10QSB 1 form10qsb063004.txt FORM 10-QSB (06-30-04) UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 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: 502,476,999 as of August 6, 2004. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] 21ST CENTURY TECHNOLOGIES, INC FORM 10-Q FOR THE QUARTER ENDED JUNE 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.
SIX MONTHS ENDED JUNE 30, _____________________________ 2004 2003 ___________ ___________ INCOME STATEMENT DATA: Operating income $ 810,963 $ 326,923 Net operating income before investment gains and losses 240,158 (810,562) Net income/Net increase in stockholders' equity resulting from earnings 1,976,425 (908,902) 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) 0.03 0.00 Dividends declared per common share 0.000 0.00 SELECTED PERIOD-END BALANCES: Total investment portfolio $15,430,555 $ 0.00 Total assets 16,835,800 1,564,309 Borrowings 1,519,396 1,128,294 Number of Portfolio Companies 11 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 JUNE 30, 2004 (Unaudited) Assets Investments: Investments in equity securities, at fair value (cost of $6,403,614) $ 9,743,700 Investments in and advances to controlled companies, at fair value (cost of $7,511,832) 2,922,650 Commercial loans, at fair value (cost of $2,764,205) 2,764,205 ___________ Total investments 15,430,555 Cash and cash equivalents 464,833 Receivables: Investment advisory and management fees 770,000 Interest and dividends 102,401 Other assets 68,011 ___________ $16,835,800 =========== Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued liabilities $ 89,811 Notes payable, controlled companies 1,228,430 Notes payable, others 201,155 ___________ Total liabilities 1,519,396 ___________ 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, 498,476,999 shares issued and outstanding 498,477 Additional paid in capital 25,677,516 Common stock subscriptions receivable - Accumulated deficit (9,516,323) Unrealized appreciation (depreciation) on investments (1,369,466) ___________ Total stockholders' equity 15,316,404 ___________ $16,835,800 =========== The accompanying notes are an integral part of the financial statements.
21ST CENTURY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) June 30, 2003 _____________ Assets CURRENT ASSETS: Cash and cash equivalents $ 1,010 Accounts Receivable, Net 56,083 Stock Subscription Receivable 126,000 Inventories 458,617 Prepaid Expenses 58,500 Advances to Stockholders 194,593 ____________ Total Current Assets 894,793 Property, Plant, and Equipment, Net 149,968 Other Assets, Net 519,548 ____________ Total Assets $ 1,564,309 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable-trade $ 206,354 Accounts Payable-other 510,779 ____________ Total Current Liabilities 717,133 OTHER LIABILITIES: Advances from Stockholders 319,542 Notes Payable 91,619 ____________ Total Other Liabilities 411,161 ____________ TOTAL LIABILITIES: 1,128,294 STOCKHOLDERS' EQUITY: Preferred Stock, issued and outstanding, 1,200,000 shares and 0 shares at $.001 par value at June 30, 2003 and 2002 1,200 Common Stock, issued and outstanding, 144,792,761 and 1,833,145 at $.001 par value at June 30, 2003 & 2002 respectively 144,793 Paid-in Capital 14,657,060 Retained Earnings (Deficit) (14,367,038) Treasury Stock 0 Stock Subsriptions 0 ____________ Total Stockholders' Equity 436,015 ____________ Total Liabilities and Stockholders' Equity $ 1,564,309 ============ See notes to financial statements.
21ST CENTURY TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS (UNAUDITED) 3 MONTHS 3 MONTHS 6 MONTHS 6 MONTHS ENDED ENDED ENDED ENDED 6/30/2004 6/302003 6/30/2004 6/30/2003 ___________ ___________ ___________ ___________ OPERATING INCOME: Manufacturing and other revenues 0 154,645 0 326,923 Investment Income 190,963 0 344233 0 Investment advisory and Management fees 620,000 0 770,000 ___________ ___________ ___________ ___________ Total Operating Income 810,963 154,645 1,114,233 326,923 Direct cost of sales 0 97,999 0 257,833 ___________ ___________ ___________ ___________ Gross Profit 810,963 56,645 1,114,233 69,090 OPERATING EXPENSES: Interest Expense 3,680 31,983 32,007 31,983 Advertising and selling 19,404 40,541 25,694 45,989 Compensation costs 189,988 103,450 332,434 185,541 General and administrative 215,957 380,317 463,255 505,173 Depreciation & amortization 5,160 55,209 20,685 110,966 ___________ ___________ ___________ ___________ Total Operating Expenses 434,189 611,500 874,075 879,652 ___________ ___________ ___________ ___________ Net operating income (loss)/ Investment income (losss) before investment gains and losses 376,774 -554,855 240,158 -810,562 Other income 0 112,590 -14,204 112,590 Loss on sale of assets 0 -210,930 0 -210,930 Net change in unrealized appreciation/ depreciation on investments 1,093,150 0 1,976,425 0 Income(loss) from continuing operations before income tax 1,469,924 -641,495 2,202,379 -908,902 Income tax provision(benefit) 0 0 0 0 Income (loss) from continuing operations 1,469,924 -641,495 2,202,379 -908,902 Net increase (decrease) in stockholders' equity resulting from net income(loss) 1,469,924 -641,495 2,202,379 -908,902 Earnings per Common Share, basic & diluted 0 0 0 0 Cash dividends declared per share 0 0 0 0 Weighted Average common shares outstanding 483,035,160 144,792,761 483,035,160 144,792,761 Weighted Average common shares outstanding-- fully diluted 498,035,160 144,792,761 498,035,160 144,792,761 See Notes to Financial Statements
21ST CENTURY TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, ___________________________ 2004 2003 ___________ ________ OPERATING ACTIVITIES (381,942) (575,584) Net cash provided by operating activities (381,942) (575,584) INVESTING ACTIVITIES Repayment of Commercial Loans 275,000 0.00 Investment in Equity Securities (778,614) 0.00 Investments in Commercial Loans (1,071,560) 0.00 Proceeds from sale of assets 0 750,000 Repayment of Stockholder Advances 0 3,375 Advances to Stockholders 0 (85,377) Net cash provided by (used in) investing activities (1,575,174) 667,998 FINANCING ACTIVITIES Issuance of common stock, net of costs 1,155,337 31,000 Repayment of Notes (86,071) (6,566) Repayment of stockholder advances (443,611) (231,238) Repayment of Stockholder Advances 0 115,400 Net cash (used in) provided by financing activities 625,655 (91,400) Increase (decrease) in cash and cash equivalents (1,331,461) 1,010 Cash and cash equivalents at beginning of period 1,796,294 0.00 Cash and cash equivalents at end of period $ 464,833 $ 1,010 SUPPLEMENTAL DISCLOSURES Interest paid $ 0 $ 0
21ST CENTURY TECHNOLOGIES, INC. SCHEDULE OF INVESTMENTS Title of Security Portfolio Company Industry Held by Company Cost _____________________________________ __________________ _________________ __________ Investments in equity securities: Jane Butel Corporation Food Services Common Stock $ 344,927 TransOne, Inc. Financial Services Common Stock 500,000 Primetime Call Centers Financial Services Common Stock 258,687 Pacific Development, Inc. Real Estate Series B Preferred 5,300,000 __________ 6,403,614 __________ Investments in and advances to controlled companies: American Impersonators, Inc Entertainment Common Stock 40,710 Credit Card Financial Corp Financial Services Common Stock 135,943 Paramount MultiServices, Inc. Financial Services Common Stock 1,410,105 Prizewise, Inc. Technologies Common Stock 260,585 Innovative Weaponry, Inc. Manufacturing Common Stock 3,313,876 Trident Technologies, Inc. Manufacturing Common Stock 1,893,798 Griffon USA, Inc. Inactive Common Stock 397,326 Hallmark Human Resources, Inc. Inactive Common Stock 51,489 Trade Partners International, Inc. Inactive Common Stock 1,000 Net Construction, Inc. Inactive Common Stock 6,000 U.S. Optics Technologies, Inc. Inactive Common Stock 1,000 __________ 7,511,832 __________ Commercial loans: City Wide Funding, Inc. Financial Services Debt 1,551,438 1920 Bel Air, LLC Real Estate Debt 900,000 Five unrelated individuals N/A Debt 312,767 __________ 2,764,205 __________ Total investments 16,679,651 ========== See notes to 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 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 our corporate income tax return for 2003. Interim consolidated financial statements of 21st are prepared in accordance with 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 June 30, 2004 and December 31, 2003, investments consisted of the following:
JUNE 30, 2004 December 31, 2003 ___________________________ ___________________________ COST FAIR VALUE Cost Fair Value ___________ ___________ ___________ ___________ Commercial loans $ 2,764,205 $ 2,764,205 $ 1,692,645 $ 1,692,645 Investments in equity securities 6,403,614 9,743,700 5,625,000 6,430,000 Investments in and advances to Portfolio Companies 7,511,832 2,922,650 6,467,320 2,316,430 ___________ ___________ ___________ ___________ Total $16,679,651 $15,430,555 $13,794,965 $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 June 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 June 30, 2004 and December 31, 2003 at cost and fair value was as follows excluding unearned income:
JUNE 30, 2004 December 31, 2003 ________________________________ _______________________________ INVESTMENTS PERCENTAGE OF Investments Percentage of AT COST TOTAL PORTFOLIO at Cost Total Portfolio ____________ _______________ ___________ _______________ Debt $ 2,764,205 16.6% $1,692,645 12.4% Equity 6,403,614 38.4% 5,625,000 41.4% Investments in and advances to controlled companies 7,511,832 45.0% 2,316,430 46.2% ____________________________________________________________________ Total $ 16,679,651 100.0% $3,602,192 100.0% ==================================================================== JUNE 30, 2004 December 31, 2003 __________________________________ __________________________________ INVESTMENTS AT PERCENTAGE OF Investments at Percentage of FAIR VALUE TOTAL PORTFOLIO Fair Value Total Portfolio ______________ _______________ ______________ _______________ Debt $ 2,764,205 17.9% $ 1,692,645 16.2% Equity 9,743,700 63.1% 6,430,000 61.6% Investments in and advances to controlled companies 2,922,650 19.0% 2,316,430 22.2% __________________________________________________________________________ Total $ 15,430,555 100.0% $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 June 30, 2004 and December 31, 2003 excluding unearned income:
JUNE 30, 2004 December 31, 2003 ________________________________ _______________________________ INVESTMENTS PERCENTAGE OF Investments Percentage of AT COST TOTAL PORTFOLIO at Cost Total Portfolio ____________ _______________ ___________ _______________ Food Services $ 344,927 2.3% $ 200,000 1.4% Financial Services 3,856,186 23.1% 531,878 3.9% Entertainment 40,710 0.00% 0 0% Real Estate 6,200,000 37.2% 6,550,000 47.5% Other 6,237,828 37.4% 6,503,087 47.2% ____________________________________________________________________ Total $ 16,679,651 100.0% $3,784,965 100.0% ==================================================================== JUNE 30, 2004 December 31, 2003 __________________________________ __________________________________ INVESTMENTS AT PERCENTAGE OF Investments at Percentage of FAIR VALUE TOTAL PORTFOLIO Fair Value Total Portfolio ______________ _______________ ______________ _______________ Food Services 345,000 2.2% 200,000 1.9% Financial Services 7,214,088 46.9% 1,336,878 12.8% Entertainment 40,700 0% 0 0% Real Estate 6,200,000 40.3% 6,550,000 62.8% Other 1,630,767 10.6% 2,352,197 22.5% ___________________________________________________________________ Total $ 15,430,555 100.0% $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 June 30, 2004 and 2003: (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) SIX MONTHS ENDED JUNE 30 _______________________________ 2004 2003 ____________ ____________ BASIC Net income/Net increase in stockholders' equity resulting from earnings $ 2,202,379 $ (908,902) Weighted average common shares outstanding 483,035,160 144,792,761 Earnings per common share-basic $ 0.00 $ 0.00 DILUTED Net income/Net increase in stockholders' equity resulting from earnings $ 2,202,379 $ (908,902) Weighted average common shares outstanding 498,035,160 144,792,761 Earnings per common share-diluted 0.00 0.00 NOTE 4. CONTINGENCIES 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. We have not accrued any loss accrual due to the appeals process and, in the opinion of management, the loss if any, will not have a material effect on these financial statements. Daniel Brailey, Richard Grob and James Mydlach have sued 21st Century Technologies, Inc. in the District Court of Clark County, Nevada. The matter bears Case No. A482378 and is pending in Department No. III in that jurisdiction. The case arises generally out of an alleged breach of contract. Settlement negotiations were underway as of the date of this report. The amount of any settlement is unknown as of the date of this report, therefore we have not accrued any costs associated with any anticipated settlement in these financial statements. It is anticipated that any costs associated with settlement discussions will not be material to these financial statements. We are also 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. NOTE 5. SUBSEQUENT EVENT On July 2, 2004, a settlement agreement was reached regarding Case No. A482378 above. The terms of the settlement were judged confidential by the Court. The amount of the settlement was not accrued in these financial statements and in the opinion of management was not material to these financial statements. On August 6, 2004, we acquired a 24% equity interest in the commons stock of DLC Construction, Inc. The acquisition resulted as an "equity kicker" to a $500,000 line of credit provided to DLC. The Company had previously announced a letter of intent to acquire 100% of the common stock of DLC Construction, Inc. During negotiations, it was determined that a more appropriate use of Company funds was to provide a line of credit that DLC Construction, Inc. could use for expansion purposes. As a part of the Line of Credit Agreement, 21st Century was given 24% of the common stock of DLC Construction, Inc. INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Stockholders 21st Century Technologies, Inc. Las Vegas, NV We have reviewed the accompanying balance sheet of 21st Century Technologies, Inc. as of June 30, 2004 and the related statements of operations for the three and six months ended June 30, 2004 and 2003 and the related statements of cash flow for the six months ended June 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 August 11, 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 $15,430,555 and $10,439,075 at June 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:
JUNE 30, 2004 December 31, 2003 _____________ _________________ ASSETS HELD: Majority Owned Companies (a): Investments in and advances to 2,922,650 2,316,430 Controlled Companies (b): Other Affiliates (c): Loans at fair value 2,764,205 1,692,645 Equity Investments at fair value 9,743,700 6,430,000
SIX MONTHS ENDED JUNE 30, ___________________________ 2004 2003 __________ __________ INCOME RECOGNIZED: From Majority Owned Companies (a): Interest and fee income $ 344,233 $ 158,168 From Controlled Companies (b): From Other Affiliates (c): Interest and fee income 770,000 1,000,000 Net change in unrealized appreciation (depreciation) on investments 1,976,425 868,000 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 June 30, 2004 and December 31, 2003, unrealized depreciation on investments totaled $1,369,466 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 June 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 six months ended June 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.) THREE MONTHS ENDED JUNE 30, 2004 VS. 2003 _______________________ CHANGE DUE TO: Asset growth $ 868,000 Increase in fee income 770,000 Advisory and other income 344,233 ___________ Total change in operating income $ 1,982,233 =========== Total operating income for the six months ended June 30, 2004 increased $787,310, or 241%, to $1,114,233 from $326,923 for the six months ended June 30, 2003. Operating income for the three months ended June 30, 2004 increased $656,318, or 424%, to $810,963 from $154,645 for the three months ended June 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 six months ended June 30, 2003 compared to the same period in 2004 is attributable to the following items: SIX MONTHS ENDED JUNE 30, 2004 VS. 2003 ______________________ CHANGE DUE TO: Advertising & Selling 24 Interest Expense (20,295) Depreciation & Amortization (90,281) Salaries and benefits 146,893 General and administrative expense 41,918 _________ Total change in operating expense $ (5,577) ========= Total operating expenses for the six months ended June 30, 2004 decreased $5,577 to $874,075 from $879,652 for the six months ended June 30, 2003. General and administrative expenses increased $41,918 for the six months ended June 30, 2004 as compared to the same period in 2003 primarily due to higher expenses related to servicing our portfolio as well as an increase in certain general and administrative expenses associated with 21st's expanded operations as a business development company. Total operating expenses decreased $177,311 to $434,189 for the 3 months ended June 30, 2004, from $611,500 for the three months ended June 30, 2003. NET OPERATING INCOME Net operating income/loss before investment gains and losses (NOI) for the six months ended June 30, 2004 totaled 240,158 compared with a loss of $(810,562) for the quarter ended June 30, 2003. NET INVESTMENT GAINS AND LOSSES There were no realized gains or losses for the six months ended June 30, 2004. The net change in unrealized appreciation (depreciation) on investments of $(1,976,425) for the six months ended June 30, 2004 consisted of $1,976,425 of net appreciation. The appreciation is related to further equity investment 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 will 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 totaled $1,469,924 and $2,202,379 for the three months and six months ended June 30, 2004 compared to $(641,495) and ($908,902) for the three months and six months ended June 30, 2003. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES CASH, CASH EQUIVALENTS AND CASH, SECURITIZATION ACCOUNTS At June 30, 2004 and December 31, 2003, we had $464,833 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 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, borrowings under our credit facilities and equity financings. During the third and fourth quarter of 2003, the Company raised $4,629,564 by selling 235,730,081 shares of common stock. This offering was completed in the first quarter of 2004, bringing the total cash raised to $5,000,000 and an additional 35,300,000 shares of common stock were issued under regulation E. Additionally, Compass Capital purchased 3,000,000 shares of restricted common stock for a total payment of $750,000. This was part of the commitment to purchase 10,000,000 shares $2,500,000 which resulted in a director representing Compass Capital being elected to the Board of Directors. BORROWINGS At June 30, 2004, we had aggregate outstanding borrowings of $1,519,396. 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 June 30, 2004, approximately 90% 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. 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 Lawsuit designated Case No. A482378 filed by Brailey, Mydlack, and Grob was settled on July 2, 2004. The terms of the settlement agreement were judged to be confidential. On August 6, 2004, we agreed to provide a $500,000 line of credit to DLC Construction, Inc., a Las Vegas, Nevada commercial general contracting company. The agreement provided 21st Century Technologies, Inc. with a 24% equity interest in the common stock of DLC. 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 21stG'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 We are also 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. For a more complete discussion of these legal proceedings, see the notes to the financial statements. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 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 DESCRIPTION OF DOCUMENT NUMBER Certification of President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350). Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350). (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 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 August 13, 2004. 21ST CENTURY TECHNOLOGIES /s/ KEVIN ROMNEY ___________________________ Kevin Romney Chief Executive Officer /s/ ALVIN L. DAHL ___________________________ Alvin L. Dahl Chief Financial Officer