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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark one)
X
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-26433
TITANIUM HOLDINGS GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0386415
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1023 Morales
San Antonio, Texas 78207
(Address of principal executive offices)
(210) 293-1232
(Issuer's telephone number, including area code)
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(Former name, if changed since last report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date: The total number of shares of
Common Stock, par value $0.001 per share, outstanding as of May 13, 2002 was
5,572,810.
Transitional Small Business Disclosure Format (check one) Yes No X
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TITANIUM HOLDINGS GROUP, INC.
TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31,2002 (Unaudited)
and December 31, 2001 (Audited) ....................................................... 2
Condensed Consolidated Statements of Income of Operations for the three months ended
March 31, 2002 and 2001 (Unaudited) ................................................... 3
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002
and 2001 (Unaudited) .................................................................. 4
Notes to the Condensed Consolidated Financial Statements (Unaudited) ..................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ......................................................................................... 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .......................................................................... 14
Item 2. Changes in Securities ...................................................................... 14
Item 3. Defaults Upon Senior Securities ............................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders ........................................ 14
Item 5. Other Information and Subsequent Events .................................................... 14
Item 6. Exhibits and Reports on Form 8-K ........................................................... 15
SIGNATURES .............................................................................................. 15
INDEX TO EXHIBITS ....................................................................................... 16
</TABLE>
1
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEET
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<CAPTION>
MARCH 31, DECEMBER 31,
2002 2001
(Unaudited) (Audited)
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ASSETS
Current assets
Cash $ 263,242 $ 571,423
Accounts receivable, net of allowance for doubtful accounts of $63,418 246,517 203,819
Inventory 432,864 434,845
Marketable securities-available for sale 1,535,800 2,361,180
Prepaid expenses and other current assets 42,590 48,759
------------- -------------
Total current assets 2,521,013 3,620,026
Fixed assets-less accumulated depreciation and amortization of $682,443 and $684,943, respectively 59,059 67,205
Deferred income tax asset, net of valuation allowance of $341,000 - -
Other investment 768,272 768,272
Marketable securities-available for sale (collateralized) 1,904,000 1,914,000
Notes receivable-related party, including accrued interest of $125,187, and $103,668 respectively 1,520,355 1,411,001
Goodwill 2,101,334 2,101,334
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TOTAL ASSETS $ 8,874,033 $ 9,881,838
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 395,958 $ 352,453
Current maturities of long-term debt 6,570 6,570
Notes payable-secured 1,485,000 1,655,000
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Total current liabilities 1,887,528 2,014,023
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Long-term liabilities
Long-term debt, less current maturities 18,723 19,710
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Total liabilities 1,906,251 2,033,733
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Commitments and Contingencies
Redeemable preferred stock-$.001 par value; authorized 5,000,000 shares
70,000 shares of convertible stock designated as Series E stock-
$2.50 stated value; issued and outstanding 70,000 shares 175,000 175,000
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Stockholders' equity
Common stock-$.001 par value; authorized 20,000,000 shares;
issued and outstanding 5,572,810 shares 5,575 5,575
Additional paid-in capital 10,189,891 10,189,891
Accumulated other comprehensive income 1,973,010 2,808,390
Accumulated deficit (5,375,694) (5,330,751)
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Total stockholders' equity 6,792,782 7,673,105
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,874,033 $ 9,881,838
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
2
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
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2002 2001
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Net Sales $ 1,190,575 $ 1,142,932
Cost of sales 700,927 657,469
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Gross profit 489,648 485,463
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Operating expenses:
Salaries 289,778 279,067
Professional fees 50,454 110,228
Depreciation and amortization 7,500 6,003
Amortization of goodwill - 106,919
Marketing 8,702 1,201
Rent 85,169 86,214
Interest 39,028 104,057
Other 144,481 175,643
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Total operating expenses 625,112 869,332
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Operating loss (135,464) (383,869)
Other income 91,834 191,151
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Net loss from continuing operations (43,630) (192,718)
Income from operations of discontinued subsidiaries - 55,283
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Net loss (43,630) (137,435)
Preferred stock dividends (1,313) (1,313)
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Net loss attributable to common stockholders $ (44,943) $ (138,748)
============= =============
Loss per share from continuing operations $ (0.01) $ (0.03)
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Income per share from discontinued operations $ - $ 0.01
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Loss per share-basic and diluted $ (0.01) $ (0.02)
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Weighted average number of shares outstanding 5,572,810 6,751,214
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
3
TITANIUM HOLDINGS GROUP, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
<TABLE>
<CAPTION>
2002 2001
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (43,630) $ (137,435)
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Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,500 15,291
Loss on disposal of property and equipment 646 -
Amortization of goodwill - 106,919
Non-cash interest expense - 32,697
Accrued interest income (90,104) -
Shares returned for legal services - (46,875)
Loss on equity investment - 24,389
Net change in net assets of discontinued operations - (26,001)
Changes in assets and liabilities net of
effects of dispositions:
Increase in accounts receivable (42,698) (95,815)
Decrease in inventories 1,981 68,694
Decrease in prepaid expenses and taxes 6,169 5,713
Increase in prepaid income taxes - (5,008)
Increase (decrease) in accounts payable and accrued expenses 43,505 (25,921)
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Total adjustments (73,001) 54,083
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Net cash used in operating activities (116,631) (83,352)
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Cash flows from investing activities:
Cash paid for notes receivable (225,000)
Proceeds from notes receivable and accrued interest 205,750 -
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Net cash used in investing activities (19,250) -
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Cash flows from financing activities:
Repayment of long-term debt (987) (213,697)
Repayment of secured notes payable-net (170,000) -
Purchase of treasury stock - (9,061)
Dividends paid (1,313) (1,313)
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Net cash used in financing activities (172,300) (224,071)
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Net decrease in cash (308,181) (307,423)
Cash - beginning 571,423 2,619,731
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Cash - ending $ 263,242 $ 2,312,308
============= =============
Supplemental information:
Cash paid during the period for:
Interest $ 39,028 $ 75,811
============= =============
Income taxes $ - $ -
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
TITANIUM HOLDINGS GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
1. General
The accompanying financial statements, footnotes and discussions should be
read in conjunction with the financial statements, related footnotes and
discussions contained in the Company's Annual Report filed with Form 10-KSB for
the year ended December 31, 2001. The financial information contained herein is
unaudited. In the opinion of management, all adjustments necessary for a fair
presentation of such financial information have been included. All adjustments
are of a normal recurring nature.
The results of operations for the three months ended March 31, 2002 and
2001, are not necessarily indicative of the results to be expected for the full
year.
2. Principal Business Activity and Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
Titanium Holdings Group, Inc. and its subsidiary (collectively the "Company").
All significant intercompany balances and transactions have been eliminated in
consolidation.
The principal business activity of the Company is manufacturing and the
wholesale distribution of sanitary maintenance supplies and paper products.
Property and equipment are recorded at cost. Depreciation is provided for
by the straight-line method over the estimated useful lives of the property and
equipment.
Inventories consisting of raw materials, work in process and finished goods
are valued at the lower of cost or market. Cost is determined using the
first-in, first-out method.
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.
The Company has disposed of certain subsidiaries during the year ended
December 31, 2001. The results of operations related to these subsidiaries have
been segregated from continuing operations for the three-month period ended
March 31, 2001.
Preferred stock dividends in arrears, which represent dividends declared,
but unpaid at March 31, 2002 totals $1,313. As of April 1, 2002, all dividends
declared through March 31, 2002 have been paid in full.
Earnings (loss) per share ("EPS") is computed by dividing net income or
loss by the weighted-average number of common shares outstanding for the period.
Both basic and diluted net income (loss) per share are the same, because the
effect of the Company's outstanding warrants and options is anti-dilutive.
3. Investment in Affiliate
On March 14, 2001, b2bstores.com, Inc. completed a merger with IVAX
Diagnostics, Inc., in which IVAX Diagnostics, Inc. merged with and into
b2bstores.com, Inc. Immediately prior to the merger, the Company owned
approximately 11% of the outstanding b2bstores.com, Inc. common stock. In the
5
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 due to the merger, the Company is no
longer considered to be an affiliate of IVAX Diagnostics, Inc.
4. Other 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. On May 31, 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 to relieve the Company of certain obligations owed to
Equip2move including; (i) complete and total relief of the remaining obligation
to produce $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
March 31, 2002.
During January 2002, with authorization by the Board of Directors, the
Company invested $225,000 to Excalibur I, L.L.C. 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.
5. Stockholders' Equity
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 January 2001, the Company bought back 2,969 of its common shares on
the open market for an amount aggregating $5,745, pursuant to its Stock
Repurchase Program which was authorized by the Company's Board of Directors on
November 22, 2000.
During March 2001, the Company retired 829 of its common shares
representing shares not earned per the purchase agreement of Superior Chemical &
Supply, Inc. for the 12 months ended July 31, 2000.
6
6. Recent Accounting Pronouncements
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".
Under the provisions of SFAS No. 142, the Company has six months from the
date the statement is initially applied to complete the first step of the
transitional goodwill impairment test. The Company is currently negotiating with
an independent consultant to perform a review of goodwill.
Had goodwill not been amortized during the quarter ended March 31, 2001,
the results of operations would have been as follows:
Quarter Ended
March 31, 2001
--------------------------
Reported net loss $ (137,435)
Addback: Goodwill amortization 106,919
----------
Adjusted net loss $ (30,516)
==========
Basic and Diluted earnings (loss) per share:
Reported net loss $ (0.02)
==========
Addback: Goodwill amortization (0.02)
==========
Adjusted net loss $ 0.00
==========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The matters discussed in this Form 10-QSB 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-QSB and the other filings with the Securities and
Exchange 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.
7
General
In December 2000, the Board voted to discontinue its business plan of
acquisition and consolidation of janitorial supply companies. The Board
currently continues to explore 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 a Mergers and Acquisitions 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, Cleaning Ideas Corporation ("Cleaning Ideas"), monitor its
equity investments and passively invest in business opportunities at the Board's
discretion.
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, Inc. ("Kandel & Son"),
NISSCO/Sunline, Inc. ("NISSCO"), Cleaning Ideas, Superior Chemical & Supply,
Inc. ("Superior") and June Supply, Inc. ("June Supply") and had completed
substantial investments in two companies, b2bstores.com, Inc. (now known as IVAX
Diagnostics, Inc.) and equip2move.com Corporation. Subsequently, the Company has
disposed of four of its operating subsidiaries, including; (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.
Results of Operations
Results of operations for the three months ended March 31, 2002 and 2001:
The net sales increased $47,643 for the three months ended March 31, 2002
("2002") as compared to the three months ended March 31, 2001 ("2001") from
$1,142,932 to $1,190,575. The gross profit percentage decreased from 42% for
2001 to 41% for 2002. The decrease in gross profit is mostly attributable to the
emergence of much stronger competition in 2002, therefore realizing a lower
mark-up on the sale of product.
Operating expenses decreased from $869,332 for 2001 to $625,112 for 2002,
approximately 28%. A large portion of this decrease, approximately $244,000, was
due to the liquidation of debt, thereby reducing related interest expense
accordingly. Additionally, amortization of goodwill related to acquisitions
amounted to approximately $106,000 during 2001 compared to $0 during 2002. This
reduction, as well as the reduction in most other operating expenses, is due to
the disposal of two subsidiaries in June 2001.
The Company had a net loss in 2002 of $43,630, as compared to a net loss of
$137,435, in 2001.
Liquidity and Capital Resources
For the three months ended March 31, 2002, the Company's cash flows from
operations was negative $116,631, as a result of a net loss of $43,630 and
adjustments to arrive at cash used in operating activities of depreciation and
amortization of $7,500, a loss on disposal of property and equipment of $646, a
decrease in inventories of $1,981, a decrease in prepaid expenses and other
current assets of $6,169, an increase in accounts payable and accrued expenses
of $43,505, offset by accrued interest income of $90,104 and an increase in
accounts receivable of $42,698.
8
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.
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 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 private placement
offerings of promissory notes in September 2001 and January 2002, the income
earned from an investment in promissory notes and the continued operating
revenues from Cleaning Ideas, although the Company may need to raise additional
capital through the sale of equity or debt.
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
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.
9
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 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.
10
Decreased Value in IVD Shares
The Company holds 1,228,500 shares of Ivax Diagnostics, Inc. ("IVD") common
stock. 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. In
addition, certain promissory notes are secured by 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 these promissory 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
The Company has invested in promissory notes issued by Excalibur I, L.L.C.
("Excalibur"). 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 Cleaning Ideas, continues to operate in the janitorial
supply industry. The following risk factors relate to that area of the Company's
operations.
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.
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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 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
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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, 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.
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PART II-OTHER INFORMATION
ITEM 1. Legal Proceedings
On March 13, 2000, upon a request from Zero.NET, Inc., a Delaware
corporation ("ZERO") to consider a stock 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 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. 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 was originally set for trial June 3, 2002, but
has now been rescheduled for January 21, 2003. The Company intends to
vigorously pursue a legal validation of their rights under the Agreement.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information and Subsequent Events
The Company has been notified by the NASDAQ Stock Market that, in
2003, the OTC Bulletin Board will be phased out and a new market, the
Bulletin Board Exchange, will be launched. The Company is currently
analyzing the impact such changes will have on the trading of its Common
Stock and what market alternatives may be available.
In January 2002, the Company began a new private placement of a
minimum of $25,000 and maximum of $1,000,000 of promissory notes (the "Note
Offering"). The notes are three-year, 9.75% notes and are secured by
certain shares of common stock of IVD (the "Diagnostics Shares") held by
the Company. Pursuant to the terms of the Note Offering, the Company is
required to escrow Diagnostics Shares with an aggregate fair market value
equal to 125% of the total aggregate face value of the outstanding notes.
The amount of outstanding notes and value of the Diagnostics shares are
reviewed periodically by the escrow agent, at which time the escrowed
shares are adjusted accordingly. As of the May 13, 2002, the Company had
sold an aggregate of $270,000 worth of the promissory notes to 3 accredited
investors. This offering of
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the promissory notes is being conducted in reliance upon the exemption from
registration provided by Rule 506 of Regulation D and is scheduled to
terminate on May 30, 2002.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
The exhibits, as listed on the Exhibit Index on page 12, are
hereby incorporated by reference.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, as
amended, the Issuer has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
May 13, 2002
Titanium Holdings Group, Inc.
By: /s/ Randall K. Davis
----------------------------
Randall K. Davis, Chief Executive Officer
By: /s/ Jan Pasternack
----------------------------
Jan Pasternack, Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
2(i) Asset Purchase Agreement, by and between ebuyxpress.com L.L.C.,
NISSCO/Sunline, Inc. and Company, 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(ii) Asset Purchase Agreement, by and between York Supply, Ltd., June
Supply Corp., and Company, dated December 22, 2000 (Incorporated
by reference to the Company's Report on Form 8-K filed with the
SEC on December 28, 2000).
2(iii) Asset Purchase Agreement, by and between Superior One Source,
Inc., Superior Chemical & Supply, Inc., and Company, dated June
29, 2001. (Incorporated by reference to the Company's Report on
Form 8-K filed with the SEC on July 20, 2001).
2(iv) Stock Purchase Agreement between Richard Kandel, Kandel & Son,
Inc. and Company, dated June 29, 2001. (Incorporated by reference
to 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) Bylaws 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).
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).
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4(ix) Form of three-year 9 3/4% Secured Promissory Note (Incorporated
by reference to 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
Company's Report on Form 10-QSB filed with the SEC on November 9,
2001).
-------------------------------
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