SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Mark One
--------
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
--- EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2001.
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number 0-26433
TITANIUM HOLDINGS GROUP, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 88-0386415
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1023 Morales Street
San Antonio, Texas 78207
(Address of Principal Executive Offices, including ZIP Code)
(210) 227-9161
(Issuer's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $0.001 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days: Yes X No ____
---
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB____.
State the issuer's revenues for its most recent fiscal year:
$4,517,722.
As of March 18, 2002, the aggregate market value of the Common Stock of
the Registrant held by non-affiliates computed by reference to the price at
which the common equity was sold, or the average bid and asked prices of such
common equity. (See definition of affiliate in Rule 12b-2 of the Exchange Act)
was approximately $1,351,686 (for purposes of calculating this amount, only
directors, officers, and beneficial owners of 5% or more of the capital stock of
the Registrant have been deemed affiliates).
The number of shares of the Common Stock of the Registrant outstanding
as of March 20, 2002 was 5,572,810.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2002
Annual Meeting of Shareholders to be held on June 14, 2002, are incorporated by
reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes ______ No X
------------
================================================================================
TITANIUM HOLDINGS GROUP, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED DECEMBER 31, 2001
INDEX
<TABLE>
<S> <C>
PART I.............................................................................2
ITEM 1. DESCRIPTION OF BUSINESS.............................................2
ITEM 2. DESCRIPTION OF PROPERTY.............................................6
ITEM 3. LEGAL PROCEEDINGS...................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................7
PART II............................................................................8
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION................................................9
ITEM 7. FINANCIAL STATEMENTS...............................................16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...............................................16
PART III..........................................................................17
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT..................17
ITEM 10. EXECUTIVE COMPENSATION.............................................17
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................17
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...................................17
</TABLE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT
Formation and Acquisitions
Titanium Holdings Group Inc., formerly known as Enviro-Clean of
America, Inc. (the "Company") was incorporated under Nevada law on December 9,
1997. Shortly after incorporation, the Company implemented a consolidation
business strategy relating to the marketing and distribution of sanitary
supplies and related paper products. In January 1999, the Company completed the
acquisitions of Kandel & Son, Inc. ("Kandel & Son"), a New York-based sanitary
supply distribution company and NISSCO/Sunline, Inc., a Florida-based marketing
group ("NISSCO"). NISSCO and Kandel & Son were subsequently disposed of on
September 29, 2000 and June 29, 2001 respectively. (See Business Development -
Dispositions).
In August 1999, the Company acquired Cleaning Ideas Corp. and its
wholly owned subsidiary, Sanivac, Inc., which does business under its own name,
as well as under the trade name "Davis Manufacturing Company" (collectively,
"CIC"). CIC is a San Antonio, Texas based manufacturer and distributor of
cleaning supplies, with a particular focus on chemical-based products. CIC has
been in business for over 70 years and gives the Company a geographic presence
in the Southwestern United States. Under the Davis Manufacturing name, CIC
manufactures over 300 products for distribution. CIC operates 9 retail cleaning
supplies stores that sell products bearing the "Cleaning Ideas" private label
brand name. The retail stores focus on selling industrial quality products to
consumers and small businesses. (See Business Issuer - Products, Sales and
Marketing). Prior to its acquisition, Randall K. Davis, President, Chief
Executive Officer and Chairman of the Board of the Company, and his parents
owned CIC.
Also in August 1999, the Company acquired Superior Chemical & Supply,
Inc. ("Superior"), a Bowling Green, Kentucky-based distributor of cleaning
supplies. Superior was subsequently disposed of on June 29, 2001 (See Business
Development - Dispositions).
In December 1999, the Company completed the acquisition of June
Supply-San Antonio, Inc., ("June Supply"), a Texas janitorial supply
distributor. The assets of June Supply were subsequently disposed of on December
22, 2000 (See Business Development - Dispositions).
Dispositions
On September 29, 2000 the Company completed the sale of the assets of
NISSCO to ebuyexpress.com, L.L.C. at a sale price of $100,000. The Company's
Board of Directors (the "Board") authorized the disposition of NISSCO after a
large core group of members indicated they would be leaving the NISSCO
membership and creating a separate competing buying group. The sale of the
assets of NISSCO resulted in a net loss on the disposal of the subsidiary of
approximately $1.9 million (See Notes to Consolidated Financial Statements -
Note 2 - Acquisitions and Dispositions).
On December 22, 2000, the Company completed the sale of the assets of
June Supply to York Supply Limited, ("York") at a sales price of $1,400,000. The
Board authorized the final disposition of June Supply subsequent to its decision
to discontinue the consolidation and acquisition strategy and after
2
experiencing disappointing revenues by June Supply for the fiscal year 2000.
(See Business Development - Change of Course). The sale of the assets of June
Supply resulted in a net loss on the disposal of the subsidiary of approximately
$2.1 million. (See Notes to Consolidated Financial Statements - Note 2 -
Acquisitions and Dispositions).
York is a Texas limited partnership whose general partner is York
Supply Management Company, Inc., a Texas corporation ("York Supply Corp"). Alan
Stafford, former President and one of the two shareholders of June Supply prior
to the Company's acquisition, is the sole limited partner of York, holding a 99%
stake in the partnership. Mr. Stafford is also the sole shareholder, director
and officer of York Supply Corp. Both York and York Supply Corp were formed for
the purpose of completing the acquisition of the assets of June Supply and have
no prior history of operations.
On July 5, 2001, the Company completed the sale of the assets of
Superior, to Superior One Source, Inc. ("One Source") for gross proceeds of
$533,334. The Board authorized the final disposition of Superior based on (i)
the Board's decision to discontinue the consolidation strategy, (ii) decreased
revenues and significant account losses by Superior, and (iii) the opportunity
to relieve the Company's payment obligation under the terms of the Superior
acquisition (See Business Development - Change of Course). The disposition of
Superior was supported by an independent third party fairness opinion. The sale
of the assets of Superior resulted in a net loss on the disposal of
approximately $950,000 (See Notes to Consolidated Financial Statements - Note 2
- Acquisitions and Dispositions).
One Source is a Kentucky corporation whose sole shareholder is Stephen
Haynes, the former President of Superior. One Source was formed specifically for
the purpose of completing the acquisition of the assets of Superior and has no
prior history of operations. There are no other material relationships between
One Source and the Company, Superior, or any of the affiliates, directors or
officers of the Company.
On July 6, 2001, the Company completed the sale of all of the capital
stock of Kandel & Son to Richard Kandel, former Chairman of the Board and Chief
Executive Officer of the Company, for consideration consisting of the following:
(i) 1,000,000 shares of the Company's Common Stock and (ii) 300,000 shares of
IVAX Diagnostics, Inc ("IVD").
The Company retired the 1,000,000 Company shares, reducing the
outstanding common stock of the Company by approximately 15%, and retained the
IVD shares as an equity investment. In addition, as part of the transaction, Mr.
Kandel tendered his resignation as Chief Executive Officer and Chairman of the
Board of the Company and released his rights to any compensation under his
employment agreement with the Company. There are no other material relationships
between the Company, Kandel & Son, or any of the affiliates, directors or
officers of the Company and the disposition of Kandel & Son was supported by an
independent third party fairness opinion. The sale of Kandel & Son resulted in a
net gain from the disposal of approximately $1.15 million. (See Notes to
Consolidated Financial Statements - Note 2 - Acquisitions and Dispositions).
Change of Course
In December 2000, the Board unanimously agreed to discontinue the
acquisition and consolidation of janitorial supply companies as a result of
changes in the marketplace. Some of the reasons for the Board's decision to
discontinue the strategy were:
. a limited number of available companies that met the Company's
acquisition criteria,
. inflated acquisition pricing on the few suitable available targets,
3
. inadequate investment interest under the acquisition and
consolidation strategy as applied to the janitorial supply market,
and
. disappointing sales and business outlook of current subsidiaries
and potential targets.
In order to facilitate a new direction for the Company, the Board
formed a special Mergers and Acquisition Committee (the "M&A Committee") to
explore strategic alternatives available in the marketplace with the goal of
enhancing shareholder value. The Company will continue to hold and operate CIC,
while the M&A Committee attempts to identify business combination alternatives,
including, but not limited to, potential divestitures, dispositions,
acquisitions, mergers and strategic alliances. In addition, on February 9, 2001,
the Company engaged the services of Harter Financial, Inc. to provide consulting
and advisory services in regard to possible strategic alternatives. (See
Management's Discussion and Analysis of Financial Condition and Results of
Operation)
At a special meeting of shareholders of the Company on August 31, 2001,
the Company's shareholders approved a motion to amend the Company's Articles of
Incorporation in order to change the name of the Company from "Enviro-Clean of
America, Inc." to "Titanium Holdings Group, Inc." The change of name was
recommended and supported by the Board for the purpose of reflecting the
Company's change in business strategy to public stockholders.
BUSINESS OF COMPANY
Although the Company is actively seeking strategic alternatives, the
Company continues to operate as a holding company, the principal asset of which
is all the issued and outstanding capital stock of CIC. In addition, the Company
continues to monitor the performance of its equity investment of 1,228,500
shares of common stock of IVD and its 19.9% stake in equip2move.com Corporation
("equip2move") (See Notes to the Consolidated Financial Statements - Note 10-
Related Party Transaction) as well as note investments with Excalibur I, LLC
("Excalibur").
Through CIC, the Company engages in the manufacturing, purchasing,
marketing and distribution of janitorial and sanitary supplies and related paper
products. Although the Company has discontinued its consolidation and
acquisition strategy and will not acquire additional janitorial supply
companies, its present plan is to continue to operate CIC in the same manner it
has in the past.
The Market for the Company's Products
The market for sanitary/janitorial supplies and services in the United
States is substantial. According to the International Sanitary Supply
Association's most recent survey in 1997, the sanitary/janitorial distribution
industry had $16.7 billion in sales. Specifically, the survey cited the
following breakdown of the leading product groups by total sales:
. Paper and Plastics, at approximately $6.6 billion in total sales,
. Chemical Products (cleaners, degreasers, etc.), at approximately
$6.1 billion in total sales, and
. Janitorial Supplies and Accessories, at approximately $1.9 billion
in sales.
According to the same survey, the following customers were cited as the
leading purchasers of the industry products:
. Industrial and Manufacturing Companies, at approximately $3.6
billion in aggregate purchases.
. Commercial Property Owners, at approximately $2 billion in
aggregate purchases,
4
. Educational Institutions, at approximately $2 billion in aggregate
purchases,
. Health Care Companies, at approximately $1.6 billion in aggregate
purchases.
Additional market opportunity exists with respect to sales to
restaurants/clubs, retail establishments, residential properties, government,
recreational facilities, transportation companies, hotels/motels, and religious
facilities.
Products, Sales and Marketing
CIC is a San Antonio- based regional manufacturer, distributor and
retail vendor of cleaning supplies to customers located within Southern Texas.
CIC distributes over 1,000 products to customers mainly located in
Texas. The Company competes principally on the basis of price and value-added
services such as next-day delivery, training, customer support and technological
innovation in distribution.
Products distributed by CIC are generally shipped by truck or other
common carriers to local distributors who keep an inventory of the most popular
products. Less commonly ordered products can be shipped via UPS or other
delivery service for next day delivery or by the same common carriers for less
time-sensitive deliveries.
The Company purchases products, through master distributors, from a
wide variety of manufacturers. Master distributor refers to a large distributor
with national or regional distribution capabilities. Master distributors the
Company uses include Bunzl/Papercraft, La Gass Bros., Inc. and Sweet Paper
Company. The Company believes that virtually all of its products are available
from multiple sources and the loss of one or even several sources would not have
a material adverse effect on the Company's business. Further, the Company does
not have any ongoing or long-term contractual obligations with any local or
master distributors. Similarly, no single customer accounts for more than 5% of
the Company's sales on an annual basis. Accordingly, the Company is not overly
dependent on any one or few customers.
Competition
The market for janitorial/sanitary supplies has only a few large,
well-capitalized competitors and consists of a large number of small companies
servicing local and regional markets. The larger suppliers in the industry
include:
. Unisource Worldwide
. W.W. Grainger
. Corporate Express
. Waxie Sanitary Supply
Most of these corporations have multiple divisions, with one of those
being in the sanitary/janitorial supply industry. The Company is not a
significant competitor in the industry in terms of annual sales, and its market
share is negligible.
Trademarks and Research and Development
Except for CIC's trademarks on the names "Cleaning Ideas" and
"Sanivac," the Company has no trademarks, patents, or other licenses that are
material to the conduct of its business, nor has there been any material
research and development expenses.
5
Employees
The Company, mainly through CIC, currently employs approximately forty-
five (45) full-time employees.
Governmental Regulations
There are a number of government agencies that set standards and
regulations on the use and handling of chemical products and for sanitary
conditions. Included in these agencies are the Occupational Safety and Health
Administration (OSHA) which regulates chemicals related to occupational safety,
the Environmental Protection Agency (EPA) chartered to protect land, air, and
water, and the Consumer Product Safety Commission (CPSC) which regulates use and
labeling of chemicals and products. These agencies issue rulings that directly
affect the practices and purchases of the sanitary/janitorial supplier's
customers.
Maintenance and distribution of many of the Company's products are
subject to extensive regulation at the federal, state and local levels. In
particular, the Company is subject to regulations involving storage of hazardous
materials promulgated by the Federal Environmental Protection Agency and the
Occupational Safety and Health Act. As such, the Company's business is dependent
upon continued compliance with governmental regulations regarding the operations
of the Company's facilities. The Company believes that it is in substantial
compliance with all such regulations that are applicable to its business.
However, failure to maintain and demonstrate compliance with all such
regulations could result in the preclusion of handling certain product lines,
result in mandated clean up expenditures, and could have a material adverse
effect on the business and prospects of the Company.
The costs to the Company of complying with environmental regulations
are not material.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive and administrative offices are located at 1023
Morales Street, San Antonio, TX 78207, where the CIC offices are located. At
this time the Company does not pay rent at this location, as CIC is the lessee
for the premises. CIC leases its facilities from their former owners. Management
of the Company believes that the rental rates for each of these facilities is at
least as favorable as market terms. Rent expense for CIC is estimated to be
approximately $282,400 for the next 12 months.
The Company does not invest in real estate, other than as incident to
its business.
ITEM 3. LEGAL PROCEEDINGS.
On March 13, 2000, upon a request from Zero.NET, Inc., a Delaware
corporation ("ZERO") to negotiate a transaction, the Company negotiated and
entered into a Stock Purchase Agreement (the "Agreement"), between the Company
and ZERO, in which the Company sold 1,000,000 shares of b2bstores.com, Inc.
("b2b") restricted common stock to ZERO at $7.00 per share. The gross proceeds
on the sale of the b2b stock were $7,000,000 less a brokerage commission, paid
to Zero's brokerage firm, of $250,000. On January 29, 2001, the Company received
a letter from outside counsel of ZERO (the "Letter"), which stated that ZERO
desired to rescind the Agreement, claiming there was a material failure of
consideration for the purchase of the b2b stock by ZERO. In response to the
Letter, the Company has denied any right of rescission by ZERO and, on February
6, 2001, filed a petition for declaratory judgment in State District Court of
Bexar County, Texas (the "Court"). The Company has petitioned the
6
Court for a declaration that the Agreement remains in effect and is binding on
the parties and that the purported rescission of the Agreement by ZERO is
ineffective and invalid. There has been no further contact between the Company
and ZERO since the Company's original receipt of the Letter. ZERO removed the
state court case to the United States District Court for the Western District of
Texas, San Antonio Division, Civil Action No. SA 01 CV 364 EP in May 2001
pursuant to diversity of citizenship. A scheduling order was subsequently
entered. Some written discovery has been conducted and the parties have
exchanged witness and exhibit lists. The case is set for trial June 3, 2002. The
Company intends to vigorously pursue a legal validation of their rights under
the Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the stockholders during
the fourth quarter of the fiscal year ended December 31, 2001.
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock is traded on the NASD OTC Bulletin Board
(the "OTC") under the symbol "TTHG." Prior to the Company's name change to
Titanium Holdings Group, Inc. in August 2001, the Company's Common Stock was
traded on the OTC under the symbol ("EVCL"). There is currently a limited
trading market for the Company's Common Stock. The following chart lists the
high and low closing bid prices for the shares of the Company's Common Stock for
each quarter within the last two years as reported by the National Quotation
Bureau, L.C.C. These prices are between dealers and do not include retail
markups, markdowns or other fees and commissions, and may not represent actual
transactions.
2000 High Low
--------------------------------------------------------
January 1 - March 31 $7.000 $0.125
April 1 - June 30 $6.125 $2.000
July 1 - September 30 $4.250 $2.000
October 1 - December 31 $3.000 $1.125
2001 High Low
--------------------------------------------------------
January 1 - March 31 $2.25 $0.625
April 1 -June 30 $1.30 $0.55
July 1- September 30 $1.10 $0.75
October 1 - December 31 $1.00 $0.25
On March 18, 2002, the closing price of the Company's Common Stock was
$0.40.
HOLDERS
There were 251 record holders of the Company's Common Stock as of March
23, 2002.
DIVIDENDS
The Company has paid no dividends on its Common Stock to date, nor does
it anticipate doing so in the foreseeable future. Any future determination to
pay dividends will be at the discretion of the Board and will be dependent upon
there being sufficient capital and surplus as required by applicable law, the
Company's financial condition, results of operations, capital requirements and
such other factors as the Board deems relevant. There can be no assurance that
the Company will ever choose to declare such a dividend or that if it did that
such funds would be legally available for payment of such dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On August 23, 2001, the Company began a private placement of a minimum
of $500,000 and maximum of $2,000,000 of secured promissory notes (the "9 3/4%
Notes"). The 9 3/4% Notes have a three year maturity date, a simple interest
rate of 9 3/4%, and are secured by certain Company shares of IVAX Diagnostics,
Inc. pursuant to an pledge and security agreement and an escrow agreement. As of
the final
8
closing of December 31, 2001, the Company sold an aggregate of $1,855,000 worth
of the 9 3/4% Notes to approximately 17 accredited investors. The 9 3/4% Notes
also contain a provision which allows the payee to demand prepayment within
thirty days upon the delivery of a notice. As of March 20, 2002, four (4) note
holders had demanded prepayments totaling $540,000 and the Company had delivered
$440,000 to such holders. As of March 20, 2002, 680,000 shares of IVD shares
were held in escrow for the sole purpose of securing the 9 3/4% Notes. The
proceeds from the offering of the 9 3/4% Notes were used to prepay outstanding
12 3/4% promissory notes which had previously been issued by the Company and for
general working capital purposes.
The sale of securities in this transaction was made pursuant to
subscription agreements and investor questionnaire containing representations
and warranties, and eliciting information intended to enable the Company to
establish the facts and circumstances entitling the Company to rely upon the
exemptions from the registration requirements of the Securities Act under Rule
506 of Regulation D. In addition, the Rule 506 offering did not involve general
solicitation or advertising and all of the notes issued bear a restrictive
legend as described in the subscription agreements.
On January 25, 2002, the Company began a new private placement of a
minimum of $25,000 and maximum of $1,000,000 of secured promissory notes (the
"Second 9 3/4% Notes"). The Second 9 3/4% Notes have terms that are
substantially similar to the 9 3/4% Notes. As of the March 19, 2002, the Company
had sold an aggregate of $170,000 worth of the Second 9 3/4% Notes to 3
accredited investors. This offering of the Second 9 3/4% Notes is being
conducted in reliance upon the exemption from registration provided by Rule 506
of Regulation D. The offering of the Second 9 3/4% Notes has a termination date
of May 30, 2002.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The matters discussed in this Form 10-KSB contain certain
forward-looking statements and involve risks and uncertainties (including
changing market conditions, competitive and regulatory matters, etc.) detailed
in the disclosure contained in this Form 10-KSB and the other filings with the
Securities and Exchange Commission (the "Commission") made by the Company from
time to time. The discussion of the Company's liquidity, capital resources and
results of operations, including forward-looking statements pertaining to such
matters, does not take into account the effect of any changes to the Company's
operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
This item should be read in conjunction with the financial statements
contained elsewhere in the report.
GENERAL
In December 2000, the Board unanimously voted to discontinue its
business plan of acquisition and consolidation of janitorial supply companies.
The Board is currently exploring strategic alternatives outside the janitorial
industry which could include a variety of business combinations, including, but
not limited to, divestitures, dispositions, acquisitions, mergers and strategic
alliances. The Company has formed the M&A Committee and engaged the services of
Harter Financial, Inc. to facilitate the search for an acceptable strategic
alternative. Additionally, the Company will explore alternative business plans
which may be incorporated into its current structure. In the interim, the
Company intends to continue to operate its remaining operating subsidiary, CIC,
monitor its
9
investments in IVD, equip2move and Excalibur, and assess other potential
opportunities in the marketplace.
Prior to the Board's decision to discontinue its consolidation strategy
in the janitorial industry, the Company's business model focused on acquiring
janitorial distribution companies which met the Board's defined criteria. Since
the implementation of the strategy in January 1999 until its discontinuance in
December 2000, the Company had acquired five operating subsidiaries in the
janitorial industry, including Kandel & Son, NISSCO, CIC, Superior and June
Supply and had completed substantial investments in two companies,
b2bstores.com, Inc. (now known as IVAX Diagnostics, Inc.) and equip2move.
Subsequently, the Company has disposed of four of its operating subsidiaries,
including the disposals of; (i) the sale of the assets of NISSCO on September
29, 2000, (ii) the sale of the assets of June Supply on December 22, 2000, (iii)
the sale of all of the capital stock of Kandel & Son as of June 29, 2001, and
(iv) the sale of the assets of Superior as of June 29, 2001. The dispositions of
the subsidiaries, although substantially reducing overall revenues, have
increased cash flows, due to the significant reduction in interest expenses and
principal payment expenses relating to the acquisition debt.
RESULTS OF OPERATIONS
Results of operations for the year ended December 31, 2001 and 2000:
The net sales decreased $543,832 for the year ended December 31, 2001
("2001") as compared to the year ended December 31, 2000 ("2000") from
$5,061,554 to $4,517,722. The gross profit percentage increased from 39% for
2000 to 43% for 2001. The decrease in sales is mostly attributable to the
emergence of much stronger competition in 2001. The increase in gross profit
percentage is a result of a decrease in "drop-shipments", which yield a much
lower gross profit.
Operating expenses decreased from $4,944,026 for 2000 to $3,170,241 for
2001, approximately 36%. The majority of this decrease, approximately
$1,850,000, was due to the liquidation of debt from the subsidiary dispositions,
thereby reducing related interest expense accordingly. Additionally,
amortization of goodwill related to acquisitions amounted to approximately
$352,000 during 2001 and $814,000 during 2000. This reduction as well as the
reduction in most other operating expenses is due to the disposal of four
subsidiaries subsequent to June 30, 2001.
The Company had a net loss in 2001 of $902,835, as compared to net
income of $552,792, in 2000. This reduction was mainly a result of a one time
sale of marketable securities in 2000 of 1,000,000 shares of IVD restricted
stock, which provided net proceeds to the Company of $6,750,000.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2001, the Company's cash flows provided
by operations was $156,543, as a result of a net loss of $902,835 and
adjustments to arrive at cash provided by operating activities of depreciation
and amortization and non-cash interest of $551,840, a decrease in accounts
receivable of $17,414, a decrease in prepaid expenses and other current assets
of $992,169, a loss on an equity investment of $212,112, offset by a gain on
sale of subsidiaries of $208,200, shares returned for legal services of $46,875,
a net change in net assets of discontinued operations of $94,130, accrued
interest income, net of $103,668, an increase in inventories of $10,434 and a
decrease in accounts payable and accrued expenses of $250,850.
The Company has no material research and development expenditures nor
does it anticipate that it will have any such expenditures in the next twelve
months.
10
The Company has budgeted for approximately $100,000 in capital
improvements in 2002, primarily for equipment replacements at CIC's
manufacturing facility. Other than as specified in the above sentence and the
possible disbursement for increased expenses for legal, printing, accounting and
other services associated with the search for or implementation of a strategic
alternative, the Company does not expect its capital requirements to increase in
any substantive amount during the calendar year 2002. The Company's future
liquidity and capital funding requirements will depend on the extent to which
the Company is successful in determining and implementing a new direction for
the Company. The Company expects that capital requirements for calendar year
2002 will be met with the proceeds from the sale of an investment holding in
March 2000, the proceeds from a private placement offerings in August 2001 and
January 2002, the income earned from an investment in a promissory note and the
continued operating revenues from the Company's subsidiary.
The Company's contractual obligations and commitments are summarized as follows:
<TABLE>
<CAPTION>
Obligation Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Notes Payable $1,655,000 1,655,000 0 0 0
Long-Term Debt 26,280 6,570 19,710 0 0
Operating Leases 745,900 282,400 444,200 19,300 0
---------------------------------------------------------------------------------------------------------------------
Total Contractual
Obligations $2,427,180 1,943,970 463,910 19,300 0
=====================================================================================================================
</TABLE>
GENERAL RISK FACTORS
Lack of an Operating Business Plan
The Company was organized in December 1997 and, in 1999, implemented an
acquisition and consolidation strategy in the janitorial supply industry. Within
two (2) years, the Company had acquired five wholly-owned operating subsidiaries
in the janitorial industry. Subsequently, four of the five subsidiaries were
sold. In December 2000, the Board voted to discontinue the acquisition and
consolidation strategy due to; (i) a limited number of available companies that
met the Company's required acquisition criteria, (ii) the inflated acquisition
pricing on the few suitable available targets, and (iii) the Company's inability
to attract a high level of investment interest under this strategy.
Since that time, the Board has not implemented a subsequent operating
business plan or determined a particular business direction for the Company. The
Company, therefore, continues to operate its remaining subsidiary, CIC, and
monitor its outstanding investments. If the Company fails to identify a suitable
business direction, the Company's present operating revenues may not sustain
operating expenses, which could result in significant losses for the Company.
Operating Losses
From its incorporation on December 9, 1997, through the present, the
Company has incurred significant operating losses. Such losses reflect the cost
of the implementation of the acquisition and consolidation strategy, as well as
the ultimate cost of disposal of the subsidiaries and abandonment of the
11
strategy. The Company also anticipates that, in the near future, while the Board
seeks an alternative strategy, it will incur net-operating losses. While
management believes that it can develop a plan of operations that, when
implemented, will permit the Company to achieve and sustain profitable
operations, no assurance can be given that the Company's operations will be
profitable in the future.
Limited Operating History
The Company has a limited operating history upon which to evaluate the
performance and prospects of the Company. There can be no assurance that the
Company will operate profitably, that management of the Company will be
successful in developing a strategic alternative or that a chosen strategic
alternative will be successful. There can be no assurance that the Company will
generate sufficient revenues to meet its expenses or to achieve or maintain
profitability.
Risk of Registration Under the Investment Company Act of 1940.
The Investment Company Act of 1940 requires registration for companies
that are engaged primarily in the business of investing, reinvesting, and
owning, holding or trading in securities. A company may be deemed to be an
investment company if it owns "investment securities" with a value exceeding 40%
of the value of its total assets (excluding government securities and cash
items) on an unconsolidated basis, unless an exemption or safe harbor applies.
Securities issued by companies other than majority-owned subsidiaries are
generally counted as investment securities for purposes of the Investment
Company Act. In light of the Company's minority equity investments in emerging
companies and the possibility that the Board may pursue similar opportunities in
the marketplace, the Company could have a substantial amount of its assets
consist of equity interests in companies which are not majority-owned by the
Company. The Company's equity interests in companies that are not majority-owned
subsidiaries could be counted as investment securities. Registration as an
investment company would subject the Company to restrictions that are
inconsistent with its business strategy. The Company may have to take actions,
including buying, refraining from buying, selling or refraining from selling
securities, when it would otherwise not choose to in order to continue to avoid
registration under the Investment Company Act.
Indemnification and Limitation of Liability
Under the Nevada Revised Statutes (the "Statutes"), the Company shall
have the power to eliminate the personal liability of the directors and officers
of the Company for monetary damages to the fullest extent possible under the
Statutes or other applicable law. These provisions eliminate the liability of
directors or officers to the Company and its stockholders for monetary damages
arising out of any violation of a director of his fiduciary duty of due care.
Under the Statutes, the Company may, by a majority of its disinterested
directors, shareholders, or, in some cases, by independent legal counsel,
indemnify any officer or director against expenses actually and reasonably
incurred, if such person acted in good faith in a manner reasonably believed to
be in the best interests of the Company, and in the case of any criminal action
or proceeding, if such person had no reasonable cause to believe his conduct was
unlawful. The Company may indemnify any officer or director against expenses and
amounts actually paid or incurred in settlement not exceeding, in the judgment
of the Board of Directors, estimated expenses of litigation. Indemnification
and/or advancement of expenses provided by the Statutes are not exclusive and
the Company may make any further advancement or payment of expenses. However, no
indemnification and/or advancement will be made to any officer or director if
such person shall have been adjudged to be liable, unless, upon
12
application and determination of the court that in view of the circumstances in
the case, such person is fairly and reasonably entitled to indemnification.
The Commission has taken the position that indemnification of officers
and directors for liability under the federal securities laws may be against
public policy and, therefore, unenforceable.
Potential Loss from Lawsuit
On March 13, 2000, the Company entered into a Stock Purchase Agreement
between the Company and ZERO, in which the Company sold 1,000,000 shares of b2b
restricted common stock to ZERO at $7.00 per share (See "Legal Proceedings").
The net proceeds on the sale of the b2b stock were $6,750,000. ZERO has since
put the Company on notice that it desires to rescind the Stock Purchase
Agreement due to a material failure of consideration for the purchase of the b2b
stock. The Company has denied any right of rescission by ZERO and began legal
proceedings to contest such rescission claim. If a court were to determine that
a declaration favorable to the Company was not proper and ZERO were to pursue
and have the attempted rescission legally validated, it would have a material
adverse effect on the Company.
Decreased Value in IVD Shares
The Company holds 1,228,500 shares of IVD common stock (See "Business
of Company"). This investment represents a significant amount of the Company's
total assets. There is substantial fluctuation in the value of the IVD common
stock as traded on the American Stock Exchange. Due to the significant holdings
by the Company of the IVD common stock, a material depreciation in the value of
the IVD common stock would have a direct and materially adverse effect on the
Company and its ability to continue to do business or seek a strategic
alternative (See Business Development - Change of Course). In addition, the 9
3/4 Notes are secured by approximately 680,000 shares of the Company's IVD
common stock holdings. A significant decrease in the value of the IVD common
stock would likely cause the holders of the 9 3/4% Notes to request a 30 day
prepayment by the Company, which would significantly impact the Company's cash
reserves and ability to secure working capital.
Possible Default on Company Investment
Since June 2001, the Company has invested an aggregate of $1,425,000 in
Excalibur promissory notes (See "Business of Company"). This investment
represents a significant amount of the Company's total assets. Payments on the
promissory notes are payable on a quarterly basis until 150% of the principal
amount invested is paid back or upon the end of a two year period from the time
of the investment, whichever comes first. The return on the promissory notes is
based on the ability of Excalibur to arrange purchases of charged off debt
portfolios and its ability to then arrange for the collection of the debt. If
Excalibur were unable to secure debt portfolios at an advantageous price or
arrange for successful collection of the debt, their ability to service the
promissory notes and return the interest and principal due would be affected and
the Company's investment would be at risk. The loss of a significant amount of
the Company's investment with Excalibur would have a material adverse effect on
the Company.
RISK FACTORS RELATING TO THE JANITORIAL SUPPLY INDUSTRY
The Company, through CIC, continues to operate in the janitorial supply
industry. The following risk factors relate to that area of the Company's
operations.
13
Competition
The sanitary and janitorial supplies market is highly competitive and
is served by numerous small, owner-operated private companies, public companies
and several large regional and national companies. In addition, relatively few
barriers prevent entry into the industry. As a result, any organization that has
adequate financial resources and access to a minimum of technical cleaning
expertise may become a competitor of the Company. Competition in the industry
depends on a number of factors, including price. Certain of the Company's
competitors may have lower overhead cost structures and may, therefore, be able
to provide their products and services at lower rates than the Company can
provide such products and services. Many of these competitors have long-standing
operations and long-standing relationships with large customers such as
hospitals and governmental agencies. There can be no assurance that the
Company's competitors will not be able to use their competitive advantages in
competing in price, offering more extensive lines of products or more favorable
payment terms or otherwise, resulting in material adverse effects on the
business of the Company. In addition, some of the Company's competitors are
larger and have greater resources than are available to the Company. The Company
cannot be certain that its competitors will not develop the expertise,
experience, and resources to provide products and services that are superior in
both price and quality to the products and services of the Company. Similarly,
the Company cannot be certain that it will be able to maintain or enhance its
competitive position in the market.
Government Regulation
Maintenance and distribution of many of the Company's products are
subject to extensive regulation at the federal, state, and local levels. In
particular, the Company is subject to regulations involving storage of hazardous
materials promulgated by the Federal Environmental Protection Agency and the
Occupational Safety and Health Act. As such, the Company's business is dependent
upon continued compliance with governmental regulations regarding the operations
of the Company's facilities. The Company believes that it is in substantial
compliance with all such regulations that are applicable to its business.
However, failure to maintain and demonstrate compliance with all such
regulations could result in the preclusion of handling certain product lines and
in mandated clean up expenditures.
Potential Exposure to Environmental Liabilities
The operations of the Company are subject to various environmental laws
and regulations, including those dealing with the handling and disposal of waste
products. As part of the cleaning and janitorial supplies manufacturing process,
one or more of the operating Subsidiaries may store and use some raw materials
that are deemed to be hazardous materials and are closely regulated. As a result
of past and future operations, the Company may be required to incur
environmental remediation costs and other clean-up expenses. In addition, the
Company cannot be certain that it will be able to identify or be indemnified for
all potential liabilities relating to any acquired business.
There can be no assurance that the aggregate amount of any
environmental liabilities that might be asserted against the Company or any or
all of its operating Subsidiaries, in any such proceeding will not be material.
The Company cannot predict the types of environmental laws or
regulations that may from time to time be enacted in the future by federal,
state, or local governments, how existing or future laws or regulations will be
interpreted or enforced, or what types of environmental conditions may be found
to exist at its facilities. The enactment of more stringent laws or regulations
or a more strict interpretation of
14
existing laws and regulations may require additional expenditures by the
Company, some of which could be material.
Product Liability and Insurance
The business of the Company involves substantial product liability
risks associated with the handling, storing, and usage of cleaning products.
While the Company believes its practices and procedures provide safeguards that
comply with industry standards, it is not possible to eliminate all risks in
this regard. The Company maintains product liability insurance in amounts it
believes are usual and customary for a business of its size in its industry,
though there can be no assurance that in the event of a finding of liability on
the part of the Company for use of its products, that the amount of recovery
would not be substantially in excess of the limits under the Company's insurance
policies. If the Company were to incur product liability in excess of its
insurance limits, it would have a material adverse impact on the Company's
business and prospects.
Potential Risks of Low Priced Stocks
Historically, the price per share of the Company's Common Stock on the
NASD OTC Bulletin Board has been below $5.00 per share with minimal trading.
Accordingly, the Common Stock is within the definition of "penny stock," as
contained in certain rules and regulations of the SEC. Under those regulations,
any broker-dealer seeking to effect a transaction in a penny stock not otherwise
exempt from the rules must first deliver to the potential customer a
standardized risk disclosure document in a form required by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer must also provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salespersons in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. This information must be given to the customer orally or in writing
before the transaction and in writing before or with delivery of the customer's
confirmation of the transaction. Under the penny stock rules, the broker-dealer
must make a special determination of the suitability of the suggested investment
for the individual customer and must receive the customer's written consent to
the transaction. The effect of these rules is to limit the trading market and
adversely effect the liquidity of the Common Stock.
RISK FACTORS RELATING TO A STRATEGIC ALTERNATIVE
No Assurance of Success of a Strategic Alternative
The Board has determined that it is in the best interest of its
Stockholders to discontinue the consolidation and acquisition strategy in the
sanitation and janitorial supply industry. Since the Company's formation, the
sanitation and janitorial supply industry is the only industry that management
of the Company has been involved in operating. There can be no assurance that
current management will be successful in locating a strategic alternative or
that such an alternative would benefit the Company or Stockholder value. In
addition, if the Company were to begin operating in a different industry, there
could be no assurance that current management could operate in another industry
successfully or retain management that would successfully run the Company in
that industry.
Significant Charges and Expenses in a Business Combination
Although there is currently no specific business combination or
alternative that the Company has negotiated, business combinations and
alternatives of the type that the Company may seek often involve significant
charges and expenses to conduct. These expenses include investment banking
expenses,
15
finders fees, severance payments, legal and accounting fees, printing expenses,
travel costs, and other related charges. In addition, the Company could also
incur additional unanticipated expenses in connection with a business
combination.
ITEM 7. FINANCIAL STATEMENTS
Exhibit 99(i), "Titanium Holdings Group, Inc. and Subsidiary
Consolidated Financial Statements" is incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information concerning the Company's directors and officers
required by Item 9 is incorporated by reference to the information set forth in
the Company's Definitive Proxy Statement for the 2002 Annual Meeting of
Stockholders, expected to be filed within 120 days of the Company's fiscal year
end.
ITEM 10. EXECUTIVE COMPENSATION.
The information concerning the compensation of the Company's executives
required by Item 10 is incorporated by reference to the information set forth in
the Company's Definitive Proxy Statement for the 2002 Annual Meeting of
Stockholders, expected to be filed within 120 days of the Company's fiscal year
end.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information concerning security ownership of certain beneficial
owners and management required by Item 11 is incorporated by reference to the
information set forth in the Company's Definitive Proxy Statement for the 2002
Annual Meeting of Stockholders, expected to be filed within 120 days of the
Company's fiscal year end.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related
transactions required by Item 12 is incorporated by reference to the information
set forth in the Company's Definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders, expected to be filed within 120 days of the Company's
fiscal year end.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following is a list of exhibits filed as part of this Form 10-KSB.
Where so indicated, exhibits that were previously filed are incorporated by
reference.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- ----------------------------------------------------------------------------------------------------------
<S> <C>
2(i) Agreement & Plan of Merger among Enviro-Clean of America, Inc., Cleaning Ideas, Inc., Cleaning Ideas
Corp., Charles Davis, Carolyn Davis and Randall Davis dated as of August 1, 1999 (Incorporated by
reference to the Company's Report on Form 8-K filed with the SEC on September 3, 1999).
</TABLE>
17
<TABLE>
<S> <C>
2(ii) Asset Purchase Agreement, by and between ebuyxpress.com L.L.C., NISSCO/Sunline, Inc. and Enviro-Clean
of America, Inc., dated September 29, 2000 (Incorporated by reference to the Company's Report on Form
8-K filed with the SEC on October 13, 2000).
2(iii) Asset Purchase Agreement, by and between York Supply, Ltd., June Supply Corp., and Enviro-Clean of
America, Inc. (Incorporated by reference to the Company's Report on Form 8-K filed with the SEC on
December 28, 2000).
2(iv) Asset Purchase Agreement between Superior One Source, Superior Chemical & Supply, Inc. and Enviro-Clean
of America, Inc., dated June 29, 2001. (Incorporated by reference to the exhibits of the Company's Report
on Form 8-K filed with the SEC on July 20, 2001.)
2(v) Stock Purchase Agreement between Richard Kandel, Kandel & Son, Inc. and Enviro-Clean of America, Inc.,
dated June 29, 2001. (Incorporated by reference to the exhibits of the Company's Report on Form 8-K filed
with the SEC on July 20, 2001.)
3(i) Articles of Incorporation of the Company (Incorporated by reference to the Company's Form 10-SB filed
with the SEC on June 18, 1999).
3(ii) By-Laws of the Company (Incorporated by reference to the Company's Form 10-SB filed with the SEC on June
18, 1999).
4(i) Certificate of Designation for the Company's Series A Stock (Incorporated by reference to the Company's
Form 10-SB filed with the SEC on June 18, 1999).
4(ii) Certificate of Designation for the Company's Series E Stock (Incorporated by reference to the Company's
Form 10-SB filed with the SEC on June 18, 1999).
4(iii) Certificate of Designation for the Company's Series D Preferred Stock (Incorporated by reference to the
Company's Report on Form 8-K filed with the SEC on September 3, 1999).
4(iv) Certificate of Amendment to the Certificate of Designation for the Company's Series A Stock (Incorporated
by reference to the Company's Report on Form 10-SB/A filed with the SEC on October 22, 1999).
4(v) Certificate of Designation for the Company's Series B Stock. (Incorporated by reference to the Company's
Report on Form 10-SB/A filed with the SEC on December 16, 1999).
4(vi) Form of the Warrant Certificate - June 1999 (Incorporated by reference to the Company's Report on Form
10-SB/A filed with the SEC on October 22, 1999).
4(vii) Form of the Warrant Certificate - December 1999 (Incorporated by reference to the Company's Report on
Form 10-QSB filed with the SEC on June 15, 2000).
</TABLE>
18
<TABLE>
<S> <C>
4(viii) Form of the Warrant Certificate - February 2000 (Incorporated by reference to the Company's Report on
Form 10-QSB filed with the SEC on June 15, 2000).
4(ix) Form of three-year 9 3/4% Secured Promissory Note. (Incorporated by reference to the exhibits of the
Company's Report on Form 10-QSB filed with the SEC on November 9, 2001.)
4(x) Pledge and Security Agreement by and between Company and Secured Parties, dated October 31, 2001.
(Incorporated by reference to the exhibits of the Company's Report on Form 10-QSB filed with the SEC on
November 9, 2001.)
10(i) Amended and Restated Employment Agreement between Randall K. Davis and Enviro-Clean of America, Inc.
(Incorporated by reference to the exhibits of the Company's Report on Form 10-KSB filed with the SEC on
April 2, 2001.)
10(ii) Enviro-Clean of America, Inc. 2000 Stock Incentive Plan (incorporated by reference to the exhibits of the
Company's Proxy Statement on Form DEF 14A, filed April 28, 2000).
10(iii) Registration Rights Agreement between the Company and purchasers of Units of 2 shares of common stock and
1 warrant in the Company's January 2000 offering. (Incorporated by reference to the exhibits of the
Company's Report on Form 10-KSB filed with the SEC on April 2, 2001.)
10(iv) Registration Rights Agreement between the Company and purchasers of Common Stock in the Company's June
2000 offering. (Incorporated by reference to the exhibits of the Company's Report on Form 10-KSB filed
with the SEC on April 2, 2001.)
10(v) Registration Rights Agreement between the Company and purchasers of Common Stock in the Company's
September 2000 offering. (Incorporated by reference to the exhibits of the Company's Report on Form
10-KSB filed with the SEC on April 2, 2001.)
10(vi) Registration rights Agreement between the Company and purchasers of Series B Stock and 1000 common stock
warrants - December 1999. (Incorporation by reference to the Company's Amendment No.2 to Form 10-SB filed
with the Commission on December 16, 1999.)
10(vii) Settlement Agreement by and between the Company and Equip2move,.com Corporation, dated June 30, 2001.
(Incorporated by reference to the exhibits of the Company's Report on Form 10-QSB filed with the SEC on
August 14, 2001.)
10(viii) Subscription Agreement with Excalibur I, L.L.C., dated June 26, 2001. (Incorporated by reference to the
exhibits of the Company's Report on Form 10-QSB filed with the SEC on August 14, 2001.)
</TABLE>
19
<TABLE>
<S> <C>
10(ix) Promissory Note, dated July 20, 2001 between Excalibur I, L.L.C. as borrower, and Enviro-Clean of
America, Inc. as Payee. (Incorporated by reference to the exhibits of the Company's Report on Form 10-QSB
filed with the SEC on August 14, 2001.)
10(x) Escrow Agreement by and between Company, Agent, and Escrow Agent, dated October 31, 2001. (Incorporated
by reference to the exhibits of the Company's Report on Form 10-QSB filed with the SEC on November 9,
2001.)
10(xi) Form of Agency Agreement by and between Company, Principal and Agent. (Incorporated by reference to the
exhibits of the Company's Report on Form 10-QSB filed with the SEC on November 9, 2001.)
23(i) Consent of Goldstein Golub Kessler LLP.*
99(i) Titanium Holdings Group, Inc. and Subsidiary Consolidated Financial Statements for the Fiscal Years Ended
December 31, 2001 and 2000 and Independent Auditors Report. *
</TABLE>
------------------------------
* Filed Herewith.
(b) Reports on Form 8-K:
None
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Titanium Holdings Group, Inc. has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Antonio, State of Texas, on March 28, 2002.
TITANIUM HOLDINGS GROUP, INC.
By /s/ Randall K. Davis
------------------------------------------
Randall K. Davis, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities indicated
and on March 28, 2002.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Randall K. Davis
--------------------------------------------
Randall K. Davis Chairman of the Board, Chief Executive
Officer and President
/s/ Steven Etra
--------------------------------------------
Steven Etra Secretary, Treasurer and Director
/s/ Gary Granoff
--------------------------------------------
Gary Granoff Director
/s/ Melvin Schreiber
--------------------------------------------
Melvin Schreiber Director
/s/ Aladar Deutsch
--------------------------------------------
Aladar Deutsch Director
/s/ Kenneth Etra
--------------------------------------------
Kenneth Etra Director
/s/ Jan Pasternack
--------------------------------------------
Jan Pasternack Chief Financial Officer
</TABLE>
21
Exhibit List
<TABLE>
<CAPTION>
Exhibit No. Description
----------- ----------------------------------------------------------------------------------------------------------
<S> <C>
2(i) Agreement & Plan of Merger among Enviro-Clean of America, Inc., Cleaning Ideas, Inc., Cleaning Ideas
Corp., Charles Davis, Carolyn Davis and Randall Davis dated as of August 1, 1999 (Incorporated by
reference to the Company's Report on Form 8-K filed with the SEC on September 3, 1999).
2(ii) Asset Purchase Agreement, by and between ebuyxpress.com L.L.C., NISSCO/Sunline, Inc. and Enviro-Clean of
America, Inc., dated September 29, 2000 (Incorporated by reference to the Company's Report on Form 8-K
filed with the SEC on October 13, 2000).
2(iii) Asset Purchase Agreement, by and between York Supply, Ltd., June Supply Corp., and Enviro-Clean of
America, Inc. (Incorporated by reference to the Company's Report on Form 8-K filed with the SEC on
December 28, 2000).
2(iv) Asset Purchase Agreement between Superior One Source, Superior Chemical & Supply, Inc. and Enviro-Clean
of America, Inc., dated June 29, 2001. (Incorporated by reference to the exhibits of the Company's Report
on Form 8-K filed with the SEC on July 20, 2001.)
2(v) Stock Purchase Agreement between Richard Kandel, Kandel & Son, Inc. and Enviro-Clean of America, Inc.,
dated June 29, 2001. (Incorporated by reference to the exhibits of the Company's Report on Form 8-K filed
with the SEC on July 20, 2001.)
3(i) Articles of Incorporation of the Company (Incorporated by reference to the Company's Form 10-SB filed
with the SEC on June 18, 1999).
3(ii) By-Laws of the Company (Incorporated by reference to the Company's Form 10-SB filed with the SEC on June
18, 1999).
4(i) Certificate of Designation for the Company's Series A Stock (Incorporated by reference to the Company's
Form 10-SB filed with the SEC on June 18, 1999).
4(ii) Certificate of Designation for the Company's Series E Stock (Incorporated by reference to the Company's
Form 10-SB filed with the SEC on June 18, 1999).
4(iii) Certificate of Designation for the Company's Series D Preferred Stock (Incorporated by reference to the
Company's Report on Form 8-K filed with the SEC on September 3, 1999).
4(iv) Certificate of Amendment to the Certificate of Designation for the Company's Series A Stock
(Incorporated by reference to the Company's Report on Form 10-SB/A filed with the SEC on October 22,
1999).
</TABLE>
<TABLE>
<S> <C>
4(v) Certificate of Designation for the Company's Series B Stock. (Incorporated by reference to the Company's
Report on Form 10-SB/A filed with the SEC on December 16, 1999).
4(vi) Form of the Warrant Certificate - June 1999 (Incorporated by reference to the Company's Report on Form
10-SB/A filed with the SEC on October 22, 1999).
4(vii) Form of the Warrant Certificate - December 1999 (Incorporated by reference to the Company's Report on
Form 10-QSB filed with the SEC on June 15, 2000).
4(viii) Form of the Warrant Certificate - February 2000 (Incorporated by reference to the Company's Report on
Form 10-QSB filed with the SEC on June 15, 2000).
4(ix) Form of three-year 9 3/4% Secured Promissory Note. (Incorporated by reference to the exhibits of the
Company's Report on Form 10-QSB filed with the SEC on November 9, 2001.)
4(x) Pledge and Security Agreement by and between Company and Secured Parties, dated October 31, 2001.
(Incorporated by reference to the exhibits of the Company's Report on Form 10-QSB filed with the SEC on
November 9, 2001.)
10(i) Amended and Restated Employment Agreement between Randall K. Davis and Enviro-Clean of America, Inc.
(Incorporated by reference to the exhibits of the Company's Report on Form 10-KSB filed with the SEC on
April 2, 2001.)
10(ii) Enviro-Clean of America, Inc. 2000 Stock Incentive Plan (incorporated by reference to the exhibits of the
Company's Proxy Statement on Form DEF 14A, filed April 28, 2000).
10(iii) Registration Rights Agreement between the Company and purchasers of Units of 2 shares of common stock and
1 warrant in the Company's January 2000 offering. (Incorporated by reference to the exhibits of the
Company's Report on Form 10-KSB filed with the SEC on April 2, 2001.)
10(iv) Registration Rights Agreement between the Company and purchasers of Common Stock in the Company's June
2000 offering. (Incorporated by reference to the exhibits of the Company's Report on Form 10-KSB filed
with the SEC on April 2, 2001.)
10(v) Registration Rights Agreement between the Company and purchasers of Common Stock in the Company's
September 2000 offering. (Incorporated by reference to the exhibits of the Company's Report on Form
10-KSB filed with the SEC on April 2, 2001.)
10(vi) Registration rights Agreement between the Company and purchasers of Series B Stock and 1000 common stock
warrants - December 1999. (Incorporation by reference to the Company's Amendment No.2 to Form 10-SB filed
with the Commission on December 16, 1999.)
</TABLE>
<TABLE>
<S> <C>
10(vii) Settlement Agreement by and between the Company and Equip2move,.com Corporation, dated June 30, 2001.
(Incorporated by reference to the exhibits of the Company's Report on Form 10-QSB filed with the SEC on
August 14, 2001.)
10(viii) Subscription Agreement with Excalibur I, L.L.C., dated June 26, 2001. (Incorporated by reference to the
exhibits of the Company's Report on Form 10-QSB filed with the SEC on August 14, 2001.)
10(ix) Promissory Note, dated July 20, 2001 between Excalibur I, L.L.C. as borrower, and Enviro-Clean of
America, Inc. as Payee. (Incorporated by reference to the exhibits of the Company's Report on Form 10-QSB
filed with the SEC on August 14, 2001.)
10(x) Escrow Agreement by and between Company, Agent, and Escrow Agent, dated October 31, 2001. (Incorporated
by reference to the exhibits of the Company's Report on Form 10-QSB filed with the SEC on November 9,
2001.)
10(xi) Form of Agency Agreement by and between Company, Principal and Agent. (Incorporated by reference to the
exhibits of the Company's Report on Form 10-QSB filed with the SEC on November 9, 2001.)
23(i) Consent of Goldstein Golub Kessler LLP. *
99(i) Titanium Holdings Group, Inc. and Subsidiary Consolidated Financial Statements for the Fiscal Years Ended
December 31, 2001 and 2000 and Independent Auditors Report. *
</TABLE>
------------------------------
* Filed Herewith.
Exhibit 99(i)
-------------
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
INDEPENDENT AUDITOR'S REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet F-2
Statement of Operations F-3
Statement of Changes in Stockholders' Equity F-4-5
Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F -17
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Titanium Holdings Group, Inc.
(formerly Enviro-Clean of America, Inc.)
We have audited the accompanying consolidated balance sheet of Titanium
Holdings Group, Inc. (formerly Enviro-Clean of America, Inc.) and Subsidiary as
of December 31, 2001 and the related statements of operations, changes in
stockholders' equity, and cash flows for each of the two years in the period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Titanium Holdings Group, Inc.
& Subsidiary as of December 31, 2001, and the results of their operations and
their cash flows for each of the two years in the period then ended in
conformity with accounting principles generally accepted in the United States
of America.
/s/ GOLDSTEIN GOLUB KESSLER LLP
New York, New York
February 14, 2002
F-1
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
==============================================================================================================
December 31, 2001
--------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
Current assets
Cash $ 571,423
Accounts receivable, net of allowance for doubtful accounts of $63,418 203,819
Inventory 434,845
Marketable securities-available for sale 2,361,180
Prepaid expenses and other current assets 48,759
------------------
Total current assets 3,620,026
Fixed assets-less accumulated depreciation and amortization of $682,443 67,205
Deferred income tax asset, net of valuation allowance of $ 341,000 -
Other investment 768,272
Marketable securities-available for sale (collateralized) 1,914,000
Notes receivable - related party, including accrued interest of $103,668 1,411,001
Goodwill 2,101,334
------------------
TOTAL ASSETS $ 9,881,838
==================
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 352,453
Current maturities of long-term debt 6,570
Notes payable - secured 1,655,000
------------------
Total current liabilities 2,014,023
------------------
Long-term liabilities
Long-term debt, less current maturities 19,710
------------------
Total liabilities 2,033,733
------------------
Commitments
Redeemable preferred stock-$.001 par value; authorized 5,000,000 shares
70,000 shares of convertible stock designated as Series E stock-
$2.50 stated value; issued and outstanding 70,000 shares 175,000
------------------
Stockholders' equity
Common stock-$.001 par value; authorized 20,000,000 shares;
issued and outstanding 5,572,810 5,575
Less: Treasury stock -
Additional paid-in capital 10,189,891
Accumulated other comprehensive income 2,808,390
Accumulated deficit (5,330,751)
------------------
Total stockholders' equity 7,673,105
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,881,838
==================
</TABLE>
See Notes to Consolidated Financial Statements
F-2
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
=====================================================================================================================
Year ended December 31, 2001 2000
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 4,517,722 $ 5,061,554
Cost of sales 2,587,351 3,069,763
-------------------- ----------------
Gross profit 1,930,371 1,991,791
-------------------- ----------------
Operating expenses:
Salaries 1,211,549 1,612,690
Professional fees 395,746 579,030
Depreciation and amortization 35,948 29,072
Amortization of goodwill 352,414 813,748
Marketing 32,142 23,628
Rent 340,725 344,131
Interest 392,015 671,413
Other 409,702 870,314
-------------------- ----------------
Total operating expenses 3,170,241 4,944,026
-------------------- ----------------
Operating loss (1,239,870) (2,952,235)
Other income (expense) (19,386) 6,861,517
-------------------- ----------------
Income (loss) before income tax expense (1,259,256) 3,909,282
Income tax expense 16,330 -
-------------------- ----------------
Net income (loss) from continuing operations (1,275,586) 3,909,282
-------------------- ----------------
Income from operations of discontinued subsidiaries 164,551 653,950
Income (loss) from disposal of subsidiaries 208,200 (4,010,440)
-------------------- ----------------
Net income (loss) from discontinued operations 372,751 (3,356,490)
-------------------- ----------------
Net income (loss) (902,835) 552,792
Preferred stock dividends (5,250) (123,296)
-------------------- ----------------
Net income (loss) attributable to common stockholders (908,085) 429,496
==================== ================
Income (loss) per share from continuing operations $ (0.21) $ 0.64
==================== ================
Income (loss) per share from discontinued operations $ 0.06 $ (0.57)
==================== ================
Income (loss) per share-basic and diluted $ (0.15) $ 0.07
==================== ================
Weighted average number of shares outstanding 6,143,968 5,878,750
==================== ================
</TABLE>
See Notes to Consolidated Financial Statements
F-3
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
<TABLE>
<CAPTION>
==================================================================================================================================
Common Stock Preferred Stock Additional
Number of Number of Treasury Paid-in
Shares Amount Shares Amount Stock Capital
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000: 4,451,000 $4,451 845,590 $6,659,000 $ - $ 3,772,236
Comprehensive income (loss):
Net Income
Unrealized holding gains on
available-for-sale securities
Total comprehensive income (loss)
Issuance of common stock for cash at
$4.00 per share 245,000 245 - - 979,755
Issuance of common stock in connection with
conversion of Series B preferred stock 426,195 426 (20,790) (2,079,000) 2,130,549
Issuance of common stock in connection with
the conversion of subordinated notes payable 453,987 454 1,171,200
Issuance of common stock for cash at $3.00
per share 281,500 282 - - 844,218
Issuance of common stock for cash at $1.25
per share 416,600 417 520,333
Common stock issued in connection with
acquisition of Nissco/Sunline, Inc. 750,000 750 - - 1,874,250
Common stock issued in connection with
acquisition of June Supply-San Antonio, Inc 227,870 228 - - (228)
Common stock issued in connection with
acquisition of Superior Chemical & Supply,
Inc 10,000 10 39,990
Common stock issued to employees in
consideration of services 9,600 10 47,990
Common stock options issued in consideration
of professional fees - - 178,750
Treasury stock purchased at $2.00 per share - - - - (1,000,000) -
Redemption of Series A preferred stock (500,000) (2,500,000)
Redemption of Series B preferred stock (4,800) (480,000)
Redemption of Series D preferred stock (320,000) (1,600,000)
Preferred stock dividends - - - - -
-------------------------------------------------------------------------------
Balance at December 31, 2000 7,271,752 $7,273 - - $(1,000,000) $ 11,559,043
===============================================================================
<CAPTION>
============================================================================================================================
Accumulated
Other Compre. Accumulated Common Stock Stockholders '
Income Deficit To Be Issued Equity
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 2000: $ $(4,852,162) $ 2,075,000 $ 7,658,525
Comprehensive income (loss):
Net Income 552,792 552,792
Unrealized holding gains on
available-for-sale securities 1,392,210 1,392,210
---------
Total comprehensive income (loss) 1,945,002
---------
Issuance of common stock for cash at
$4.00 per share - - 980,000
Issuance of common stock in connection with
conversion of Series B preferred stock 51,975
Issuance of common stock in connection with
the conversion of subordinated notes payable 1,171,654
Issuance of common stock for cash at $3.00
per share - - 844,500
Issuance of common stock for cash at $1.25
per share - 520,750
Common stock issued in connection with
acquisition of Nissco/Sunline, Inc. - (1,875,000) -
Common stock issued in connection with
acquisition of June Supply-San Antonio, Inc - - -
Common stock issued in connection with
acquisition of Superior Chemical & Supply,
Inc (40,000) -
Common stock issued to employees in consideration
of services 48,000
Common stock options issued in consideration
of professional fees 178,750
Treasury stock purchased at $2.00 per share - - (1,000,000)
Redemption of Series A preferred stock (2,500,000)
Redemption of Series B preferred stock (480,000)
Redemption of Series D preferred stock (1,600,000)
Preferred stock dividends (123,296) (123,296)
---------------------------------------------------------------------
Balance at December 31, 2000 $1,392,210 $(4,422,666) $ 160,000 $ 7,695,860
=====================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 (CONTINUED)
<TABLE>
<CAPTION>
====================================================================================================================
Common Stock Preferred Stock
Number of Number of Treasury
Shares Amount Shares Amount Stock
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 2001: 7,271,752 $7,273 $ (1,000,000)
Comprehensive income (loss)
Net loss
Unrealized holding gains on
available-for-sale-securities
Total comprehensive income (loss)
Treasury stock purchased on the open market (320,659)
Treasury stock acquired in connection with
the return of shares for legal services (46,875)
Treasury stock acquired in connection with
the acquisition of Superior Chemical &
Supply, Inc (3,316)
Treasury stock retired (1,698,942) (1,698) 1,370,850
Forfeiture of shares to be issued in connection
with the sale of Superior
Preferred stock dividends
--------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 5,572,810 $5,575 - $ - $ -
====================================================================================================================
<CAPTION>
===================================================================================================================================
Additional Accumulated
Paid-in Other Compre. Accumulated Common Stock Stockholders'
Capital Income Deficit To Be Issued Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 2001: $ 11,559,043 $ 1,392,210 $ (4,422,666) $ 160,000 $7,695,860
Comprehensive income (loss)
Net loss (902,835) (902,835)
Unrealized holding gains on
available-for-sale-securities 1,416,180 1,416,180
-------------
Total comprehensive income (loss) 513,345
-------------
Treasury stock purchased on the open market (320,659)
Treasury stock acquired in connection with
the return of shares for legal services (46,875)
Treasury stock acquired in connection with
the acquisition of Superior Chemical &
Supply, Inc (3,316)
Treasury stock retired (1,369,152) -
Forfeiture of shares to be issued in connection
with the sale of Superior (160,000) (160,000)
Preferred stock dividends (5,250) (5,250)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 10,189,891 $ 2,808,390 $ (5,330,751) $ - $ 7,673,105
===================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-5
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
=====================================================================================================================
Year ended December 31, 2001 2000
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss) $ (902,835) $ 552,792
------------------ -----------
Adjustments to reconcile net income or (loss) to net cash
provided by (used in)operating activities:
Depreciation and amortization 35,948 114,827
Amortization of goodwill 352,414 813,748
Non-cash interest expense 163,478 185,160
Accrued interest income-net (103,668) -
Stock options issued for services - 178,750
Shares issued as employee compensation - 48,000
Increase in allowance for doubtful accounts - 60,909
Gain on sale of investment - (6,747,000)
(Gain) loss on sale of subsidiaries (208,200) 4,010,440
Shares returned for legal services (46,875) -
Loss on equity investment 212,112 94,826
Net change in net assets of discontinued operations (94,130) -
Changes in assets and liabilities net of effects of dispositions:
(Increase) decrease in accounts receivable 17,414 (119,883)
(Increase) decrease in prepaid expenses and taxes 992,169 (1,004,823)
(Increase) decrease in inventories (10,434) 31,163
Increase (decrease) in accounts payable and accrued expenses (250,850) 312,829
------------------ -----------
Total adjustments 1,059,378 (2,021,054)
------------------ -----------
Net cash provided by (used in) operating activities 156,543 (1,468,262)
------------------ -----------
Cash flows from investing activities:
Decrease in notes receivable - 835,992
Purchase of property and equipment-net (6,213) (47,630)
Cash advanced for notes receivable-net (1,307,333) -
Equity investment - (1,075,000)
Net proceeds on sale of investment - 6,750,000
Net proceeds on sale of subsidiaries 533,334 1,500,000
Acquisition of subsidiaries - (362,200)
------------------ -----------
Net cash provided by (used in) investing activities (780,212) 7,601,162
------------------ -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 2,397,225
Repayment of notes payable-related parties and other (2,753,730) (1,951,696)
Net proceeds from issuance of secured notes 1,655,000 -
Preferred stock redeemed - (4,580,000)
Purchase of treasury stock (320,659) (1,000,000)
Dividends paid (5,250) (212,176)
------------------ -----------
Net cash used in financing activities (1,424,639) (5,346,647)
------------------ -----------
Net increase (decrease) in cash (2,048,308) 786,253
Cash - beginning 2,619,731 1,833,478
------------------ -----------
Cash - ending $ 571,423 $ 2,619,731
================== ===========
Supplemental information:
Cash paid during the period for:
Interest $ 303,618 $ 769,757
================== ===========
Income taxes $ 23,430 $ 1,031,193
================== ===========
Supplemental schedule of non-cash investing and financing activities:
Conversion of subordinated debt-related parties $ - $ 1,362,000
-----------
Fixed asset financing obligations incurred $ 30,430 $ 74,043
================== ===========
Treasury stock acquired $ 50,191 $ -
================== ===========
Sale of subsidiary in exchange for investment $ 950,000 $ -
================== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
1. PRINCIPAL The accompanying consolidated financial
BUSINESS statements include the accounts of Titanium
ACTIVITY AND Holdings Group, Inc. and it's Subsidiary
SUMMARY OF (collectively the "Company"). All significant
SIGNIFICANT intercompany balances and transactions have been
ACCOUNTING eliminated in consolidation.
POLICIES:
The principal business activity of the Company is
manufacturing and the wholesale distribution of
sanitary maintenance supplies and paper products.
The Company recognizes revenue when products are
shipped.
The Company maintains cash in bank deposit
accounts which, at times, may exceed federally
insured limits. The Company has not experienced
any losses in such accounts. The Company believes
it is not exposed to any significant credit risk
on cash.
Merchandise inventories are valued at the lower
of cost or market. Cost is determined using the
first-in, first-out and average cost methods.
.
Inventory is comprised of the following:
Raw materials $ 83,483
Work in process 33,732
Finished goods 317,630
-------
$ 434,845
=======
Property and equipment are recorded at cost.
Depreciation and amortization of property and
equipment is provided for by the straight-line
method over the estimated useful lives of the
respective assets. Leasehold improvements are
amortized over the shorter of the economic life
of the improvement or the lease term.
The preparation of financial statements in
accordance with generally accepted accounting
principles requires the use of estimates by
management. Actual results could differ from
these estimates.
At each balance sheet date, the Company
evaluates the period of amortization of
intangible assets. The factors used in evaluating
the period of amortization include: (i) current
operating results, (ii) projected future
operating results, and (iii) any other material
factors that effect the continuity of the
business.
Preferred stock dividends in arrears, which
represent dividends declared, but unpaid at
December 31, 2001, totals $1,313. Preferred stock
dividends declared for the year ended December
31, 2001 totals $5,250. As of January 1, 2002,
all dividends declared through December 31, 2001,
have been paid in full.
The estimated fair values of the notes payable
approximate their carrying amounts based on terms
of the instruments and rates currently available
to the Company for similar loans.
Basic net income per common share is based on the
weighted-average number of shares outstanding
during the period while diluted net income per
common share
F-7
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
considers the diluted effect of stock options and
warrants reflected under the treasury stock
method. Both basic net income per share and
diluted net income per share are the same since
the Company's outstanding warrants and common
stock to be issued have not been included in the
calculation because their effect would have been
antidilutive.
Goodwill aggregating $2,101,334 at December 31,
2001, arising from business acquisitions
accounted for under the purchase method is being
amortized over 10 years using the straight-line
method. Accumulated amortization amounted to
$669,656 at December 31, 2001.
The Company complies with Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123") which
requires Companies to include the fair value of
stock options and other stock-based compensation
issued to employees and non-employees as
compensation expense in the income statement or
to disclose the pro-forma effect on net income
and earnings per share of employee compensation
expense in the footnotes to the company's
financial statements. The Company has elected to
account for its stock options issued under its
stock option plans pursuant to Accounting
Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. This decision results
in recognition of no compensation expense for
stock options issued under a Company stock option
plan which are granted to employees with an
exercise price at or greater than the market
price on the grant date. However, in accordance
with the disclosure provisions of SFAS No. 123,
the Company has provided proforma basis
information to reflect results of operations and
income (loss) per share had compensation expense
been recognized based on the fair value of these
grants.
In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 141, "Business Combinations"
(SFAS No. 141) and Statement of Financial
Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (SFAS No. 142.)
SFAS No. 141 addresses financial accounting and
reporting for business combinations. This
statement requires the purchase method of
accounting to be used for all business
combinations, and prohibits the pooling-
of-interests method of accounting. This
statement is effective for all business
combinations initiated after June 30, 2001 and
supercedes APB Opinion No. 16, "Business
Combinations" as well as FASB Statement of
Financial Accounting Standards No. 38,
"Accounting for Preacquisition Contingencies of
Purchased Enterprises".
SFAS No. 142 addresses how intangible assets that
are acquired individually or with a group of
other assets should be accounted for in financial
statements upon their acquisition. This statement
requires goodwill to be periodically reviewed for
impairment rather than amortized, beginning on
January 1, 2002. SFAS No. 142 supercedes APB
Opinion No. 17, "Intangible Assets".
The Company is assessing the impact of
adopting these standards on the consolidated
financial statements.
F-8
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
Management does not believe that any recently
issued, but not yet effective, accounting
standards, if currently adopted, would have a
material effect on the accompanying financial
statements.
2. ACQUISITIONS On August 15, 2000, the Company entered into an
AND agreement to sell all of the net assets of Nissco
DISPOSITIONS /Sunline, Inc. ("Nissco"), it's Florida-based
subsidiary engaged in group marketing of sanitary
/janitorial supplies . The aggregate selling
price of these assets was $100,000. Nissco has
been dissolved as of December 28, 2000.
The loss on disposal of this subsidiary
aggregating $1,956,328 has been calculated as
follows:
Selling price $ 100,000
---------
Property and equipment 33,447
Excess of cost over fair value of
assets originally acquired (goodwill) 2,022,881
---------
Net assets upon disposal 2,056,328
---------
Net loss on disposal of subsidiary $1,956,328
=========
The operations of Nissco have been segregated
from the consolidated income from continuing
operations.
In March 2000, the Company and the sellers of
June Supply Corporation ("June Supply"), adjusted
the original purchase price of June Supply,
thereby reducing both the notes payable to the
sellers and the corresponding goodwill by
$300,000 during the first quarter of 2000.
On November 30, 2000, the Company entered into an
agreement to sell all of the assets of June
Supply Corp. ("June"), it's Texas-based
janitorial and maintenance supply wholesale
distributor. The aggregate selling price of these
assets was $1,400,000. June has been dissolved as
of December 28, 2000.
The loss on disposal of this subsidiary
aggregating $2,054,112 has been calculated as
follows:
Selling price $1,400,000
---------
Cash 66,159
Accounts receivable 808,342
Inventory 1,024,285
Property and equipment 125,648
Accounts payable (403,220)
Loans payable (18,770)
---------
Net assets sold 1,602,444
Excess of cost over fair value of assets
originally acquired (goodwill) 1,851,668
---------
Net assets upon disposal 3,454,112
---------
Net loss on disposal of subsidiary $2,054,112
=========
F-9
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
The operations of June have been segregated from
the consolidated income from continuing
operations.
Effective June 29, 2001, the Company sold all of
the outstanding capital stock of Kandel & Son,
Inc., it's New York-based wholly-owned subsidiary
engaged in the wholesale distribution of sanitary
supplies, to Richard Kandel, the Company's
Chairman of the Board and Chief Executive
Officer. The stock was sold in exchange for
300,000 shares of IVAX Diagnostics, Inc common
stock, par value $.01, valued at $1,464,000,
1,000,000 shares of Enviro-Clean of America, Inc.
common stock, par value $.001, and the release of
any obligation by the Company under Mr. Kandel's
employment agreement, dated December 1, 2000. As
part of the transaction, Mr. Kandel resigned as
the Chairman of the Board and the Chief Executive
Officer of the Company.
The gain on disposal of this subsidiary
aggregating $1,154,540 has been calculated as
follows:
Selling price $1,464,000
Basis of assets sold 309,460
-------
Net income from disposal of subsidiary $1,154,540
=========
The operations of Kandel have been segregated
from the consolidated income (loss) from
continuing operations.
Effective June 29, 2001, the Company sold
all of the net assets of Superior Chemical &
Supply, Inc., it's Kentucky-based wholly-owned
subsidiary engaged in the distribution of
cleaning supplies. The aggregate selling price of
these assets was $533,334.
The loss on disposal of this subsidiary
aggregating $946,340 has been calculated as
follows:
Selling price $ 533,334
----------
Cash 4,092
Accounts receivable 258,586
Inventory 235,113
Property and equipment 48,460
Accounts payable (97,173)
Loans payable (26,519)
----------
Net assets sold 422,559
Excess of cost over fair value of assets
originally acquired (goodwill) 1,057,115
----------
Net assets upon disposal 1,479,674
----------
Net loss on disposal of subsidiary $ 946,340
==========
The operations of Superior have been segregated
from the consolidated income (loss) from
continuing operations.
F-10
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
Sales of the disposed Subsidiaries through the
date of disposal were $10,011,488 and $2,072,838
in 2000 and 2001, respectively.
3. INVESTMENTS The Company classifies its existing marketable
equity securities as available-for-sale in
accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS No. 115"),
"Accounting for Certain Investments in Debt and
Equity Securities." These securities are carried
at fair market value, with unrealized holding
gains and losses reported in stockholders' equity
as a component of other comprehensive income
(loss). Gains or losses on securities sold are
based on the specific identification method.
In 1999 and 2000, the Company and certain
directors of the Company invested in
b2bstores.com, Inc., formerly a California based
company which designed Internet-based electronic
commerce programs. During the three months ended
March 31, 2000, b2bstores.com, Inc. repaid
working capital loans from the Company totaling
$1,399,836 plus interest equal to 8% per annum.
Subsequently, in March 2000, the Company sold
one-half of its investment, or 1,000,000 shares
of b2bstores.com, Inc. common stock, for net
proceeds of $6,750,000 through a private sale to
ZERO.NET, Inc., a Delaware company.
On March 14, 2001, b2bstores.com, Inc. completed
a merger with IVAX Diagnostics, Inc., in which
IVAX Diagnostics, Inc. merged with and into b
2bstores.com, Inc. In the merger, b2bstores.com,
Inc. issued 20,000,000 shares of common stock as
merger consideration, changed its name to IVAX
Diagnostics , Inc., and commenced trading on the
American Stock Exchange under the symbol "IVD."
Because of the dilutive effect on the Company's
equity holdings, the Company is no longer
considered to be an affiliate of IVAX
Diagnostics, Inc.
On July 28, 2000, the Company purchased a 30%
equity stake in Equip2move.com, Inc.
("Equip2move"), a New York-based start-up company
which hosts auctions on the Internet. In July of
2000 the Company provided a working capital loan
of $1,000,000 to Equip2move, which was ultimately
converted into 1,000,000 shares of Equip2move's
Series A Preferred Stock and a warrant to
purchase 1,000,000 shares of Equip2move common
stock at an exercise price of $1.00 (the
"Warrant"). The Company's investment of
$1,075,000 represented approximately 35% of the
total equity of Equip2move as of May 31, 2001. As
part of a stockholders agreement, the Company
committed to provide additional financing of
$1,250,000 by February 1, 2001. The Company did
not deliver the additional proceeds by the
scheduled deadline and began negotiations to
relieve the financing obligation. The
negotiations ended as of June 29, 2001, when the
Company and Equip2move agreed to a settlement and
relieve the Company of certain obligations owed
to Equip2move including; (i) complete and total
relief of the remaining obligation to provide
$1,250,000 in additional financing for Equip2move
by February 1, 2001, and (ii) termination of any
remaining obligation by the Company to pay not
less than $150,000 and not more than $250,000 for
the creation, design and implementation of the
Equip2move website through June 30, 2001. In
exchange for the relief of the future
obligations, the Company reduced its equity in
Equip2move from its position of approximately 35%
to 19.9%. This reduction was completed through
the Company's return of 2,607,675 shares of
Series B common stock of Equip2move and the
Warrant. The Company holds 1,217,325 shares of
Series B common stock and 1,000,000 shares of
Series A Preferred Stock as of December
F-11
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
31, 2001. The Company has recorded a net loss of
approximately $212,000 representing the Company's
allocated 35% investment in Equip2move for the
six-month period ended June 29, 2001. At December
31, 2001, the Company accounts for its investment
in Equip2move on the cost basis.
On June 25, 2001, with authorization by the Board
of Directors, the Company advanced $1,350,000 to
Excalibur I, L.L.C. ("Excalibur") in exchange for
a note receivable. Excalibur is in the business
of acquiring and servicing charged-off debt
portfolios. A managing member of Excalibur is
also a director of the Company.
4. FIXED ASSETS: Fixed assets are comprised of the following:
Estimated
Useful Life
-----------
Furniture, fixtures and equipment $ 492,901 5 years
Leasehold improvements 126,836 5 years
Transportation and delivery equipment 82,259 5 years
Computer hardware 47,652 3 years
------
749,648
Less: accumulated depreciation and amortization 682,443
-------
$ 67,205
======
5. ACCOUNTS The following are included in accounts payable
PAYABLE AND and accrued expenses at December 31, 2001:
ACCRUED
EXPENSES:
Accounts payable $ 304,828
Dividends on Preferred Stock 1,313
Other accrued expenses 46,313
------
$ 352,454
=======
6. COMMITMENTS The Company leases office, warehouse, store
AND space, other facilities and equipment under
CONTINGENCIES: noncancelable operating leases expiring through
October 2005.
Future minimum lease payments under these leases
at December 31, 2001 are as follows:
Year ending December 31,
2002 $282,400
2003 272,400
2004 171,800
2005 19,300
---------------------------
$745,900
=======
Certain leases contain escalation clauses
relating to operating expenses and real estate
taxes.
On March 13, 2000, upon a request from Zero.NET,
Inc., a Delaware corporation ("ZERO") to
negotiate a transaction, the Company negotiated
and
F-12
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
entered into a stock Purchase Agreement (the
"Agreement"), between the Company and ZERO, in
which the Company sold 1,000,000 shares of
b2bstores.com, Inc. ("b2b") restricted common
stock to ZERO at $7.00 per share. The gross
proceeds on the sale of the b2b stock were
$7,000,000 less a brokerage commission, paid to
Zero's brokerage firm, of $250,000. On January
29, 2001, the Company received a letter from
outside counsel of ZERO (the "Letter"), which
stated that ZERO desired to rescind the
Agreement, claiming there was a material failure
of consideration for the purchase of the b2b
stock by ZERO. In response to the letter, the
Company has denied any right of rescission by
ZERO and, on February 6, 2001, filed a petition
for declaratory judgment in State District Court
of Bexar County, Texas (the "Court"). The Company
has petitioned the Court for a declaration that
the Agreement remains in effect and is binding on
the parties and that the purported rescission of
the Agreement by ZERO is ineffective and invalid.
There has been no further contact between the
Company and ZERO since the Company's original
receipt of the Letter. ZERO removed the state
court case to the United States District Court
for the Western District of Texas, San Antonio
Division, Civil Action No. SA 01 CV 364 EP in May
2001 pursuant to diversity of citizenship. A
scheduling order was subsequently entered. Some
written discovery has been conducted and the
parties have exchanged witness and exhibit lists.
The case is set for trial June 3, 2002. The
Company intends to vigorously pursue a legal
validation of their rights under the Agreement.
7. INCOME TAXES: The provision for income taxes differs from the
amount computed using the federal statutory rate
of 34% as a result of the following:
<TABLE>
<CAPTION>
Year ended December 31, 2001 2000
----------------------------------------------------------------------------------
<S> <C> <C>
Tax at federal statutory rate $(307,000) $146,000
State taxes 16,330
Utilization of net operating
loss carryforward (146,000)
Increase in valuation allowance (307,000)
$ 16,330 $ -0-
====== ===
</TABLE>
The components of deferred income taxes resulting
from the differences in the bases of assets and
liabilities for income tax and financial
reporting purposes, and other items are as
follows:
Current
--------
Allowance for doubtful accounts $ 22,000
Net operating loss carryforwards 319,000
Valuation allowance (341,000)
---------
$ -0-
===
As of December 31, 2001, the Company had net
operating loss carryforwards available to offset
future taxable income of approximately $938,000
which will expire through 2019. Between December
1997 and December 1999, the Company completed
offerings of securities. Under Section 382 of the
Internal Revenue Code (the "Code"), these
activities effect an ownership change and thus
F-13
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
may severely limit, on an annual basis, the
Company's ability to utilize its net operating
loss carryforwards.
8. NOTES PAYABLE On June 1, 1999, the Company received $3,000,000
-RELATED in exchange for 300 units. Each unit was
PARTIES AND comprised of a $10,000 face value note. The
OTHER: notes were due April 1, 2002 and paid interest in
arrears quarterly on the face amount at a rate of
12.75% per annum. Issued along with each unit
were warrants to purchase 2,400 shares of common
stock (720,000 shares in aggregate) of the
Company. The warrants are exercisable at any time
after November 27, 1999, through June 1, 2003 at
an exercise price of $4.25 per share. The Company
has discounted the carrying value of the notes by
the fair value of the warrants on the date of
issue. The discount was being amortized as
additional interest over the term of the notes.
As of June 30, 2000, a total of $1,362,000 of
debt principal was converted into 453,987 common
shares of the Company and $39 cash in lieu of
fractional shares. In August and September 2001,
the Company redeemed all of the remaining
outstanding notes totaling $1,638,000.
In August of 1999, a secured promissory note of
$900,000 was issued pursuant to the acquisition
of Cleaning Ideas. The note was payable over two
years in eight equal quarterly installments of
$112,500 plus interest at 8-3/4% per annum,
secured by the assets of Cleaning Ideas. The note
was repaid in full in July 2001.
In August of 1999, a promissory note of
$1,200,000 was issued pursuant to the acquisition
of Superior. The note was payable over 3 years in
12 equal quarterly installments of $100,000 plus
interest at 8% per annum, secured by the accounts
receivable and inventory of Superior. Effective
June 30, 2001, in connection with the sale of the
assets of Superior, the note was repaid in full.
In September 2001, the Company began a new
private placement of a minimum of $500,000 and a
maximum of $2,000,000 of promissory notes. The
notes are due on demand upon written notice by
noteholders. The notes bear interest at 9.75%
per annum and are secured by certain shares of
common stock of IVAX Diagnostics, Inc. held by
the Company. As of December 31, 2001, the net
proceeds received through the placement was
$1,655,000.
Notes payable-other $ 26,280
Less current maturities 6,570
-----
$ 19,710
=========
During the year ended December 31, 2001 and 2000,
interest expense amounted to $392,015 and
$671,413 respectively.
9. STOCKHOLDERS' In January 2000, the Company began a new private
EQUITY: placement of a maximum of 137,500 Units at $8.00
per unit, each consisting of two shares of common
stock and one common stock purchase warrant. The
warrants have an exercise price of $4.25 and are
exercisable for a three year period which began
upon issuance. On
F-14
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
February 29, 2000, the Company sold an aggregate
of 122,500 units to approximately 18 accredited
investors for aggregate proceeds to the Company
of $980,000. The Company closed the private
placement on February 29, 2000.
In May 2000, the Company issued 9,600 shares of
common stock to its employees at a price of $5.00
in consideration for work performed.
In June 2000, a total of $1,362,000 of related
party subordinated debt was converted into
453,987 common shares and $39 cash in lieu of
fractional shares. In connection with the same
offering of Common Stock, an additional 281,500
shares of Common Stock were sold for aggregate
cash proceeds of $844,500.
In October 2000, the Company began a new private
placement of a minimum of 320,000 and a maximum
of 2,000,000 shares of common stock at $1.25 per
share. The Company closed the private placement
during February 2001. The stock is restricted
securities as defined under Rule 144 promulgated
by the Security and Exchange Commission under the
Securities Act (Rule 144). Accordingly,
purchasers of the common stock may only resell or
otherwise transfer the common stock, or any
dividend thereon, pursuant to an effective
registration statement, or an exemption from
registration, including a sale in compliance with
Rule 144 which, among other restrictions, imposes
a holding period of at least one year before
public resales of securities may be made. On
November 27, 2000, the Company sold an aggregate
of 416,600 shares to approximately 14 accredited
investors for aggregate proceeds to the Company
of $520,750. The Company will use the proceeds
from this offering for working capital purposes.
Effective August 15, 2000, Thomas Haines, head of
Nissco/Sunline, Inc., then a wholly owned
Subsidiary, retired. At that time the Company
redeemed 500,000 shares of his stock in the
Company for a total of $1,000,000.
During January 2001, a shareholder returned
25,000 shares of the Company's Common Stock which
was originally issued in consideration for
services performed, as part of a negotiated
settlement.
During March 2001, the Company retired 829 shares
of issued but unearned Common Stock, representing
shares that could no longer be earned pursuant to
the Superior Chemical & Supply, Inc. acquisition
agreement.
During the year ended December 31, 2001, the
Company bought back 175,369 of its common shares
for an amount aggregating $320,659, pursuant to
its Stock Repurchase Program, which was
authorized by the Company's Board of Directors on
November 22, 2000.
10. PREFERRED Effective on September 30, 1999, the sole holder
STOCK: of the Series A Stock, consented to the amendment
of the Certificate of Designation for the Series
A Stock which removed the ability of the holder
of the Series A Stock to put the Series A Stock
to the Company at any date after January 15, 2001
and to increase the conversion price of the
Series A Stock from $2.50 to $5.00. On April 1,
2000, with Board approval, all of the outstanding
shares of the Series A Preferred Stock, were
redeemed for a total of $2,500,000 plus unpaid
accrued dividends of $25,000.
F-15
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
On March 16, 2000, the Company redeemed all of
its outstanding shares of Series D Preferred
Stock for a total of $1,600,000 plus unpaid
accrued dividends of $29,071.
During March 2000, the Company began a program to
convert all of its Series B Preferred Stock.
Under the program, the stockholders could either
convert their shares plus accrued dividends into
common shares or redeem them for cash. On April
1, 2000, 4800 shares, totaling $480,000 plus
accrued and unpaid dividends totaling $12,000,
was redeemed for cash and the balance of
$2,079,000 was converted into 426,195 common
shares. The conversion price for the Series B
Stock was $5.00 per share of the Common Stock and
the redemption price was $100.00 per share of the
Series B Stock.
11. STOCK OPTIONS In January 2000, the Board of Directors adopted
AND SFAS NO. 123 the 2000 Stock Incentive Plan (the "Plan") to
PRO FORMA provide for grants of options to purchase shares
of Common Stock to employees, non-employee
directors and independent contractors of the
Company who are eligible to participate in the
Plan. Options granted under the Plan are fully
vested at issuance. Generally, options granted
have a term of three years. The Company has
reserved 1,500,000 shares of Common Stock for
issuance pursuant to options granted under the
Plan. The following table summarizes stock option
activity at and for the period ended December 31,
2001:
Weighted
Average
Exercise
Shares Price
------ -----
Options outstanding at beginning of period - - $ - -
Granted 115,000 1.18
Exercised - - - -
Forfeited - - - -
-------------- -------
Options outstanding at December 31, 2001 115,000 $ 1.18
============== =======
Range of exercise prices $0.95 - $1.25
Weighted average fair value of
options granted during the period $0.84
Weighted average remaining contractual
life of outstanding options 2.36 years
Options exercisable at December 31, 2001 115,000 $1.18
Pro forma net loss and net loss per share
presented below reflect the results of the
Company as if the fair value based accounting
method described in SFAS No. 123 had been used to
account for stock -based compensation costs, net
of taxes:
<TABLE>
<CAPTION>
As Reported Pro Forma
----------- ---------
<S> <C> <C> <C>
Period Period Period Period
Ended Ended Ended Ended
</TABLE>
F-16
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
-----------------------------------------------------
<S> <C> <C> <C> <C>
Pro forma net loss $ (902,835) $ - - $(999,435) $ - -
Pro forma basic
loss per share $ (0.15) $ - - $(0.16) $ - -
</TABLE>
F-17