief executive officer and chief financial officer must now certify the
accuracy of the financial statements contained in our periodic reports;
o Our periodic reports must disclose our conclusions about the effectiveness of
our disclosure controls and procedures;
o Our periodic reports must disclose whether there were significant changes in
our internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses; and
o We may not make any loan to any director or executive officer and we may not
materially modify any existing loans.
The Sarbanes-Oxley Act has required us to review our current policies and
procedures to determine whether we comply with the Sarbanes-Oxley Act and the
new regulations promulgated thereunder. We will continue to monitor our
compliance with all future regulations that are adopted under the Sarbanes-Oxley
Act and will take actions necessary to ensure that we are in compliance
therewith.
RISK FACTORS
INVESTING IN 21ST CENTURY TECHNOLOGIES, INC. INVOLVES A NUMBER OF SIGNIFICANT
RISKS RELATING TO OUR BUSINESS AND INVESTMENT OBJECTIVE. AS A RESULT, THERE CAN
BE NO ASSURANCE THAT WE WILL ACHIEVE OUR INVESTMENT OBJECTIVE. IN ADDITION TO
THE RISK FACTORS DESCRIBED BELOW, OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY INCLUDE:
o GLOBAL ECONOMIC DOWNTURNS, COUPLED WITH WAR OR THE THREAT OF WAR;
o RISK ASSOCIATED WITH POSSIBLE DISRUPTION IN OUR OPERATIONS DUE TO TERRORISM;
o FUTURE REGULATORY ACTIONS AND CONDITIONS IN OUR OPERATING AREAS; AND
o OTHER RISKS AND UNCERTAINTIES AS MAY BE DETAILED FROM TIME TO TIME IN OUR
PUBLIC ANNOUNCEMENTS AND SEC FILINGS.
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. Our portfolio
consists of primarily long-term loans to and investments in private companies.
Investments in private businesses involve a high degree of business and
financial risk, which can result in substantial losses and accordingly should be
considered speculative. There is generally no publicly available information
about the companies in which we invest, and we rely significantly on the
diligence of our employees and agents to obtain information in connection with
our investment decisions. In addition, some smaller businesses have narrower
product lines and market shares than their competition, and may be more
vulnerable to customer preferences, market conditions or economic downturns,
which may adversely affect the return on, or the recovery of, our investment in
such businesses.
OUR PORTFOLIO OF INVESTMENTS IS ILLIQUID. We generally acquire our investments
directly from the issuer in privately negotiated transactions. The majority of
the investments in our portfolio may be subject to restrictions on resale or
otherwise have no established trading market. We typically exit our investments
when the portfolio company has a liquidity event such as a sale,
recapitalization, or initial public offering of the company. The illiquidity of
our investments may adversely affect our ability to dispose of debt and equity
securities at times when it may be otherwise advantageous for us to liquidate
such investments. In addition, if we were forced to immediately liquidate some
or all of the investments in the portfolio, the proceeds of such liquidation
would be significantly less than the current value of such investments.
Substantially all of our portfolio investments are recorded at fair value as
determined in good faith by our board of directors and, as a result, there is
uncertainty regarding the value of our portfolio investments. At December 31,
2003, approximately 97% of our total assets represented portfolio investments
recorded at fair value. Pursuant to the requirements of the 1940 Act, we value
substantially all of our investments at fair value as determined in good faith
by our board of directors on a quarterly basis. Since there is typically no
readily ascertainable market value for the investments in our portfolio, our
board of directors determines in good faith the fair value of these investments
pursuant to a valuation policy and a consistently applied valuation process.
Initial valuations as of September 30, 2003 and December 31, 2003, respectively,
were provided by independent valuation specialists.
There is no single standard for determining fair value in good faith. As a
result, determining fair value requires that judgment be applied to the specific
facts and circumstances of
each portfolio investment while employing a consistently applied valuation
process for the types of investments we make. Unlike banks, we are not permitted
to provide a general reserve for anticipated loan losses; we are instead
required by the 1940 Act to specifically value each individual investment on a
quarterly basis, and record unrealized depreciation for an investment that we
believe has become impaired, including where collection of a loan or realization
of an equity security is doubtful, or when the enterprise value of the company
does not currently support the cost of our debt or equity investment.
Conversely, we will record unrealized appreciation if we believe that the
underlying portfolio company has appreciated in value and, therefore, our equity
security has also appreciated in value. Without a readily ascertainable market
value and because of the inherent uncertainty of valuation, the fair value of
our investments determined in good faith by the board of directors may differ
significantly from the values that would have been used had a ready market
existed for the investments, and the differences could be material.
We adjust quarterly the valuation of our portfolio to reflect the board of
directors' determination of the fair value of each investment in our portfolio.
Any changes in estimated fair value are recorded in our statement of operations
as "Net unrealized gains (losses)."
ECONOMIC RECESSIONS OR DOWNTURNS COULD IMPAIR OUR PORTFOLIO COMPANIES AND HARM
OUR OPERATING RESULTS. Many of the companies in which we have made or will make
investments may be susceptible to economic slowdowns or recessions. An economic
slowdown may affect the ability of a company to engage in a liquidity event. Our
non-performing assets are likely to increase and the value of our portfolio is
likely to decrease during these periods. These conditions could lead to
financial losses in our portfolio and a decrease in our revenues, net income,
and assets.
Our business of making private equity investments and positioning them for
liquidity events also may be affected by current and future market conditions.
The absence of an active senior lending environment may slow the amount of
private equity investment activity generally. As a result, the pace of our
investment activity may slow. In addition, significant changes in the capital
markets could have an effect on the valuations of private companies and on the
potential for liquidity events involving such companies. This could affect the
amount and timing of gains realized on our investments.
OUR BORROWERS MAY DEFAULT ON THEIR PAYMENTS, WHICH MAY HAVE AN EFFECT ON OUR
FINANCIAL PERFORMANCE. We make long-term unsecured, subordinated loans and
invest in equity securities, which may involve a higher degree of repayment
risk. We primarily invest in companies that may have limited financial resources
and that may be unable to obtain financing from traditional sources. Numerous
factors may affect a borrower's ability to repay its loan, including the failure
to meet its business plan, a downturn in its industry, or negative economic
conditions. Deterioration in a borrower's financial condition and prospects may
be accompanied by deterioration in any related collateral.
OUR PRIVATE FINANCE INVESTMENTS MAY NOT PRODUCE CURRENT RETURNS OR CAPITAL
GAINS. Private finance investments are typically structured as debt securities
with a relatively high fixed rate of interest and with equity features such as
conversion rights, warrants, or options. As a result, private finance
investments are generally structured to generate interest income from the time
they are made and may also produce a realized gain from an accompanying equity
feature. We cannot be sure that our portfolio will generate a current return or
capital gains.
WE MAY BORROW MONEY WHICH MAGNIFIES THE POTENTIAL FOR GAIN OR LOSS ON AMOUNTS
INVESTED AND MAY INCREASE THE RISK OF INVESTING IN US. Borrowings, also known as
leverage, magnify the potential for gain or loss on amounts invested and,
therefore, increase the risks associated with investing in our securities. We
can borrow from and issue senior debt securities to banks, insurance companies,
and other lenders. Lenders of these senior securities would have fixed dollar
claims on our consolidated assets that are superior to the claims of our common
shareholders. If the value of our consolidated assets increases, then leveraging
would cause the net asset value attributable to our common stock to increase
more sharply than it would have had we not leveraged. Conversely, if the value
of our consolidated assets decreases, leveraging would cause net asset value to
decline more sharply than it otherwise would have had we not leveraged.
Similarly, any increase in our consolidated income in excess of consolidated
interest payable on the borrowed funds would cause our net income to increase
more than it would without the leverage, while any decrease in our consolidated
income would cause net income to decline more sharply than it would have had we
not borrowed. At December 31, 2003, we had $1,959,267 of outstanding
indebtedness, bearing a weighted average annual interest cost of 5%.
CHANGES IN INTEREST RATES MAY AFFECT OUR COST OF CAPITAL AND NET INVESTMENT
INCOME. Because we can borrow money to make investments, our net investment
income before net realized and unrealized gains or losses, or net investment
income, can be dependent upon the difference between the rate at which we borrow
funds and the rate at which we invest these funds. As a result, there can be no
assurance that a significant change in market interest rates will not have a
material adverse effect on our net investment income. In periods of rising
interest rates, our cost of funds would increase, which would reduce our net
investment income. We can use a combination of long-term and short-term
borrowings and equity capital to finance our investing activities.
WE OPERATE IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES. We compete for
investments with a large number of private equity funds and mezzanine funds,
investment banks and other equity and non-equity based investment funds, and
other sources of financing, including traditional financial services companies
such as commercial banks. Some of our competitors have greater resources than we
do. Increased competition would make it more difficult for us to purchase or
originate investments at attractive prices. As a result of this competition,
sometimes we may be precluded from making otherwise attractive investments.
WE DEPEND ON KEY PERSONNEL. We depend on the continued services of our executive
officers and other key management personnel. If we were to lose any of these
officers or other management personnel, such a loss could result in
inefficiencies in our operations and lost business opportunities.
CHANGES IN THE LAW OR REGULATIONS THAT GOVERN US COULD HAVE A MATERIAL IMPACT ON
US OR OUR OPERATIONS. We are regulated by the SEC. In addition, changes in the
laws or regulations that govern business development companies, regulated
investment companies, real estate investment trusts, and small business
investment companies may significantly affect our business. Any change in the
law or regulations that govern our business could have a material impact on us
or our operations. Laws and regulations may be changed from time to time, and
the interpretations of the relevant laws and regulations also are subject to
change.
RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE PERFORMANCE. Our
operating results will fluctuate and, therefore, you should not rely on current
or historical period results to be indicative of our performance in future
reporting periods. Factors that could cause operating results to fluctuate
include, among others, variations in the investment origination volume and fee
income earned, variation in timing of prepayments, variations in and the timing
of the recognition of realized and unrealized gains or losses, the degree to
which we encounter competition in our markets, and general economic conditions.
OUR COMMON STOCK PRICE MAY BE VOLATILE. The trading price of our common stock
may fluctuate substantially. The price of the common stock may be higher or
lower than the price you pay for your shares, depending on many factors, some of
which are beyond our control and may not be directly related to our operating
performance. These factors include the following:
o price and volume fluctuations in the overall stock market from time to time;
o significant volatility in the market price and trading volume of securities
of business development companies or other financial services companies;
o changes in regulatory policies or tax guidelines with respect to business
development companies or regulated investment companies;
o actual or anticipated changes in our earnings or fluctuations in our
operating results or changes in the expectations of securities analysts;
o general economic conditions and trends;
o loss of a major funding source; or
o departures of key personnel.
ITEM 2. PROPERTIES
Our principal offices are located at 2700 W. Sahara, Suite 440 and 420, Las
Vegas, NV. The office is equipped with an integrated network of computers for
word processing, financial analysis, accounting and loan servicing. We believe
our office space is suitable for our needs for the foreseeable future.
As of the close of the reporting period, the Company and its wholly owned non
consolidated portfolio companies had approximately 155 employees.
Innovative Weaponry is in process of moving to new offices at 2900 S. Highland
Dr., Suite 18B, Las Vegas, NV and Trident has production and sales offices
located at 4011 C HWY 377 South, Fort Worth, TX 76116.
ITEM 3. LEGAL PROCEEDINGS
We may be a party to certain other lawsuits including legal proceedings
incidental to the normal course of our business. While the outcome of these
legal proceedings cannot at this time be predicted with certainty, we do not
expect that these proceedings will have a material effect upon our financial
condition or results of operations.
On September 5, 2001, Patricia Wilson, a former officer, director and employee
of the Company, filed suit against the Company and directors Ken Wilson, Jim
Mydlach and Dave Gregor. The suit is pending in the 153rd District Court of
Tarrant County, Texas in Cause Number 153-189311-01. The suit arises out of Ms.
Wilson's termination as an officer and director of the company on August 31,
2001. The causes of action asserted against the Defendants include breach of
fiduciary duty, breach of contract, defamation and negligent investigation. The
Petition seeks actual damages of $500,000.00, exemplary damages of $10,000,000,
and 9,000,000 shares of Company stock. A further discussion of the litigation is
included in the Company's Form 8- K filed as of September 26, 2001.
On February 20, 2004, in Case No. 02-1927 RGK, in the United States District
Court for the Central District of California, in a case styled Bike Doctor, a
California Partnership -vs- 21st Century Technologies, Inc., Kenneth E. Wilson
and Scott Sheppard, a judgment was entered against the Company for $145,000,
together with interest and costs. The judgment arises out of a Motion for
Summary Judgment filed by the Plaintiff. The Company has given notice of appeal
to the 9th Circuit Court of Appeals. Counsel for the Company is reviewing the
record to determine the efficacy of grounds for appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By affirmative vote of the majority of the outstanding voting rights, on
February 20, 2003, the Company effected a 100 to 1 reverse split of its common
stock and raised its authorized common shares to 300,000,000 shares with a par
value of $.001 per share. On November 11, 2003, by affirmative vote of the
majority of the outstanding voting rights, the Company amended its Articles of
Incorporation to increase the number of authorized common shares to 750,000,000
with a par value of $.001 per share.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded over the counter and quoted on the OTC NASDAQ
Electronic Bulletin Board under the Signal "TFCT." That symbol became effective
after the accomplishment of the recapitalization on February 20, 2003. The
following table represents the range of the high and low bid prices of the
Company's stock for each fiscal quarter for the last two fiscal years ending
December 31, 2003. Such quotations represent prices between dealers and may not
include markups, markdowns, or commissions and may not necessarily represent
actual transactions.
As Restated
------------------
Year Quarter High Low High Low
2002 First Quarter .04 .02 4.00 2.00
Second Quarter .04 .02 4.00 2.00
Third Quarter .03 .01 3.00 1.00
Fourth Quarter .02 .01 2.00 1.00
2003 First Quarter .95 .01 95.00 1.00
Second Quarter .45 .03 45.00 3.00
Third Quarter .09 .01 9.00 1.00
Fourth Quarter .12 .04 12.00 4.00
Our market has traded sporadically and is often thinly traded with large changes
in volume of shares traded on any particular day. Shareholders should consider
the possibility of the loss of the entire value of their shares.
As of December 31, 2003 the authorized capital of the company is 750,000,000
shares of common voting stock par value $.001 per share and 50,000,000 shares of
preferred stock. As of December 31, 2003 the Company has outstanding 437,173,162
shares of common stock and 17,200,000 shares of $.001 preferred stock.
Prior to restating for the 100:1 reverse stock split which was effective
February 20, 2003, the Company had issued an outstanding capital of 120,831,994
shares of $.001 par value common voting stock and 79,095,106 preferred warrants
outstanding at December 31, 2002.
After the recapitalization effective February 20, 2003, there were 300,000,000
shares of $.001 par value common stock authorized with 92,303,426 issued and
outstanding.
On October 7, 2003, by vote of the majority voting interests, the Company
increased its authorized common shares to 750,000,000 shares of $.001 par value
common shares.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto. As discussed in Note
A to the Financial Statements, we converted to a Business Development Company
effective October 1, 2003. The results of operations for 2003 are divided into
two periods, the "Post-Conversion as a Business Development Company" period and
"Pre-Conversion prior to becoming a Business Development Company" period.
Different accounting principles are used in the preparation of financial
statements of a business development company under the Investment Company Act of
1940 and, as a result, the financial results for periods prior to October 1,
2003 are not comparable to the period commencing on October 1, 2003 and are not
expected to be representative of our financial results in the future. As a
result of the change, the financial results for periods prior to January 1, 2003
are not comparable to the period commencing on January 1, 2003 and are not
expected to be representative of our financial results in the future.
Years Ended December 31 2003 2002 2001
----------------------------------------
Total Investment Income $1,158,168 -0- -0-
Net Change in unrealized appreciation $ 868,000 -0- -0-
Cumulative Effect of conversion to BDC $ 232,996 -0- -0-
Income (loss) from Operations $105,535 $(2,038,822) $(5,189,510)
Per Share of Common Stock 0.00 (0.01) (0.03)
At December 31:
Total Assets $13,489,476 $2,534,637 $3,981,905
Total Liabilities $ 2,005,224 $1,984,410 $1,567,252
Stockholders' Equity $11,484,252 $ 547,069 $2,411,495
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this section should be read in conjunction
with the Selected Financial Data and our Financial Statements and notes thereto
appearing elsewhere in this 10K. The 10K, including the Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains
forward-looking statements that involve substantial risks and uncertainties.
These forward-looking statements are not historical facts, but rather are based
on current expectations, estimates and projections about our industry, our
beliefs, and our assumptions. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", and "estimates" and variations of these words and
similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties, and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements including
without limitation (1) any future economic downturn could impair our customers'
ability to repay our loans and increase our non-performing assets, (2) a
contraction of available credit and/or an inability to access the equity markets
could impair our lending and investment activities, (3) interest rate volatility
could adversely affect our results, (4) the risks associated with the possible
disruption in the Company's operations due to terrorism and (5) the risks,
uncertainties and other factors we identify from time to time in our filings
with the Securities and Exchange Commission, including our Form 10-Ks, Form
10-Qs and Form 8-Ks. Although we believe that the assumptions on which these
forward-looking statements are based are reasonable, any of those assumptions
could prove to be inaccurate, and as a result, the forward-looking statements
based on those assumptions also could be incorrect. In light of these and other
uncertainties, the inclusion of a projection or forward-looking statement in
this Annual Report should not be regarded as a representation by us that our
plans and objectives will be achieved. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this Annual
Report.
OVERVIEW
21st Century Technologies, Inc is a financial services company
providing financing and advisory services to small and medium-sized companies
throughout the United States. Effective October 1, 2003, we converted to a
Business Development Company under the Investment Company Act of 1940. Upon
completion of this conversion, we became an internally managed, diversified,
closed-end investment company. Prior to the conversion we were a diversified
holding company.
The results of operations for the year ended December 31, 2003 and the
three-month period from October 1, 2003 through December 31, 2003 reflect our
results as a business development company under the Investment Company Act of
1940. The three-month period from October 1, 2003 through December 31, 2003
includes a one-time conversion adjustment. The nine-month period from January 1,
2003 through September 30, 2003 reflects our results prior to operating as a
business development company under the Investment Company Act of 1940. The
principal difference between these two reporting periods relate to accounting
for investments at fair value rather than cost; the fact that we no longer
consolidate our wholly owned subsidiaries (Portfolio Companies). See Note A to
our Financial Statements. In addition, certain prior year items have been
reclassified to conform to the current year presentation as a business
development company.
PORTFOLIO COMPOSITION
Our primary business is lending to and investing in businesses, with
subordinated debt and equity-based investments, including warrants and equity
appreciation rights. The total portfolio value of investments in publicly traded
and non-publicly traded securities was $10.4 million at fair value at December
31, 2003.
OPERATING INCOME
Operating income includes interest income on commercial loans, advisory and
management fees, and other income. Interest income is comprised of commercial
loan interest at contractual rates and upfront fees that are amortized into
income over the life of the loan.
Income from operations before cumulative effect of accounting change for the 3
months ended December 31, 2003 was $1,776,585. Net income after cumulative
effect of accounting change was $2,009,581. Operating income before cumulative
effect of accounting change was $105,535 and after cumulative effect of
accounting change was $337,531. Net Loss for the period ended September 30,
2003 was $1,671,050. Net losses for the years ended December 31, 2002 and 2001
respectively was $1,930,845 and $5,766,572, respectively.
OPERATING EXPENSES
Operating expenses include interest expense on borrowings, employee compensation
and general and administrative expenses.
Operating expenses for the 3-months ended December 31, 2003 were $249,583 and
$1,530,079 for the nine-months ended September 30, 2003 for a total annual cost
of $1,779,662. This compares with operating expenses of $2,457,330 and
$5,561,418 for the years ended December 31, 2002 and 2001 respectively. Cost
containment, efficiencies of operations and discontinuing unprofitable
operations are the primary factors making these decreases possible.
RECONCILIATION OF NET OPERATING INCOME TO NET INCREASE (DECREASE)
IN STOCKHOLDER'S EQUITY FROM EARNINGS (LOSS)
Because we are a business development company, our investments are carried at
fair value. (See discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview"). Realized gain for the
year ended December 31, 2003 was $337,531. The net change in unrealized
appreciation for the 3-months ended December 31, 2003 was $868,000 and the net
change in unrealized depreciation on investments for the nine-months ended
September 30, 2003 was $3,345,891. The appreciation occurred in investments made
after conversion to a business development company and the depreciation is
reflected by the accounting change to fair value of the formerly consolidated
subsidiaries which are now recorded at fair value.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (CONVERSION TO
BUSINESS DEVELOPMENT COMPANY)
The results of operations for 2003 are divided into two periods. The
nine-month period, representing the period January 1, 2003 through September 30,
2003, reflects the Company's results prior to operating as a business
development company under the Investment Company Act of 1940, as amended. The
three-month period ended December 31, 2003, reflects the Company's results as a
business development company under the Investment Company Act of 1940, as
amended. Accounting principles used in the preparation of the financial
statements beginning October 1, 2003 are different than those of prior periods
and, therefore, the financial position and results of operations of these
periods are not directly comparable. The primary differences in accounting
principles relate to the carrying value of investments--see corresponding
sections below for further discussion.
The cumulative effect adjustment for the three-month period ended
December 31, 2003 reflects the effects of conversion to a business development
company as follows:
CUMULATIVE EFFECT OF BUSINESS
DEVELOPMENT COMPANY CONVERSION
------------------------------
Effect of recording equity investments at fair value $ (4,213,891)
Adjustments for previously adjusted net assets 4,570,444
Adjustment for previously consolidated net loss (123,557)
-----------------
$ 232,996
=================
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS
At December 31, 2003 and December 31, 2002, we had $1.8 million and
$-0-, respectively, in cash and cash equivalents. We had investments in equity
securities with fair value of $6,430,000 and $-0- at December 31, 2003 and
December 31, 2002, respectively. Our objective is to maintain a low cash
balance, while keeping sufficient cash on hand to cover current funding
requirements and operations.
LIQUIDITY AND CAPITAL RESOURCES
We expect our cash on hand and cash generated from operations, to be
adequate to meet our cash needs at our current level of operations, including
the next twelve months. We generally fund new originations using cash on hand,
advances under our credit facilities and equity financings.
BORROWINGS
The Company's borrowings consist of a non-interest bearing purchase note payable
incurred in the acquisition of Paramount MultiServices, Inc. and several
installment and promissory notes, which bear interest at 6.0% to 10%, are
unsecured and contain no restrictions.
The purchase note payable is payable in annual installments of either the
Company's restricted common stock or cash through December 2006. Because the
terms of the note did not provide for interest, the Company has discounted the
carrying value of this note to its fair value using a discounted interest rate
of 5%.
On September 27,2002, the Company issued a $200,000 convertible promissory note
convertible into 1,200,000 shares of Series A Convertible Preferred Stock, when
authorized and issued, with rights and preferences as the Company may determine,
to Fredericks Partners, a California partnership. The note provided for interest
at 10% and was due March 27, 2003. In addition, the note gave its holders
600,000,000 votes as "debt votes" awarded by the Board of Directors by
resolution of September 27, 2002. The note provided that it may be converted at
any time prior to payment. On February 20, 2003, Fredericks Partners exercised
its conversion priviledge.
CRITICAL ACCOUNTING POLICIES
The financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions.
INCOME RECOGNITION
Interest on commercial loans is computed by methods that generally
result in level rates of return on principal amounts outstanding. When a loan
becomes 90 days or more past due, or if we otherwise do not expect the customer
to be able to service its debt and other obligations, we will, as a general
matter, place the loan on non-accrual status and cease recognizing interest
income on that loan until all principal has been paid. However, we may make
exceptions to this policy if the investment is well secured and in the process
of collection.
In accordance with GAAP, we include in income certain amounts that we
have not yet received in cash, such as contractual payment-in-kind (PIK)
interest, which represents contractually deferred interest added to the loan
balance that is generally due at the end of the loan term. However, in certain
cases, a customer makes principal payments on its loan prior to making payments
to reduce the PIK loan balances and, therefore, the PIK portion of a customer's
loan can increase while the total outstanding amount of the loan to that
customer may stay the same or decrease. There is no PIK loan balance at December
31, 2003.
Loan origination fees are deferred and amortized as adjustments to the
related loan's yield over the contractual life of the loan. In certain loan
arrangements, warrants or other equity interests are received from the borrower
as additional origination fees. The borrowers granting these interests are
typically non-publicly traded companies. We record the financial instruments
received at estimated fair value as determined by our board of directors or an
independent valuation expert. Fair values are determined using various valuation
models which attempt to estimate the underlying value of the associated entity.
These models are then applied to our ownership share considering any discounts
for transfer restrictions or other terms which impact the value. Changes in
these values are recorded through our statement of operations. Any resulting
discount on the loan from recordation of warrant and other equity instruments
are accreted into income over the term of the loan.
VALUATION OF INVESTMENTS
At December 31, 2003, approximately 97% of our total assets represented
investments recorded at fair value. Value, as defined in Section 2(a)(41) of
1940 Act, is (i) the market price for those securities for which a market
quotation is readily available and (ii) for all other securities and assets,
fair value is as determined in good faith by the board of directors. Since there
is typically no readily ascertainable market value for the investments in our
portfolio, we value substantially all of our investments at fair value as
determined in good faith by the board of directors pursuant to a valuation
policy and a consistent valuation process. Because of the inherent uncertainty
of determining the fair value of investments that do not have a readily
ascertainable market value, the fair value of our investments determined in good
faith by the board of directors may differ significantly from the values that
would have been used had a ready market existed for the investments, and the
differences could be material.
There is no single standard for determining fair value in good faith.
As a result, determining fair value requires that judgment be applied to the
specific facts and circumstances of each portfolio investment. Unlike banks, we
are not permitted to provide a general reserve for anticipated loan losses.
Instead, we must determine the fair value of each individual investment on a
quarterly basis. We will record unrealized depreciation on investments when we
believe that an investment has become impaired, including where collection of a
loan or realization of an equity security is doubtful. Conversely, we will
record unrealized appreciation if we believe that the underlying portfolio
company has appreciated in value and, therefore, our investment has also
appreciated in value, where appropriate.
As a business development company, we invest primarily in illiquid
securities including debt and equity securities of private companies. The
structure of each debt and equity security is specifically negotiated to enable
us to protect our investment and maximize our returns. We generally include many
terms governing interest rate, repayment terms, prepayment penalties, financial
covenants, operating covenants, ownership parameters, dilution parameters,
liquidation preferences, voting rights, and put or call rights. Our investments
are generally subject to some restrictions on resale and generally have no
established trading market. Because of the type of investments that we make and
the nature of our business, our valuation process requires an analysis of
various factors. Our fair value methodology includes the examination of, among
other things, the underlying investment performance, financial condition and
market changing events that impact valuation.
VALUATION OF LOANS AND DEBT SECURITIES
As a general rule, we do not value our loans or debt securities above
cost, but loans and debt securities will be subject to fair value write-downs
when the asset is considered impaired. In many cases, our loan agreements allow
for increases in the spread to the base index rate if the financial or
operational performance of the customer deteriorates or shows negative variances
from the customer's business plan and, in some cases, allow for decreases in the
spread if financial or operational performance improves or exceeds the
customer's plan.
VALUATION OF EQUITY SECURITIES
With respect to private equity securities, each investment is valued
using industry valuation benchmarks, and then the value is assigned a discount
reflecting the illiquid nature of the investment, as well as our minority,
non-control position. When an external event such as a purchase transaction,
public offering, or subsequent equity sale occurs, the pricing indicated by the
external event will be used to corroborate our private equity valuation.
Securities that are traded in the over-the-counter market or on a stock exchange
generally will be valued at the prevailing bid price on the valuation date.
However, restricted and unrestricted publicly traded securities may be valued at
discounts from the public market value due to restrictions on sale, the size of
our investment or market liquidity concerns.
RECENT DEVELOPMENTS
The Company has entered into a letter of intent to acquire DLC, Inc., a Las
Vegas based general contracting firm. DLC has a multi-year history of successful
projects, including several federal and local government projects. DLC currently
has gross income of approximately $3 million dollars per year. We anticipate
closing this transaction in the second quarter of 2004.
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our business activities contain elements of risk. We consider the principal
types of risk to be portfolio valuations and fluctuations in interest rates. We
consider the management of risk essential to conducting our businesses.
Accordingly, our risk management systems and procedures are designed to identify
and analyze our risks, to set appropriate policies and limits and to continually
monitor these risks and limits by means of reliable administrative and
information systems and other policies and programs.
As a business development company, we invest in illiquid securities including
debt and equity securities of primarily private companies. Our investments are
generally subject to restrictions on resale and generally have no established
trading market. We value substantially all of our investments at fair value as
determined in good faith by the board of directors in accordance with our
valuation policy. There is no single standard for determining fair value in good
faith. As a result, determining fair value requires that judgment be applied to
the specific facts and circumstances of each portfolio investment while
employing a consistently applied valuation process for the types of investments
we make.
We determine fair value to be the amount for which an investment could be
exchanged in an orderly disposition over a reasonable period of time between
willing parties other than in a forced or liquidation sale. Our valuation policy
considers the fact that no ready market exists for substantially all of the
securities in which we invest. Our valuation policy is intended to provide a
consistent basis for determining the fair value of the portfolio. We will record
unrealized depreciation on investments when we believe that an investment has
become impaired, including where collection of a loan or realization of an
equity security is doubtful, or when the enterprise value of the company does
not currently support the cost of our debt or equity investments. Conversely, we
will record unrealized appreciation if we believe that the underlying portfolio
company has appreciated in value and, therefore, our equity security has also
appreciated in value. The value of investments in public securities are
determined using quoted market prices discounted for restrictions on resale.
Without a readily ascertainable market value and because of the inherent
uncertainty of valuation, the fair value of our investments determined in good
faith by the board of directors may differ significantly from the values that
would have been used had a ready market existed for the investments, and the
differences could be material. In addition, the illiquidity of our investments
may adversely affect our ability to dispose of debt and equity securities at
times when it may be otherwise advantageous for us to liquidate such
investments. In addition, if we were forced to immediately liquidate some or all
of the investments in the portfolio, the proceeds of such liquidation would be
significantly less than the current value of such investments.
Because we can borrow money to make investments, our net investment income
before net realized and unrealized gains or losses, or net investment income,
can be dependent upon the difference between the rate at which we borrow funds
and the rate at which we invest these funds. As a result, there can be no
assurance that a significant change in market interest rates will not have a
material adverse effect on our net investment income. In periods of rising
interest rates, our cost of funds would increase, which would reduce our net
investment income. We use a combination of long-term and short-term borrowings
and equity capital to finance our investing activities. Our long-term fixed-rate
investments are financed primarily with long-term debt and equity. We may use
interest rate risk management techniques in an effort to limit our exposure to
interest rate fluctuations. Such techniques may include various interest rate
hedging activities to the extent permitted by the 1940 Act.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
C O N T E N T S
INDEPENDENT AUDITORS' REPORT..........................................F-1
BALANCE SHEETS........................................................F-2 - F-3
STATEMENTS OF OPERATIONS..............................................F-4
STATEMENTS OF STOCKHOLDERS' EQUITY....................................F-5
STATEMENTS OF CASH FLOWS..............................................F-6
SCHEDULE OF INVESTMENTS...............................................F-7
NOTES TO FINANCIAL STATEMENTS.........................................F-8 - F-30
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
21st Century Technologies, Inc.
Las Vegas, Nevada
We have audited the accompanying balance sheets of 21st Century Technologies,
Inc. as of December 31, 2003 and 2002, including the schedule of investments, as
of December 31, 2003 and the related statements of operations, stockholders'
equity, and cash flows for the three months ended December 31, 2003 and the nine
months ended September 30, 2003 and for each of the years ended December 31,
2002 and 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 21st Century Technologies,
Inc., as of December 31, 2003, and the results of their operations and their
cash flows for the three months ended December 31, 2003 and the nine months
ended September 30, 2003 and for each of the years ended December 31, 2002 and
2001 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, accounting principles used
in the preparation of the financial statements beginning October 1, 2003 (upon
conversion to a business development company under the Investment Company Act of
1940) are different than those of prior periods and therefore are not directly
comparable.
Certified Public Accountants
March 18, 2004
F-1
21ST CENTURY TECHNOLOGIES, INC.
BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Investments:
Investments in equity securities, at fair value
(cost of $5,625,000) $ 6,430,000
Investments in and advances to controlled
companies, at fair value (cost of $6,467,320) 2,316,430
Commercial loans, at fair value (cost of $1,692,645) 1,692,645
---------------
Total investments 10,439,075
Cash and cash equivalents 1,796,294
Receivables:
Investment advisory and management fees 1,150,000
Interest and dividends 8,168
Other assets 95,939
---------------
$ 13,489,476
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 45,957
Advances from stockholders 443,611
Notes payable, controlled companies 1,228,430
Notes payable, others 287,226
---------------
Total liabilities 2,005,224
---------------
Commitments and contingencies -
Stockholders' equity:
Preferred stock, Series A, $.001 par value, 1,200,000
shares authorized, no shares issued and outstanding -
Preferred stock, Series B, $.001 par value, 1,200,000
shares authorized, issued and outstanding 1,200
Preferred stock, Series C, $.001 par value, 15,000,000
shares authorized, issued and outstanding 15,000
Preferred stock, Series D, $1 stated value, 1,000,000
shares authorized, 10,000 shares issued and outstanding 10,000
Common stock, $.001 par value, 750,000,000 shares
authorized, 437,173,162 shares issued and outstanding 437,173
Additional paid in capital 24,583,483
Common stock subscriptions receivable (443,000)
Accumulated deficit (9,773,713)
Unrealized appreciation (depreciation) on investments (3,345,891)
---------------
Total stockholders' equity 11,484,252
---------------
$ 13,489,476
===============
The accompanying notes are an integral part of the financial statements.
F-2
21ST CENTURY TECHNOLOGIES, INC.
BALANCE SHEET
DECEMBER 31, 2002
ASSETS
Current assets:
Cash and cash equivalents $ -
Accounts receivable, trade net of allowance for
doubtful accounts of $290,591 143,424
Inventories 501,706
Prepaid expense 36,443
Advances to stockholders, net of allowance for
uncollectible amounts $55,728 112,591
----------------
Total current assets 794,164
Property and equipment, net of accumulated depreciation of $716,457 1,202,265
Other assets:
Intangible assets, net of accumulated amortization of $40,218 368,188
Goodwill 43,256
Reorganization value, net of accumulated amortization of $384,539 126,764
----------------
$ 2,534,637
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 956,145
Advances from stockholders 577,180
Notes payable 251,085
Convertible promissory note payable 200,000
----------------
Total current liabilities 1,984,410
----------------
Commitments and contingencies -
Minority interest 3,158
Stockholders' equity:
Preferred stock, Series A, $.001 par value, 1,200,000
shares authorized, no shares issued and outstanding -
Preferred stock, Series B, $.001 par value, 1,200,000
shares authorized, issued and outstanding -
Preferred stock, Series C, $.001 par value, 15,000,000
shares authorized, issued and outstanding -
Preferred stock, Series D, $1 stated value, 1,000,000
shares authorized, 10,000 shares issued and outstanding -
Common stock, $.001 par value, 750,000,000 shares
authorized, 1,999,271shares issued and outstanding 1,999
Additional paid in capital 14,003,205
Common stock subscriptions receivable
Accumulated deficit (13,458,135)
Unrealized appreciation (depreciation) on investments
----------------
Total stockholders' equity 547,069
----------------
$ 2,534,637
================
The accompanying notes are an integral part of the financial statements.
F-3
21ST CENTURY TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
Prior to Becoming a Business
Development Company
-------------------------------------------------
Three Months Nine Months
Ended Ended Year Ended Year Ended
Dec. 31, 2003 Sept. 30, 2003 Dec. 31, 2002 Dec. 31, 2001
------------- -------------- ------------- -------------
Operating income:
Manufacturing and other revenues $ - $ 467,050 $ 1,262,393 $ 1,714,941
Investment income 8,168 - 12,507 6,218
Investment advisory and management fees 1,150,000 - - -
-----------------------------------------------------------------
Total operating income 1,158,168 467,050 1,274,900 1,721,159
Direct cost of sales - 364,084 677,265 1,106,617
-----------------------------------------------------------------
Gross profit 1,158,168 102,966 597,635 614,542
-----------------------------------------------------------------
Operating expenses:
Interest expense 7,673 54,722 69,553 52,429
Advertising and selling 29,496 70,314 87,604 151,956
Compensation costs 97,500 303,932 506,038 1,178,547
General and administrative 114,914 1,057,865 1,794,135 4,178,486
Impairment related charges - 43,246 - -
-----------------------------------------------------------------
Total operating expenses 249,583 1,530,079 2,457,330 5,561,418
-----------------------------------------------------------------
Net operating income (loss)/investment income (loss)
before investment gains and losses 908,585 (1,427,113) (1,859,695) (4,946,876)
Loss on sale of assets - (243,937) (179,127) (242,634)
Net change in unrealized appreciation
(depreciation) on investments 868,000 - - -
-----------------------------------------------------------------
Income (loss) from continuing operations before income taxes 1,776,585 (1,671,050) (2,038,822) (5,189,510)
Income tax provision (benefit) - - - -
-----------------------------------------------------------------
Income (loss) from continuing operations 1,776,585 (1,671,050) (2,038,822) (5,189,510)
Income (loss) from discontinued operations
of ELM, TPI and NCI, net of income taxes - - 107,977 (577,062)
-----------------------------------------------------------------
Income (loss) before cummulative effect of
accounting change 1,776,585 (1,671,050) (1,930,845) (5,766,572)
Cummulative effect of conversion to business
development company, net of income tax effect 232,996 - - -
-----------------------------------------------------------------
Net increase (decrease) in stockholders' equity
resulting from net income (loss) $ 2,009,581 $ (1,671,050) $ (1,930,845) $ (5,766,572)
=================================================================
Earnings per share, both basic and dilutive:
Income (loss) per common from continuing operations $ 0.01 $ (0.01) $ (1.09) $ (4.55)
Income (loss) per common share from discontinued operations $ - $ - $ 0.06 $ (0.51)
Cummulative effect of conversion to business
development company $ - $ - $ - $ -
Net income (loss) per common share $ 0.01 $ (0.01) $ (1.03) $ (5.06)
The accompanying notes are an integral part of the financial statements.
F-4
21ST CENTURY TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Preferred Series A Preferred Series B Preferred Series C
------------------ ------------------ ------------------
DESCRIPTION # of shs. Amount # of shs. Amount # of shs. Amount
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000
Issuance of common stock for cash
Issuance of common stock for services
Repayment of note payable and interest
Repayment of stockholder advances
Issuance of commn stock for assets
Cancelation of treasury stock
Net loss
------------------------------------------------------------------------
Balance at December 31, 2001 0 0 0 0 0 0
Issuance of common stock for cash
Issuance of common stock for services
Issuance of common stock previously earned
Receipt of 19 million shares as consideration
for sale of assets
Reissuance of above shares for services
Cancelation of treasury stock and
stock purchase subscriptions
Net loss
------------------------------------------------------------------------
Balance at December 31, 2002 0 0 0 0 0 0
Adjustment for shares not going through
reverse stock split, issuance of
preferred warrants 1,200,000 1,200
Conversion of preferred warrants into
common stock shares
Conversion of Series A preferred shares
into Series B preferred shares and
common shares and debt repayment (1,200,000) (1,200) 1,200,000 1,200
Common stock issued as debt repayment
Common stock issued for cash
Common and preferred stock issued for services 15,000,000 15,000
Common stock returned for repayment
of advances receivable
Common stock issued for inventory
Net Loss
------------------------------------------------------------------------
Balance at September 30, 2003 0 0 1,200,000 1,200 15,000,000 15,000
Reclassification of unrealized depreciation
upon conversion to a business
development company
Issuance of common stock for cash
Preferred shares issued to acquire HCIA
preferred stock shares
Net income
------------------------------------------------------------------------
Balance at December 31, 2003 $ 0 0 1,200,000 $ 1,200 15,000,000 $15,000
========================================================================
Treasury
Preferred Series D Common Stock Additional Stock & Stock
------------------ ------------
DESCRIPTION # of shs. Amount # of shs. Amount Paid in Capital Subscriptions
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 779,874 781 7,614,412 323,622
Issuance of common stock for cash 364,193 364 2,142,460
Issuance of common stock for services 329,461 329 2,493,591
Repayment of note payable and interest 35,000 35 769,111
Repayment of stockholder advances 17,107 17 171,063
Issuance of commn stock for assets 105,000 105 422,895
Cancelation of treasury stock (16,934) 16,934
Net loss
-------------------------------------------------------------------------------
Balance at December 31, 2001 0 0 1,630,635 1,631 13,596,598 340,556
Issuance of common stock for cash 166,136 166 28,753
Issuance of common stock for services 12,500 12 37,488
Issuance of common stock previously earned 190,000 190 359,810 (360,000)
Receipt of 19 million shares as consideration
for sale of assets (350,000)
Reissuance of above shares for services 350,000
Cancelation of treasury stock and
stock purchase subscriptions (19,444) 19,444
Net loss
-------------------------------------------------------------------------------
Balance at December 31, 2002 0 0 1,999,271 1,999 14,003,205 0
Adjustment for shares not going through
reverse stock split, issuance of
preferred warrants (790,951) (791) 791
Conversion of preferred warrants into
common stock shares 79,095,106 79,095 (79,095)
Conversion of Series A preferred shares
into Series B preferred shares and
common shares and debt repayment 12,000,000 12,000 196,000
Common stock issued as debt repayment 11,000,000 11,000 179,000
Common stock issued for cash 44,849,760 44,850 1,355,127
Common and preferred stock issued for services 83,496,072 83,496 243,492
Common stock returned for repayment
of advances receivable (2,429,157) (2,429) (110,161)
Common stock issued for inventory 1,000,000 1,000 59,000
Net loss
-------------------------------------------------------------------------------
Balance at September 30, 2003 - - 230,220,101 230,220 15,847,359 -
Reclassification of unrealized depreciation
upon conversion to a business
development company
Issuance of common stock for cash 206,953,061 206,953 3,446,124 (443,000)
Preferred shares issued to acquire HCIA
preferred stock shares 10,000,000 10,000 5,290,000
Net income
--------------------------------------------------------------------------------
Balance at December 31, 2003 10,000,000 $10,000 437,173,162 $437,173 $24,583,483 $(443,000)
================================================================================
Unrealized
Accumulated Apprec on
DESCRIPTION Deficit Investments Total
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 (5,760,718) 0 2,178,097
Issuance of common stock for cash 2,142,824
Issuance of common stock for services 2,493,920
Repayment of note payable and interest 769,146
Repayment of stockholder advances 171,080
Issuance of commn stock for assets 423,000
Cancelation of treasury stock 0
Net loss (5,766,572) (5,766,572)
--------------------------------------------------------
Balance at December 31, 2001 (11,527,290) 0 2,411,495
Issuance of common stock for cash 28,919
Issuance of common stock for services 37,500
Issuance of common stock previously earned 0
Receipt of 19 million shares as consideration
for sale of assets (350,000)
Reissuance of above shares for services
Cancelation of treasury stock and
stock purchase subscriptions 0
Net loss (1,930,845) (1,930,845)
--------------------------------------------------------
Balance at December 31, 2002 (13,458,135) 0 547,069
Adjustment for shares not going through
reverse stock split, issuance of
preferred warrants 1,200
Conversion of preferred warrants into
common stock shares 0
Conversion of Series A preferred shares
into Series B preferred shares and
common shares and debt repayment 208,000
Common stock issued as debt repayment 190,000
Common stock issued for cash 1,399,977
Common and preferred stock issued for services 341,988
Common stock returned for repayment
of advances receivable (112,590)
Common stock issued for inventory 60,000
Net loss (1,671,050) (1,671,050)
--------------------------------------------------------
Balance at September 30, 2003 (15,129,185) - 964,594
Reclassification of unrealized depreciation
upon conversion to a business
development company 4,213,891 (4,213,891) 0
Issuance of common stock for cash 3,210,077
Preferred shares issued to acquire HCIA
preferred stock shares 5,300,000
Net income 1,141,581 868,000 2,009,581
--------------------------------------------------------
Balance at December 31, 2003 $(9,773,713) $(3,345,891) $11,484,252
========================================================
The accompanying notes are an integral part of the financial statements.
F-5
21ST CENTURY TECHNOLOGIES, INC.
STATEMENTs OF CASH FLOWS
Prior to Becoming a
Business Development
Company
-------------------
Three Months Nine Months
Ended Ended
Dec. 31, 2003 Sept. 30, 2003
------------- --------------
Operating activities:
Net Income (loss) $ 1,543,588 $ (1,671,050)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations
Depreciation and amortization 9,833 74,806
Provision for bad debts
Common stock issued for services 401,988
Loss on disposal of assets 243,937
Unrealized appreciation on investments (868,000)
Cumulative effect of accounting change 232,997
Changes in asset and liability accounts:
(Increase) decrease in accounts receivable 75,367
(Increase) decrease in interest and fees receivable (1,158,168)
(Increase) decrease in inventory
(Increase) decrease in prepaid expenses 40,031 (58,088)
Increase (decrease) in accounts payable (84,278) (415,850)
Increase (decrease) in accrued expenses
Increase (decrease) in deferred revenue
-------------------------------------------
Net cash provided by (used in) operating activities (283,997) (1,348,890)
-------------------------------------------
Investing activities:
Proceeds from disposal of assets 765,000
Purchase of property and equipment
Cash acquired in MMC acquisition
Advances to stockholder
Repayment of stockholder advances
Investments in equity securities (208,837)
Investments in commercial loans (1,692,645)
-------------------------------------------
Net cash provided by (used in) investing activities (1,901,482) 765,000
-------------------------------------------
Financing activities:
Issuance of common stock 3,210,077 1,409,177
Proceeds from notes payable 231,841
Repayments of notes payable (200,672) (99,191)
Advances from stockholders 98,521 404,490
Repayments of stockholder advances (488,580)
-------------------------------------------
Net cash provided by (used in) financing activities 3,107,926 1,457,737
-------------------------------------------
Net increase (decrease) in cash 922,447 873,847
Cash at beginning of period 873,847
-------------------------------------------
Cash at end of period $ 1,796,294 $ 873,847
===========================================
Prior to Becoming a Business
Development Company
-------------------------------------------
Year Ended Year Ended
Dec. 31, 2002 Dec. 31, 2001
------------- -------------
Operating activities:
Net Income (loss) $ (1,930,845) $ (5,766,572)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations
Depreciation and amortization 279,561 374,388
Provision for bad debts (58,688) 5,600
Common stock issued for services 387,500 2,493,920
Loss on disposal of assets 431,699 240,192
Unrealized appreciation on investments
Cumulative effect of accounting change
Changes in asset and liability accounts:
(Increase) decrease in accounts receivable (2,652) 400,216
(Increase) decrease in interest and fees receivable
(Increase) decrease in inventory 260,067 (284,551)
(Increase) decrease in prepaid expenses 16,318 134,756
Increase (decrease) in accounts payable 108,120 589,039
Increase (decrease) in accrued expenses (118,032) 144,702
Increase (decrease) in deferred revenue (225,000)
---------------------------------------------
Net cash provided by (used in) operating activities (626,952) (1,893,310)
---------------------------------------------
Investing activities:
Proceeds from disposal of assets 11,101
Purchase of property and equipment (16,842) (1,320,068)
Cash acquired in MMC acquisition 6,065
Advances to stockholder (6,477) (55,763)
Repayment of stockholder advances 10,871
Investments in equity securities
Investments in commercial loans
---------------------------------------------
Net cash provided by (used in) investing activities (12,218) (1,358,895)
---------------------------------------------
Financing activities:
Issuance of common stock 28,919 2,142,824
Proceeds from notes payable 263,371 1,005,000
Repayments of notes payable (237,421) (76,842)
Advances from stockholders 582,180 100,100
Repayments of stockholder advances (5,100)
---------------------------------------------
Net cash provided by (used in) financing activities 631,949 3,171,082
---------------------------------------------
Net increase (decrease) in cash (7,221) (81,123)
Cash at beginning of period 7,221 88,344
---------------------------------------------
Cash at end of period $ - $ 7,221
=============================================
The accompanying notes are an integral part of the financial statements.
F-6
21ST CENTURY TECHNOLOGIES, INC.
SCHEDULE OF INVESTMENTS
Title of Security Percentage of December 31, 2003
-----------------
Portfolio Company Industry Held by Company Class Held Fair Value Cost
----------------- -------- --------------- ---------- ----------- ----
Investments in equity securities:
Jane Butel Corporation Food Services Common Stock 4.22% $ 200,000 $ 200,000
TransOne, Inc. Financial Services Common Stock 4.76% 930,000 125,000
Health Care Investors of
America, Inc. Real Estate Series B Preferred 15.38% 5,300,000 5,300,000
----------------------------------
6,430,000 5,625,000
----------------------------------
Investments in and advances to controlled companies:
Paramount MultiServices, Inc. Financial Services Common Stock 100% 1,228,430 1,228,430
Prizewise, Inc. Technologies Common Stock 100% 30,000 30,000
Innovative Weaponry, Inc. Manufacturing Common Stock 100% 181,000 2,948,260
Trident Technologies, Inc. Manufacturing Common Stock 100% 719,000 1,828,075
Griffon USA, Inc. Inactive Common Stock 100% 9,000 378,326
Hallmark Human Resources, Inc. Inactive Common Stock 100% 45,000 51,229
Trade Partners International, Inc. Inactive Common Stock 100% 48,000 1,000
Net Construction, Inc. Inactive Common Stock 100% 8,000 1,000
U.S. Optics Technologies, Inc. Inactive Common Stock 100% 48,000 1,000
----------------------------------
2,316,430 6,467,320
----------------------------------
Commercial loans:
City Wide Funding, Inc. Financial Services Debt 326,259 326,259
Credit Card Financial Corporation Financial Services Debt 80,619 80,619
1920 Bel Air, LLC Real Estate Debt 1,250,000 1,250,000
Two unrelated individuals N/A Debt 35,767 35,767
----------------------------------
1,692,645 1,692,645
----------------------------------
Total investments 10,439,075 13,784,965
==================================
(1) All of the above investments, except for 1920 Bel Air, LLC, are non-income
producing
The accompanying notes are an integral part of the financial statements.
F-7
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND OPERATIONS
21st Century Technologies, Inc. (`the Company' or `we') is a solutions-focused
financial services company that provides financing and advisory services to
companies throughout the United States in the communications, information
services, and technology industry sectors. Effective October 1, 2003, the
Company became a diversified internally managed, closed-end investment company
that elected to be treated as a business development company under the
Investment Company Act of 1940, as amended.
Prior to becoming a business development company, the Company, through its
subsidiaries, was engaged in the manufacture and sale of firearm related
products (Note 13). The Company was incorporated under the laws of the State of
Delaware on May 15, 1967.
Innovative Weaponry, Inc. - New Mexico was incorporated on June 22, 1988 under
the laws of the State of New Mexico. The Company was formed for the development
and sale of specialized firearms, firearm systems and related equipment. On
September 14, 1992, Innovative Weaponry, Inc. filed a petition for relief under
Chapter 11 of the Federal Bankruptcy Laws in the United States Bankruptcy Court
of the District of New Mexico. Under Chapter 11, certain claims are stayed while
the Debtor continues business operations as Debtor-in-Possession. On August 19,
1994, IWI-NV (now 21st Century Technologies, Inc.) and IWI-NM entered into a
letter of intent whereby IWI-NV would use its unregistered, restricted common
stock and cash to satisfy certain obligations of IWI-NM in settlement of
IWI-NM's bankruptcy action (Note 2). On February 1, 1995, the U.S. Bankruptcy
Court of the District of New Mexico confirmed the IWI-NM's plan of
reorganization. The plan became effective 30 days after its confirmation. IWI-NM
became a wholly owned subsidiary of Innovative Weaponry, Inc. (IWI-NV) (formerly
First National Holding Corporation) (FNHC Nevada) (now known as 21st Century
Technologies, Inc.), a publicly owned company.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Beginning October 1, 2003, the accompanying financial statements reflect the
separate accounts of 21st Century, and the related results of operations. In
accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and
Securities Exchange Act of 1934, the Company does not consolidate portfolio
company investments in which the Company has a controlling interest.
Prior to September 30, 2003, the accompanying consolidated financial statements
included the general accounts of the company and its wholly owned subsidiaries,
Innovative Weaponry, Inc., Trident Technologies Corporation, Griffon USA, Inc.,
Trade Partners International, Inc., Unertyl Optical Company, US Optics Corp.,
Hallmark, Inc., 2826 Elm St., Inc. and Net Construction, Inc. and its 97% owned
subsidiary Miniature Machine Corporation, Inc., each of which have fiscal years
ending December 31st. All material intercompany transactions, accounts and
balances have been eliminated in the consolidation.
F-8
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Although the nature of the Company's operations and its reported financial
position, results of operations and its cash flows are dissimilar for the
periods prior to and subsequent to its becoming a business development company,
its financial position for the years ended December 31, 2003 and 2002 and its
operating results, cash flows and changes in stockholders' equity for each of
the years ended December 31, 2003 (split apart as indicated above), 2002 and
2001 are presented in the accompanying financial statements pursuant to Article
6 of Regulation S-X. In addition, the accompanying footnotes, although different
in the nature as to the required disclosures and information reported therein,
are also presented as they relate to each of the above referenced periods.
CONVERSION TO BUSINESS DEVELOPMENT COMPANY
The Company's results of operations for 2003 are divided into two periods. The
nine-month period, representing the period January 1, 2003 through September 30,
2003, reflects the Company's results prior to operating as a business
development company under the Investment Company Act of 1940, as amended. The
three-month period ended December 31, 2003, reflects the Company's results as a
business development company under the Investment Company Act of 1940, as
amended. Accounting principles used in the preparation of the financial
statements beginning October 1, 2003 are different than those of prior periods
and, therefore, the financial position and results of operations of these
periods are not directly comparable. The primary differences in accounting
principles relate to the carrying value of investments--see corresponding
sections below for further discussion.
The cumulative effect adjustment for the three-month period ended December 31,
2003 reflects the effects of conversion to a business development company as
follows:
CUMULATIVE EFFECT OF
BUSINESS DEVELOPMENT
COMPANY CONVERSION
Effect of recording equity investments at fair value $ ( 4,213,891)
Adjustments for previously adjusted net assets 4,570,444
Adjustment for previously consolidated net loss ( 123,557)
--------------
$ 232,996
==============
BUSINESS COMBINATIONS (PRIOR TO BECOMING A BUSINESS DEVELOPMENT COMPANY)
On March 14, 2001, the Company acquired 97% of the outstanding common stock of
Miniature Machine Corporation (MMC), a corporation engaged in the manufacture
and sale of adjustable gun sights, in exchange for 500,000 common stock shares
valued at $.406 a share and a $100,000 note payable (Note 5). The transaction
was accounted for as a purchase. The purchase price was allocated to the fair
value of the net assets acquired, including patents valued at $150,000, with a
$50,888 excess of the Company's cost over the fair value of net assets acquired
allocated to goodwill.
On January 2, 2001, the Company purchased substantially all of the net assets of
a nightclub operation in exchange for a $100,000 note payable (Note 4). These
net assets were sold on June 20, 2002 (Note 12).
F-9
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
REVERSE STOCK SPLIT
On February 20, 2003, the Company effected a 100 to 1 reverse split of its
common stock (Note 2). The par value of the common stock was not affected by the
reverse split and remains at $.001 per share. Consequently, the aggregate par
value of the issued common stock was reduced by reclassifying the par value
amount of the reversed common shares from `Common Stock' to `Paid in Capital in
Excess of Par' and all per share amounts and outstanding shares have been
retroactively restated in the accompanying consolidated financial statements for
all periods presented to reflect the reverse stock split.
REVENUE RECOGNITION (AS A BUSINESS DEVELOPMENT COMPANY)
Interest on commercial loans is computed by methods that generally result in
level rates of return on principal amounts outstanding. When a loan becomes 90
days or more past due, or if we otherwise do not expect the customer to be able
to service its debt and other obligations, we will, as a general matter, place
the loan on non-accrual status and cease recognizing interest income on that
loan until all principal has been paid. However, we may make exceptions to this
policy if the investment is well secured and in the process of collection.
Loan origination fees are deferred and amortized as adjustments to the related
loan's yield over the contractual life of the loan. In certain loan
arrangements, warrants or other equity interests may be received from the
borrower as additional origination fees. The borrowers granting these interests
are typically non-publicly traded companies. We record the financial instruments
received at estimated fair value as determined by independent business valuation
appraisers. Fair values are determined using various valuation models which
attempt to estimate the underlying value of the associated entity. These models
are then applied to our ownership share considering any discounts for transfer
restrictions or other terms which impact the value. Changes in these values are
recorded through our statement of operations. Any resulting discount on the loan
from recordation of warrant and other equity instruments are accreted into
income over the term of the loan. We elected to employ independent valuation
companies to value the investment in previously wholly owned subsidiaries and
significant acquisitions for the nine-month period ended September 30, 2003 and
December 31, 2003, respectively.
In certain investment transactions, we perform investment banking and other
advisory services. For services that are separately identifiable and external
evidence exists to substantiate fair value, income is recognized as earned which
is generally when the investment transaction closes.
REVENUE RECOGNITION (PRIOR TO BECOMING A BUSINESS DEVELOPMENT COMPANY)
The Company extends unsecured credit to its customers from the retail and
wholesale sale of its products to its customers located predominately throughout
the United States. Revenue is recognized when products are shipped. All products
are shipped F.O.B. the Company's facilities. Shipping and handling costs, which
are separately billed to customers, are not material and are reflected in the
accompanying consolidated financial statements along with revenues.
F-10
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Deferred revenues result from customer payments made in advance of the
manufacture of night sights and sea patches. These payments represent
nonrefundable deposits that are forfeitable if customers do not comply with the
terms of the orders. Revenues are recognized when the products are completed and
shipped. During the year ended December 31, 2001, the order terms related to
these deposits were not complied with and the amounts were recognized as
revenue.
ALLOWANCE FOR BAD DEBTS
The Company extends unsecured credit to its customers for amounts invoiced.
Invoices are generally due on a net 30-day basis and are considered past due
after 31 days. The Company evaluates its accounts receivable on a customer by
customer basis after an invoice is over 90 days past due and provides for bad
debts after all reasonable collection efforts have been made and when management
determines the amounts to be uncollectible.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure 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 differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of the consolidated statement of cash flows, cash includes demand
deposits, time deposits, short-term cash equivalent investments with maturities
of less than three months and cash management money market funds available on a
daily basis. None of the Company's cash is restricted.
INVENTORIES
Inventory consists of raw materials used in the manufacture of firearm products
and finished goods imported for resale. Inventory is stated at the lower of
cost, determined using the first-in, first-out method, or net realizable value
(market). At December 31, 2003, with the conversion of the Company to a business
development company and the resulting non-consolidation of its operating
subsidiaries, inventories are no longer reported in the Company's general
accounts. At December 31, 2002 inventories were comprised of the following
components.
Raw materials $ 50,113
Work in progress 247,155
Finished goods 204,438
-----------
$ 501,706
===========
F-11
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation of property and equipment is being provided by the straight-line
method over estimated useful lives of three to seven years. During the three
months ended December 31, 2003, the nine months ended September 30, 2003 and
each of the years ended December 31, 2002 and 2001, depreciation expense totaled
$9,833, $56,303, $195,904 and $294,929, respectively of which for the years
ended December 31, 2002 and 2001, $8,708 and $5,408, respectively, is included
as part of discontinued operations. At December 31, 2003 and 2002, property and
equipment was comprised of the following. Also, consistent with presentation as
a business development company, at December 31, 2003, property and equipment are
included with other assets.
2003 2002
---- ----
Land, building and improvements $ - $ 1,084,768
Machinery and equipment 87,804 577,419
Transportation equipment - 48,376
Furniture and fixtures 77,986 208,159
----------- -----------
165,790 1,918,722
Less accumulated depreciation ( 124,351) ( 716,457)
----------- -----------
$ 41,439 $ 1,202,265
============ ============
GOODWILL AND INTANGIBLE ASSETS (PRIOR TO BECOMING A BUSINESS DEVELOPMENT
COMPANY)
Goodwill relating to the Company's purchase of MMC is being amortized using the
straight-line method over five years. For the year ended December 31, 2001,
amortization expense totaled $7,632.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after
June 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their useful lives.
The Company applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement resulted in an increase in net
income of $10,176 in 2002 as a result of non-amortization of existing goodwill.
During 2002, the Company performed the first of the required impairment tests
for its goodwill and indefinite lived intangible assets and determined that
goodwill was not impaired. However, during the nine months ended September 2003,
the Company determined that this goodwill had been impaired and its carrying
value of $43,246 was charged against operations.
F-12
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The Company's intangible assets consist of trademarks, patents and license
agreements (Note 6). These intangible assets are being amortized using the
straight-line method over five to forty years. For the nine months ended
September 30, 2003 and each of the years ended December 31, 2002 and 2001,
amortization expense related to these intangible assets totaled $18,503, $83,656
and $69,661, respectively. At December 31, 2003, with the conversion of the
Company to a business development company and the resulting non-consolidation of
its operating subsidiaries, these intangible assets are no longer reported in
the Company's general accounts.
BANKRUPTCY REORGANIZATION
In March 1995, Innovative Weaponry, Inc. (IWI) emerged from a bankruptcy filing
under Chapter 11 of the U.S. Bankruptcy Code. Pursuant to the plan of
reorganization, IWI became a wholly owned subsidiary of the Company and all
prior IWI stockholders retained less than a 50% interest in the consolidated
reorganized entities.
As a result of IWI's acquisition by the Company, IWI adopted `fresh start'
accounting pursuant to Statement of Position 90-7, FINANCIAL REPORTING BY
ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE. Accordingly, IWI's assets
and liabilities were adjusted to their fair values and retained earnings were
eliminated. The resulting `reorganization value' in excess of amounts allocated
to identifiable assets and liabilities is being amortized over 10 years using
the straight-line method. For the nine months ended September 30, 2003 and each
of the years ended December 31, 2002 and 2001, amortization expense totaled
$37,213, $49,617 and $49,617, respectively. At December 31, 2003, with the
conversion of the Company to a business development company and the resulting
non-consolidation of its operating subsidiaries, these intangible assets are no
longer reported in the Company's general accounts.
IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS
The Company has adopted Statement of financial Accounting Standards No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS. This Statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used, and long-lived assets and certain identifiable intangibles to be
disposed of. The Company periodically evaluates, using independent appraisals
and projected undiscounted cash flows, the carrying value of its long-lived
assets and certain identifiable intangible to be held and used whenever changes
in events or circumstances indicate that the carrying amount of assets may not
be recoverable. In addition, long-lived assets and identifiable intangibles to
be disposed of are reported at the lower of carrying value or fair value less
cost to sell. During the year ended December 31, 2002, the Company identified an
impairment of inventory related to its TPI subsidiary (Note 12) and recognized a
loss on the disposal of other long-lived assets related to its night sight
operating segment (Note 13). In addition, during the nine months ended September
30, 2003, the Company identified an impairment of goodwill relating to its MMC
operations.
F-13
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
VALUATION OF INVESTMENTS (AS A BUSINESS DEVELOPMENT COMPANY)
As a business development company under the Investment Company Act of 1940, all
of the Company's investments must be carried at market value or fair value as
determined by our Board of Directors for investments which do not have readily
determinable market values. Prior to this conversion, only marketable debt and
equity securities and certain derivative securities were required to be carried
at market value.
Beginning October 1, 2003, portfolio assets for which market prices are
available are valued at those prices. However, most of our assets were acquired
in privately negotiated transactions and have no readily determinable market
values. These securities are carried at fair value as determined by our Board of
Directors under our valuation policy. Currently, our valuation policy provides
for obtaining independent business valuations for those equity securities that
are not traded on a national securities exchange. The audit committee of our
Board of Directors reviews our loans and investments and makes recommendations
to our Board of Directors.
At December 31, 2003, approximately 92% of our total assets represented
investments recorded at fair value. Value, as defined in Section 2(a)(41) of
1940 Act, is (i) the market price for those securities for which a market
quotation is readily available and (ii) for all other securities and assets,
fair value is as determined in good faith by the board of directors. Since there
is typically no readily ascertainable market value for the investments in our
portfolio, we valued substantially all of our investments at fair value using
independent business valuation experts.
There is no single standard for determining fair value in good faith. As a
result, determining fair value requires that judgment be applied to the specific
facts and circumstances of each portfolio investment. Unlike banks, we are not
permitted to provide a general reserve for anticipated loan losses. Instead, we
must determine the fair value of each individual investment on a quarterly
basis. We will record unrealized depreciation on investments when we believe
that an investment has become impaired, including where collection of a loan or
realization of an equity security is doubtful. Conversely, we will record
unrealized appreciation if we believe that the underlying portfolio company has
appreciated in value and, therefore, our investment has also appreciated in
value, where appropriate.
As a business development company, we invest primarily in illiquid securities
including debt and equity securities of private companies. The structure of each
debt and equity security is specifically negotiated to enable us to protect our
investment and maximize our returns. We generally include many terms governing
interest rate, repayment terms, prepayment penalties, financial covenants,
operating covenants, ownership parameters, dilution parameters, liquidation
preferences, voting rights, and put or call rights. Our investments are
generally subject to some restrictions on resale and generally have no
established trading market. Because of the type of investments that we make and
the nature of our business, our valuation process requires an analysis of
various factors. Our fair value methodology includes the examination of, among
other things, the underlying investment performance, financial condition and
market changing events that impact valuation.
F-14
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
As a general rule, we do not value our loans or debt securities above cost, but
loans and debt securities will be subject to fair value write-downs when the
asset is considered impaired. In many cases, our loan agreements allow for
increases in the spread to the base index rate if the financial or operational
performance of the customer deteriorates or shows negative variances from the
customer's business plan and, in some cases, allow for decreases in the spread
if financial or operational performance improves or exceeds the customer's plan.
With respect to private equity securities, each investment is valued as
indicated above by a independent business valuation company using industry
valuation benchmarks, and then the value is assigned a discount reflecting the
illiquid nature of the investment, as well as a minority, non-control position,
if applicable. When an external event such as a purchase transaction, public
offering, or subsequent equity sale occurs, the pricing indicated by the
external event will be used to corroborate our private equity valuation.
Securities that are traded in the over-the-counter market or on a stock exchange
generally will be valued at the prevailing bid price on the valuation date.
ADVERTISING COSTS
Advertising costs consist primarily of magazine advertising, sales catalogues
and promotional brochures. Magazine advertising is charged to expense over the
period the advertising takes place and other advertising costs are charged to
expense over the periods expected to be benefited, which is generally not more
than twelve months. For the three months ended December 31, 2003, the nine
months ended September 30, 2003 and each of the years ended December 31, 2002
and 2001, advertising expense totaled $29,496, $70,314, $87,604 and $151,956,
respectively.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share amounts are computed by dividing the net
earnings (loss) by the weighted average number of common stock shares
outstanding. Diluted earnings (loss) per share amounts reflect the maximum
dilution that would have resulted from the conversion of the Series C preferred
stock (Note 2), the exercise of warrants (Note 2) and, at December 31, 2001, the
issuance of common stock earned but not issued (Note 6).
F-15
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The table below is a reconciliation of the denominators of our basic and diluted
earnings (loss) per share calculations for the three months ended December 31,
2003, the nine months ended September 30, 2003 and for each of the years ended
December 31, 2002 and 2001. There is no impact to the numerators of our diluted
earnings per share calculations from the potentially dilutive common shares.
Three Nine Year Year
Months Months Ended Ended
12/31/03 9/30/03 12/31/02 12/31/01
-------- ------- -------- --------
Weighted average shares, basic 298,519,876 139,696,577 1,872,055 1,139,851
Assumed conversion of Series C preferred 15,000,000 - - -
Assumed exercised A, B and C warrants - - - -
-------------- ------------- ----------- -----------
Weighted average shares, dilutive 313,519,876 139,696,577 1,872,055 1,139,851
============== ============= =========== ===========
There are no potentially dilutive common shares for the nine months ended
September 30, 2003 and for each of the years ended December 31, 2002 and 2001,
because we had a loss from continuing operations during these periods.
STOCK BASED INCENTIVE PROGRAM
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages entities to
recognize compensation cost for stock-based employee compensation plans using
the fair value method of accounting, as defined therein, but allows for the
continued use of the intrinsic value method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. The Company has not granted any options or warrants however, it plans
to use the accounting prescribed by APB Opinion No. 25. As such, the Company
will be required to disclose pro forma net income and loss per share amounts as
if the fair value method of accounting has been applied.
INCOME TAXES
The Company has not elected to be a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. Accordingly, the
Company will be subject to U.S. federal income taxes on sales of investments for
which the fair values are in excess of our tax bases (Note 7). Prior to
conversion to a business development company, deferred tax assets and
liabilities were determined based on differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities (i.e.,
temporary differences) and were measured at the enacted rates that will be in
effect when these differences reverse.
Upon conversion to a business development company, all deferred tax assets and
liabilities relating to our now unconsolidated subsidiaries were eliminated.
F-16
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
COMPREHENSIVE INCOME
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statements
and (b) display the accumulated balance of other comprehensive income separately
in the equity section of a balance sheet. The Company's comprehensive income
does not differ from its reported net income.
As a business development company, the Company must report changes in the fair
value of its investments outside of its operating income on its statement of
operations and reflect the accumulated appreciation or depreciation in the fair
value of its investments as a separate component of its stockholders' equity.
This treatment is similar to the treatment required by SFAS No. 130.
RECENT ACCOUNTING PRONOUNCEMENTS
During the year ended December 31, 2003, there were several new accounting
pronouncements issued by the Financial Accounting Standards Board (FSAB) the
most recent of which was Statements on Financial Accounting Standards (SFAS) No.
150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY and FASB Interpretation No. 46, CONSOLIDATION OF VARIABLE
INTEREST ENTITIES. Each of these pronouncements, as applicable, has been or will
be adopted by the Company. Management does not believe the adoption of any of
these accounting pronouncements has had or will have a material impact on the
Company's financial position or operating results.
2. CAPITAL STRUCTURE DISCLOSURES
The Company's capital structure is complex with several series of preferred
stock and a general class of common stock. Through December 31, 2002 and prior
to the February 20, 2003 recapitalization described below, the Company's capital
structure consisted only of 200,000,000 authorized common stock shares with a
$.001 par value per share.
On February 20, 2003, the Company filed with the Secretary of State Nevada a
certificate of amendment amending the Company's Articles of Incorporation, and
pursuant to authorization by the Board of Directors and a majority of eligible
shareholder votes, such amendment provided for a 100 to 1 reverse split of the
Company's common stock (actually only 79,095,106 shares were subject to the
reverse split). The amendment also authorized the increase of the authorized
number of common shares of all classes of capital stock to 350,000,000, of which
300,000,000 are to be shares of common stock with a par value of $.001, and
further providing authorization for the issuance of preferred shares in such
series and with such voting powers as may be determined by the Board. The shares
may be issued by the Company from time to time as approved by the Board of
Directors without approval of the shareholders except as otherwise provided for
by the applicable Nevada law.
F-17
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SERIES A CONVERTIBLE PREFERRED STOCK
On February 20, 2003, the Company designated 1,200,000 Series A Convertible
Preferred Stock shares with a par value of $.001 per share. The Series A shares
are convertible at the holder's option into 10 shares of common stock and 1
share of Series B Convertible Preferred Stock. The Series A shares rank in
priority to the Company's common stock and any other preferred stock shares
issued, both as to the payment of dividends and as to distributions of assets
upon liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary. Dividends, if declared by the Board of Directors, accrue at an
annual rate of $.30 and are fully cumulative. Also on this date, these shares
were issued and immediately converted into 12,000,000 common stock shares and
1,200,000 Series B Convertible Preferred Stock shares. No other Series A shares
have been issued.
SERIES B PREFERRED STOCK
On February 20, 2003, the Company designated 1,200,000 Series B Convertible
Preferred Stock shares with a par value of $.001 per share. The Series B shares
rank in priority to the Company's common stock both as to the payment of
dividends and as to distributions of assets upon liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary. Dividends, if
declared by the Board of Directors, accrue at an annual rate of $.30 and are
fully cumulative. In addition, each Series B share provides for 500 votes.
Fredericks Partners, a California partnership, as holder of the Series B shares
owns controlling votes in the Company. Other than the 1,200,000 Series B shares
issued upon the conversion of the Series A shares described above, no other
Series B shares have been issued.
SERIES C PREFERRED STOCK
On August 14, 2003, the Company designated 15,000,000 Series C Preferred Stock
shares with a par value to be determined by the Board of Directors (the
preferred shares originally were designated with a $.001 par value per share).
The shares contain no participation rights and therefore the holders are not
entitled to participate in any dividends declared by the Board of Directors. The
shares are convertible into common stock shares at the rate of 1 to 1 anytime
during the year following the date of issuance and the shares automatically
convert to common stock shares at that same rate one year from the date of
issuance if not previously converted during that time. In the event of
liquidation, dissolution or other similar winding up event, the shares rank in
priority to the Company's common stock and the Series B and D preferred stock as
to distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary.
SERIES D PREFERRED STOCK
On December 10, 2003, the Company designated 1,000,000 Series D Preferred Stock
shares with no par value and a stated value of $1per share. The shares contain
no participation rights and therefore the holders are not entitled to
participate in any dividends declared by the Board of Directors. The shares do
not contain any voting rights. In the event of liquidation, dissolution or other
similar winding up event, the holders of the shares have the right to convert
their stock into common stock shares on a 1 to 1 basis. Otherwise, the shares
rank last in priority behind the Series C and Series B preferred stock shares.
Also on this date, the Company issued all authorized Series D shares to Pacific
Development in exchange for shares of HCIA.
F-18
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
COMMON STOCK
On November 11, 2003, the Company amended its Articles of Incorporation to
increase the number of authorized common shares to 750,000,000 with a par value
of $.001 per share. Each common stock share contains one voting right and
contains the rights to dividends if and when declared by the Board of Directors.
COMMON STOCK WARRANTS
On July 7, 2003, in connection with a $60,000 loan to the Company, the Company
entered into a Common Stock and Warrant Purchase Agreement whereby the Company
granted the lender class A, B and C warrants to purchase a total of 3,000,000
common stock shares at various prices. Specifically, the A Warrants entitle the
lender/holder to acquire up to 1,000,000 free trading shares, in increments of
250,000 shares each, at a price of $.10 per share. The warrants are exercisable
anytime during a period ending 24 months and 1 day from the date of the
agreement.
Similarly, the B and C Warrants each entitle the lender/holder to acquire up to
1,000,000 free trading shares, in increments of 250,000 shares each, at a price
of $.20 and $.30 per share, respectively. The B and C warrants are each
exercisable anytime during a period ending 30 months and 1 day and 36 months and
1 day, respectively, from the date of the agreement.
PREFERRED WARRANTS
On July 8, 2002, the Company distributed an offer, which expired on November 19,
2002, under which the stockholders could elect to exchange common stock shares
for preferred warrants. Each preferred warrant entitled the holder to purchase
one share of common stock for $.01 and was automatically exercised for the
difference, expressed in whole shares of post-split common stock, between the
fair market value of one share of common stock and $.01 as a result of the above
recapitalization. The exchange ratio and exercise price of the preferred
warrants were not to be adjusted as a result of the above recapitalization and,
therefore, were not to be subject to the 100 to 1 reverse stock split. As of
November 19, 2002, the holders of 79,095,106 common stock shares had accepted
the offer to surrender their shares and receive the preferred warrants although
the shares were not canceled and the preferred warrants not issued until January
2003. On February 20, 2003, the above recapitalization was completed and the
remaining 120,832,039 common stock shares under went the reverse stock split. In
March 2003, in a cost savings decision by the Company, the preferred warrants
were canceled and 79,095,106 restricted common stock shares were issued.
3. RISK CONCENTRATIONS AND UNCERTAINTIES
Prior to September 30, 2003, the Company, through its subsidiaries, operated in
highly specialized industries. There are only four companies worldwide who
manufacture and sell night sights using tritium. The gun sight industry is
highly dependent on major firearms manufacturers as well as consumer and
governmental demand for weapons. World conditions and economies can affect the
future sales of this product.
F-19
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The Company's magnetic and hydraulic-magnetic technologies (Note 13) required
additional modifications to fit specific customer needs. Demand for these
products from governmental and industrial sources was largely estimated and
while the Company had studied various markets, no assurance could be given that
these products could be successfully marketed.
4. NOTES PAYABLE
The Company's debt consist of a purchase note payable incurred in the
acquisition of Paramount MultiServices, Inc. (Note 6) and several installment
and promissory notes, which bear interest at 6.0% to 10%, are generally due upon
demand and past due, are unsecured and contain no restrictions.
The Purchase note payable is payable in annual installments of either the
Company's common stock, pending a California fairness hearing, or cash through
December 2006. Because the terms of the note did not provide for interest, the
Company has discounted the carrying value of this note to its fair value using a
discounted interest rate of 5%. As of this date, the initial $500,000 purchase
price payment has not been paid pending the fairness hearing, which is necessary
so that the common stock issued by the Company as payment will be immediately
free trading shares.
At December 31, 2003, future principal payments required under the terms of this
purchase note payable are as follows.
YEAR ENDED
DECEMBER 31, AMOUNT
2004 $ 785,714
2005 226,757
2006 215,959
-----------
$ 1,228,430
===========
On September 27, 2002, the Company issued a $200,000 convertible promissory note
convertible into 1,200,000 shares of Series A Convertible Preferred Stock, when
authorized and issued, with rights and preferences as the Company may determine,
to Fredericks Partners, a California partnership. The note provided for interest
at 10% and was due March 27, 2003. In addition, the note gave its holders
600,000,000 votes as `debt votes' awarded by the Board of Directors by
resolution of September 27, 2002. The note provided that it may be converted at
any time prior to payment. On February 20, 2003, Fredericks Partners exercised
its conversion privilege (Note 2).
F-20
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
5. COMMITMENTS AND CONTINGENCIES
LEASES
Through July 2003, the Company conducted its operations from its own facilities
located in Ft. Worth, Texas, which it had occupied since early 2001. In
addition, The Company's Unertyl division facilities located in Pennsylvania,
were leased on a month-to-month basis and the Company's 2826 Elm St., Inc.
nightclub facility was leased under a non-cancelable operating lease expiring
through November 2005. Beginning in July 2003, the Company sold the building and
relocated its corporate office to Las Vegas, Nevada, which it is leasing under a
non-cancelable operating lease expiring in July 2008 at a monthly rate of
$6,570. As part of the sale agreement, the Company agreed to leaseback the Ft.
Worth facilities through March 2004 at a monthly rate of $6,500. For the three
months ended December 31, 2003, the nine months ended September 30, 2003 and
each of the years ended December 31, 2002 and 2001, rent expense for the
Company's facilities totaled $39,210, $94,635, $66,800 and $92,378,
respectively.
At December 31, 2003, future minimum rental payments required under the terms of
the Company's Las Vegas office lease agreement was as follows.
YEAR ENDED
DECEMBER 31, AMOUNT
2004 $ 78,840
2005 78,840
2006 78,840
2007 78,840
2008 45,990
-----------
$ 361,350
===========
LEGAL MATTERS
The Company is subject to legal proceedings that arise in the ordinary course of
business. Management does not believe that the outcome of any of these matters
will have a material adverse effect on the Company's consolidated financial
position, operating results or cash flows.
LICENSE AGREEMENT
Trident Technologies Corporation (TTC), a wholly owned subsidiary of the
Company, is obligated under a license agreement (Agreement) with The University
of California as operators of Los Alamos National Laboratory (patent holder)
related to the development, marketing and sales rights to certain specified
magnetic and/or magnet technology.
F-21
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
TTC is obligated to pay a royalty fee of 8.0% on net income (as defined in the
Agreement) of products sold using the patented technology. Further, TTC is to
pay an annual maintenance fee of $74,000. All royalty fees paid during a
specific year are to be credited to that year's maintenance fee and the
maintenance fee requirement is considered met if the royalty payments during an
Agreement year are equal to or exceed the required maintenance fee.
During the year ended December 31, 2002, the Company determined the license was
no longer cost beneficial and stopped paying its royalty and annual maintenance
fees causing the license to expire. As a result, the Company charged to
continuing operations the unamortized carrying value of the license totaling
$49,160.
6. RELATED PARTY TRANSACTIONS
STOCKHOLDERS
During the three months ended December 31, 2003, the nine month ended September
30, 2003 and each of the years ended December 31, 2002 and 2001, the Company
made advances totaling $0, $0, $6,477 and $55,763, respectively, to stockholders
and former officers and directors of the Company. The advances were due on
demand as funds were available, non-interest bearing and unsecured. In addition,
during the same periods, $0, $0, $0 and $10,817, respectively, of these advances
were repaid and $0, $0, $42,720 and $0, respectively, were charged to expense as
uncollectible. Also, during the year ended December 31, 2002, $55,728 of these
advances were reserved because of doubt as to their collectibility and during
the nine months ended September 30, 2003, the remaining $112,591 of these
advances were charged to expense as uncollectible.
During the year ended December 31, 2000, the Company received $171,080 from
existing stockholders for the purchase of additional common stock to be issued
by the Company. Because of the volatility of the trading price of the Company's
common stock these funds were held by the Company while negotiations for the
price per share were being conducted with these stockholders. In February and
March 2001, negotiations were completed and 1,710,800 shares were issued in
repayment of these advances.
During the three months ended December 31, 2003, the nine months ended September
30, 2003, and each of the years ended December 31, 2002 and 2001, the Company
received advances totaling $98,521, $404,490, $582,180 and $100,100,
respectively, from stockholders. These advances are due upon demand as funds are
available, non-interest bearing and unsecured. Also, during the same periods,
the Company repaid $0, $636,580 ($148,000 through the issuance of common stock),
$5,100 and $0, respectively, of these advances and during the year ended
December 31, 2002, $100,000 of these advances were assumed as part of the ELM
net assets disposition (Note 12).
F-22
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
STOCK BASED COMPENSATION ARRANGEMENT
In September of 1994, the board of directors entered into a consulting contract
with the Company's former CEO. This agreement required the Company to issue
1,000,000 shares of common stock to the CEO and to compensate him at the rate of
$10,000 per month. Should the Company be unable to pay the CEO in cash, the
Company would issue him its common stock in amount equal to $0.02 per share
(which was the share price at the time the consulting contract was entered
into). The Company paid the CEO through December of 1994. In January of 1995,
the Company and the CEO re-negotiated the agreement to remunerate him solely in
stock of the Company. This was necessary because of the Company's cash flow
position and inability to pay the previously agreed upon compensation. The
agreement required the CEO to perform services for the Company in exchange for
500,000 shares of Company common stock per month. As of the expiration date of
the agreement, January 5, 1998, the CEO earned a total of 19,000,000 shares of
the Company's common stock with a $360,000 fair value. This compensation was
charged to expense over the period of the agreement. The agreement required that
the stock not be issued until after the end of the initial term of the
agreement, which was three years. In June 2002, the stock was issued and is
subject to Rule 144 of the Securities and Exchange Commission and further
subject to a five-year "lockup" requirement, precluding the CEO from selling
said stock for five years from the date of issuance. Also, in June 2002, these
shares were `turned in' to the Company as consideration for the purchase of the
net assets of the Company's night club operation by the former CEO (Note 12).
PARAMOUNT MULTISERVICES, INC. (PMI)
On December 30, 2003, the Company acquired all of the outstanding common stock
of PMI for a purchase price of $1,300,000 which was discounted to $1,228,430
(Note 4). The purchase price is payable in annual installments through December
30, 2006 at an imputed interest rate of 5.0% in either common stock of the
Company or in cash. Because the majority stockholder and a director and officer
of PMI is a member of executive management of the Company, the Company obtained
an independent business valuation of PMI to support the price paid for its
investment.
MANAGEMENT FEES
During the three months ended December 31, 2003, the Company entered into
agreements to provide management services to three controlled companies, PMI,
IWI and TTI, and accrued management fee revenues pursuant to these agreements
totaling $150,000. On December 30, 2003, in connection with the Company's
investment in PMI, the management agreement terminated. The remaining
agreements, which each provide for quarterly management fees of $30,000, are
open ended and can be terminated by either party upon 30 days written notice.
F-23
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
7. INCOME TAXES
The Company accounts for corporate income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109. Under SFAS No. 109, deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition,
future tax benefits, such as those from net operating loss carry forwards, are
recognized to the extent that realization of such benefits is more likely than
not. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. At December 31, 2003, the Company's
cost of its investments for federal income tax purposes are equal to its cost
for financial reporting purposes.
A reconciliation of income tax expense at the statutory federal rate of 34% to
income tax expense at the Company's effective tax rate for the three months
ended December 31, 2003, the nine months ended September 30, 2003 and for each
of the years ended December 31, 2002 and 2001 is as follows.
Three Nine
Months Months
Ended Ended
12/31/03 9/30/03 2002 2001
-------- ------- ---- ----
Tax benefits computed at statutory rate $ 604,039 $( 568,157) $( 656,487) $( 1,960,634)
Increase in valuation allowance ( 524,261) 552,035 650,976 1,957,841
Adjustment to valuation allowance
resulting from conversion to a
business development company 84,501 - - -
Permanent differences 4,723 16,122 5,511 2,793
----------- ------------ ----------- -----------
$ - $ - $ - $ -
============ ============= ============ ============
As of December 31, 2003, the Company has approximately $9.8 million of net
operating losses available to offset future taxable income and approximately
$3.3 million of unrealized depreciation in the carrying value of its investments
available to offset future appreciation if it occurs. These carry forwards
expire in years 2008 through 2023.
F-24
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
At December 31, 2003 and 2002, significant components of the Company's deferred
tax assets (benefits) and liabilities are summarized below.
2003 2002
---- ----
Deferred tax assets:
Net operating loss carry forward $ 4,460,665 $ 4,275,376
Amortization differences - 157,515
Less valuation allowance ( 4,460,665) ( 4,432,891)
----------- -----------
- -
Deferred tax liabilities:
Depreciation differences - -
----------- -----------
Net deferred tax assets $ - $ -
============ ============
8. FINANCIAL INSTRUMENTS
The Company's financial instruments, which potentially subject it to credit and
other risks, consists of its cash, accounts receivable, investments in equity
securities and loans (after becoming a business development company) (Note 1),
notes payable and advances to/from officer and stockholders.
CASH
The Company maintains its cash in bank deposit and other accounts, which, at
times, may exceed federally insured limits. Although the Company has not
experienced any losses in such accounts and does not believe it is exposed to
any significant credit risks involving its cash at December 31, 2003, $1,596,294
of the Company's cash was maintained in financial institutions in excess of
federal insurance coverage.
ACCOUNTS RECEIVABLE, TRADE
The Company's accounts receivable are unsecured and generally represent sales on
a net 30-day basis to customers located throughout the United States. With the
exception for amounts reserved for doubtful collectibility, management believes
it is not exposed to any significant credit risks affecting accounts receivable
and that these accounts are fairly stated at estimated net realizable amounts.
At December 31, 2002 and 2001, accounts receivable are reflected in the
accompanying consolidated financial statements net of an allowance for doubtful
accounts totaling $290,591 and $6,500, respectively. The allowance represents
management's estimate of those receivables that might not be collectible based
on the Company's historical collection experience.
F-25
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTES PAYABLE
Management believes the carrying value of the notes payable represents the fair
value of this financial instrument because their terms are similar to those in
the lending market for comparable debt with comparable risks.
ADVANCES TO/FROM STOCKHOLDERS
Management believes the carrying value of these advances represent the fair
value of these financial instruments because their terms are similar to those in
the lending market for comparable loans with comparable risks.
9. OTHER STATEMENT OF CASH FLOWS DISCLOSURES
For the three months ended December 31, 2003, the nine months ended September
30, 2003 and each of the years ended December 31, 2002 and 2001, supplemental
disclosure of cash flow information is as follows:
Three Nine
Months Months
Ended Ended
12/31/03 9/30/03 2002 2001
-------- -------- ---- ----
Cash paid for interest $ 7,673 $ 54,722 $ 69,553 $ 22,331
Cash paid for income taxes - - - -
Non-cash investing and financing activities:
Issuance of common stock in purchase
of MMC $ - $ - $ - $ 203,000
Issuance of common stock in exchange
for services $ - $ 401,988 $ 387,500 $ 2,493,920
Issuance of common stock in exchange
for patents $ - $ - $ - $ 220,000
Issuance of common stock to repay
note payable and accrued interest $ - $ 250,000 $ - $ 769,146
Issuance of common stock to repay
stockholder advances $ - $ 148,000 $ - $ 171,080
Issuance of common stock
previously earned $ - $ - $ 360,000 $ -
F-26
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
10. STOCK OPTION PLAN
On August 6, 2002, the Company established the 2002 Directors, Officers and
Consultants Stock Option, Stock Warrant and Stock Award Plan (the Plan) as a way
of attracting and retaining highly qualified and experienced directors,
employees and consultants and to give them a continued proprietary interest in
the success of the Company and its subsidiaries. Additionally, the plan is
intended to encourage ownership of the Company's common stock. Pursuant to the
Plan, as amended on February 20, 2003, the aggregate number of shares that may
be optioned, subject to conversion, or issued is 10,000,000 shares of common
stock, warrants, options, preferred stock or any combination thereof. As of
December 31, 2003, no options have been granted under this plan.
11. INTERIM FINANCIAL DATA AND FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the Company's year ended December 31, 2003,
adjustments were made to the Company's financial statements that affected
previously reported interim 2003 quarterly periods. The overall effect of the
adjustments was to decrease net income by $377,741.
12. DISCONTINUED OPERATIONS (PRIOR TO SEPTEMBER 30, 2003)
2826 ELM, INC. (ELM)
On June 20, 2002, the Company discontinued operations of its night club, which
was acquired in January 2001 (Note 1), and sold the remaining net assets to a
corporation controlled by a stockholder and former officer and director of the
Company (Note 6). In consideration for these net assets, the Company received
19,000,000 if its common stock shares owned by the stockholder with a fair value
of $350,000 and recognized a gain on the disposition of $211,453, which is
included in the accompanying consolidated financial statements as part of
discontinued operations.
TRADE PARTNERS INTERNATIONAL, INC. (TPI)
On April 3, 2002, the Company discontinued operations in its wholly owned
subsidiary (Note 1) and incurred a $144,744 loss on the impairment of inventory,
which is included in the accompanying consolidated financial statements as a
part of discontinued operations pursuant to SFAS No. 144, DISCONTINUED
OPERATIONS. TPI operations were part of the Company's tire sealant operating
segment (Note 13).
NET CONSTRUCTION, INC. (NCI) (FORMERLY QCB ARMOR)
On June 19, 2001, QCB Armor changed its name to Net Construction, Inc. to
facilitate the acquisition of a telecommunications and networking company.
However, on April 3, 2002, due to higher than anticipated overhead expenses the
Company decided to discontinue operations of NCI. NCI's remaining net
liabilities of $18,532 will be assumed by the Company's other operations. NCI's
operating results are included in the accompanying consolidated financial
statements as part of discontinued operations.
F-27
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
13. BUSINESS SEGMENTS
Prior to becoming a business development company, the Company had six reportable
operating segments for which its management reviewed financial information and
based decisions. These operating segments are (1) manufacturing night sights for
handguns, (2) manufacturing a patented device used for climbing steel surfaces
called "The Gripper," (3) manufacturing an Emergency Magnetic-Hydraulic Sea
Patch and Pro-Mag Systems, (4) importing and resale of firearms, (5) importing
and distribution of a tire sealant product and (6) a nightclub. Generally, these
activities are conducted through separate subsidiary corporations.
During the nine months ended September 30, 2003 and each of the years ended
December 31, 2002 and 2001, foreign sales were insignificant. The following
table reflects certain information about the Company's reportable operating
segments related to its continuing operations for the nine months ended
September 30, 2003 and each of the years ended December 31, 2002 and 2001.
Information related to its discontinued operations is contained in Note 12.
(1) (2) (3) (4)
IWI TRIDENT SEA FIREARMS
NINE MONTHS ENDED 9/30/03 NIGHT SIGHTS GRIPPER PATCH RESALE TOTAL
Revenue, external customers 337,540 129,510 467,050
Operating income (loss) (1,521,825) 94,712 (1,427,113)
Interest expense 35,958 35,958
Depreciation/amortization 152,146 10,930 163,076
Consulting services, non cash 420,000 420,000
Expenditures for long-lived assets -
Total long-lived assets, net of
depreciation 610,094 9,370 619,464
Total assets 2,813,203 66,838 2,880,041
(1) (2) (3) (4)
IWI TRIDENT SEA FIREARMS
2002 NIGHT SIGHTS GRIPPER PATCH RESALE TOTAL
Revenue, external customers 944,669 28,609 129,510 159,604 1,262,392
Operating income (loss) (2,154,986) (7,690) 94,712 29,142 (2,038,822)
Interest expense 69,553 69,553
Depreciation/amortization 256,279 14,574 270,853
Consulting services, non cash 387,500 387,500
Expenditures for long-lived assets 16,842 16,842
Total long-lived assets, net of
depreciation 1,192,895 9,370 1,202,265
Total assets 2,467,799 66,838 2,534,637
F-28
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(1) (2) (3) (4)
IWI TRIDENT SEA FIREARMS
2001 NIGHT SIGHTS GRIPPER PATCH RESALE TOTAL
Revenue, external customers 1,607,660 2,115 51,208 53,958 1,714,941
Operating income (loss) (4,513,616) (20,317) (492,743) (116,623) (5,143,299)
Interest expense 52,429 52,429
Depreciation/amortization 325,370 43,610 368,980
Consulting services, non cash 2,493,920 2,493,920
Expenditures for long-lived assets 1,512,998 3,732 1,516,730
Total long-lived assets, net of
depreciation 1,748,282 20,163 1,768,445
Total assets 3,664,410 209,585 107,910 3,981,905
14. FINANCIAL HIGHLIGHTS
Following is a schedule of financial highlights for the three months ended
December 31, 2003, the first reporting period a business development company
(Note 1).
Per share date (basic and dilutive):
Net asset value at beginning of period $ -
-----------------
Net operating income (loss) before investment gains (losses) -
Increase in unrealized appreciation on investments (1) 0.01
Cumulative effect of conversion to a business development company -
Income tax provision -
-----------------
Net increase (decrease) in stockholders' equity from net income (loss)(1) 0.01
-----------------
Dividends declared -
Distributions to stockholders -
Effect of issuance of common shares for cash 0.02
-----------------
Net asset value at end of period $ 0.03
=================
Per share market value at end of period $ 0.03
Total return (2) 17.13%
Shares outstanding at end of period 437,173,162
Ratio/supplemental data:
Net assets at end of period $ 11,484,252
Ratio of operating expenses to average net assets 2.44%
Ratio of net operating income (loss) to average net assets 8.78%
(1) Amount computed using average shares outstanding during the period
(2) Total return equals net income (loss) dividend by average shares out-
standing during the period
F-29
21ST CENTURY TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 2003
First Second Third Fourth
----- ------ ----- ------
Net sales $ 172,278 $ 154,645 $ 140,127 $ 1,158,168
Gross profit 12,445 56,645 33,876 1,158,168
Income (loss) before cumulative
effect of accounting change ( 322,930) ( 641,495) ( 706,625) 1,776,585
Cumulative effect of conversion to
business development company - - - ( 232,996)
Net income (loss)/net increase (decrease)
in stockholders' equity resulting from
net income (loss) ( 267,407) ( 641,495) ( 762,148) 2,009,581
Earnings (loss) per share
basic and diluted $ 0.00 $ 0.00 $ 0.00 $ 0.01
Year Ended December 31, 2002
First Second Third Fourth
----- ------ ----- ------
Net sales $ 728,758 $ 479,910 $ 314,731 $( 261,006)
Gross profit 438,851 202,971 198,644 ( 255,338)
Income (loss) before cumulative
effect of accounting change 42,558 219,433 ( 228,309) ( 1,930,845)
Cumulative effect of conversion to
business development company - - - -
Net income (loss)/net increase (decrease)
in stockholders' equity resulting from
net income (loss) 42,558 219,433 ( 228,309) ( 1,930,845)
Earnings (loss) per share
basic and diluted $ 0.00 $ 0.00 $ 0.00 $( 1.03)
F-30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
none
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors, executive officers and key employees and their respective ages
and positions are set forth below. Biographical information for each of those
persons is also presented below. Our executive officers are appointed by our
Board of Directors and serve at its discretion. Arland D. Dunn was appointed to
be Chairman of the Board, CEO and President of the Company on May 1, 2002. On
that date, Larry B. Bach was appointed as Secretary of the Company. Mr. Dunn
became President and Director of all of the Company's then-existing
subsidiaries. Shane Traveller and James Terrell were elected to the Board of
Directors on September 3, 2003. John Hopf was elected a member of the Board of
Directors on December 9, 2003.
Name Age Position Held
Arland D. Dunn 63 Chief Executive Officer, President and Chairman
of the Board
Larry B. Bach 66 Secretary and Director
Shane Traveller, CPA 37 Director and Chairman of the Audit and Investment
Committee (Named Financial Expert)
James Terrell -- Director and member of the Audit and Investment
Committee
John Hopf 38 Director and member of the Audit and Investment
Committee
Alvin L. Dahl, CPA 62 Chief Financial Officer
Kevin Romney 43 General Manager
Arland D. Dunn, President, CEO and Chairman of the Board
Las Vegas, Nevada
Born in the high desert of eastern California, Mr. Dunn graduated Columbia Law
School (With Special Recognition). Business was more appealing to him than the
practice of law. Returning to his roots, he joined the Inyo Marble Products
Company in his native Inyo County, California. At that time, the company was the
largest provider of marble and terrazzo in the United States. Mr. Dunn guided
that company through a difficult period of contraction of basic natural resource
industries in the United States, including dealing successfully with the then
new environmental, safety and ecological regulation, while maintaining
profitability and business growth. He earned his substantial equity position in
Inyo Marble.
Mr. Dunn then chose to broaden his business experience, joining IAP Industries,
a force in retail photography and allied services, as executive vice-president.
Mr. Dunn learned the popular photography business that would lead to his
successful next enterprise.
The creation of Traditional Industries, Inc. by Mr. Dunn in the late 1970's led
to a most successful organization, boosted by new methods of consumer financing
designed by Mr. Dunn. Independent direct sales organizations represented
Traditional, aggressively promoting goods and services paid for by consumer
installment contracts. Traditional not only sold in its own account, but also
bought and sold consumer installment debt paper from other sources, creating a
less-then-prime financial network engaged in the buying, selling and trading of
consumer installment debt. Revenues went from $0 to $200,000,000 per annum.
Traditional was named by Forbes as one of the best managed small businesses in
America.
Mr. Dunn's most significant contribution to the success of Traditional, among
many significant contributions, was the expert dealing in the volatile market
for short-term consumer installment contracts, financing the purchasing and
reselling of such obligations through public instruments. Profits earned in the
high-velocity market, trading in such instruments were greatly enhanced by Mr.
Dunn's innovative methods.
Always on the lookout for innovative opportunities, Mr. Dunn then entered the
then rapidly growing ATM market, which led, in turn to interest in non-bank
electronic money transfer. As an outgrowth of the ATM enterprise, a new
money-transferring system, which better served the public at less cost and with
greater efficiency was developed under Mr. Dunn's supervision.
Following the events of 9/11, Mr. Dunn sought new enterprises to deal with the
new world. 21st Century Technologies, Inc. asked him to become their new leader
as chairman of the board and chief executive officer at a time of difficulty.
Larry B. Bach, Director and Secretary of the Company
A resident of Henderson, Nevada, Mr. Bach has served as Director since August
20, 2002 and Corporate Secretary to the Company since May 1, 2002, serving at
the Company's Las Vegas, Nevada executive offices. From 1998 until 2002, he was
Vice-President/Secretary of KeyCom, Inc., which developed the XTRAN (TM) money
transfer system, which was sold to Emergent Financial Services, Inc. From 1995
until 1998, Mr. Bach served in various executive capacities with Centennial
Financial Services, Inc., dealing in the high-velocity and complex business of
dealing in short term consumer debt financing, becoming engaged with Centennial
as a result acting as counsel and advisor to Churchill-Steele Ltd., a New
Orleans-based venture capital firm. Prior to Churchill-Steele, Mr. Bach engaged
in the private practice of law, with additional experience as chairman of the
Homestead Oil Company, which engaged in drilling and exploration, principally in
Oklahoma.
Mr. Bach received a Bachelor of Arts (English) from the University of North
Texas, followed by a JD from Southern Methodist University, where he served on
the Law Review as a member of the Board of Editors of the Journal of Air Law and
Commerce.
Shane Traveller, CPA, Director
Mr. Traveller brings an extensive background in service to public companies both
as an independent auditor, then later as an officer and director.
At a Nasdaq NMS-listed medical device company, he oversaw all operations,
product development and manufacturing in addition to financial reporting,
investor relations, and information systems. Originally brought in as interim
CFO to cut costs, improve reporting and investor relations, he was later named
President and COO with responsibility for all aspects of the company. During his
tenure, sales increased 33%, productivity increased 45%, staffing decreased 42%
and the company achieved cash flow break even for the first time in ten years.
With a company he co-founded, Mr. Traveller established supply channels in
Eastern Europe, negotiated a letter of intent and subsequent joint venture
agreement with a Russian supplier, and oversaw the market release of five new
products. He raised seed capital and set up the production facility, and
internal accounting controls.
As a consultant and independent auditor, Mr. Traveller has been closely involved
in the development and implementation of internal controls, management of staff,
preparation and filing of countless financial statements and SEC filings. He has
led clients through IPO's and secondary offerings, private placements, mergers
and acquisitions, and conversions to a Business Development Company under the
Investment Act of 1940.
A "clean up" specialist, Mr. Traveller assists companies with meeting SEC
compliance, listing requirements, and corporate governance. He is also involved
in providing management consulting, assisting with business plan development and
implementation, and providing capital formation guidance.
EDUCATION AND OTHER INFORMATION
o Brigham Young University - Bachelor of Science degree from Marriott
School of Management, major in Accounting, minor in Finance
o Certified Public Accountant - State of California certificate number 66731
(inactive)
o American Institute of Certified Public Accountants
James Terrell, Director
Mr. Terrell brings extensive business experience in various industries. Mr.
Terrell has owned and operated various wedding chapels since 1968 and currently
helps operate The Little White Chapel on Las Vegas Boulevard. The Little White
Chapel is widely known all over the world for performing weddings for
celebrities such as Michael Jordan, Bruce Willis, Demi Moore, and even Britney
Spears.
In addition to owning and operating wedding chapels, Mr. Terrell brings
experience in owning and operating various investment and retail businesses.
John Hopf, Director
Mr. Hopf brings extensive experience in the fields of investment banking,
business plan development, strategic alliances, mergers and acquisitions, and
public relations. As an advisor for the Compass Capital Group, Mr. Hopf acts as
both advisor and investment banker to help clients facilitate strategic
alliances, mergers and acquisitions, and access to capital markets. Mr. Hopf is
a holder Series 7, 24,55 and 63 securities licenses. He was director of Business
Development a AB Watley Group, Inc. New York, dealing with trade volumes of over
100,000,000 shares per month. Prior to his Watley experience, Mr. Hopf served as
General Securities Principal and Trader for Andover Brokerage, New York,
including management of 40 branch offices. Prior to his career in the brokerage
industry, Mr. Hopf served in the U. S. Marine Corps and majored in Marketing
while attending C. W. Post College at Long Island University.
Alvin L. Dahl, CPA, Chief Financial Officer
Mr. Dahl, a certified public accountant has extensive experience in the
accounting industry. In 1994, he acquired Ray & Associates, LLP, an accounting
firm specializing in tax, audit, and management advisory services. Under his
supervision, the firm averaged an annual growth rate of 30+%, more than doubling
the annual revenue, while retaining 90% of its original clients. In 2000, Mr.
Dahl sold the accounting and auditing portion of the firm as well as the
majority of the tax services and retained certain tax clients and the management
advisory services.
Prior to his ownership background in the accounting industry, Mr. Dahl served as
Chief Financial Officer for Advanced Framing Systems, Inc., a steel housing
manufacturer with annual sales of $40 million and 100 + employees; and held
various asset management positions for financial firms in the real estate
industry.
Mr. Dahl also held executive level positions in various financial institutions
including positions as President and Chairman of the Board in two Texas Savings
& Loan Associations prior to industry deregulation.
Mr. Dahl completed his BBA in Finance and Accounting at The University of Texas
at Austin in 1966 and has completed 36 semester hours of graduate level course
work.
Kevin D. Romney, CPA, General Manager
Mr. Romney served the Company as General Manager since May 20, 2002. In 1987,
Mr. Romney founded The Romney Group, a telemarketing company specializing in the
sale of financial products, surveys, subscriptions, lead generation, political
calling etc. Clients include Chase, Discover, First USA, Greyhound, NRA, Phillip
Morris, Investors Business Daily, American Remodeling, Republican and Democratic
candidates. At inception, the company's main product was finding locations for
vending machines owned by individual investors. In 1995, The Romney Group
expanded to include other types of telemarketing. Explosive growth of 60-70% per
year led to recognition of The Romney Group as one of the 15 fastest growing
telemarketing companies of its size by Telemarketing Magazine for several years
in a row, growing to revenue in excess of $3 million per year. Prior to the
founding of The Romney Group, Mr. Romney was an auditor for Ernst & Whinney, a
Big Eight CPA firm.
Mr. Romney received his BBA from Brigham Young University, with emphasis in
accounting.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information as of December 31, 2003,
Annual
Name and Principal Position Year(s) Salary Bonus
- --------------------------- ------- ------ -----
Arland D. Dunn 2003 $150,000 $0
CEO and President
Larry B. Bach, Director and Secretary 2003 * $0
Kevin Romney, General Manager 2003 $104,000 $0
Alvin L. Dahl 2003 * $0
Chief Financial Officer
* Less than $100,000.00
COMPENSATION OF DIRECTORS.
The Company's standard arrangement for compensation of directors for any
services provided as Director, including services for committee participation or
for special assignments ranges from $500.00 to $1,500.00 per meeting.
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information furnished to us with respect to the
beneficial ownership of our common stock by (i) each executive officer, director
and nominee, and by all directors and executive officers as a group, and (ii)
each beneficial owner of more than five percent of our outstanding common stock,
in each case as of December 31, 2003. Unless otherwise indicated, each of the
persons listed has sole voting and dispositive power with respect to the shares
shown as beneficially owned, subject to applicable community property laws.
Except as otherwise stated, the mailing address for each person
identified below is 2700 W. Sahara, Suite 440, Las Vegas, Nevada.
Shares Beneficially Percent of Class
Name Class Owned (1)
- ----------------------------------- ------ ---------------- -------------------
Fredricks Partners
5707 Corsa, Suite 107
Westlake Village, CA 913652 Common 12,000,000 (2) 2.7%
Fredericks Partners Series B
Preferred 1,200,000 (3) 100.0%
Arland D. Dunn, Chief Executive
Officer & Director Common -0-
Arland D. Dunn Series C
Preferred 5,000,000 33.3%
Larry B. Bach, Secretary & Director Common 50,000(2) *
Larry B. Bach Series C
Preferred 2,500,000 16.7%
Alvin L. Dahl, Chief Financial Officer Common 2,495,000(2) *
James B. Terrell, Director Common 2,350,000(2) *
Shane H. Traveller, Director Common -0-
All Directors and Officers as a group:
Common Stock (5 persons) 4,895,000
Series B Preferred (1 person) 1,200,000
Series C Preferred (2 persons) 7,500,000
* Less than 1%.
(1) Unless noted otherwise, the address for all persons listed is c/o the
Company at 2700 W. Sahara Blvd, Suite 440, Las Vegas, NV 89102
(2) Percentage of beneficial ownership is based on 437,173,162 shares of common
stock outstanding as of December 31, 2003, and 1,200,000 and 15,000,000 shares
of Series B and Series C preferred stock outstanding, respectively, on December
31, 2003.
(3) Arland D. Dunn is the managing partner of Fredericks Partners. In this
capacity, he has full voting control over the stock.
ITEM 14. CONTROLS AND PROCEDURES.
(a) Within the 90-day period prior to the filing date of this annual report, the
Company's chief executive officer and chief financial officer conducted an
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934). Based upon this
evaluation, the Company's chief executive officer and chief financial officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them of any material information relating to the Company that is
required to be disclosed by the Company in the reports it files or submits under
the Securities Exchange Act of 1934.
(b) There have not been any significant changes in the Company's internal
controls or in other factors that could significantly affect those controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)
Documents filed as part of this Report:
1. The following financial statements are incorporated by reference
from the Consolidated Financial Statements, Notes thereto and Reports of
Independent Public Accountants
Balance Sheet as of September 30, 2003 and December 31, 2003 and 2002.
Statement of Operations for the nine months ended September 30, 2003
and 3 months ended December 31, 2003, and years ended December 31,
2002, and 2001.
Statement of Cash Flows for the years ended December 31, 2003, 2002
Statement of Investments as of December 31, 2003.
Stockholders' Equity for the Years ended December 31, 2003, 2002, and
2001
Notes to Financial Statements.
Reports of Independent Public Accountants.
a. The following exhibits are filed herewith or incorporated by
reference as set forth below:
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
1 Articles of Incorporation of First National
Holding Corporation dated January 28, 1994
2 Certificate of Amendment to Articles of
Incorporation filed September 19, 1994
3 Certificate of Amendment to Articles of
Incorporation filed September 29, 1995
4 Articles of Merger filed May 19, 1995
5 Bylaws
8 Trident Technologies Sub-License Agreement
dated July 31, 1996
9 Limited Exclusive Patent License
10 Agreement between The Regents of the University
of California and Trident Technologies Corporation
11 License of Dept. of Treasury, Bureau
Of Alcohol, Tobacco and Firearms
12 Representation Agreement dated
May 3, 1999
13 Registry of Radioactive Sealed Sources
and Devices dated February 20, 1996
14 U.S. Nuclear Regulatory Commission
Materials License dated October 18, 1996
15 NRC Registration Amendment
dated August 22, 1997
16 Request to Rescind Confirmatory Order
dated September 14, 1998
17 Distribution and Agency Agreement
dated October 15, 1999
18 Radioactive Materials License dated
October 09, 1999
19 U.S. Bankruptcy Court Order Confirming
Plan of Reorganization dated February 1,
1995
23 Purchase Order dated April 3, 2000
24 Subsidiaries of the Registrant
25 MMC Acquisition Agreement
26 PRE 14C filed January 17, 2003
27 DEF 14C filed January 30, 2003
28 S-8 registration statement filed February 20, 2003
29 S-8 registration statement filed June 25, 2003
30 N-54A Election as a BDC filed August 27, 2003
31 1-E Notification of Stock sales filed August 28, 2003
32 2-E Registration Statement filed October 6, 2003
33 PRE 14C filed October 8, 2003 to increase Authorized Shares
34 DEF 14C filed October 20, 2003 increasing Authorized Shares
35 1-E Notification of Stock sales filed November 28, 2003
36 SEC EXHIBIT 14 - Code of Ethics
SEC EXHIBIT 31.1 - Certification of Chief Executive Officer Pursuant
to Rule 13a-14(a) and 15d-14(a)
SEC EXHIBIT 31.2 - Certification of Chief Financial Officer Pursuant
to Rule 13a-14(a) and 15d-14(a)
SEC EXHIBIT 32.1 - Certification of Chief Executive Officer Pursuant
to Section 1350 of Title 18 of the U.S. Code
SEC EXHIBIT 32.2 - Certification of Chief Financial Officer Pursuant
to Section 1350 of Title 18 of the U.S. Code
1- Incorporated by reference to the Form 10-SB filed with the SEC on
January 27, 2000.
2- Incorporated by reference to the Form 10-KSB filed with the SEC
on April 12, 2001.
b) Several Form 8-Ks were issued and submitted to the Securities and Exchange
Commission during the reporting period. These Form 8-K dealt with earnings
projections, Financial releases, resignation and election of directors, removal
of director and election of A replacement, the moving of the corporate offices
and correction of the terms of a reported Transaction.
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.
21st CENTURY TECHNOLOGIES, INC.
________________________________
(Registrant)
Date: March 30, 2004 By: /s/ ARLAND D. DUNN
_____________________________________
Arland D. Dunn
President and Chief Operating Officer
March 30, 2004 By: /s/ ALVIN L. DAHL
______________________________________
Alvin L. Dahl
Chief Financial Officer