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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number: 000-29209
21ST CENTURY TECHNOLOGIES, INC.
_________________________________________________________________
(Exact name of small business issuer as specified in its charter)
Nevada 48-1110566
____________________________________ _________________________________
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2700 W. Sahara Blvd., Suite 440, Las Vegas, NV 89102
________________________________________________________________
(Address of principal executive offices)
(702) 248-1588
___________________________
(Issuer's telephone number)
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 736,161,554 as of November 8, 2004.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
21ST CENTURY TECHNOLOGIES, INC
FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 2004
PART I. FINANCIAL INFORMATION
In this Quarterly Report, the "Company", "21st", "we", "us" and "our"
refer to 21st Century Technologies, Inc and its wholly owned portfolio companies
unless the context otherwise requires.
SELECTED FINANCIAL AND OTHER DATA
The selected financial and other data below should be read in conjunction
with our "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements (unaudited) and notes
thereto.
NINE MONTHS ENDED SEPTEMBER 30,
_______________________________
2004 2003
___________ ___________
INCOME STATEMENT DATA:
Operating income $ 1,651,311 $ 467,050
Net operating income before investment gains and (losses) 259,094 (1,481,229)
Net income/Net increase (decrease) in stockholders' equity
resulting from earnings 1,925,061 (1,615,527)
Increase(decrease) in stockholders' equity resulting from
non-operating charges (2,149,291) 0
PER COMMON SHARE DATA:
Earnings per common share basic and diluted $ 0.00 $ 0.00
Net operating income before investment gains and losses
per common share basic and diluted 0.00 0.00
Net asset value per common share (a) 0.021 0.00
Dividends declared per common share 0.000 0.00
SELECTED PERIOD-END BALANCES:
Total investment portfolio $16,233,093 $ 0.00
Total assets 17,659,958 2,880,041
Borrowings 1,728,985 1,327,266
Number of Portfolio Companies 9 7
Number of employees 156 21
(a) Based on common shares outstanding at period-end
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
21ST CENTURY TECHNOLOGIES, INC.
BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
September 30, 2004
__________________
ASSETS
INVESTMENTS:
Investments in equity securities, at fair value
(cost of $6,593,695) $ 10,076,800
Investments in and advances to controlled
companies, at fair value (cost of $7,992,925) 2,853,300
Commercial loans, at fair value (cost of $3,297,619) 3,302,993
____________
Total investments 16,233,093
Cash and cash equivalents 1,100,135
RECEIVABLES:
Investment advisory and management fees 125,000
Interest and dividends 125,690
Other Assets 76,040
____________
Total Assets $ 17,659,958
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts Payable and accrued liabilities $ 299,401
Notes payable, controlled companies 1,228,430
Lawsuit Settlement 3,500,000
Notes payable, others 201,154
____________
Total Liabilities 5,228,985
____________
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, 592,161,554 shares issued and outstanding 592,162
Additional paid in capital 27,081,506
Common stock subscriptions receivable -
Accumulated deficit (13,617,749)
Unrealized appreciation (depreciation) on investments (1,651,146)
____________
Total stockholders' equity 12,430,973
____________
$ 17,659,958
============
21ST CENTURY TECHNOLOGIES, INC.
BALANCE SHEET
SEPTEMBER 30, 2003
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 875,884
Accounts Receivable, Net 75,169
Stock Subscription Receivable 673,522
Inventories 525,832
Prepaid Expenses 32,752
Advances to Stockholders 77,418
___________
Total Current Assets 2,260,577
Property, Plant, and Equipment, Net 121,706
Other Assets, Net 497,758
___________
TOTAL ASSETS $ 2,880,041
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable-trade $ 128,269
Accounts Payable-other 456,604
___________
Total Current Liabilities 584,873
OTHER LIABILITIES:
Notes Payable-Stockholder 505,853
Notes Payable 236,540
___________
Total Other Liabilities 742,393
___________
TOTAL LIABILITIES: 1,327,266
STOCKHOLDERS' EQUITY:
Preferred stock, issued and Outstanding:
Series B--1,200,000 shares and 0 shares;
Series C --15,000,000 shares and 0 at
$.001 par value at September 30, 2003
and 2002 16,200
Common Stock, issued 233,220,101 and
1,999,271 and outstanding shares at $.001
par value at September 30, 2003 233,220
Paid in Capital 16,377,018
Retained Earnings (Deficit) (15,073,663)
Treasury Stock 0
Stock Subscriptions 0
___________
Total stockholders' Equity 1,552,775
___________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,880,041
===========
See Notes to Financial Statements
21ST CENTURY TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED
9/30/2004 9/30/2003 9/30/2004 9/30/2003
___________ ___________ ___________ ___________
OPERATING INCOME:
Manufacturing and other revenues 0 140,127 0 467,050
Investment Income 182,078 0 526,311 0
Investment advisory and
Management fees 355,000 0 1,125,000
___________ ___________ ___________ ___________
Total Operating Income 537,078 140,127 1,651,311 467,050
Direct cost of sales 0 106,251 0 364,084
___________ ___________ ___________ ___________
Gross Profit 537,078 33,876 1,651,311 102,966
OPERATING EXPENSES:
Interest Expense 19,035 3,975 51,042 35,958
Advertising and selling 745 24,325 29,439 70,314
Compensation costs 235,367 118,391 567,800 303,932
General and administrative 307,769 541,700 736,589 1,046,872
Depreciation & amortization (13,338) 52,110 7,347 163,076
___________ ___________ ___________ ___________
Total Operating Expenses 549,578 740,501 1,392,217 1,620,152
___________ ___________ ___________ ___________
Net operating income (loss)/
Investment income (losss) before
investment gains and losses (12,500) (706,625) 259,094 (1,517,186)
Other income (14,574) 0 (28,778) 112,590
Loss on sale of assets 0 0 0 (210,930)
Net change in unrealized appreciation/
depreciation on investments (281,680) 0 1,694,745 0
Income(loss) from continuing
operations before income tax (308,754) (706,625) 1,925,061 (1,615,526)
Lawsuit Settlement Expense (3,500,000) 0 (3,500,000) 0
Loss on Abandoned Projects (574,352) 0 (574,352) 0
Income tax provision(benefit) 0 0 0 0
Income (loss) from continuing operations (4,383,106) (706,625) (2,149,291) (1,615,526)
Net increase (decrease) in stockholders'
equity resulting from net income(loss) (4,383,106) (706,625) (2,149,291) (1,615,526)
Earnings per Common Share, basic & diluted 0 0 0 0
Cash dividends declared per share 0 0 0 0
Weighted Average common shares outstanding 545,319,277 144,792,761 545,319,277 144,792,761
Weighted Average common shares outstanding--
fully diluted 560,319,277 159,792,761 560,319,277 159,792,761
The accompanying notes are an integral part of these financial statements
21ST CENTURY TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
___________________________
2004 2003
___________ ___________
OPERATING ACTIVITIES $ 587,459 $(1,251,031)
Net cash provided by (used in) operating 587,459 (1,251,031)
INVESTING ACTIVITIES
Repayment of Commercial Loans 275,000
Investment in Equity Securities (2,018,766)
Investments in Commercial Loans (1,610,348)
Proceeds from Sale of Assets 750,000
Repayment of Stockholder Advances 3,375
Advances to Stockholders (85,377)
Net cash provided by (used in) investing (3,354,114) 667,998
FINANCING ACTIVITIES
Issuance of common stock, net of costs 2,595,337 1,107,914
Repayment of Notes (86,071) (6,566)
Repayment of stockholder advances (443,611) (231,238)
Advances from Stockholders 443,886
Net cash (used in) provided by financing 2,065,655 1,458,917
Increase (decrease) in cash and cash equivalents (701,000) 875,884
Cash and cash equivalents at beginning of period 1,796,294 0
Cash and cash equivalents at end of period $ 1,095,294 $ 875,884
The accompanying notes are an integral part of these financial statements
21ST CENTURY TECHNOLOGIES, INC.
SCHEDULE OF INVESTMENTS
Title of Security September 30, 2004
Portfolio Company Industry Held by Company Fair Value Cost
Investments in equity securities:
Jane Butel Corporation Food Services Common Stock 8.90% $ 461,800 $ 533,695
TransOne, Inc. Financial Services Common Stock 16.20% 4,140,000 585,000
DLC Construction, Inc. Construction Common Stock 24.00% 175,000 175,000
Pacific Development, Inc. Real Estate Series B Preferred 15.38% 5,300,000 5,300,000
___________________________
10,076,800 6,593,695
___________________________
Investments in and advances to
controlled companies:
Paramount MultiServices, Inc. Financial Services Common Stock 100% 1,428,000 1,478,105
Prizewise, Inc. Technologies Common Stock 51% 367,300 427,332
Innovative Weaponry, Inc. Manufacturing Common Stock 100% 181,000 3,553,308
Trident Technologies, Inc. Manufacturing Common Stock 100% 719,000 2,061,365
Griffon USA, Inc. Inactive Common Stock 100% 9,000 398,326
Hallmark Human Resources, Inc. Inactive Common Stock 100% 45,000 51,489
Trade Partners International, Inc. Inactive Common Stock 100% 48,000 1,000
Net Construction, Inc. Inactive Common Stock 100% 8,000 21,000
U.S. Optics Technologies, Inc. Inactive Common Stock 100% 48,000 1,000
___________________________
2,853,300 7,992,925
___________________________
Commercial loans:
City Wide Funding, Inc. Financial Services Debt 1,551,438 1,546,064
1920 Bel Air, LLC Real Estate Debt 900,000 900,000
TransOne, Inc. Financial Services Debt 533,788 533,788
Four unrelated individuals N/A Debt 317,767 317,767
___________________________
3,302,993 3,297,619
___________________________
Total investments 16,233,093 17,884,239
===========================
The accompanying notes are an integral part of the financial statements
21ST CENTURY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS AND UNAUDITED INTERIM FINANCIAL STATEMENTS BASIS
OF PRESENTATION
21st Century Technologies, Inc. ("21st" or the "Company" or "we" or "us"
or "our") is a solutions-focused financial services company that provides
financing and advisory services to companies throughout the United States. The
Company is an 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.
The Company did not elect to be treated for federal income tax purposes as
a regulated investment company under the Internal Revenue Code with the filing
of our corporate income tax return for 2003.
Interim financial statements of 21st are prepared in accordance with U.S.
generally accepted accounting principles ("GAAP") for interim financial
information and pursuant to the requirements for reporting on Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying
annual consolidated financial statements prepared in accordance with GAAP are
omitted. In the opinion of management, all adjustments, consisting solely of
normal recurring accruals, considered necessary for the fair presentation of
financial statements for the interim periods, have been included. The current
period's results of operations are not necessarily indicative of results that
ultimately may be achieved for the year. The interim unaudited financial
statements and notes thereto, which have been reviewed by our independent
accountants, should be read in conjunction with the financial statements and
notes thereto included in the Company's Form 10-K for the fiscal year ended
December 31, 2003, as filed with the SEC.
The accompanying financial statements reflect the accounts of 21st Century
Technologies, Inc., 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.
NOTE 2. INVESTMENTS
21st Century changed to a Business Development Company, effective October
1, 2003. Therefore, the prior periods are no longer directly comparable and we
have chosen to compare our investment growth with the most directly comparable
period. As of September 30, 2004 and December 31, 2003, investments consisted of
the following:
SEPTEMBER 30, 2004 December 31, 2003
___________________________ ___________________________
COST FAIR VALUE Cost Fair Value
___________ ___________ ___________ ___________
Commercial loans $ 3,297,619 $ 3,302,993 $ 1,692,645 $ 1,692,645
Investments in equity securities 6,593,695 10,076,800 5,625,000 6,430,000
Investments in and advances to Portfolio
Companies 7,992,925 2,853,300 6,467,320 2,316,430
___________________________ ___________________________
Total $17,884,239 $16,233,093 $13,784,965 $10,439,075
=========================== ===========================
21st's customer base includes primarily small- and medium-sized private
companies in various industry sectors. The proceeds of the loans to these
companies are generally used for buyouts, growth, acquisitions, liquidity,
refinancings and restructurings. In addition, we may occasionally make loans to
individuals who are principals in these companies where the proceeds are used
for or in connection with the operations or capitalization of such companies.
The company's loans generally have stated maturities at origination that range
from 3 months to 5 years. Customers typically pay an origination fee based on a
percentage of the commitment amount. They also often pay a management advisory
fee.
At September 30, 2004, some loans had associated equity interests or other
provisions designed to provide the Company with an enhanced internal rate of
return. These equity and equity-like instruments generally do not produce a
current return, but are held for potential investment appreciation and capital
gains. In some cases, some or all of the deferred interest may be exchanged as
the exercise price for the option to purchase warrants. The equity interests and
warrants and options to purchase warrants often include registration rights,
which allow 21st to register the securities after public offerings.
The composition of 21st's portfolio of publicly and non-publicly traded
investments as of September 30, 2004 and December 31, 2003 at cost and fair
value was as follows excluding unearned income:
SEPTEMBER 30, 2004 December 31, 2003
_______________________________ _______________________________
INVESTMENTS PERCENTAGE OF Investments Percentage of
AT COST TOTAL PORTFOLIO at Cost Total Portfolio
_______________________________ _______________________________
Debt $ 3,297,619 18.4% $ 1,692,645 12.3%
Equity 6,593,695 36.7% 5,625,000 40.8%
Investments in and advances to
controlled companies 7,992,925 44.9% 6,467,320 46.9%
______________________________________________________________
Total $17,884,239 100.0% $13,784,965 100.0%
==============================================================
SEPTEMBER 30, 2004 December 31, 2003
________________________________ ________________________________
INVESTMENTS PERCENTAGE OF Investments Percentage of
AT FAIR VALUE TOTAL PORTFOLIO at Fair Value Total Portfolio
________________________________ ________________________________
Debt $ 3,302,993 20.3% $ 1,692,645 16.2%
Equity 10,076,800 62.1% 6,430,000 61.6%
Investments in and advances to
controlled companies 2,853,300 17.6% 2,316,430 22.2%
______________________________________________________________
Total $16,233,093 100.0% $10,439,075 100.0%
==============================================================
Set forth below are tables showing the composition of 21st's portfolio by
industry sector at cost and fair value at September 30, 2004 and December 31,
2003 excluding unearned income:
SEPTEMBER 30, 2004 December 31, 2003
_______________________________ _______________________________
INVESTMENTS PERCENTAGE OF Investments Percentage of
AT COST TOTAL PORTFOLIO at Cost Total Portfolio
_______________________________ _______________________________
Food Services $ 533,695 5.2% $ 200,000 1.4%
Financial Services 3,609,169 20.2% 531,878 3.9%
0 0%
Real Estate 6,200,000 34.7% 6,550,000 47.5%
Other 7,141, 375 39.9% 6,503,087 47.2%
______________________________________________________________
Total $17,884,239 100.0% $13,784,965 100.0%
==============================================================
SEPTEMBER 30, 2004 December 31, 2003
________________________________ ________________________________
INVESTMENTS PERCENTAGE OF Investments Percentage of
AT FAIR VALUE TOTAL PORTFOLIO at Fair Value Total Portfolio
________________________________ ________________________________
Food Services 461,800 2.9% 200,000 1.9%
Financial Services 7,119,458 43.9% 1,336,878 12.8%
Entertainment 0 0%
Real Estate 6,200,000 38.2% 6,550,000 62.8%
Other 2,441,835 15.0% 2,352,197 22.5%
______________________________________________________________
Total $16,233,093 100.0% $10,439,075 100.0%
==============================================================
NOTE 3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per common share for the six months ended September 30, 2004 and 2003:
NINE MONTHS ENDED SEPTEMBER 30
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2004 2003
____________ ____________
BASIC
Net income/Net increase in
stockholders' equity
resulting from earnings $ (4,383,106) $ (1,615,527)
Weighted average common
shares outstanding 545,319,277 189,006,431
Earnings per common
share-basic $ 0.00 $ 0.00
DILUTED
Net income/Net increase in
stockholders' equity
resulting from earnings $ (4,383,106) $ (1,615,527)
Weighted average common
shares outstanding 560,319,277 204,006,431
Earnings per common
share-diluted 0.00 0.00
NOTE 4. CONTINGENCIES
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. We have not accrued any
loss accrual due to the appeals process, because in the opinion of management,
the loss is not probable.
From time to time, we may also be a party to certain legal proceedings
incidental to the normal course of our business including disputes under
contracts. While the outcome of legal proceedings cannot be predicted with
certainty, we do not expect that any proceedings will have a material effect
upon our financial condition or results of operations.
NOTE 5. WRITE OFF OF NON PRODUCTIVE INVESTMENTS
During the third quarter, it was determined that Credit Card Financial
Corporation, American Impersonators, Inc. and Prime Time, Inc. were no longer
viable entities. Therefore, the investment in these three corporations was
written off against income in this quarter.
NOTE 6. SUBSEQUENT EVENTS
Subsequent to the date of these financials, the first payment was made to
Patricia Wilson which reduced the outstanding amount of the Settlement. The
balance of the settlement will be paid in varying installments which continue
through April 1, 2009.
Subsequent to the date of these financials, the first installment totaling
$345,454.54 of the $950,000.00 commitment to prizeWize.com was paid. The next
installment is due January 17, 2005 in the amount of $302,272.73 with a final
payment of $302,272.73 due on April 17, 2005. The initial payment increased our
ownership position to 57.8%. Payment of the additional two installments will
increase 21st Century's ownership to 70%.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
21st Century Technologies, Inc.
Las Vegas, NV
We have reviewed the accompanying balance sheets of 21st Century Technologies,
Inc. as of September 30, 2004 and 2003 and the related statements of operations
for the three and nine months ended September 30, 2004 and 2003 and the related
statements of cash flow for the nine months ended September 30, 2004 and 2003.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
Turner, Stone & Company LLP
Certified Public Accountants
Dallas, Texas
November 5, 2004
ITEM 2. 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 Consolidated Financial and Other Data, the Selected Operating
Data and our Consolidated Financial Statements and notes thereto appearing
elsewhere in this Quarterly Report. This Quarterly Report, 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)economic downturns can disproportionately impact
certain sectors in which we concentrate, and any future economic downturn could
disproportionately impact the industries in which we concentrate causing us to
suffer losses in our portfolio and experience diminished demand for capital in
these industry sectors, (3) a contraction of available credit and/or an
inability to access the equity markets could impair our lending and investment
activities, (4) interest rate volatility could adversely affect our results, (5)
the risks associated with the possible disruption in the Company's operations
due to terrorism and (6) 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 Quarterly 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 Quarterly Report.
OVERVIEW
21st Century Technologies, Inc. is a solutions-focused financial services
company providing financing and advisory services to small and medium-sized
companies throughout the United States. Effective October 1, 2003, we became an
internally managed, non-diversified, closed-end investment company that elected
to be treated as a business development company under the Investment Company Act
of 1940. 21st Century Technologies, Inc. will not elect to be treated for
federal income tax purposes as a regulated investment company under the Internal
Revenue Code with the filing of its federal corporate income tax return for
2003.
PORTFOLIO COMPOSITION AND ASSET QUALITY
Our primary business is lending to and investing in businesses, primarily
in the financial services, and technology industry sectors, through investments
in senior debt, subordinated debt and equity-based investments, including
warrants and equity appreciation rights. Though we intend to increase our level
of subordinated debt and equity-based investments, we expect a substantial
majority of our portfolio will continue to consist of investments in portfolio
companies. The total fair value of investments in non-publicly traded securities
was $17,075,141 and $10,439,075 at September 30, 2004 and December 31, 2003,
respectively (exclusive of unearned income).
The following table summarizes 21st's assets held and income from Majority
Owned Companies, Controlled Companies and Other Affiliates:
SEPTEMBER 30, December 31,
2004 2003
_____________ ____________
ASSETS HELD:
Majority Owned Companies (a):
Investments in and advances to 2,853,300 2,316,430
Controlled Companies (b):
Other Affiliates (c):
Loans at fair value 3,302,993 1,692,645
Equity Investments at fair value 10,076,800 6,430,000
NINE MONTHS ENDED SEPT 30,
2004 2003
INCOME RECOGNIZED:
From Majority Owned Companies (a):
Interest and fee income $ 526,311 $ 158,168
From Controlled Companies (b):
From Other Affiliates (c):
Interest and fee income 1,125,000 1,000,000
Net change in unrealized appreciation
(depreciation) on investments 300,000 868,000
Realized losses on investments -- --
(a) Majority owned companies are generally defined under the Investment Company
Act of 1940 as companies in which 21st Century owns more than 50% of the
voting securities of the company.
(b) Controlled companies are generally defined under the Investment Company Act
of 1940 as companies in which 21st Century owns more than 25% but not more
than 50% of the voting securities of the company.
(c) Other affiliates are generally defined under the Investment Company Act of
1940 as companies in which 21st Century owns at least 5% but not more than
25% of the voting securities of the company.
ASSET QUALITY
Asset quality is generally a function of our underwriting and ongoing
management of our investment portfolio. As a business development company, our
loans and equity investments are carried at market value or, in the absence of
market value, at fair value as determined by our board of directors in good
faith on a quarterly basis. As of September 30, 2004 and December 31, 2003,
unrealized depreciation on investments totaled $1,651,146 and $3,345,891,
respectively. For additional information on the change in unrealized
depreciation on investments, see the section entitled "Reconciliation of Net
Operating Income to Net Increase (Decrease) in Stockholders' Equity from
Earnings".
We monitor loan concentrations in our portfolio, both on an individual
loan basis and on a sector or industry basis, to manage overall portfolio
performance due to specific customer issues or specific industry issues.
We monitor individual customer's financial trends in order to assess the
appropriate course of action with respect to each customer and to evaluate
overall portfolio quality. We closely monitor the status and performance of each
individual investment on a quarterly and, in some cases, a monthly or more
frequent basis. Because we are a provider of long-term privately negotiated
investment capital to growth-oriented companies and we actively manage our
investments through our contract structure, we do not believe that contract
exceptions such as breaches of contractual covenants or late delivery of
financial statements are necessarily an indication of deterioration in the
credit quality or the need to pursue remedies or an active workout of a
portfolio investment.
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.
As of September 30, 2004 and December 31, 2003, none of the loans to our
other affiliates were on non-accrual status.
When principal and interest on a loan is not paid within the applicable
grace period, we will contact the customer for collection. At that time, we will
make a determination as to the extent of the problem, if any. We will then
pursue a commitment for immediate payment and will begin to more actively
monitor the investment. We will formulate strategies to optimize the resolution
process and will begin the process of restructuring the investment to better
reflect the current financial performance of the customer. Such a restructuring
may involve deferring payments of principal and interest, adjusting interest
rates or warrant positions, imposing additional fees, amending financial or
operating covenants or converting debt to equity. In general, in order to
compensate us for any enhanced risk, we receive appropriate compensation from
the customer in connection with a restructuring. During the process of
monitoring a loan that is out of compliance, we will in appropriate
circumstances send a notice of non-compliance outlining the specific defaults
that have occurred and preserving our remedies, and initiate a review of the
collateral. When a restructuring is not the most appropriate course of action,
we may determine to pursue remedies available under our loan documents or at law
to minimize any potential losses, including initiating foreclosure and/or
liquidation proceedings.
OPERATING INCOME
Operating income includes interest income on commercial loans, advisory
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. Most of our loans contain lending features that adjust the
rate margin based on the financial and operating performance of the borrower,
which generally occurs quarterly.
The change in operating income from the nine months ended September 30,
2003 compared to the same period in 2004 is attributable to the following items:
(Due to the conversion to a Business Development Company, effective October 1,
2003, the periods are not directly comparable.)
NINE MONTHS ENDED
SEPTEMBER 30, 2004
__________________
CHANGE DUE TO:
Asset growth $14,779,917
Increase in fee income 1,125,000
Interest and other income 526,311
Manufacturing income 0
___________
Total change in operating income $ 1,184,261
===========
Total operating income for the nine months ended September 30, 2004
increased $1,184,261, or 354%, to $1,651,311 from $467,050 for the nine months
ended September 30, 2003. Operating income for the three months ended September
30, 2004 increased $396,951, or 383%, to $537,078 from $140,127 for the three
months ended September 30, 2003.
OPERATING EXPENSES
Operating expenses include interest expense on borrowings, including
amortization of deferred debt issuance costs, employee compensation, and general
and administrative expenses.
The change in operating expenses from the nine months September 30, 2003
compared to the same period in 2004 is attributable to the following items:
NINE MONTHS ENDED
SEPTEMBER 30, 2004 VS. 2003
___________________________
CHANGE DUE TO:
Advertising & Selling (40,875)
Interest Expense 15,084
Depreciation & Amortization (155,730)
Salaries and benefits 263,868
General and administrative expense (310,283)
__________
Total change in operating expense $ (227,935)
==========
Total operating expenses for the nine months ended September 30, 2004
decreased $227,935 to $1,392,217 from $1,620,152 for the nine months ended
September 30, 2003. General and administrative expenses decreased $310,283 for
the nine months ended September 30, 2004 as compared to the same period in 2003
primarily due to higher expenses related to operating our Haltom City facility
and moving the corporate offices to Las Vegas, Nevada. Total operating expenses
decreased $190,923 to $549,578 for the 3 months ended September 30, 2004, from
$740,051 for the three months ended September 30, 2003.
NET OPERATING INCOME
Net operating income/loss before investment gains and losses (NOI) for the
nine months ended September 30, 2004 totaled 259,094 compared with a loss of
$(1,517,186) for the quarter ended September 30, 2003.
NET INVESTMENT GAINS AND LOSSES
There were no realized gains or losses for the three and nine months ended
September 30, 2004.
The net change in unrealized appreciation (depreciation) on investments of
$(1,694,745) for the nine months ended September 30, 2004 consisted of
$2,276,425 of net appreciation less $581,680 advanced to controlled companies.
The appreciation is related to additional equity interest granted and an
increase in the valuation of TransOne, Inc. (a provider of debit card services
with major contracts in process).
INCOME TAXES
We are taxed under Subchapter C of the Internal Revenue Code. We did not elect
to be a regulated investment company under Subchapter M of the Internal Revenue
Code with the filing of our federal corporate income tax return for 2003.
NET INCOME
Net income (loss) totaled $(4,383,106) and $(2,149,291)for the three
months and nine months ended September 30, 2004 compared to $(706,625) and
($1,615,527) for the three months and nine months ended September 30, 2003.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH, CASH EQUIVALENTS AND CASH, SECURITIZATION ACCOUNTS
At September 30, 2004 and December 31, 2003, we had $1,100,135 and
$1,796,294, respectively, in cash and cash equivalents. Our objective is to
maintain sufficient cash on hand to cover current funding requirements and
operations.
LIQUIDITY AND CAPITAL RESOURCES
We expect our cash on hand, future equity offerings, and cash generated
from operations to be adequate to meet our cash needs at our current level of
operations. We generally fund new originations using cash on hand, borrowings
under our credit facilities and equity financings.
During the third quarter of 2004, the Company raised $1,440,000 by selling
80,000,000 shares of common stock issued under Regulation E.
BORROWINGS
At September 30, 2004, we had aggregate outstanding borrowings of
$1,724,144.
At December 31, 2003, we had aggregate outstanding borrowings of
$2,005,224.
See Note 3 to the Financial Statements for further discussion of our
borrowings.
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. We believe that the following are some of the more
critical judgment areas in the application of our accounting policies that
currently affect our financial condition and results of operations.
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. We currently do not have any interest
income of this nature, but we may during future periods.
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. 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 September 30, 2004, approximately 80% 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.
AT DECEMBER 31, 2003, THE BOARD OF DIRECTORS ELECTED TO EMPLOY INDEPENDENT
BUSINESS VALUATION CONSULTANTS TO PROVIDE A VALUATION OF OUR EXISTING PORTFOLIO
COMPANIES AND CERTAIN OTHER INVESTMENTS. SAID VALUATIONS WERE ACCEPTED BY THE
BOARD OF DIRECTORS AND WERE UTILIZED IN THE PREPARATION OF THE AUDITED FINANCIAL
STATEMENTS FOR 2003 AND IN THESE UNAUDITED FINANCIAL STATEMENTS. DUE TO
INCREASED CONTRACTS OUTSTANDING, THE BOARD OF DIRECTORS ELECTED TO REQUEST A
MID-YEAR RE-VALUATION OF TRANSONE, INC. THIS VALUATION WAS PERFORMED BY AN
INDEPENDENT OUTSIDE VALUATION CONSULTANT AND RESULTED IN AN INCREASED VALUATION
OF THIS INVESTMENT. THE BOARD OF DIRECTORS REVIEWS THE VALUATION OF EACH
INVESTMENT ON A QUARTERLY BASIS. AS OF SEPTEMBER 30, 2003, THERE WAS NO CHANGE
IN VALUES OTHER THAN AN INCREASED INVESTMENT IN TRANSONE, INC. PRIZEWISE,
TRIDENT, AND THE OTHER INVESTMENTS WILL BE EVALUATED AT DECEMBER 31, 2004 TO
REFLECT INCREASES IN INVESTMENT AS WELL AS INCREASE/DECREASE VALUE.
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 DEVELOPMENT
The first payment in settlement of the Patricia Wilson judgment was made
subsequent to these financial statements. The balance of the settlement amount
will be paid in varying installments and will be completed on April 1, 2009.
The first installment of the $950,000.00 commitment to PrizeWise.com has been
made subsequent to the date of these financial statements. Payment of the first
installment increased 21st Century's ownership position to approximately 60%.
Payment of the remaining two installments will increase the ownership position
to 70%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate sensitivity refers to the change in earnings that may result
from the changes in the level of interest rates. Our net interest income can be
affected by changes in various interest rates, including LIBOR, prime rates and
commercial paper rates.
As a business development company, we use a greater portion of equity to
fund our business. Accordingly, other things being equal, increases in interest
rates will result in greater increases in our net interest income and reductions
in interest rates will result in greater decreases in our net interest income
compared with the effects of interest rate changes on our results under more
highly leveraged capital structures.
Currently, we do not engage in hedging activities because we have determined
that the cost of hedging the risks associated with interest rate changes
outweighs the risk reduction benefit. We monitor this position on an ongoing
basis.
ITEM 4. CONTROLS AND PROCEDURES
(a) Within the 90 days prior to the date of this report, 21st carried out
an evaluation, under the supervision and with the participation of
21st's management, including 21st's Chief Executive Officer and
President and Chief Financial Officer, of the effectiveness of the
design and operation of 21st's disclosure controls and procedures (as
defined in Rule 13a-14 of the Securities Exchange Act of 1934). Based
on that evaluation, the Chief Executive Officer and President and the
Chief Financial Officer have concluded that 21st's current disclosure
controls and procedures are effective in timely alerting them of
material information relating to 21st that is required to be disclosed
in 21st's SEC filings.
(b) There have not been any significant changes in the internal controls
of 21st or other factors that could significantly affect these
internal controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 arose 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 was included in the
Company's Form 8- K filed as of September 26, 2001. On August 23, 2004, a jury
found in favor of Mrs. Wilson and awarded judgments as follows: $6,329,173.17
against 21st Century; $637,723.16 jointly against 21st Century and Ken Wilson;
and $115,099.32 against Ken Wilson, individually . Directors Mydlach, Gregor,
and Rausch were released from the lawsuit. The Company and Ms. Wilson reached a
settlement agreement on September 30, 2004, the terms of which are confidential.
The settlement agreement did not relieve Ken Wilson of his individual liability
under the judgment.
Daniel Brailey, Richard Grob and James Mydlach sued 21st Century Technologies,
Inc. in the District Court of Clark County, Nevada. The case arose generally out
of an alleged breach of contract. An agreement was reached in July of 2004, the
terms of which were confidential. The costs associated with this settlement were
not material to these financial statements.
We may also be a party to certain legal proceedings incidental to the normal
course of our business including disputes under contracts. 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
A form 1-E filing was made on August 26, 2004 which indicated the beginning a
$5,000,000 capital raise under regulation E.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 30, 2004, the Company filed a PRE 14C notifying stockholders of a
special meeting to be held on October 29, 2004. The DEF 14C was filed on October
11, 2004. The purpose of the meeting was to vote to authorize two billion shares
of Common Stock of the Company and to authorize the Company's Board of
Directors, without consent of the stockholders of the Corporation, to adopt any
recapitalization affecting the outstanding shares of capital stock of the
corporation by effecting a forward or reverse split of all of the outstanding
shares of any class of capital stock of the corporation, with appropriate
adjustments to the corporation's capital account, provided that the
recapitalization does not require any amendment to the Articles of Incorporation
of the corporation.
Only shareholders' of record on October 1, 2004 were entitled to vote at this
meeting. No proxies were requested since the principal shareholders who
collectively represent 612,000,000 shares or 54% of the 1,130,686,999 voting
shares outstanding on October 1, 2004 were either present or voted in absentia.
All of the principal shareholders voted in favor of the proposal.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Listed below are the exhibits which are filed as part of this report
(according to the number assigned to them in Item 601 of Regulation S-K):
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
31.1 Certification of President and Chief Executive Officer
Pursuant to Section 302
31.2 Certification of Chief Financial Officer Pursuant to Section
302
32.1 Certification of President and Chief Executive Officer
Pursuant to Section 906
32.2 Certification of Chief Financial Officer Pursuant to Section
906
(b) Form 8-K--
January 13, 2004 - we filed a report on Form 8-K regarding the acquisition
of Paramount MultiServices, Inc.
January 26, 2004 - we filed a report on Form 8-K regarding an amendment to
the October 30, 2003 earnings report
January 27, 2004 - we filed a report on Form 8-K regarding a PR earnings
prediction of January 20, 2003
March 19,2004 - we filed a report on Form 8-K regarding a PR earnings
prediction on March 18, 2004
March 23, 2004 - we filed a report on Form 8-K regarding a PR earnings
prediction on March 22, 2004
March 25, 2004 - we filed a report on Form 8-K regarding a PR earnings
prediction on March 24, 2004
April 2, 2004 -- we filed a report on Form 8-K regarding an earnings
prediction
April 19, 2004 - we filed a report on Form 8-K regarding a lawsuit that had
been filed
April 19, 2004 - we filed a report on Form 8-K regarding the NRC fine
levied on IWI
April 22, 2004 - we filed a report on Form 8-K regarding the death of the
CEO and election of new officers and directors.
May 14, 2004 - we filed a report on Form 8-K regarding an earnings
prediction
May 18, 2004 - we filed a report on Form 8-K regarding an earnings
prediction
June 30, 2004 - we filed a Form 2-E paper filing regarding capital raised
July 14, 2004 - we filed a report on Form 8-K announcing the settlement of
a lawsuit
July 26, 2004 - we filed a report on Form 8-K regarding an earnings
prediction
August 9, 2004 - we filed a report on Form 8-K regarding the resignation of
the Corporate Secretary
August 26, 2004 - we filed a report on Form 8-K reporting the jury decision
in the Patricia Wilson lawsuit
September 15, 2004 - we filed a report on Form 8-K regarding the departure
of a Director and Principal Officer
October 6, 2004 - we filed a report on Form 8-K regarding the settlement
agreement for the Patricia Wilson judgment
November 5, 2004 - we filed a report on Form 8-K regarding the change in
transfer agent
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on November 15, 2004.
21ST CENTURY TECHNOLOGIES
/s/ JOHN R. DUMBLE
___________________________
John R. Dumble
Chief Executive Officer
and President
/s/ JOHN R. DUMBLE
___________________________
John R. Dumble
Acting Chief Financial Officer