-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q4onBWDa1jFxKZ71jEHZLWd7P7PJuifusUuRdVsZ5iGrF+8ibajWVw3HFGW6y8r5 NaRD63rbRR/GOB7s0FnDGA== 0000949353-05-000467.txt : 20061019 0000949353-05-000467.hdr.sgml : 20061019 20051209165843 ACCESSION NUMBER: 0000949353-05-000467 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20051209 DATE AS OF CHANGE: 20060614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Titanium Group LTD CENTRAL INDEX KEY: 0001338520 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 000000000 STATE OF INCORPORATION: D8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-128302 FILM NUMBER: 051256101 BUSINESS ADDRESS: STREET 1: 4/F, BOCG INSURANCE TOWER STREET 2: 134-136 DES VOEUX CENTRAL CITY: HONG KONG STATE: K3 ZIP: NONE BUSINESS PHONE: 852-3427-3177 MAIL ADDRESS: STREET 1: 4/F, BOCG INSURANCE TOWER STREET 2: 134-136 DES VOEUX CENTRAL CITY: HONG KONG STATE: K3 ZIP: NONE S-1/A 1 s1-amd1_titanium.txt FORM S-1 AMD 1 As filed December 9, 2005 File No. 333-128302 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM S-1/A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TITANIUM GROUP LIMITED (Exact name of registrant as specified in its charter)
BRITISH VIRGIN ISLANDS 7373 NOT APPLICABLE (State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.) incorporation or organization Classification Code Number)
4/F, BOCG INSURANCE TOWER 134-136 DES VOEUX ROAD CENTRAL, HONG KONG (852) 3427 3177 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) JASON MA, CHIEF EXECUTIVE OFFICER 4/F, BOCG INSURANCE TOWER 134-136 DES VOEUX ROAD CENTRAL, HONG KONG (852) 3427 3177 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies of all communications to: FAY M. MATSUKAGE, ESQ. DILL DILL CARR STONBRAKER & HUTCHINGS, P.C. 455 SHERMAN STREET, SUITE 300 DENVER, COLORADO 80203 (303) 777-3737; (303) 777-3823 FAX Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of the Registration Statement. If any of the securities registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ----------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ---------------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ---------------------- CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED UNIT PRICE REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------- Common stock, $0.01 par 9,956,000 shares $0.20 $1,991,200 $234.36 value per share - -------------------------------------------------------------------------------------------------------------------
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ii Subject to Completion, Dated December 9, 2005 TITANIUM GROUP LIMITED UP TO 9,956,000 SHARES OF COMMON STOCK Unless the context otherwise requires, the terms "we", "our" and "us" refers to Titanium Group Limited The selling shareholders named in this prospectus are offering 9,956,000 shares of common stock of Titanium Group Limited. We will not receive any of the proceeds from the sale of these shares. The shares were acquired by the selling shareholders directly from us in a private offering of our common stock that was exempt from registration under the securities laws. The selling shareholders have set an offering price of $0.20 until our shares are quoted on the OTC Bulletin Board and thereafter at prevailing market prices or privately negotiated prices. See "Selling Stockholders" on page 38 for more information about the selling shareholders. Our common stock is presently not traded on any market or securities exchange. The offering price may not reflect the market price of our shares after the offering. INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. A DETAILED EXPLANATION OF THESE RISKS IS INCLUDED IN THE SECTION ENTITLED "RISK FACTORS" OF THIS PROSPECTUS, BEGINNING ON PAGE 4. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. ____________, 2005 TABLE OF CONTENTS PAGE PROSPECTUS SUMMARY.............................................................3 RISK FACTORS...................................................................4 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..............................9 DILUTION.......................................................................9 DETERMINATION OF OFFERING PRICE................................................9 DIVIDEND POLICY................................................................9 USE OF PROCEEDS................................................................9 SELECTED FINANCIAL DATA........................................................9 HISTORICAL EXCHANGE RATES.....................................................10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL.............................10 CONDITION AND RESULTS OF OPERATIONS...........................................10 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................15 BUSINESS......................................................................15 MANAGEMENT....................................................................25 EXECUTIVE COMPENSATION........................................................27 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................29 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................30 TAXATION......................................................................31 DESCRIPTION OF SECURITIES.....................................................32 SELLING STOCKHOLDERS..........................................................38 PLAN OF DISTRIBUTION..........................................................41 LEGAL MATTERS.................................................................42 EXPERTS.......................................................................42 ADDITIONAL INFORMATION........................................................42 REPORTS TO STOCKHOLDERS.......................................................43 INDEX TO FINANCIAL STATEMENTS.................................................43 2 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should carefully read this entire prospectus and the financial statements contained in this prospectus before purchasing our securities. TITANIUM GROUP LIMITED Titanium Group Limited was incorporated on May 17, 2004 as an international business company pursuant to the International Business Companies Act of the British Virgin Islands ("BVI"). On June 22, 2005, we acquired all of the entire issued share capital of Titanium Technology Limited, a company incorporated in Hong Kong on February 14, 2001 with limited liability ("Titanium Technology"). On September 20, 2002, Titanium Technology and EAE Productions (HK) Limited, a company incorporated in Hong Kong on October 8, 1997, established Titanium Technology (Shenzhen) Co., Ltd., a wholly foreign owned enterprise in China. We established a BVI company to hold Titanium Technology, as we believed that it would be easier to attract investment capital into a BVI company rather than a Hong Kong company. While the BVI entity is the parent company, our accounting history is that of Titanium Technology and therefore our operations go back to 2001 when Titanium Technology began operations. Through our wholly-owned subsidiary, Titanium Technology, we develop and market biometrics technologies. Based in Hong Kong, with a research and development center in ShenZhen, People's Republic of China ("PRC"), and a sales representative office in the United States, we have built a strong network of expertise, comprising over 30 IT practitioners and researchers, enabling us to provide what we believe are top-quality biometrics products and professional services. In order to ensure the sustainability of cutting edge technologies, we have engaged both Tsinghua University and the Chinese Academy of Science, Institute of Automation to perform certain research and development work on our behalf. Our offices are located at 4/F, BOCG Insurance Tower, 134-136 Des Voeux Road Central, Hong Kong, where our telephone number is 852 3427 3177. Our website is located at WWW.TITANIUM-TECH.COM. Information contained in our website is not part of this prospectus. THE OFFERING Securities offered..................9,956,000 shares of common stock. Use of proceeds.....................We will not receive any of the proceeds from the selling stockholders of shares of our common stock. Securities outstanding..............50,000,000 shares of common stock. Plan of distribution................The offering is made by the selling stockholders named in this prospectus, to the extent they sell shares. Sales may be made in the open market or in private negotiated transactions, at fixed or negotiated prices. See "Plan of Distribution." RISK FACTORS Investing in our securities involves a high degree of risk. You should consider carefully the information under the caption "Risk Factors" in deciding whether to purchase the Units. SUMMARY FINANCIAL INFORMATION The following summary financial data (expressed in United States Dollars) is derived from the unaudited financial statements for the nine-month period ended September 30, 2005 and the fiscal years ended December 31, 2004, 2003 and 2002 for Titanium Technology, included elsewhere in this offering memorandum. In June 2005, we acquired 100% ownership of Titanium Technology, but did not have any operations prior to the acquisition. 3 Accordingly, for accounting purposes, the historical financial statements of Titanium Technology will be the historical financial statements of the company. We have prepared the financial statements in accordance with generally accepted accounting principles. Our results of operations for any interim period do not necessarily indicate our results of operations for the full year. You should read this summary financial data in conjunction with "Management's Discussion and Analysis or Plan of Operation," "Business," and our financial statements.
INCOME STATEMENT DATA: NINE MONTHS YEAR ENDED DECEMBER 31, ENDED ----------------------------------------------------- SEPTEMBER 30, 2005 2004 2003 2002 ---------------------------------------------------------------------- Revenues $ 1,271,009 $ 814,006 $ 558,679 $ 547,095 Net income $ 76,737 $ 258,204 $ 10,373 $ 66,801 Net income per common share (proforma)(1) $ $ $ $ .00 .01 .00 .00 BALANCE SHEET DATA: DECEMBER 31, SEPTEMBER 30, ----------------------------------------------------- 2005 2004 2003 2002 ---------------------------------------------------------------------- Working capital $ 676,443 $ 236,560 $ 112,106 $ 104,727 Total assets $ 1,529,381 $ 738,252 $ 503,562 $ 331,051 Long-term debt $ - $ 182,051 $ 120,086 $ - Stockholders' equity $ 1,045,896 $ 388,948 $ 131,055 $ 120,809 - ------------------------- (1) Based on 47,000,000 shares outstanding as a result of the recapitalization with Titanium Group Limited for the years ended December 31, 2004, 2003, and 2002.
RISK FACTORS Before deciding to invest in us or to maintain or increase your investment, you should carefully consider the risk factors described below, together with all other information in this prospectus and in our other filings with the SEC, before making an investment decision. If any of the following risks actually occurs, our business, financial conditions or operating results could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. WE HAVE ONLY A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE YOUR INVESTMENT IN OUR STOCK. Your evaluation of our business will be difficult because we have a limited operating history. Titanium Technology has been in business since February 2001. We face a number of risks encountered by early-stage companies, including our need to develop infrastructure to support growth and expansion; our need to obtain long-term sources of financing; our need to establish our marketing, sales and support organizations, as well as our distribution channels; our need to manage expanding operations; and our dependence on technology which could become incompatible or out of date. Our business strategy may not be successful, and we may not successfully address these risks. OUR SUCCESS AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE AND PROTECT OUR PROPRIETARY TECHNOLOGY. Our success depends on our ability to protect our proprietary technology. In the event that a third party misappropriates or infringes on our intellectual property, our business would be seriously harmed. Third parties may independently discover or invent competing technologies or reverse engineer our technology. We expect that if we should successfully licenses to use our technology, competitors may attempt to duplicate our technology. Even though we have been issued a patent from Hong Kong and even if we were to obtain copyright protection on the software, we would still have to enforce our rights against those who might attempt to infringe on our intellectual property, as patent protection does not necessarily deter infringement. Such enforcement efforts are likely to be expensive and time-consuming and we may lack the ability to engage in any significant enforcement efforts. 4 THE LOSS OF OUR OFFICERS AND DIRECTORS OR OUR FAILURE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL COULD IMPAIR OUR ABILITY TO MAINTAIN OUR BUSINESS OPERATIONS. Our success depends largely upon the efforts, abilities, and decision-making of our executive officers and directors. Although we believe that we maintain a core group sufficient for us to effectively conduct our operations, the loss of any of our key personnel could, to varying degrees, have an adverse effect on our operations and system development. We do not currently maintain "key-man" life insurance on any of our executives or directors, but we intend to have such policies in place in the near future. On the other hand, all of the key officers have employment contracts in place and significant stock ownership and we strongly believe that the stability of the core team will be maintained for a long period of time. Nevertheless, the loss of any one of them would have a material adverse affect on us and technically, there can be no assurance that the services of any member of our management will remain available to us for any period of time. The knowledge and expertise of our officers and directors are critical to our operations. There is no guarantee that we will be able to retain our current officers and directors, or be able to hire suitable replacements in the event that some or all of our current management leave our company. In the event that we should lose key members of our staff, or if we are unable to find suitable replacements, we may not be able to maintain our business and might have to cease operations, in which case you might lose all of your investment. WE DERIVE OVER HALF OF OUR REVENUES FROM A FEW CUSTOMERS, THE LOSS OF WHICH COULD HAVE AN ADVERSE EFFECT ON OUR REVENUES. For the year ended December 31, 2004 and the nine months ended September 30, 2005, four customers accounted for over 50% of our revenue. Since a small number of customers account for a substantial portion of our revenues, the loss of any of our significant customers would cause revenue to decline and could have a material adverse effect on our business. While the four customers for the 2004 fiscal year are not the same as the four customers for the 2005 period, this indicates that we need to expand our client base so that we will no longer be subject to this risk. WE FACE COMPETITION FROM EXISTING AND POTENTIAL COMPETITORS IN THE BIOMETRICS INDUSTRY, WHICH COULD FORCE US TO OFFER LOWER PRICES AND/OR NARROW OUR FOCUS, RESULTING IN REDUCED REVENUES. The current global political climate has heightened interest in the use of security solutions, and we expect competition in this field, which is already substantial, to intensify. Competitors in biometrics are developing and bringing to market products that use face recognition as well as eye, fingerprint, and other forms of biometric verification. Our products also will compete with other non-biometric technologies, such as certificate authorities and traditional keys, cards, surveillance systems, and passwords. Widespread adoption of one or more of these technologies or approaches in the markets we intend to target could significantly reduce the potential market for our systems and products. Due to our small size, it can be assumed that most if not all of our competitors have significantly greater financial, technical, marketing and other competitive resources. Many of our competitors and potential competitors have greater name recognition and more extensive customer bases that could be leveraged, for example, to position themselves as being more experienced, having better products, and being more knowledgeable than us. To compete, we may be forced to offer lower prices and narrow our marketing focus, resulting in reduced revenues. SECURITY BREACHES IN SYSTEMS THAT WE SELL OR MAINTAIN COULD RESULT IN THE DISCLOSURE OF SENSITIVE GOVERNMENT INFORMATION OR PRIVATE PERSONAL INFORMATION THAT COULD RESULT IN THE LOSS OF CLIENTS AND NEGATIVE PUBLICITY. Many of the systems we sell manage private personal information and protect information involved in sensitive government functions. A security breach in one of these systems could cause serious harm to our business as a result of negative publicity and could prevent us from having further access to such systems or other similarly sensitive areas for other governmental clients. Our systems may also be affected by outages, delays and other difficulties. We do not have insurance coverage that would cover losses and liabilities that may result from such events. 5 THE MARKET FOR OUR SOLUTIONS IS STILL DEVELOPING AND IF THE INDUSTRY ADOPTS STANDARDS OR A PLATFORM DIFFERENT FROM OUR PLATFORM, THEN OUR COMPETITIVE POSITION WOULD BE NEGATIVELY AFFECTED. The market for identity solutions is still emerging. The evolution of this market is in a constant state of flux that may result in the development of different technologies and industry standards that are not compatible with our current products or technologies. In particular, the face recognition market lacks widely recognized industry standards for commercial use. A LIMITED NUMBER OF STOCKHOLDERS WILL COLLECTIVELY CONTINUE TO OWN OVER 75% OF OUR COMMON STOCK AFTER THIS OFFERING AND MAY ACT, OR PREVENT CERTAIN TYPES OF CORPORATE ACTIONS, TO THE DETRIMENT OF OTHER STOCKHOLDERS. Immediately after this offering, our directors and officers will continue to own more than 75% of our outstanding common stock. Accordingly, these stockholders may, if they act together, exercise significant influence over all matters requiring stockholder approval, including the election of a majority of the directors and the determination of significant corporate actions after this offering. This concentration could also have the effect of delaying or preventing a change in control that could otherwise be beneficial to our stockholders. THERE IS A LACK OF A PUBLIC MARKET FOR OUR COMMON SHARES, WHICH LIMITS OUR SHAREHOLDERS ABILITY TO RESELL THEIR SHARES OR PLEDGE THEM AS COLLATERAL. There is currently no public market for our shares, and we cannot assure you that a market for our stock will develop. It is our understanding that a broker-dealer plans to submit a Form 211 to commence quotation of our stock on the OTC Bulletin Board. However, we cannot assure you that our common stock will be listed for quotation on the OTC Bulletin Board. If this effort should be unsuccessful, we intend to pursue listing on the OTC Bulletin Board through another broker-dealer. Consequently, investors may not be able to use their shares for collateral or loans and may not be able to liquidate at a suitable price in the event of an emergency. In addition, investors may not be able to resell their shares at or above the price they paid for them or may not be able to sell their shares at all. Due to the registration of the shares, we will be subject to the reporting requirements of the Securities Exchange Act of 1934. As a company that files reports under this Act, our common stock will be considered a "covered security" under the National Securities Market Improvement Act of 1996 for secondary trading transactions in most states. We also intend to obtain coverage in Standard & Poor's Corporation Records, which we believe will facilitate secondary trading of our shares. REGULATIONS RELATING TO "PENNY STOCKS" MAY LIMIT THE ABILITY OF OUR SHAREHOLDERS TO SELL THEIR SHARES AND, AS A RESULT, OUR SHAREHOLDERS MAY HAVE TO HOLD THEIR SHARES INDEFINITELY. If a market develops for our common stock, our common stock would, most likely, be subject to rules promulgated by the SEC relating to "penny stocks," which apply to non-NASDAQ companies whose stock trades at less than $5.00 per share or whose tangible net worth is less than $2,000,000. These rules require brokers who sell "penny stocks" to persons other than established customers and "accredited investors" to complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning the risks of trading in the security. These rules may discourage or restrict the ability of brokers to sell our common stock and may affect the secondary market for the common stock. OUTSTANDING COMMON STOCK PURCHASE WARRANTS MAY NEGATIVELY IMPACT OUR ABILITY TO OBTAIN FUTURE EQUITY FINANCING ON FAVORABLE TERMS. As of the date of this prospectus, there are outstanding 3,000,000 common stock purchase warrants, each of which entitles the holder to purchase one share of common stock at an exercise price of $0.50 per share through June 30, 2008. The warrants are redeemable at $0.001 per warrant if the common stock is then listed on a recognized stock exchange or trading at $1.00 per share for 20 consecutive trading days. These outstanding warrants could have the effect of keeping our stock from trading at prices substantially higher than $0.50 per share. As the market price of the stock exceeds $0.50 per share, holders of the warrants would be likely to exercise their warrants, thereby increasing the number of shares and potentially depressing the market price. This means that we would be able to 6 obtain financing through the sale of our stock, but only at prices below $0.50 per share. The lower the price of the stock, the more shares we would have to sell to raise a given amount of financing. Accordingly, as long as the warrants remain unexercised and outstanding, the terms under which we may be able to obtain additional capital financing may be adversely affected. POTENTIAL FUTURE SALES UNDER RULE 144 WOULD INCREASE THE NUMBER OF SHARES IN THE MARKET AND MAY THEREBY DEPRESS THE MARKET PRICE FOR THE COMMON STOCK. In general, under Rule 144, a person who has satisfied a one-year holding period may sell within any three-month period a number of shares which does not exceed the greater of one percent of the then outstanding shares of common stock. Rule 144 also permits the sale of shares without any quantity limitation by a person who is not an affiliate of us and who has beneficially owned the shares for a minimum period of two years. Therefore, the possible sale of our shares may, in the future, have a depressive effect on the price of our common stock in the market, should one develop. WE ARE A BRITISH VIRGIN ISLANDS COMPANY AND, BECAUSE THE RIGHTS OF SHAREHOLDERS UNDER BRITISH VIRGIN ISLANDS LAW DIFFER FROM THOSE UNDER U.S. LAW, YOU MAY HAVE FEWER PROTECTIONS AS A SHAREHOLDER. Our corporate affairs are governed by our memorandum and articles of association, the International Business Companies Act of the British Virgin Islands and the common law of the British Virgin Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under British Virgin Islands law are to a large extent governed by the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. BRITISH VIRGIN ISLANDS COMPANIES MAY NOT BE ABLE TO INITIATE SHAREHOLDER DERIVATIVE ACTIONS, THEREBY DEPRIVING SHAREHOLDERS OF THE ABILITY TO PROTECT THEIR INTERESTS. British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the US. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. AS A BRITISH VIRGIN ISLANDS CORPORATION, SHAREHOLDERS MAY HAVE DIFFICULTY IN ENFORCING JUDGMENTS AGAINST US, THEREBY RENDERING ANY JUDGMENTS USELESS. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for losses suffered. SINCE NONE OF OUR OFFICERS AND DIRECTORS IS A UNITED STATES RESIDENT, IT MAY BE DIFFICULT TO ENFORCE ANY LIABILITIES AGAINST THEM. All of our officers and directors reside in Hong Kong. Accordingly, if events should occur that give rise to any liability on the part of these persons, shareholders would likely have difficulty in enforcing such liabilities. If a 7 shareholder desired to sue these persons, the shareholder would have to serve such persons with legal process. Even if personal service is accomplished and a judgment is entered against that person, the shareholder would then have to locate assets of that person, and register the judgment in the foreign jurisdiction where assets are located. OUR OFFICERS AND DIRECTORS MAY BE SUBJECT TO A LOWER STANDARD OF CARE OWED TO THE SHAREHOLDERS, WHICH MAY RESULT IN DECREASED CORPORATE PERFORMANCE. In most jurisdictions in the United States, directors owe a fiduciary duty to the corporation and its shareholders, including a duty of care, under which directors must properly apprise themselves of all reasonably available information, and a duty of loyalty, under which they must protect the interests of the corporation and refrain from conduct that injures the corporation or its shareholders or that deprives the corporation or its shareholders of any profit or advantage. Under British Virgin Islands law, liability of a corporate director to the corporation is primarily limited to cases of willful malfeasance in the performance of his duties or to cases where the director has not acted honestly and in good faith and with a view to the best interests of the company. As a result of this risk and other discussed above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would if we were incorporated and operating in the United States. CURRENCY CONVERSION CONTROL POLICY IN THE PRC AND EXCHANGE RATE RISK MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION. The PRC Government has strict restrictions on free conversion of RMB into foreign currencies and vice versa. On January 1, 1994, the PRC implemented a unified controlled exchange rate system based on market supply and demand. Based on such system, the People' Bank of China ("PBOC") quoted a daily exchange rate of RMB against US dollars based on the market rate for foreign exchange transaction conducted by the designated banks in the PRC foreign exchange market during the preceding day. The PBOC also quoted the exchange rates of RMB against other foreign currencies based on the international market rate. On July 21, 2005, PBOC announced that the PRC government reformed the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of foreign currencies. As a result, RMB appreciated against U.S. dollars and Hong Kong dollars by approximately 2% on July 21, 2005. The value of RMB may continue to appreciate or depreciate in the future, subject to many factors, including future changes in the currency value of the basket of currencies with reference to which the RMB exchange rate is floated, changes in the PRC government's policy, domestic and international economic and political developments, as well as market supply and demand. Moreover, foreign exchange transactions under capital account (including principal payments in respect of foreign currency-denominated obligations) continue to be subject to foreign exchange controls and the approval of State Administration of Foreign Exchange of the PRC. The existing restrictions on the conversion of RMB into foreign currencies (and thus restrictions on the subsequent repatriation of those funds), and any tightening of such restrictions may have an adverse effect on our ability to obtain sufficient foreign currencies to meet our needs. Alternatively, in the event that RMB continues to appreciate in the future currencies (U.S. dollars, Hong Kong dollars or otherwise) and if RMB continues to appreciate in the future, we may incur exchange losses thereby affecting our profitability. INVESTORS IN THE COMPANY COULD BE HARMED IF MANAGEMENT SHOULD ENGAGE IN COMPETING BUSINESSES. Our officers and directors are not prohibited from engaging in competing businesses. We do not have a right of first refusal pertaining to opportunities that come to their attention and related to the operations of the company. While we believe that the ownership of stock in the company is sufficient to motivate management to focus primarily on the business of the company, we cannot assure you that this will not occur. The BVI corporate statute applicable to the company requires officers and directors, in performing their functions, to act honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, but this may be difficult to enforce. 8 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes "forward-looking statements." All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "project," "estimate," "anticipate," "believe," or "continue" or the negative thereof or variations thereon or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove to have been correct. DILUTION The common stock to be sold by the selling shareholders is common stock that is currently issued and outstanding. Accordingly, there will be no dilution to our existing shareholders. DETERMINATION OF OFFERING PRICE The selling shareholders have set an offering price of $0.20 until our shares are quoted on the OTC Bulletin Board and thereafter at prevailing market prices or privately negotiated prices. We believe that this price was based on the fact that most of the selling shareholders recently purchased their shares at that price. They may not have perceived an increase in value of their shares since the date of purchase. Most of the selling shareholders have warrants to purchase common stock exercisable at $0.50 per share. DIVIDEND POLICY To date, we have not declared or paid any dividends on our common stock. We do not intend to declare or pay any dividends on our common stock in the foreseeable future, but rather to retain any earnings to finance the growth of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual and legal restrictions and other factors the board of directors deems relevant. USE OF PROCEEDS We will not receive any of the proceeds from the selling stockholders of shares of our common stock. However, we may receive the sale price of any common stock we sell to the selling stockholders upon exercise of the warrants. We expect to use the proceeds received from the exercise of warrants, if any, for general working capital purposes. SELECTED FINANCIAL DATA The following summary financial data (expressed in United States Dollars) is derived from the unaudited financial statements for the nine-month period ended September 30, 2005 and the fiscal years ended December 31, 2004, 2003 and 2002 for Titanium Technology, included elsewhere in this offering memorandum. In June 2005, we acquired 100% ownership of Titanium Technology, but did not have any operations prior to the acquisition. Accordingly, for accounting purposes, the historical financial statements of Titanium Technology will be the historical financial statements of the company. We have prepared the financial statements in accordance with generally accepted accounting principles. Our results of operations for any interim period do not necessarily indicate our results of operations for the full year. You should read this summary financial data in conjunction with "Management's Discussion and Analysis or Plan of Operation," "Business," and our financial statements. 9
INCOME STATEMENT DATA: NINE MONTHS YEAR ENDED DECEMBER 31, ENDED ----------------------------------------------------- SEPTEMBER 30, 2005 2004 2003 2002 ---------------------------------------------------------------------- Revenues $ 1,271,009 $ 814,006 $ 558,679 $ 547,095 Net income $ 76,737 $ 258,204 $ 10,373 $ 66,801 Net income per common share (proforma)(1) $ $ $ $ .00 .01 .00 .00 BALANCE SHEET DATA: DECEMBER 31, SEPTEMBER 30, ----------------------------------------------------- 2005 2004 2003 2002 ---------------------------------------------------------------------- Working capital $ 676,443 $ 236,560 $ 112,106 $ 104,727 Total assets $ 1,529,381 $ 738,252 $ 503,562 $ 331,051 Long-term debt $ - $ 182,051 $ 120,086 $ - Stockholders' equity $ 1,045,896 $ 388,948 $ 131,055 $ 120,809 - ------------------------- (1) Based on 47,000,000 shares outstanding as a result of the recapitalization with Titanium Group Limited for the years ended December 31, 2004, 2003, and 2002.
HISTORICAL EXCHANGE RATES Since October 17, 1983, the Hong Kong dollar has been pegged to the U.S. dollar at HK$7.80 to US$1.00. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In June 2005, we acquired 100% ownership of Titanium Technology, but did not have any operations prior to the acquisition. Accordingly, for accounting purposes, the historical financial statements of Titanium Technology will be the historical financial statements of the company. As Titanium Technology is a software development company, it earns revenues through license sales of its products, all of which utilize the proprietary technology it develops. Development of the technology requires a significant outlay of cash before a viable product is developed that utilizes the technology. After development of a product, even more cash is required to market the product before any revenues are realized. Accordingly, the challenge that faces many software development companies is being able to obtain enough cash to fund research and development and marketing expenses and sustain the company until revenues are generated. Such funds are needed fairly quickly after products are developed, as the environment in which the products are used is constantly changing. Companies face the risk of discovering that their products do not meet the needs of the potential customers or are technologically outdated after a marketing campaign is launched. We believe that Titanium Technology has fared better than other technology companies, as it has been able to generate revenues rather early in the company's development, which have funded research and development expenses, as well as selling, general and administrative expenses. In the past few years, Titanium Technology has been able to develop proprietary products mainly based on proceeds from sales revenues. Some of the examples are ProAccess FaceOK, which the company launched in the fall of 2003. The company then launched ProFacer iDVR in the summer of 2004 and was then quickly granted an official endorsement from the People's Bank of China, which secured a unique advantage for the company to market its technology and products in the banking and finance section in the People's Republic of China. The above illustrates management's ability to internally fund the growth of the company with limited resources. Nevertheless, we believe that external funding from investors can stimulate and accelerate product development for a number of reasons. First, the company has now achieved a certain amount of recognition in the industry, especially in its region. It has also established several important marketing channels, most notably a sole distributor in Japan who brought along opportunities and major customers such as the NTT Group. Second, there is 10 a clear sign of increased awareness in the personal security area in which biometric technologies are some of the most commonly used applications. The current global market size is approximately $1 billion, but is expected to grow to around $7 billion by year 2008, according to Alster, "A Touchy Subject," CFO MAGAZINE - IT SPECIAL EDITION, p. 29 (Spring 2005, Vol. 21 No.5). Third, the company has achieved a major breakthrough in its technology recently. In April 2005, we developed the newest facial recognition engine that achieves a false acceptance rate of less than 0.001% and a verification rate of over 99.9%. The most notable strength of this technology is perhaps its ability to be utilized in a one-to-many application as well as its ability to be deployed in all indoor lighting conditions. Based on these breakthrough abilities, management believes that the company is now a leader in this technology, worldwide, and should try to market its products and services in areas outside of Asia. We raised net proceeds of $535,000 (HK$4,173,000) through a private placement of securities. These proceeds are being used to provide the funds necessary to implement the next step in our business plan, which is becoming a publicly-held company in the United States. Funds are being used for legal, accounting, and corporate consulting services and working capital. We believe that by becoming a publicly-held company, we will enhance the visibility of our products and services and our ability to obtain additional financing in the future. CRITICAL ACCOUNTING POLICIES REVENUE RECOGNITION. We earn revenue from two major sources - either from projects or from the provision of maintenance services. For income from projects, we recognize the revenue at the time when the projects have been completed, delivered, and accepted by the customers. Actually, the project itself is the rendering of consultancy services and the sale of a system utilizing biometrics technology, which includes software and hardware. In most cases, the customer may require us to carry out some minor modification or customization of the software. When the software is modified, we take a few days to test-run in-house to ensure that the product runs per the customer's requirement. The system, both software and hardware, is delivered to the customer after the test-run. Upon delivery, we install the system at the customer's premises. We charge our customers a maintenance fee which assures them of the ability to call upon us to fix any problems with products or systems installed by us. For income from the provision of maintenance services, we recognize the revenue at the time when the maintenance services have been rendered to the customer. If the maintenance service has a duration of more than a year, the revenue is prorated and recognized over that period. We recognize sales to distributors at the time when the products are delivered to the distributors, as this is when the risk and reward have substantially passed to the distributors. The selling prices have been predetermined in accordance with the distribution agreements, and are approximately 30% to 40% off the recommended retail prices. Once the products are shipped and the distributor has accepted the products, we bill the distributor and the distributor is obligated to settle the bill accordingly within the credit period granted. There is no right of return or other incentives given to the distributors. RESEARCH AND DEVELOPMENT COSTS. Research costs are expensed as incurred. Product development expenses consist primarily of labor cost. The products are developed by in-house technicians who perform research and development, enhance and maintain existing products, and provide quality assurance. Product development costs are required to be capitalized when a product's technological feasibility has been established by completion of a working model of the product and ending when a product is available for general release to customers. To date, management considers that the products, "ProAccess" and "ProFacer," have reached this stage of development and have capitalized $152,010 (HK$1,185,678) and $259,279 (HK$2,022,379) of product development costs associated with ProAccess and ProFacer as intangible assets for the years ended December 31, 2003 and 2004, respectively. These intangible assets are being amortized using the straight-line method over a period of five years, as management believes that the product life cycle for these products is approximately five years. Amortization amounted to $30,402 (HK$237,135) and $82,258 (HK$641,610) and was included as cost of sales for the years ended December 31, 2003 and 2004, respectively. GRANT AND SUBSIDY INCOME. Grant and subsidy income represents a subsidy from the government of Hong Kong for assisting us in development of products of innovative nature. The products developed under this subsidy plan include ProAccess and ProFacer. Pursuant to the agreements made between us and the Hong Kong 11 government, the government will provide funding to us of up to $256,410 (HK$2,000,000) per project for product development and such funding will be made available for a specific project in accordance with the milestones we establish. During the three years ended December 31, 2004, we have submitted several grant applications and have received a total of $320,787 (HK$2,502,139). We are not required to repay the government grant. However, we are required to contribute approximately 50% of the overall project costs in accordance with the grant agreement. We have contributed $296,066 (HK$2,309,313) for the ProAccess and ProFacer projects. Upon completion of the project, we are required to tender to the government, its pro rata share of the residual funds remaining in the project account. In addition we are required to pay the government a royalty fee of 5% on the gross revenue earned from any activities in connection with the project. We paid royalty fees of $4,186 (HK$32,647) and $4,427 (HK$34,532) for the 2003 and 2004 fiscal years, respectively. We are entitled to retain ownership of the intellectual property resulting from the project. FOREIGN CURRENCY TRANSLATION METHODOLOGY. Our functional currency is the Hong Kong dollar because the majority of our revenues, capital expenditures, and operating and borrowing costs are either denominated in Hong Kong dollars or linked to the Hong Kong dollar exchange rate. Accordingly, transactions and balances not already measured in Hong Kong dollars, which are primarily transactions involving the United States dollar and the PRC Yuan, have been re-measured into Hong Kong dollars in accordance with the relevant provisions of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." The object of this re-measurement process is to produce largely the same results that would have been reported if the accounting records had been kept in Hong Kong dollars. The exchange rate adopted throughout the consolidated financial statements where United States dollars are presented was US$1 for HK$7.8. Cash, receivables, payable, and loans are considered monetary assets and liabilities and have been translated using the exchange rate as of the balance sheet dates. Non-monetary assets and liabilities, including non-current assets and shareholders' equity, are stated at their actual dollars cost or are restated from their historic cost, by applying the historical exchange rate as monthly average exchange rates to underlying transactions. RESULTS OF OPERATIONS FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2002. Sales revenues slightly increased by $11,584 (HK$90,353) to $558,679 (HK$4,357,694) in 2003 from $547,095 (HK$4,267,341) in 2002. Most of our revenues in 2002 were generated from projects from the provision of consultancy services. We launched new products in 2003. Because we devoted a substantial amount of our resources to the development of new products and fulfilling our operational needs, our marketing efforts suffered. As a result, sales did not increase significantly in spite of the product launch. Gross margin related to projects decreased from 50.3% in 2002 to 29.7% in 2003 due to our decision to seek aggressively more market share. We bid competitively on several projects to insure that we would be awarded the work, which caused the gross margin to drop in 2003. Selling, general and administrative expenses increased from $143,299 (HK$1,117,729) in 2002 to $299,002 (HK$2,095,078) in 2003, due to a substantial increase in the number of employees and operating expenses at the early development stage. Also in 2003, we established our research center in Shenzhen, China. Research and development costs increased from $84,936 (HK$662,500) in 2002 to $89,092 (HK$694,918) in 2003. The receipt of grant and subsidy income of $151,594 (HK$1,182,435) in 2003, as compared to $11,559 (HK$90,159) did not offset these increased expenditures in 2003. Accordingly, our net income decreased from $66,801 (HK$521,046) in 2002 to $10,373 (HK$80,908) in 2003. FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2003. Sales revenues increased by $255,328 (HK$1,991,558) (45.7%) comparing the 2004 fiscal year to the 2003 fiscal year, due to the beginning of significant sales of some of the products we had developed, such as ProAccess FaceOK. The gross margin related to projects also improved as a percentage of sales, from 29.7% to 38.2%, and in terms of dollars, from $145,479 (HK$1,134,736) to $283,327 (HK$2,209,951) due to the accumulation of experience, which led to better project management in general, and due to the fact that in 2004 we had greater name 12 recognition and did not have to bid as competitively to secure contracts for projects. Selling, general and administrative expenses decreased from $299,002 (HK$2,095,078) in 2003 to $241,642 (HK$1,884,804) in 2004, despite an increase in the number of employees, due to the assignment of some technical related tasks to inland China, where salary cost is significantly lower. Also in 2004, no research and development costs were incurred, as compared to $89,092 (HK$694,918) in 2003, which was primarily for the research expenses on the ProFacer project. As both projects, ProAccess and ProFacer, reached the stage of development where they were available for general release to the public, expenses incurred for product development were capitalized, and therefore, no research and development expenses were incurred for 2004. Also, we received $6,040 (HK$47,110) more in grant and subsidy income in 2004 than in 2003. Accordingly, Titanium Technology generated net income of $258,204 (HK$2,013,993) for 2004, as compared to net income of $10,373 (HK$80,908) for 2003. NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004. Sales revenues increased by $777,116 (HK$6,061,501) (157.3%) comparing the 2005 period to the 2004 period, due to sales of ProAccess FaceGuard and the commencement of projects such as sales of a facial recognition system and physical access control system to the Elixir Group of Macau. The gross margin as a percentage of sales decreased slightly in 2005 to 38.0% from 40.9% in 2004 due to increased amortization of product development costs that had been capitalized. However, gross margin in terms of dollars increased to $482,473 (HK$3,763,289) from $201,817 (HK$1,574,170) due to the increase in sales revenues. Selling, general and administrative expenses increased from $264,228 (HK$2,060,975) in 2004 to $454,272 (HK$3,543,321) in 2005 due to the expansion of our operations, which included hiring more personnel. However, these expenses as a percentage of revenues decreased from 53.5% in 2004 to 35.7% in 2005. Other income in 2005 of $70,982 (HK$553,660), which consisted primarily of grant and subsidy income, decreased from $138,296 (HK$1,078,706) in 2004. As a result, while we generated significantly more revenues in 2005, our increased operating costs, reduced other income, and provision for income taxes resulted in net income comparable to what was generated for the nine months of last year. We generated net income of $76,737 (HK$598,548) for the nine months ended September 30, 2005, as compared to $77,070 (HK$601,149) for the comparable 2004 period. LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 2003 AND 2004. At December 31, 2004, we had working capital of $236,560 (HK$1,845,168), as compared to $112,106 (HK$874,425) at December 31, 2003. The increase was due primarily to the increase in net income for the 2004 fiscal year. For the 2004 fiscal year, operating activities provided cash of $280,834 (HK$2,190,499), while investing activities and financing activities used cash of $283,428 (HK$2,210,734) and $25,641 (HK$200,000), respectively. Included in the amount of cash provided by operating activities was a shareholders' loan of $64,103 (HK$500,000). As disclosed in "Certain Relationships and Related Transactions," the shareholders' loan was unsecured and did not accrue interest. Of the $283,428 (HK$2,210,734) used for investing activities, $267,804 (HK$2,088,869) was used for product development costs. In comparison, 2003 operating activities and financing activities provided cash of $168,132 (HK$1,311,428) and $27,778 (HK$216,667), respectively, while investing activities, primarily product development costs, used cash of $164,327 (HK$1,281,751). Product development costs are required to be capitalized when a product's technological feasibility has been established by completion of a working model of the product and ending when a product is available for general release to customers. We capitalized $152,010 (HK$1,185,678) and $259,279 (HK$2,022,379) of product development costs associated with ProAccess and ProFacer as intangible assets for the 2003 and 2004 fiscal years, respectively. Included in the amount of cash provided by operating activities was a shareholders' loan of $117,949 (HK$920,000). The $38,462 (HK$300,000) reflected as proceeds from long-term debt were proceeds of a loan from HKCB Finance Limited, the repayment of which was personally guaranteed by our officers and directors. 13 AS OF SEPTEMBER 30, 2005. Titanium Technology had working capital of $676,443 (HK$5,276,255) at September 30, 2005, as compared to $236,560 (HK$1,845,168) at December 31, 2004. The increase was due primarily to the completion of our private placement of securities, through which we received net proceeds of $535,000 (HK$4,173,000). These proceeds are being used to provide the funds necessary to implement the next step in our business plan, which is becoming a publicly-held company in the United States. Funds are being used for legal, accounting, and corporate consulting services and working capital. We believe that by becoming a publicly-held company, we will enhance the visibility of our products and services and our ability to obtain additional financing in the future. For the nine months ended September 30, 2005, operating activities provided $81,186 (HK$633,248) in addition to $395,291 (HK$3,083,268) provided by financing activities, but $119,056 (HK$928,641) was used in investing activities, primarily for the acquisition of plant and equipment. We used $100,133 (HK$781,041) to renovate our newly leased offices and $18,923 (HK$147,600) for product development costs. We also used $182,051 (HK$1,420,000) to repay shareholders' loans. In comparison, for the nine months ended September 30, 2004, $151,034 (HK$1,178,065) was provided by operating activities, but $177,490 (HK$1,384,420) was used for investing activities, of which $162,438 (HK$1,267,019) was used for product development costs. At September 30, 2005, we had contractual obligations as set forth below:
- --------------------------------------------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD - --------------------------------------------------------------------------------------------------------------------- LESS THAN MORE THAN 5 TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS - --------------------------------------------------------------------------------------------------------------------- Long-Term Debt Obligations Nil Nil Nil Nil Nil - --------------------------------------------------------------------------------------------------------------------- Capital (Finance) Lease Obligations Nil Nil Nil Nil Nil - --------------------------------------------------------------------------------------------------------------------- Operating Lease Obligations $104,805 $31,670 $91,135 Nil Nil - --------------------------------------------------------------------------------------------------------------------- Purchase Obligations Nil Nil Nil Nil Nil - --------------------------------------------------------------------------------------------------------------------- Other Long-Term Liabilities Reflected on the Nil Nil Nil Nil Nil Company's Balance Sheet - --------------------------------------------------------------------------------------------------------------------- Total $104,805 $31,670 $91,135 Nil Nil - ---------------------------------------------------------------------------------------------------------------------
Under the terms of the Technology Partnership and Research and Development Contract entered into in June 2005 with the Institute, we have agreed to provide the capital and operational technicians, while the Institute has agreed to provide the location and technical technicians to perform research for the application of facial recognition operation technology. Any new facial recognition technology that is developed shall become the property of the joint venture. While the contract required us to have paid all of the costs by September 30, 2005, certain payment installments have been delayed. Accordingly, at September 30, 2005, we have paid approximately half of the roughly $25,000 (HK$192,000) required under the contract, but expect that we will have paid the remainder by the end of 2005. We also entered into a similar contract with Tsing Hua University (Shenzhen research campus) in November 2005, under which the University will perform research of a multi-media home intelligence system, covering the receipt of digital TV signals, OSD (Open Software Description) capability, PVR (Personal Video Recorder) capability, and Blue tooth facial recognition capability. We have agreed to bear all costs of the research, while the University provides the necessary technical people. The total cost of the research, approximately $25,000 (HK$192,000) is to be paid by December 30, 2005. The University will own the new intellectual property that is developed, but we will have the right to use the property. We believe we will be able to fund this expenditure with our existing cash flow, based upon the signed contracts for orders that we have. At September 30, 2005, our backlog of orders believed to be firm was approximately $1,026,000 (HK$8,000,000), as compared to approximately $256,000 (HK$2,000,000) at December 31, 2004. We expect that approximately $513,000 (HK$4,000,000) will not be filled by December 31, 2005. 14 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We engaged Zhong Yi (Hong Kong) C.P.A. to audit our financial statements on May 17, 2005. We did not consult that firm prior to its engagement. BUSINESS BUSINESS DEVELOPMENT We were incorporated on May 17, 2004 as an international business company pursuant to the International Business Companies Act of the British Virgin Islands ("BVI"). On June 22, 2005, we acquired all of the entire issued share capital of Titanium Technology Limited, a company incorporated in Hong Kong on February 14, 2001 with limited liability ("Titanium Technology"). On September 20, 2002, Titanium Technology and EAE Productions (HK) Limited, a company incorporated in Hong Kong on October 8, 1997, established Titanium Technology (Shenzhen) Co., Ltd., a wholly foreign owned enterprise in China, to conduct research and development operations. Beginning in the third quarter of 2004, it began to conduct business operations in China. EAE Productions (HK) Limited owns 8% of Titanium Technology (Shenzhen) Co., Ltd. and is owned by persons who indirectly are shareholders. We established a BVI company to hold Titanium Technology, as we believed that it would be easier to attract investment capital into a BVI company rather than a Hong Kong company. While the BVI entity is the parent company, our accounting history is that of Titanium Technology and therefore our operations go back to 2001 when Titanium Technology began operations. Titanium Technology is engaged in developing products utilizing biometrics technologies, licensing of technologies, professional services, and project contracting. Based in Hong Kong with a research and development center in Shenzhen, China, and a sales representative office in the United States, Titanium Technology has built a strong network of expertise, comprising over 30 IT practitioners and researchers, enabling us to provide what we believe are top-quality biometrics products and professional services. In particular, we believe we are a leading provider of Automatic Face Recognition Systems, or AFRS, and other biometric and security solutions to governments, law enforcement agencies, gaming companies, and other organizations in China and other parts of Asia. Our AFRS products enable customers to capture human face images electronically, encode facial image into searchable files (faceprint), and precisely compare a set of faces to a database containing potentially thousands of faces in seconds. For over five years, we have researched, developed, and marketed face biometrics technologies that incorporate advanced concepts in neural networks, artificial intelligence, image processing, pattern recognition, data mining, and massively parallel computing. Our researchers are keen to work on innovative recognition algorithms and, using advanced methods of software engineering, turn core mathematical modules into practical applications. Our proprietary mathematical algorithms, together with optimized hardware peripherals, enable our customers to cost-effectively achieve what we believe to be industry-leading accuracy rates and performance. Titanium Technology supports the latest standards in face biometrics and we are focused on enabling our customers to expand the capabilities of their systems as their biometric needs evolve. In the beginning of 2002, the award-winning core component for face recognition, called "Ti-Face", was successfully developed. To date, Ti-Face Software Development Kit ("SDK") has been adopted to develop custom-made applications for governments, universities, and institutions in the greater-China region. Examples include the Hong Kong government, Hong Kong Polytechnic University, Institution of Vocation Education (Hong Kong), Chinese Academy of Science (PRC), and Tsing Hua University (PRC). In 2003, we successfully registered a patent about "Apparatus and Method for Recognizing Images" in Hong Kong Special Administrative Region ("HKSAR"). Also in 2003, our face recognition product, ProAccess FaceOK(TM), computer logical access control software, was launched. This product was then awarded the "Best of 15 Comdex Finalist 2003" in Las Vegas in November of the same year. Comdex, an acronym for Computer Dealer's Exhibition, was a computer and information technology exposition held in Las Vegas, Nevada, each year from 1979 to 2003. It was one of the largest computer trade shows in the world. ProAccess FaceOK was also awarded several local (the IT Excellence Award in Hong Kong) and regional (the Asia Pacific ICT Award) recognitions. The IT Excellence Awards is a professional initiative of the Hong Kong Computer Society. Established in 1998, the award scheme is an annual event that recognizes excellent IT applications and innovative IT technologies. The Asia Pacific ICT Awards (APICTA) is an international awards program initiated by the Multimedia Development Corporation of Malaysia to increase ICT (Information and Communication Technology) awareness in the community and assist in bridging the Digital Divide. Participants of the Awards Program comprise members of the APICTA Network, which include Australia, Brunei, Hong Kong, India, Indonesia, Korea, Macau, Malaysia, Myanmar, Philippines, Singapore, Sri Lanka, Thailand, Vietnam and China. Nominees to the different awards are presented to APICTA by the respective economy coordinator and assessed by a panel of judges representing every member-economy. Titanium was presented the Merit Award in Security category with the ProAccess FaceOK product in 2004. In 2004, our intelligent surveillance product, ProFacer, was launched and promoted into casino and financial institution markets. We also set up distribution networks in mainland China, Australia, and Japan. Titanium Technology has proven capabilities in delivering biometrics security products, consulting, and systems integration serving the government, major financial institutions, universities, telecommunication companies, and prestigious international corporations. TI-FACE Ti-Face is the core face recognition engine developed and implemented by Titanium Technology. A proprietary algorithm, named Dynamic Local Feature Analysis (DLFA), was invented to utilize the specific features for identification instead of the entire representation of the face. This technology is capable of selecting intelligently specific areas of the face, such as the eyes or mouth, which in turn are used as distinguishable features for recognition. Embedded with the Ti-Face module, a system can dynamically select sets of blocks, or features, in each face that differ from other faces in the data repository with an outstanding processing speed. Based on this innovative face recognition technology, our research and development group successfully modularized and realized this concept into the Ti-Face Software Development Kit (SDK) in 2002. This SDK is not only our core technology but serves as the blueprint for further extending our security access control applications for all walks of life. TI-FACE SDK 3.0 FOR WINDOWS. Features included in Ti-Face SDK 3.0 are face detection, high speed face tracking, matching and authentication, detecting motion or changes in a scene, extracting imagery from a video or live-stream, comparing and matching non-facial images, performing both "one-to-one" verification and "one-to-many" identification. Independent developers can use Ti-Face SDK as a tool to easily build custom applications based on our proprietary face detection and recognition technology. Furthermore, by integrating our face recognition engine into third-party solutions and applications, end users can obtain a solution that is customized to fulfill their specific requirements. At present, we are eager to develop additional modules on face recognition, such as lip movement identifier. By combining several modules, greater security and more accurate identification methods can be obtained. Furthermore, a multimodal biometric system can be easily integrated into an application to greatly enhance security, privacy and user convenience. PRODUCTS Powered by our innovative face recognition technology, our core products can be grouped into two categories: PROACCESS and PROFACER. The ProAccess series fulfills the fundamental security and trust needs of the information world by logical and physical access control. The ProFacer series provides an ultimate solution for intelligent surveillance. Both of them have won both local and international prizes, which have shown that these are highly competitive face recognition products in the worldwide market. Moreover, Titanium Technology has proven its potential among its competitors and was selected by the HKSAR Government as one of suppliers PC/LAN Bulk Tender in Category C. 16 PROACCESS. Applying our Ti-Face technology, the first series of products, called ProAccess, were launched in the middle of 2003. The ProAccess suite is a high-performance, secure, user-friendly solution to enhance the authentication method of physical doors, personal computers, and mobile phones by advanced face recognition technology.
- -------------------------------------------------------------------------------------------------------------------- PRODUCT APPLICATION STATUS - -------------------------------------------------------------------------------------------------------------------- ProAccess FaceOK Access to computers Launched in 2003 - -------------------------------------------------------------------------------------------------------------------- ProAccess FaceGuard Facility entry Beta version has been released and deployments have been made in pilot sites. - -------------------------------------------------------------------------------------------------------------------- ProAccess FaceAttend Time attendance recorder Beta version has been released and deployments have been made in pilot sites. - -------------------------------------------------------------------------------------------------------------------- ProAccess FaceMobile Mobile computing such as PDA devices This product is under development. and mobile phones - --------------------------------------------------------------------------------------------------------------------
PROACCESS FACEOK (PROFESSIONAL & ENTERPRISE). ProAccess FaceOK fulfils the fundamental security and trust needs of the information world. Users can sign-on to their computers through face recognition, which ensures the highest degree of security against unauthorized access, especially when compared to authentication methods such as unsecured simple text input and unreliable memories. In addition, ProAccess FaceOK offers features such as audit trail, face learning, active user monitoring, and web-based single sign-on services and integrated with directory services. Audit Trail is enabled to capture all unauthorized login attempts (with images of trespassers and hackers) and store that information in a log file. The Face Learning function allows the user to learn the latest face whenever a login occurs. Natural facial progression does not compromise system accuracy. Active Monitoring monitors the environment actively to ensure continuous access control. The system proactively locks itself out when the authorized user is not detected. Hidden Encryption encrypts a file and masks it with an image file type so that only authorized users can retrieve its true content, while it appears as a normal file to others. Furthermore, users can logon to different Directory Services with the use of FaceOK. Those directories can be Novell eDirectory, Microsoft Active Directory, NT Domain, NDS, iPlanet and other LDAP compliant directories. Additionally, our new module focusing on web Single-sign on technology is integrated in FaceOK, which in turn, enforces our competitive competency in the market. Considering our variety of clients, our FaceOK is released into two editions, Professional edition and Enterprise edition. Enterprise edition is suited for the corporate buyers (such as MTRC, Mass Transit Railway Corp) and government agencies (Department of Health), whereas Professional edition is designed for SOHO or SME. Titanium Technology cooperates with distributors in Australia and Japan to market globally. Currently, we are dealing with potential distributors to enlarge our markets in different countries including United States, Europe and China. PROACCESS FACEGUARD. Conventional access control systems relying on cards, keys or codes are vulnerable to those wishing to gain unauthorized entry to a facility. The card, key or code may be lost, stolen or illegally copied. Once an intruder has gained access to a building using a stolen entry device, there is often little evidence to help in apprehending or prosecuting the culprit. Personal property, office equipment and intellectual property are all at risk. "FaceGuard" offers users a radically different approach to facilities security that not only provides secure access to buildings, but also detects and identifies anyone attempting to gain access without authorization. ProAccess FaceGuard is a biometric physical access control system, which identifies an individual's identity from their facial characteristics by comparison with recorded data, and enables keyless entry based not on what the entrant has or knows, but based on the identity of the entrant. In contrast to conventional automatic systems, which only check for possession of a valid card, pass or PIN number, this digital image analysis system recognizes individual people and turns away those who try to enter using borrowed or stolen IDs. Its clever 17 software is not fooled by life-size photos, and will only admit living, breathing humans with faces it "recognizes". Therefore, the technology allows access that is convenient, personal, private, and extremely secure. ProAccess FaceGuard is empowered by Ti-Face. It can be operated in both online and offline mode. The templates of the authorized user list can be stored in a server or in the internal memory of the device. Features such as all-in-one device and best technology are used to protect and secure physical assets. All-In-One Device - Although ProAccess FaceGuard may be networked in an enterprise environment, it is a stand-alone device that can be operated independently. The installation is simple and, except for the electric lock, there is no hidden cost in the installation. Best Technology - Although different biometrics, e.g. finger scan, may be widely employed in similar applications, we believe that face recognition is the best among the existing alternatives. First, according to our internal research, the false acceptance rate is less than 0.001% regardless of the lighting condition, which is 50 times better than traditional fingerprint authentication. Second, there is no direct contact between the device and users, and hence the problems of cleanliness and wear on the equipment are greatly reduced. Third, the core component is a CCD/CMOS camera, which is relatively low in production cost. Last but not least, we believe that users have less concern on privacy issues with regard to facial pictures and the market acceptance is much higher, since photographs of facial images for identification are commonly used, such as in passports, driver's licenses, and other forms of identification cards. PROACCESS FACEATTEND. ProAccess FaceAttend is a feature-rich, stand-alone, robust, cost effective, face recognition based time attendance recorder. It is suitable for medium and large offices, branches, factories, or other sites. ProAccess FaceAttend provides the most accurate data collection solution available by ensuring that employees must be present in order to record a punch. It brings the flexibility of a full-function time and attendance terminal together with the sophistication of the most accurate identification technology available. Using field-proven face biometric technology, FaceAttend terminals scan employees' faces to identify their identities from a huge database each time they punch. No fingerprints or palm prints are utilized. ProAccess FaceAttend can be installed at convenient locations throughout a facility to make it easy for employees to clock in. Punching is performed using biometric face scans, and the resulting transactions are periodically uploaded to a host PC running the automated timekeeping system. It greatly improves payroll accuracy by eliminating "buddy-punching," the practice of employees punching in or out for other employees who are not present at work. Not only does this reduce labor costs and the time required to prepare payroll, but it also gives supervisors more time to focus on their jobs instead of watching clocks, thereby increasing efficiency and profitability. We believe that use of ProAccess FaceAttend eases concerns and boosts security by ensuring that the people on-site actually belong there. Attendance of each employee is printed on the attendance report. The attendance report is particularly useful for payroll purposes. Wages and salaries can be paid according to the employee's worked hours, overtime etc. Given the continual growth of China as a worldwide manufacturing base, the Southern part of China houses the largest network of factories in Asia, based on gross domestic product statistics. This region is also where we clearly have a distinct advantage of physical and cultural proximity. PROACCESS FACEMOBILE. ProAccess FaceMobile is the security solution using biometric technology for the mobile computing market. As the mobile ownership becomes more universal and third generation mobiles become more popular, we are keen to introduce advanced biometric security solution to this market. This technology uses the camera equipped in the mobile phone to perform the logon process. As a result, no additional hardware cost is incurred on the capturing device. Utilizing our face recognition technology, mobile users do not require special knowledge to use it. Users simply look at the camera embedded in their phone, automatically triggering and processing authentication for the logon process. The FaceMobile supports two different system architectures. The difference between the two architectures (user authenticated on the device and on the operator) is the location where authentication is processed. 18 USER AUTHENTICATED ON THE DEVICE. In this architecture, the device captures and authenticates the user by the same device. This architecture is optimal for the following situations: o The device may be operated offline; o The device stores sensitive information locally; or o The device has high processing power. In general, this architecture is applicable in the PDA market. USER AUTHENTICATED ON THE OPERATOR. This architecture supports the user picture being captured by the device, and then the servers in the operator site authenticate the user. This approach is designed for the following cases: o Authentication is required only when the user access service from operator; or o The device need not have very powerful processing power. This approach can be a turn-key solution for current generation mobile phones. In summary, features found in FaceMobile are described below: o ENHANCED ACCESS CONTROL - As cameras are standard components in third generation mobile phones, this application of face recognition helps to greatly improve the access control of the phone with limited increased in production cost. The improved access control prevents unauthorized persons from making calls, receiving calls and reading stored data within the phone. o M-COMMERCE SUPPORT - The continual improvement of computing power of mobile devices, communication bandwidth, market acceptance, etc., will allow the real-life application of M-commerce in the near future. We believe that the use of FaceMobile could provide the foundation for secure transaction in the virtual credit card payment platform for major carriers such as NTT Docomo and Credit Card companies. PROFACER. ProFacer is a biometrically integrated surveillance system. Titanium Technology employs a full range of technology to enhance and automate existing surveillance techniques. In order to make the digital video recording technology more secure and smart, we provide the most advance biometrics systems that enable automated real time face recognition. The technology rapidly and accurately detects and recognizes faces. Characteristic processes enabling ProFacer to function effectively are detection, alignment, normalization, representation and matching: o DETECTION - When the system is attached to a video surveillance system, ProFacer recognition software searches the field of view of a video camera for human faces. If there is a face in the view, it is detected within a second. o ALIGNMENT - Once a face is detected, the system determines the head's position, size and pose. A face needs to be turned to an appropriate angle toward the camera for the system to register it. o NORMALIZATION - The image of the head is scaled and rotated so that it can be registered and mapped into an appropriate size and pose. Normalization is performed regardless of the head's location and distance from the camera. Light does not impact the normalization process. o REPRESENTATION - The system translates the facial data into a binary string - "Faceprint". This coding process allows for easier comparison of the newly acquired facial data to stored facial data. o MATCHING - The newly acquired facial data is compared to the stored data and linked to at least one stored facial representation. As comparisons are made, the system assigns a value to the comparison. If a score is above a predetermined threshold, a match is declared. The operator then views the two photos that have been declared a match to be certain that the computer is accurate. 19
- -------------------------------------------------------------------------------------------------------------------- PRODUCT APPLICATION STATUS - -------------------------------------------------------------------------------------------------------------------- ProFacer iDVR DVR system with face capture Deployed in the People's Bank of China as a pilot project - -------------------------------------------------------------------------------------------------------------------- ProFacer iWatchGuard Automatic full-time face recognition Deployed in the People's Bank of China - -------------------------------------------------------------------------------------------------------------------- ProFacer iMugShot Image to image matching Pilot projects have been done. - -------------------------------------------------------------------------------------------------------------------- ProFacer iDControl Live person to image matching Pilot projects have been done. - --------------------------------------------------------------------------------------------------------------------
PROFACER IDVR. Currently, Digital Video Recorders (DVRs) are popular in public areas, offices and homes, with the belief that the cameras deter criminal activity. However, with the public need for security rising, the sheer numbers of DVRs pose problems. On top of traditional DVR systems, Titanium Technology offers a proprietary real-time algorithm of face image detection and capture, named PROFACER IDVR. It does not require special cameras or a specific environment. Multiple faces in a stream of people may be detected, captured, recorded and delivered with further analysis, reporting and notification capabilities. The Face Capture is an application software for video surveillance, monitoring, law enforcement and other applications. Individual facial patterns are recorded and stored in a digital photo database that can be viewed and used for different applications on-site or remotely. Titanium Technology developed several algorithms, supporting the real time processing of video data and image localization, determination of position of head and motion tracing for subsequent recognition. PROFACER IDVR can be used at airports, banks, casinos, public buildings, subways, factories, schools or in any other location where it makes sense to record the faces of visitors, with facilities for integration into existing DVR systems. The PROFACER IDVR GUI is very simple such that any operator can use all of its functions with just a minimal amount of training. The system is highly flexible, allowing images to be digitalized and recorded in either color or monochrome with a storage capacity typically exceeding 36 months of facial data recording. PROFACER IDVR screen simultaneously shows the live camera shot and the latest sequence of captured images. A pilot project has been launched in GuangXi Peoples' Bank of China and generated revenues. PROFACER IWATCHGUARD. PROFACER IWATCHGUARD adds automatic full time face recognition, matching and active warning alerts to any new or existing surveillance system. It allows each camera to serve as a diligent observation point even when the video is not observed. Face recognition surveillance incorporates computer intelligence to monitor faces and match those faces against a "watch list" face database. As a modern new tool to identify potential threats to public safety, PROFACER IWATCHGUARD can scan facial images of individuals and match them with a database of images containing known suspects. In seconds, a scanned face can be searched against thousands, or even millions of database images to determine if the scanned image matches a previously stored suspect image. This creative concept has been applied to protect high security areas such as casinos, banks, computer centers, research institutes and prison and jails, for fully automatic operation 24 hours a day. For example, a casino group in Macau has started a pilot project using PROFACER IWATCHGUARD to identify unwanted guests or VIPs. Using a list of unwanted guests stored in the database, casino staff can focus on trailing specific individuals from thousands of guests everyday. With the installation of PROFACER IWATCHGUARD, closed circuit televisions are connected and in real time send the scenes to a detection manager. Inside the detection engine, a number of clear and distinct faces will be identified. Each face will attempt to match the existing black-listed faces. As soon as a face known to the database appears in the scene, the system triggers a configurable alarm. Security guards can locate the unwanted person easily and take them away. As a result, staffs are no longer burdened by monotonous work, but can be employed more flexibly and effectively while still increasing security. PROFACER IMUGSHOT. PROFACER IMUGSHOT is another product derived from ProFacer surveillance solution. In law enforcement units such as police and immigration departments, this system can greatly help reducing fraud and crime. Through identifying duplicate images in large databases, such as licensed drivers and missing children and immigration, suspicious targets can be provided as a list. As a result, the scope in finding the target subjects can be greatly narrowed which, in turn, provides a cost effective, reliable and time saving surveillance application. 20 As existing clients, like the Government Laboratory of HKSAR, have placed repeat purchase orders, we believe that our customers are satisfied with this highly accurate, promptly response, time cost effective surveillance system. It is believed that police forces would be a likely target market for this advanced application. PROFACER IDCONTROL. PROFACER IDCONTROL utilizes face recognition technology in the airline and national security. Every traveler, who is ready to make boarding registration, will be captured an image. Our PROFACER IDCONTROL can start scanning if the given facial image has a high similarity scale with the suspects contained in a database storing images of terrorists' faces provided by government agencies. Once a list of suspects is generated, airline staff can refine the verification process by one-to-one scanning. For further enhancement, facial images can be saved in the travel document during the check-in process. When travelers are ready to board the airline, our system can achieve a high degree of security by further matching live face with the face ID marked in the travel document. We believe these two levels of security measures are practical, helpful, safe and convenient in the airport. PROFACER IDCONTROL can be used for banking application. Face identity can be embedded in the credit card, every time holders withdraw money from ATM machines. For greater security, faces can be verified in addition to inputting passwords, to confirm ownership of credit or debit cards. Using these two levels of security control, personal property is strongly protected. CONSULTING Our consulting team works with the client from the earliest stages of the project and takes accountability for the success of the project. We provide services in the areas of security service and system integration/development projects. SECURITY SERVICES. We believe we are one of the leading digital security services providers in Asia, offering strategic solutions for technology-enabled enterprises. As a security advisor, we help clients to meet their requirements for continuous IT innovation and development while controlling the risks inherent in today's complex networked environments. Our security specialists help customers identify system/network security weaknesses and provide professional advice on how to best protect vital information and assets both virtually on the Internet and physically without compromising productivity or endangering the bottom line. Our services include security consulting, risk assessment and penetration testing. Security training is also provided for the staffs to increase the security awareness and knowledge. Our clients include the Labour Department of Hong Kong SAR, Tokyo Bank of Mitsubishi, Citic Ka Wah Bank, Hong Kong Productivity Council, Mandatory Provident Fund Schemes Authority, and Mass Transit Railway Corp (MTRC). In addition, we agreed to partner with IBM China/Hong Kong Limited to provide professional services for the Hong Kong government, as part of our role as a service supplier to IBM China/Hong Kong Limited under a Technical Service Agreement dated October 5, 2004. That agreement outlines a general working relationship, with specific deliverables, services, and pricing to be outlined from time to time in statement of work documents. SYSTEM DEVELOPMENT/INTEGRATION. Our solution team utilizes its technical expertise to implement complex business systems, thereby reducing time and risk for our customers' mission critical projects. We work with business systems critical to the running large commercial and public sector organizations, as well as large-scale technical systems designed to operate to the highest levels of reliability in demanding conditions. To keep pace with the competitive IT world, our staff have been equipped with newly and advanced knowledge, such as Microsoft .net and J2EE, on system implementation work. DISTRIBUTION AND MARKETS We select distributors based on the potential impact of the distribution relationship. We seek to cooperate with business partners that will bring synergies, making it quicker to penetrate the target market and localization. Distributors in the United States include Elite Technology Solutions and eInfoDev Inc. Distributors in Asia include Smart Wireless (Japan), Elixir Group (Macau), Maxfair Technology Limited (Hong Kong), and Regal Cyber Group (Hong Kong and People's Republic of China). However, for major accounts that are readily accessible, we tend to handle such accounts ourselves since these corporate clients expect expert knowledge and demand flexibility. 21 We organize exhibitions and seminars periodically to create awareness of the importance of biometrics applications. We participated in four exhibitions and one seminar in Japan in 2004 and 2005. The main purpose of these exhibitions and seminars is to introduce our products to the Japanese market, especially in the retail sector. We also prepare marketing materials such as brochures, product white papers and pricing references for the distributors and provide complete sales support and technical consulting services to them. Our markets include the following: o Hong Kong, including the Hong Kong government and commercial sectors; o China, mainly the government; o Macau, mainly casinos; and o For Japan and the US markets, we form a distribution partnership with the local agents to sell our products. Clients in Japan came from both retail and commercial sectors. Through these marketing activities, we have been able to acquire an increasing number of customers and distributors. As of the date of this prospectus, we have 12 major customers, which represents a 50% increase over the end of our last fiscal year (December 31, 2004). Further, we project that our customer list will continue to grow and span through a variety of industries, based on our history to date. This will ensure us a more balanced customer portfolio. Titanium Technology not only focuses on two core activities, biometrics-based technology development and professional services, but also operates a distribution business and distributes a number of commercially available software, such as software from Microsoft, Novell, Symantec and IBM. In March 2003, it was awarded a bulk tender to supply PC/LAN software to all departments in HKSAR government for three years. This guarantees that Titanium Technology is one of the few vendors from whom the Hong Kong government purchases software. At the time of the award, there was one other company that received an award in the same category as us. To strengthen our distributor network, we believe we have built a good relationship with many large vendors such as Microsoft, Novell, SiS International Ltd, JOS, and others. In addition, with our expertise in security technologies, eEye Digital Security has appointed Titanium Technology to be a regional distributor for eEye products. We estimate that our distribution business accounted for approximately 8% and 11% of our business in fiscal 2004 and 2003, respectively. CUSTOMERS Titanium Technology's major customers include: o In Hong Kong: the Hong Kong government o In China: People's Bank of China o In Macau: Elixir Group, a supplier to an entertainment corporation - Sociedade de Jogos de Macau o In Japan: NTT Group During the fiscal year ended December 31, 2004, 8 customers accounted for approximately 75% of revenues. Sales to Beacon Base Software Ltd. and Information Security One (Hong Kong) Ltd. were 13.32% and 21.02% of revenues, respectively. There is no law in Hong Kong or any provisions in our contracts with the Hong Kong government that specifies or triggers a termination at the election of the government. At September 30, 2005, our backlog of orders believed to be firm was approximately $1,026,000 (HK$8,000,000), as compared to approximately $256,000 (HK$2,000,000) at December 31, 2004. We expect that approximately $513,000 (HK$4,000,000) will not be filled by December 31, 2005. 22 INTELLECTUAL PROPERTY PATENTS. Titanium Technology was issued patent number HK1053239 for "Apparatus and Method for Recognizing Images" in September 2002. The patent expires September 10, 2010. Even though we have been issued a patent from Hong Kong and even if we were to obtain copyright protection on the software, we would still have to enforce our rights against those who might attempt to infringe on our intellectual property as patent protection does not necessarily deter infringement. Such enforcement efforts are likely to be expensive and time-consuming and we may lack the ability to engage in any significant enforcement efforts. Instead, we have chosen to use our resources on product development and the expansion of market share. TRADEMARK AND TRADE NAME. Titanium Technology has the following registered trademarks for "ProAccess FaceOK": o United States - Serial No. 78/414377 o Hong Kong - Trade Mark No. 300053478 o China - Serial No. ZC3732931SL COMPETITION The biometrics industry is fragmented and undeveloped, with a plethora of methods for gathering biometric information, processing the data, and interconnecting with applications. All the major prevailing biometrics systems have limitations. As a general rule, systems with a high degree of accuracy have typically been expensive to install and maintain. Systems that are inexpensive have performed poorly relative to accuracy. This compromise between accuracy and cost has led to many buyers deploying "layered" systems that combine two or more biometric methods, or require supplemental passwords and/or smart cards. The biometric industry is global in scope, with many competitors and customers located in US and Europe. While Asia has some companies in the biometrics arena, many of the biggest projects have been in nations installing national identification systems. Strategic focus is quite diverse, as well, with some firms specializing in the proprietary technology associated with capturing biometric information, others in providing enterprise-level integration services, and still others in offering managed or hosted services for outsourced systems. Large players in intermediate or end-use markets for biometrics (e.g. banking/financial services, security, PCs/peripherals, software/enterprise systems, and wireless equipment and services) have been active in investing in or sponsoring biometric technologies. We intend to compete by utilizing the following strategies: o put more funding into research and development to strengthen the quality of our products; o gain more share in the Asian market before the big competitors step in; o seek potential partnerships and strategic alliances; and o organize more exhibitions of our products. We believe that we have two major competitors: Identix Incorporated and Viisage Technology, Inc., from the United States. Identix is a multi-biometrics security technology company in both fingerprint identification and facial recognition solutions has set to the growing demand for biometrics products and solutions access multiple security markets. Viisage delivers advance technology identity solutions for governments, law enforcement agencies and business concerned with enhancing security, reducing identity theft, and protecting personal privacy. It has been renowned for its facial recognition technologies. RESEARCH AND DEVELOPMENT During the fiscal years ended December 31, 2004, 2003 and 2002, we spent $nil, $89,092 and $84,936, respectively, on research and development activities. 23 EMPLOYEES As of November 30, 2005, we employed a total of 35 persons, of which 30 were full-time. None of our employees is covered by a collective bargaining agreement. FACILITIES Our principal offices are located at 4/F, BOCG Insurance Tower, 134-136 Des Voeux Road, Central, Hong Kong. We have entered into a lease contract with this new property that runs through June 2008, with an option to renew for an additional term of two years. The lease requires monthly rent of HK$23,695 (approximately $3,050) and a monthly management fee and air conditioning charge of HK$12,863 (approximately $1,656). Our research and development center is located at 15/F, Wen Jin Plaza 23, Tian Bei Road 1, Luo Hu Qu, Shenzhen, China, while the sales representative office in the United States is located at 3723 Haven Avenue, Menlo Park, California. LEGAL PROCEEDINGS There are no legal proceedings pending and, to the best of our knowledge, there are no legal proceedings contemplated or threatened. ENFORCEABILITY OF CIVIL LIABILITIES We are a British Virgin Islands company. You should note that the British Virgin Islands courts are unlikely to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for losses suffered. All of our officers and directors reside in Hong Kong. Accordingly, if events should occur that give rise to any liability on the part of these persons, shareholders would likely have difficulty in enforcing such liabilities. If a shareholder desired to sue these persons, the shareholder would have to serve such persons with legal process. Shareholders would not be able to effect service of process within the United States on us or any of our officers or directors, unless a consent to service of process has been filed with a government entity in the United States. To the best of knowledge we do not believe that such a consent to service of process has been filed. Even if personal service is accomplished and a judgment is entered against that person, the shareholder would then have to locate assets of that person, and register the judgment in the foreign jurisdiction where assets are located. 24 MANAGEMENT OFFICERS, DIRECTORS AND KEY EMPLOYEES Our executive officers, directors, and key employees are: NAME AGE POSITION Dr. Johnny Ng 31 Chairman of the Board of Directors Jason Ma 33 Chief Executive Officer Prof. Stan Li 47 Chief Scientific Advisor Humphrey Cheung 34 Chief Technology Officer and Director Billy Tang 32 Chief Operation Officer and Director Our shareholders elect our directors annually and our board of directors appoints our officers annually. Vacancies in our board are filled by the board itself. Set forth below are brief descriptions of the recent employment and business experience of our executive officers and directors. DR. JOHNNY NG, CHAIRMAN. Dr. Ng is the Chairman of the Board of Directors of the Company. Currently, Dr. Ng's duties include his functioning as our principal financial and accounting officer. Dr. Ng received his bachelor's degree in manufacturing engineering in 1996 and doctorate degree in industrial and systems engineering in 2002 from The Hong Kong Polytechnic University, and has been an Adjunct Associate Professor there, specializing in biometrics technology. Dr. Ng first organized his own technology start-up, 303 Company Limited, in 1998. This company, which was sold to a listed company in 2001, was a solution provider of fingerprint authentication technology. He served as the Chief Executive Officer of that company from August 1999 to August 2001. Shortly after this transaction, he started Titanium Technology in September 2001 with research and development as its primary activity, and gradually expanded his business venture beyond Hong Kong. Dr. Ng has received a great deal of recognition for his achievements, which include the following: o one of the "Ten Outstanding Young Digi Persons 2000" by the Hong Kong Productivity Council and Hong Kong Junior Chamber; o "Innovative Entrepreneur of the Year" for 2003 by the Hong Kong Junior Chamber; and o one of the "Top 100 Cosmopolitan Chinese Confucian Businessman in 2004" by the Chinese Confucian Foundation and China Economic Daily. Dr. Ng is the youngest recipient in this event. The "Innovative Entrepreneur of the Year" award recognizes successful and creative entrepreneurs in greater China. According to the selection criteria, this award recognized Titanium as one of the best companies in terms of products and services, originality of ideas, uniqueness in the market, management and marketing strategies, revenues of the company, the future prospect and potential of the company. He is a highly sought after speaker at high level industry conferences and a frequent commentator in the media. He was one of the speakers, representing Hong Kong, at one of the Asia-Pacific Economic Cooperation ("APEC") business conferences held in Korea in 2005. MR. JASON MA, CHIEF EXECUTIVE OFFICER. Mr. Ma became the Chief Executive Officer of Titanium Technology in May 2005 and is responsible for formulating business strategies, overseeing the entire business operation, and establishing and executing global alliances and mergers and acquisitions for the company. Mr. Ma was born and raised in Hong Kong and went to the United States for his university education, where he received a bachelor's degree in engineering and computer science from the University of California at Berkeley in 1995, and an MBA degree from the University of Southern California's Marshall School of Business in 1998. During his stays in the United States he had worked for different companies in the fields of computer science and marketing. Mr. Ma returned Hong Kong in 1998 and has since been involved in various IT related endeavors. Before joining Titanium 25 Technology in April 2004, he was the general manager for Laurentia Technologies Ltd., a consumer electronics company (February 2003 to March 2004), and he was the director of project management for Ebiz Incubation Co., Ltd. from February 2000 to February 2003. From November 1998 to January 2000, he was the assistant marketing manager for Ball Asia Pacific Ltd. PROF. STAN LI, CHIEF SCIENTIFIC ADVISOR. Prof. Li has been a Researcher at National Lab of Pattern Recognition (NLPR), Institute of Automation, Chinese Academy of Sciences (CASIA), and the Director of the Center for Biometrics Research and Testing (CBRT) since August 2004. He worked at Microsoft Research Asia (MSRA) as a Researcher from May 2000 to Aug 2004. Prior to that, he was an Associate Professor of Nanyang Technological University, Singapore. His current research interest is in face recognition technologies, biometrics, intelligent surveillance, pattern recognition, and machine learning. Prof. Li has been the Chief Scientific Advisor to Titanium Technology since June 2005. He has published several books, including "Handbook of Face Recognition" (Springer-Verlag, 2004) and "Markov Random Field Modeling in Image Analysis" (Springer-Verlag, 2nd edition in 2001), and over 180 reference papers and book chapters in these areas. He obtained a B.Eng from Hunan University, an M.Eng from National University of Defense Technology, and a PhD. from Surrey University where he also worked as a research fellow. All the degrees are in Electrical and Electronic Engineering. He is a senior member of IEEE and currently serves as editorial board of Pattern Recognition, and program committees of various international conferences. MR. HUMPHREY CHEUNG, CHIEF TECHNOLOGY OFFICER AND DIRECTOR. Mr. Cheung has been the Chief Technology Officer of Titanium Technology since July 2001. He received a bachelor's degree in Electronic Engineering from The Chinese University of Hong Kong in 1994 and a master's degree in Manufacturing Engineering from The Hong Kong Polytechnic University in 1998. Mr. Cheung is responsible for overseeing the technical development of all product lines as well as the integration of the technologies into product, systems and platforms into deliverables that will best serve market demands. Prior to founding Titanium Technology, Mr. Cheung worked at the Computer Graphics Laboratory for the Hong Kong Polytechnic University as a research assistant. He was also a co-founder of 303 Company Limited with Dr. Johnny Ng and Mr. Billy Tang, serving as the Chief Technical Officer from April 1999 to March 2001. He has published several papers in the fields of computer graphics, solid modeling, biometrics, and pattern recognition. MR. BILLY TANG, CHIEF OPERATION OFFICER AND DIRECTOR. Mr. Tang has been the Chief Operation Officer of Titanium Technology since July 2001 and is responsible for its management and overall operation. He holds Bachelor's degree in Mathematics from the Hong Kong University of Science and Technology. Under his leadership, Titanium Technology has experienced tremendous growth and has increased its employee base to over 30 employees worldwide in just over a year. Prior to co-founding Titanium Technology, he was also a co-founder of 303 Company Limited with Dr. Johnny Ng and Mr. Humphrey Cheung. He served as Chairman of that company from April 1998 to January 2001. Mr. Tang previously was an instrumental member of the research team in the department of Industrial and Systems Engineering of the Hong Kong Polytechnic University from November 1996 to March 1997, where he focused on the research of virtual reality technology. He was a system engineer for Internet Access Hong Kong Limited, one of the largest Internet Service Providers in Hong Kong, from June 1997 to April 1998. CONFLICTS OF INTEREST Members of our management are associated with other firms involved in a range of business activities. Consequently, there are potential inherent conflicts of interest in their acting as officers and directors of our company. While the officers and directors are engaged in other business activities, we anticipate that such activities will not interfere in any significant fashion with the affairs of our business. Due to the ownership of stock in our company by management, we believe that they are sufficiently motivated to focus primarily on the business of the company. Our officers and directors are now and may in the future become shareholders, officers or directors of other companies, which may be formed for the purpose of engaging in business activities similar to us. Accordingly, additional direct conflicts of interest may arise in the future with respect to such individuals acting on behalf of us or other entities. Moreover, additional conflicts of interest may arise with respect to opportunities which come to the 26 attention of such individuals in the performance of their duties or otherwise. Currently, we do not have a right of first refusal pertaining to opportunities that come to their attention and may relate to our business operations. Our officers and directors are, so long as they are our officers or directors, subject to the restriction that all opportunities contemplated by our plan of operation which come to their attention, either in the performance of their duties or in any other manner, will be considered opportunities of, and be made available to us and the companies that they are affiliated with on an equal basis. A breach of this requirement will be a breach of the fiduciary duties of the officer or director. If we or the companies with which the officers and directors are affiliated both desire to take advantage of an opportunity, then said officers and directors would abstain from negotiating and voting upon the opportunity. However, all directors may still individually take advantage of opportunities if we should decline to do so. Except as set forth above, we have not adopted any other conflict of interest policy with respect to such transactions. EXECUTIVE COMPENSATION The following table sets forth information about the remuneration of our chief executive officers for the last three completed fiscal years. SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------- LONG TERM COMPENSATION ---------------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS OTHER RESTRICTED SECURITIES NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA- POSITION YEAR SALARY ($) BONUS ($) TION($) ($) SARS (#) ($) TION($) - ---------------------------------------------------------------------------------------------------------------------- Johnny Ng (1) 2002 $17,820 $-0- $-0- $-0- -0- $-0- $-0- 2003 $41,538 $-0- $-0- $-0- -0- $-0- $-0- 2004 $30,512 $-0- $-0- $-0- -0- $-0- $-0- - ---------------------------------------------------------------------------------------------------------------------- Humphrey Cheung 2002 $17,820 $-0- $-0- $-0- -0- $-0- $-0- 2003 $58,974 $-0- $-0- $-0- -0- $-0- $-0- 2004 $51,282 $-0- $-0- $-0- -0- $-0- $-0- - ---------------------------------------------------------------------------------------------------------------------- Billy Tang 2002 $17,820 $-0- $-0- $-0- -0- $-0- $-0- 2003 $58,974 $-0- $-0- $-0- -0- $-0- $-0- 2004 $51,282 $-0- $-0- $-0- -0- $-0- $-0- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------- (1) Mr. Johnny Ng functioned as the Chief Executive Officer from September 2001 to April 2005.
During the last fiscal year, there were no grants of stock options, stock appreciation rights, benefits under long-term incentive plans or other forms of compensation involving our officers. We reimburse our officers and directors for reasonable expenses incurred during the course of their performance. EMPLOYMENT CONTRACTS We entered into agreements with our executive officers, Jason Ma, Humphrey Cheung, and Billy Tang as of January 1, 2005. While each of the agreements provides for permanent employment, each agreement may be terminated by either party at any time without cause upon two weeks' notice. In the event of termination, the employee is subject to a 12-month non-competition provision during which he cannot engage in any business that competes with us or deal with any of our existing customers. The agreements provide for monthly salaries of $2,564 for Mr. Ma, $3,846 for Mr. Cheung, and $3,846 for Mr. Tang, with annual salary reviews on January 1 of each year. During 2005, there were unpaid salaries to Jason Ma, Humphrey Cheung, and Billy Tang in the amount of $7,692 to each person. On June 30, 2005, these three officers agreed to forgive the unpaid salaries due from us through that date in the total amount of $23,076. 27 STOCK OPTION PLAN On November 22, 2005, our board of directors approved a stock option plan under which options to purchase up to 5,000,000 shares of common stock may be granted. We anticipate that the plan will provide for the granting of incentive stock options to our employees and non-statutory options to our employees, advisors and consultants. The board of directors or the compensation committee of the board would determine the exercise price for each option at the time the option is granted. The exercise price for shares under an incentive stock option would not be less than 100% of the fair market value of the common stock on the date such option is granted. The fair market value price is the closing price per share on the date the option is granted. The committee would also determine when options become exercisable. The term of an option would be no more than ten (10) years from the date of grant. No option would be exercised after the expiration of its term. Unless otherwise expressly provided in any option agreement, the unexercised portion of any option granted to an optionee would automatically terminate one year after the date on which the optionee's employment or service is terminated for any reason, other than by reason of cause, voluntary termination of employment or service by the optionee, or the optionee's death. Options would terminate immediately upon the termination of an optionee's employment for cause or 30 days after the voluntary termination of employment or service by the optionee. If an optionee's employment or consulting relationship terminates as a result of his or her death, then all options he or she could have exercised at the date of death, or would have been able to exercise within the following year if the employment or consulting relationship had continued, would be exercisable within the one year period following the optionee's death by his or her estate or by the person who acquired the exercise right by bequest or inheritance. Options granted under the plan would not transferable other than by will or the laws of descent and distribution and may be exercised during the optionee's lifetime only by the optionee, except that a non-statutory stock option would be transferable to a family member or trust for the benefit of a family member if the committee's prior written consent is obtained. We anticipate that we will have the right to redeem any shares issued to any optionee upon exercise of the option granted under the plan immediately upon the termination of optionee's employment or service arising from disability, the death of the optionee, the voluntary termination of employment or services of the optionee, or the termination of employment or services of the optionee for cause. The redemption price would be the fair market value of the shares on the date of the event of redemption. In the event that our stock changes by reason of any stock split, dividend, combination, reclassification or other similar change in our capital structure effected without the receipt of consideration, appropriate adjustments shall be made in the number and class of shares of stock subject to the plan, the number and class of shares of stock subject to any option outstanding under the plan, and the exercise price for shares subject to any such outstanding option. In the event of a merger in which our shareholders immediately before the merger own 50% or more of the issued and outstanding shares of stock of the resulting entity after the merger, then existing options shall automatically convert into options to receive stock of the resulting entity. Unless otherwise expressly provided in any option, the committee in its sole discretion may cancel, effective upon the date of the consummation of any change of control, any option that remains unexercised on such date. We anticipate that the plan will authorize the board to amend, alter, suspend, or terminate the plan, or any part thereof, at any time and for any reason. However, the plan would require shareholder approval for any amendment to the plan to the extent necessary and desirable to comply with applicable laws. No such action by the board or shareholders would alter or impair any option previously granted under the plan without the written consent of the optionee. The plan would remain in effect until terminated by action of the board or operation of law. 28 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table provides certain information as to the officers and directors individually and as a group, and the holders of more than 5% of the our common stock, as of the date of this prospectus:
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER OF SHARES OWNED PERCENT OF CLASS (2) - ------------------------------------------------------------------------------------------------------------------------- Johnny Ng 37,835,000 (3) 75.7% 4/F BOCG Insurance Tower 134-136 Des Voeux Road Central Hong Kong Golden Mass Technologies Ltd. 37,835,000 (3) 75.7% 4/F BOCG Insurance Tower 134-136 Des Voeux Road Central Hong Kong Humphrey Cheung 0 (3) -- 4/F BOCG Insurance Tower 134-136 Des Voeux Road Central Hong Kong Billy Tang 0 (3) -- 4/F BOCG Insurance Tower 134-136 Des Voeux Road Central Hong Kong Jason Ma 0 -- 4/F BOCG Insurance Tower 134-136 Des Voeux Road Central Hong Kong All Directors and Executive Officers As a Group (4 37,835,000 75.7% persons) - ---------------------- (1) To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name. (2) Based on 50,000,000 shares outstanding as of December 5, 2005. Does not give effect to the possible exercise of the Warrants. (3) Includes 37,835,000 shares owned by Golden Mass Technologies Ltd., a British Virgin Islands company, as to which Johnny Ng has sole voting and dispositive power. Humphrey Chung and Billy Tang are indirect owners but to not have voting or dispositive power over these shares.
CHANGES IN CONTROL There are no agreements known to management that may result in a change of control of our company. 29 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Other than as disclosed below, none of our present directors, officers or principal shareholders, nor any family member of the foregoing, nor, to the best of our information and belief, any of our former directors, senior officers or principal shareholders, nor any family member of such former directors, officers or principal shareholders, has or had any material interest, direct or indirect, in any transaction, or in any proposed transaction which has materially affected or will materially affect us. ERICORPS CREATION (HK) LIMITED Ericorps Creation (HK) Limited is owned by Eric Wong and his wife, who own indirectly 10.0% of our outstanding shares. Ericorps is also one of our distributors of ProAccess FaceOK. The terms that we have with Ericorps are similar to those with other third party distributors. During the years ended December 31, 2004, 2003 and 2002, we sold goods to Ericorps Creation (HK) Limited in the amounts of $34,204, $105,874, and $64,102, respectively. AMOUNTS DUE FROM RELATED PARTIES We have paid for the expenses related to the annual company secretary fee of Golden Mass Technologies Limited ("Golden Mass"), a shareholder that is controlled by, among others, Johnny Ng, Humphrey Cheung, and Billy Tang, who are our officers and directors, since 2002. Such expenses are ongoing. In addition, we have paid Humphrey Cheung, who then transfers the cash to our subsidiary in the PRC. It takes a considerable time for us to transfer cash to our subsidiary in the PRC through normal banking channels within the PRC. The subsidiary runs a risk of missing payment obligations due to the delay in the receipt of funds. Therefore, management has opted to transfer the cash through a director instead, who hand carries the checks to the subsidiary. By doing so, we insure that the subsidiary will have the cash as and when required. Approximately five business days are saved by transferring funds using this method. The following table sets forth the advances and repayments:
Nine months ended September 30, December 31, 2005 2004 2003 2002 ------------------------------------------------------------------ Balance brought forward $ 134,447 $ 103,632 $ 49,427 $ - Advances by us during the year 115,083 87,144 60,415 49,427 Repayment to us during the year - (56,329) (6,210) - Amount offset against amounts due to related parties (211,467) - - - Amount offset against shareholders' loans (38,063) - - - ------------------------------------------------------------------ Balance carried forward $ - $ 134,447 $ 103,632 $ 49,427 ================================================================== Maximum balance during the year $ 249,530 $ 180,601 $ 103,632 $ 49,427 ==================================================================
AMOUNTS DUE TO RELATED PARTIES In 2003, Johnny Ng, Billy Tang, and Goldford Consultancy Limited ("Goldford") advanced $37,190 to us. In 2004, we repaid the advances from Goldford in full. Johnny Ng and Billy Tang also advanced funds to us and at December 31, 2004, the aggregate amounts of these advances were $27,025. During the nine months ended September 30, 2005, Johnny Ng and Billy Tang loaned us $198,376 and we repaid them $13,934, leaving a balance of $211,467. This amount, together with the shareholders' loans, was applied in full against amounts due from related parties. The following table sets forth the movement of the amounts due to related parties: 30
Nine months ended September 30, December 31, 2005 2004 2003 2002 ------------------------------------------------------------------- Balance brought forward $ 27,025 $ 37,190 $ 24,906 $ 604 Advances to us during the year 198,376 56,604 81,148 52,360 Repayment by us during the year (13,934) (66,769) (68,864) (28,058) Amount offset against amounts due from related parties (211,467) - - - ------------------------------------------------------------------- Balance carried forward $ 249,530 $ 27,025 $ 37,190 $ 24,906 ===================================================================
SHAREHOLDERS LOANS In 2003 and 2004, Johnny Ng, Billy Tang, and Humphrey Cheung, through Golden Mass, loaned us $117,949 and $64,102, respectively, leaving a balance of $182,051 owed to them at December 31, 2004. During the nine months ended September 30, 2005, no additional money was loaned. These loans were unsecured, interest-free, and not repayable within the next twelve months. The amount of $143,988, which is $182,051 less the $38,063 due from related parties, was contributed to the capital to the company at September 30, 2005. PERSONAL GUARANTEES Billy Tang, Johnny Ng, and Humphrey Cheung personally guaranteed our installment loan from a financial institution in the amount of $38,462. None of these individuals received any remuneration for the guarantee. This loan was repaid in 18 monthly installments of $2,313 in 2005. TAXATION The following is a summary of anticipated material U.S. federal income and British Virgin Islands tax consequences of an investment in our common shares. The summary does not deal with all possible tax consequences relating to an investment in our common shares and does not purport to deal with the tax consequences applicable to all categories of investors, some of which, such as dealers in securities, insurance companies and tax-exempt entities, may be subject to special rules. In particular, the discussion does not address the tax consequences under state, local and other non-U.S. and non-British Virgin Islands tax laws. Accordingly, each prospective investor should consult its own tax advisor regarding the particular tax consequences to it of an investment in the common shares. The discussion below is based upon laws and relevant interpretations in effect as of the date of this prospectus, all of which are subject to change. UNITED STATES FEDERAL INCOME TAXATION The following discussion addresses only the material U.S. federal income tax consequences to a U.S. person, defined as a U.S. citizen or resident, a U.S. corporation, or an estate or trust subject to U.S. federal income tax on all of its income regardless of source, making an investment in the common shares. In addition, the following discussion does not address the tax consequences to a person who holds or will hold, directly or indirectly, 10% or more of our common shares, which we refer to as a "10% Shareholder". Non-U.S. persons and 10% Shareholders are advised to consult their own tax advisors regarding the tax considerations incident to an investment in our common shares. A U.S. investor receiving a distribution of our common shares will be required to include such distribution in gross income as a taxable dividend, to the extent of our current or accumulated earnings and profits as determined under U.S. federal income tax law. Any distributions in excess of our earnings and profits will first be treated, for U.S. federal income tax purposes, as a nontaxable return of capital, to the extent of the U.S. investor's adjusted tax basis in our common shares, and then as gain from the sale or exchange of a capital asset, provided that our common shares constitutes a capital asset in the hands of the U.S. investor. U.S. corporate shareholders will not be entitled to any deduction for distributions received as dividends on our common shares. 31 Gain or loss on the sale or exchange of our common shares will be treated as capital gain or loss if our common shares are held as a capital asset by the U.S. investor. Such capital gain or loss will be long-term capital gain or loss if the U.S. investor has held our common shares for more than one year at the time of the sale or exchange. A holder of common shares may be subject to "backup withholding" at the rate of 28% with respect to dividends paid on our common shares if the dividends are paid by a paying agent, broker or other intermediary in the United States or by a U.S. broker or certain United States-related brokers to the holder outside the United States. In addition, the proceeds of the sale, exchange or redemption of common shares may be subject to backup withholding, if such proceeds are paid by a paying agent, broker or other intermediary in the United States. Backup withholding may be avoided by the holder of Common Shares if such holder: o is a corporation or comes within other exempt categories; or o provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding and otherwise complies with the backup withholding rules. In addition, holders of common shares who are not U.S. persons are generally exempt from backup withholding, although they may be required to comply with certification and identification procedures in order to prove their exemption. Any amounts withheld under the backup withholding rules from a payment to a holder will be refunded or credited against the holder's U.S. federal income tax liability, if any, provided that amount withheld is claimed as federal taxes withheld on the holder's U.S. federal income tax return relating to the year in which the backup withholding occurred. A holder who is not otherwise required to file a U.S. income tax return must generally file a claim for refund or, in the case of non-U.S. holders, an income tax return in order to claim refunds of withheld amounts. BRITISH VIRGIN ISLANDS TAXATION Under the International Business Companies Act of the British Virgin Islands as currently in effect, a holder of common shares who is not a resident of British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to the common shares and holders of common shares are not liable for British Virgin Islands income tax on gains realized during that year on any sale or disposal of the shares. The British Virgin Islands does not currently impose a withholding tax on dividends paid by a company incorporated under the International Business Companies Act. There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated under the International Business Companies Act. In addition, the common shares are not subject to transfer taxes, stamp duties or similar charges. There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands. DESCRIPTION OF SECURITIES We were registered in the British Virgin Islands on May 17, 2004 as a British Virgin Islands International Business Company, number 597079. Our charter documents consist of our Memorandum of Association and our Articles of Association. The Memorandum of Association loosely resembles the Articles of Incorporation of a United States corporation and the Articles of Association loosely resembles the bylaws of a United States corporation. Our Memorandum of Association provides that we any engage in any act or activity which is not prohibited by any laws of the British Virgin Islands. We are authorized to issue 100,000,000 shares of common stock, with a par value of $0.01 per share. As of the date of this prospectus, we had 50,000,000 outstanding shares of common stock. All of our outstanding shares are fully paid and non-assessable. 32 A brief description of our Memorandum of Association and Articles of Association follows, including a summary of material differences between the corporate statutes of the United States, using Delaware as an example, and those of the British Virgin Islands. This description and summary does not purport to be complete and does not address all differences between United States and British Virgin Islands corporate statutes. Copies of our Memorandum of Association and Articles of Association have been filed as exhibits to our registration statement on Form S-1 and readers are urged to review these exhibits in their entirety for a complete understanding of the provisions of our charter documents.
BRITISH VIRGIN ISLANDS DELAWARE ======================================== ============================================ Voting rights The holders of ordinary shares are The holders of common stock are entitled entitled to one vote for each share held to one vote for each share held of record of record on all matters submitted to the on all matters submitted to a vote of stockholders. Cumulative voting is not stockholders. Cumulative voting is allowed; hence, the holders of a majority allowed if permitted in the certificate of of the outstanding common stock can elect incorporation. all directors. Preemptive rights Holders of ordinary shares have no Holders of common stock have no preemptive preemptive rights. rights. Dividend rights Holders of common stock are entitled to The directors of a corporation, subject to receive such dividends as may be declared any restrictions contained in its by the Board of Directors out of funds certificate of incorporation, may declare legally available for dividends. All and pay dividends upon shares of its outstanding common shares have the same capital stock, either out of its surplus, rights with regard to dividends and as defined in the Delaware General distributions upon our liquidation, which Corporation Law, or out of its net profits is to share pro rata in any distribution for the fiscal year in which the dividend of our assets after payment of is declared and/or the preceding fiscal liabilities. Our Board of Directors is year. If the capital of the corporation not obligated to declare a dividend and shall be diminished by depreciation in the it is not anticipated that dividends will value of its property or by losses or ever be paid. All dividends unclaimed otherwise, to an amount less than the for three years after having been aggregate amount of the capital declared may be forfeited by resolution represented by the issued and outstanding of the directors for our benefit. stock of all classes having a preference upon the distribution of assets, the directors shall not declare and pay out of net profits any dividends upon any shares of any classes of capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired. Redemption of shares We may redeem any of our own shares for A Delaware corporation may redeem its own fair value. However, no purchase, shares, except that it may not redeem redemption or other acquisition of shares shares for cash or other property when the can be made unless out of surplus (as capital of the corporation is impaired or defined by the International Business when such redemption would cause any Companies Act) and unless the directors impairment of the capital of the determine that immediately after the corporation. purchase, redemption or other acquisition we will be able to satisfy our liabilities as they become due in the ordinary course of 33 BRITISH VIRGIN ISLANDS DELAWARE ======================================== ============================================ business, and the realizable value of our assets will not be less than the sum of our total liabilities and capital. In the absence of fraud, the decision of the directors as to the realizable value of our assets is conclusive, unless a question of law is involved. Annual meeting of British Virgin Islands law does not Delaware law requires annual meetings of stockholders require an international business company stockholders. to have an annual meeting. Special meeting of Under British Virgin Islands law, unless Under Delaware law, a special meeting of stockholders otherwise provided by a company's stockholders may be called by the board of memorandum of association or articles of directors or any other person authorized association, special meetings of to do so in the certificate of stockholders may be called by the incorporation or bylaws. directors at any time. Under British Virgin Islands law, directors are required to call meetings upon a written request from the stockholders holding more than 50% of the outstanding voting shares, unless the memorandum of association or articles of association provide for a lesser percentage. Action by written consent Under British Virgin Islands law, unless Under Delaware law, unless otherwise in lieu of a stockholders' otherwise provided by a company's provided in the certificate of meeting memorandum of association or articles of incorporation, stockholders may take association, stockholders may take action action by written consent in lieu of by written consent in lieu of voting at a voting at a stockholders meeting. stockholders' meeting. Record date for Under British Virgin Islands law, the Under Delaware law, the record date for determining stockholders directors of a company may fix the date determining stockholders of record at a and notice of meeting notice is given of a meeting as the meeting is a date fixed by the directors that record date for determining those shares is not more than 60 days nor less that are entitled to vote at the than 10 days before such meeting. meeting. The company's articles of association Written notice of all meetings of provide that written notice of all stockholders, stating the time, place and meetings of stockholders, stating the date thereof, shall be given no less than place, date, time and general nature of 10 nor more than 60 days before the date the business to be conducted shall be on which the meeting is to be held to each given at least 7 days before the date of stockholders entitled to vote at such the proposed meeting to those persons meeting. whose names appear as stockholders in the share register of the company on the date of the notice and are entitled to vote at the meeting. However, in general a meeting of stockholders may be called on shorter notice if at least 60% of the total number 34 BRITISH VIRGIN ISLANDS DELAWARE ======================================== ============================================ of shares entitled to vote on all matters to be considered at the meeting waive the right to notice. The inadvertent failure of the directors to give notice of a meeting to a stockholder or the fact that a stockholder has not received the notice does not invalidate the meeting. Number of directors Our Articles of Association provide that The board of directors shall consist of our board of directors will consist of one or more members, each of whom shall be not less than one nor more than 20 a natural person. The number of directors directors. Directors may be natural shall be fixed by, or in the manner persons or companies, in which event the provided in, the bylaws. company may designate a person as its representative as a director. Classified board of Under British Virgin Islands law, a Delaware law provides that a corporation's directors company's board of directors may be board of directors may be divided into divided into various classes with three classes with staggered terms of staggered terms of office. office. The company's articles of association Directors are to be elected at each annual provide that directors may be elected by stockholders' meeting to hold office until the stockholders or the existing the next annual meeting. directors for such term as the members of the directors may determine. Removal of directors The company's articles of association Under Delaware law, any director or the provide that a director shall vacate entire board of directors may be removed, office if the director (a) is removed by with or without cause, by the holders of a a resolution of the stockholders or majority of the shares then entitled to directors; (b) becomes bankrupt or makes vote at an election of directors. any arrangement or composition with his creditors generally; (c) becomes of unsound mind or of such infirm health as to be incapable of managing his affairs; or (d) resigns. Board of director The company's articles of association Under Delaware law, vacancies and newly vacancies provide that any vacancy on the board of created directorships may be filled by a directors may be filled either by the majority of the directors then in office, stockholders or by the remaining even though less than a quorum, unless directors. otherwise provided in the certificate of incorporation or bylaws. 35 BRITISH VIRGIN ISLANDS DELAWARE ======================================== ============================================ Limitation of liability of The company's articles of association The certificate of incorporation may directors provide that no director shall be liable provide that, to the fullest extent for any loss, damage or misfortune that permitted by Delaware law, no director may happen to, or be incurred by the shall be personally liable to the company in the execution of the duties of corporation or its stockholders for his office or in relation thereto. monetary damages for any breach of fiduciary duty by such director as a director. British Virgin Islands law, however, sets the standard of care expected from every director in performing his functions, as Under Delaware law, a corporation may not requiring that he act honestly and in eliminate monetary liability for (a) good faith with a view to the best breaches of the director's duty of loyalty interests of the company and exercise the to the corporation or its stockholders; care, diligence and skill that a (b) acts or omissions not in good faith or reasonably prudent person would exercise involving intentional misconduct or a in comparable circumstances. No knowing violation of law; (c) unlawful provision in the company's memorandum or dividends, stock repurchases or articles of association or in any redemptions; or (d) transactions from agreement entered into by the company which the director received an improper relieves a director from the duty to act personal benefit. Such provisions for the in accordance with the memorandum or limitation of liability may not limit a articles of association or from any director's liability for violation of, or personal liability arising from his otherwise relieve directors from, the management of the business and affairs of necessity of complying with federal or the company. state securities laws, or affect the availability of nonmonetary remedies such It should be noted, therefore, that in as injunctive relief or rescission. addition to the statutory standard of care imposed on directors, they are also bound by the usual common law duty of care in relation to the exercise of their powers as directors. Indemnification The articles of association provide that A corporation may indemnify present and every director or officer of the company former directors or officers of a shall be entitled to be indemnified corporation for any expenses, liability against all losses or liabilities which and loss incurred in connection with any he may sustain or incur in or about the action, suit, or proceeding, whether civil execution of his duties of his office or or criminal, administrative or otherwise in relation thereto. investigative that such person was or is made a party to or is threatened to be Such indemnity is subject to the made a party to by reason of the fact that limitations that a BVI company may only such person was serving (during his or her indemnify a person if the person acted tenure as director and/or officer of the honestly and in good faith with a view to corporation) at the request of the the best interests of the company and, in corporation as a director, officer, the case of criminal proceedings, the employee or agent of another corporation person had no reasonable cause to believe or entity. The director or officer is that his conduct was unlawful. The indemnified and held harmless for all decision of the directors as to whether expenses, liability and loss, including the person acted appropriately is, in the attorneys' fees, judgments, fines, ERISA absence of fraud, sufficient. excise taxes or penalties and amounts paid or to be paid in settlement reasonably incurred in connection with such proceeding. Such Officer or director 36 BRITISH VIRGIN ISLANDS DELAWARE ======================================== ============================================ is entitled to be paid by the corpoation for expenses incurred in defending any such action in advance of its final disposition. The director or officer must, as a condition to such advancement, provide to the corporation a written undertaking that if a cour determines that the director or officer is not entitled to indemnification by the corporation, then the director or officer shall repay to the corporation all amounts so advanced. The corporation may maintain directors' and officers' liability insurance. Amendment of corporate Amendments to the memorandum and articles Amendments to the certificate of documents (including an of association may be made by resolution incorporation may be made by resolution of increase in the authorized of stockholders OR directors. If the the board of directors followed by the capital stock) amendment is to be approved at a meeting approval of the holders of a majority of of stockholders or directors, the the shares of common stock then affirmative vote of a simple majority is outstanding. required - i.e., there must be more votes in favor of the amendment than against The bylaws may be amended or repealed by it. If the amendment to be approved by the board of directors or by the consent in writing, the affirmative vote stockholders. of the holders of a majority of the shares entitled to vote or a majority of the directors is required. Designation and issuance of The company's Articles of Association If authorized to do so in the certificate preferred stock provide that any share may be issued with of incorporation, the board of directors such preferred, deferred, or other may adopt a resolution providing for such special rights, or such restrictions, voting powers, designations, preferences whether in regard to dividend, voting, and relative, participating, optional or return of capital or otherwise, as the other special rights, and qualifications, directors may from time to time determine. limitations or restrictions as it may determine. Stockholder votes on Under British Virgin Islands law, the Under Delaware law, the vote of a majority certain transactions vote of a majority of the votes cast is of the outstanding shares of capital stock generally required to approve each of the entitled to vote is generally required to following transactions: (a) a merger or approve each of the following other reorganization; (b) a sale of transactions: (a) a merger or other substantially all of the assets of a reorganization; (b) a sale of corporation; and (c) a voluntary substantially all of the assets of a dissolution of the corporation. corporation; and (c) a voluntary dissolution of the corporation.
British Virgin Islands law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in US jurisdictions. While British Virgin Islands law does permit a shareholder of a British Virgin Islands company to sue its directors derivatively, that is, in the name of, and for the benefit of, our company and to sue a company and its directors for his benefit and for the benefit of others similarly situated, the circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in 37 the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the US. As in most US jurisdictions, the board of directors of a British Virgin Islands company is charged with the management of the affairs of the company. In most US jurisdictions, directors owe a fiduciary duty to the corporation and its shareholders, including a duty of care, under which directors must properly apprise themselves of all reasonably available information, and a duty of loyalty, under which they must protect the interests of the corporation and refrain from conduct that injures the corporation or its shareholders or that deprives the corporation or its shareholders of any profit or advantage. Many US jurisdictions have enacted various statutory provisions which permit the monetary liability of directors to be eliminated or limited. Under British Virgin Islands law, liability of a corporate director to the corporation is primarily limited to cases of willful malfeasance in the performance of his duties or to cases where the director has not acted honestly and in good faith and with a view to the best interests of the company. WARRANTS In connection with our private placement of Units, we issued common stock purchase warrants. The warrants give the holders the right to purchase from us, until June 30, 2008, an aggregate of 3,000,000 shares of our common stock for $0.50 per share. Both the number of warrants and the exercise price of the warrants are subject to anti-dilution adjustments in the event of stock dividends, stock splits, stock combinations and any other similar transactions. The warrants also give the holders the right to any additional rights, including those obtained through the consolidation, merger or sale of assets of the company or a similar transaction, that are granted, issued or sold to our shareholders as if the holders had held the number of shares of common stock acquirable upon the complete exercise of the warrants at the time such rights become available to the shareholders. Each warrant is redeemable at $0.001 per warrant if the common stock is then listed on a recognized stock exchange or trading at $1.00 per share for 20 consecutive trading days. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is Computershare Trust Company, Inc. Its address is 350 Indiana Street, Suite 800, Golden, Colorado 80401, and its telephone number is (303) 262-0600. SELLING STOCKHOLDERS This prospectus relates to the resale of 9,956,000 shares of common stock held by existing shareholders. We are registering the shares in order to permit the selling shareholders to offer the shares of common stock for resale from time to time. The selling shareholders have not had any material relationship with us within the past three years. The table below lists the selling shareholders and other information regarding the beneficial ownership of the common stock by the selling shareholders. The second column lists the number of shares of common stock held. The third column lists the shares of common stock being offered by this prospectus by the selling shareholders. Except for the last four shareholders listed it the table, all of the shareholders purchased units from the company, each unit consisting of one share of common stock and one common stock purchase warrant, in a private placement from July 2005 to August 2005, at a price of $0.20 per unit. We relied upon the exemption from registration contained in Rule 506 of Regulation D, as the investors were accredited investors. We agreed to register the shares for resale. DeCh'in Strategic Consulting LLC received its from Golden Mass Technologies Ltd. in consideration for services rendered in April 2005. Li Kai Chi, Ma Kit Ying, Ada, and Lam Wai Keung had been shareholders of Golden Mass Technologies Ltd. but opted to receive their ownership in the company directly, as opposed to holding an indirect ownership interest through Golden Mass. They received their shares in March 2005. 38
OWNERSHIP AFTER OFFERING -------------------------- NAME OF SELLING SHAREHOLDER NUMBER OF SHARES SHARES BENEFICIALLY REGISTERED FOR NUMBER OF NAME OF SELLING SHAREHOLDER OWNED (1) RESALE (2) SHARES (3) PERCENT --------- ---------- ---------- -------- George Lucas Adamson 50,000 (2) 25,000 25,000 (4) Lori Kay Allred 20,000 (2) 10,000 10,000 (4) William Ambrose 150,000 (2) 75,000 75,000 (4) Lloyd Banks and Vera Banks 100,000(2) 50,000 50,000 (4) Richard Bush-Luna and Cyndi Bush-Luna 25,000 (2) 12,500 12,500 (4) Howard S. Carney 100,000 (2) 50,000 50,000 (4) Chan Ho Wah Terence 100,000 (2) 50,000 50,000 (4) Linda A Chandler and Bradley Scott Chandler 10,000 (2) 5,000 5,000 (4) Cheng Chui Yee Bonnie 20,000 (2) 10,000 10,000 (4) Chin Cheung 100,000 (2) 50,000 50,000 (4) Devries Properties (5) 30,000 (2) 15,000 15,000 (4) Laura Dichter 25,000 (2) 12,500 12,500 (4) John Diepersloot Trust (6) 37,000 (2) 18,500 18,500 (4) Heather Evans 108,000 (2) 54,000 54,000 (4) Brent Alan Fedrizzi 10,000 (2) 5,000 5,000 (4) Jeffrey W. Felton 100,000 (2) 50,000 50,000 (4) Lilian Fong 300,000 (2) 150,000 150,000 (4) Michael D. Forti and Thomas A. Forti 50,000 (2) 25,000 25,000 (4) Thomas A. Forti 200,000 (2) 100,000 100,000 (4) Dirk Blair Freeman II 50,000 (2) 25,000 25,000 (4) Clifford E. Godfrey 20,000 (2) 10,000 10,000 (4) Goh Choo Hwee 10,000 (2) 5,000 5,000 (4) Arnold Goldblatt 20,000 (2) 10,000 10,000 (4) Martin Gross 10,000 (2) 5,000 5,000 (4) Jacquie Hallenbeck 100,000 (2) 50,000 50,000 (4) Sarah S. Haney 50,000 (2) 25,000 25,000 (4) Robert Hardaway 10,000 (2) 5,000 5,000 (4) Randy and Carol Heller 30,000 (2) 15,000 15,000 (4) Ryan B. Heller and Marlana Heller 15,000 (2) 7,500 7,500 (4) Adrian Hernandez and Tracy Hernandez 250,000 (2) 125,000 125,000 (4) Annie S. Hinson and Bob Hinson 250,000 (2) 125,000 125,000 (4) Paul E. Hinson 50,000 (2) 25,000 25,000 (4) Robert S. and Michele B. Hinson 50,000 (2) 25,000 25,000 (4) J Paul Consulting (7) 500,000 (2) 250,000 250,000 (4) Mike G. Jackson 250,000 (2) 125,000 125,000 (4) Kevin Jenkins 130,000 (2) 65,000 65,000 (4) Richard H. Kelly 50,000 (2) 25,000 25,000 (4) John D. Kucera 50,000 (2) 25,000 25,000 (4) Lai To Yue Linda 50,000 (2) 25,000 25,000 (4) Lam Kwan 10,000 (2) 5,000 5,000 (4) Lam Sheung Ching Larry 20,000 (2) 10,000 10,000 (4) Lee Wing Hong Bruce 200,000 (2) 100,000 100,000 (4) Lee Yau Chuen Jacko 200,000 (2) 100,000 100,000 (4) Myron Leon Trust (8) 125,000 (2) 62,500 62,500 (4) 39 OWNERSHIP AFTER OFFERING -------------------------- NAME OF SELLING SHAREHOLDER NUMBER OF SHARES SHARES BENEFICIALLY REGISTERED FOR NUMBER OF NAME OF SELLING SHAREHOLDER OWNED (1) RESALE (2) SHARES (3) PERCENT --------- ---------- ---------- -------- Catherine Leung 100,000 (2) 50,000 50,000 (4) Stella S.F. Liu Trust (9) 125,000 (2) 62,500 62,500 (4) Jay Lutsky 10,000 (2) 5,000 5,000 (4) Thomas E. Manoogian 50,000 (2) 25,000 25,000 (4) Chris J. Martinez 20,000 (2) 10,000 10,000 (4) Deborah A. Melnick 50,000 (2) 25,000 25,000 (4) Jeffrey C. Melnick 50,000 (2) 25,000 25,000 (4) Robert A. Melnick 50,000 (2) 25,000 25,000 (4) John J. Murphy and Paula B. Murphy 10,000 (2) 5,000 5,000 (4) Steven F. Neira 10,000 (2) 5,000 5,000 (4) Robert M. Nieder 200,000 (2) 100,000 100,000 (4) Ponderosa Investment Partners Inc. (10) 50,000 (2) 25,000 25,000 (4) Edward H. Price, Inc. PS Plan (11) 100,000 (2) 50,000 50,000 (4) Seth D. Rankin 30,000 (2) 15,000 15,000 (4) David J. Schanin 50,000 (2) 25,000 25,000 (4) Mike M. Schizas and Linda K. Schizas 20,000 (2) 10,000 10,000 (4) Andrew J. Schlauch and Kimberly L. Schlauch 20,000 (2) 10,000 10,000 (4) John Schoenauer 50,000 (2) 25,000 25,000 (4) William Secor 100,000 (2) 50,000 50,000 (4) The Irrevocable Seven Oaks Trust (12) 150,000 (2) 75,000 75,000 (4) H. Howland Silleck 50,000 (2) 25,000 25,000 (4) Silleck Investments, LLC (13) 100,000 (2) 50,000 50,000 (4) David Simas and Jeanne Simas 100,000 (2) 50,000 50,000 (4) David Simas FBO Kasey Simas 20,000 (2) 10,000 10,000 (4) Kyle P. Simas and David L. Simas 20,000 (2) 10,000 10,000 (4) Donald Strasburg 10,000 (2) 5,000 5,000 (4) Scott R Takeda 20,000 (2) 10,000 10,000 (4) Billy B Ray Tam 20,000 (2) 10,000 10,000 (4) Roger Wasserman 100,000 (2) 50,000 50,000 (4) Jeremy Watada 10,000 (2) 5,000 5,000 (4) Charles Wong 70,000 (2) 35,000 35,000 (4) Yau Kam Wing Anthony 200,000 (2) 100,000 100,000 (4) DeCh'in Strategic Consulting LLC (14) 1,457,000 1,457,000 -0- -- Li Kai Chi 1,833,000 1,833,000 -0- -- Ma Kit Ying, Ada 1,833,000 1,833,000 -0- -- Lam Wai Keung 1,833,000 1,833,000 -0- -- - ------------------------- (1) To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name. (2) Does not include shares underlying warrants. (3) Includes shares underlying warrants which entitle the holder to purchase common shares through June 30, 2008. (4) Less than 1%. 40 (5) Dale D. DeVries exercises voting and/or dispositive powers over these securities. (6) John Diepersloot exercises voting and/or dispositive powers over these securities. (7) Jeff Ploen exercises voting and/or dispositive powers over these securities. (8) Myron Leon exercises voting and/or dispositive powers over these securities. (9) Stella S.F. Liu exercises voting and/or dispositive powers over these securities. (10)Cory Coppage exercises voting and/or dispositive powers over these securities. (11)Edward H. Price exercises voting and/or dispositive powers over these securities. He is an affiliates of a registered broker-dealer and is an underwriter with respect to the shares being offered on behalf of Edward H. Price, Inc. PS Plan. This shareholder acquired the securities in the ordinary course of business and did not have any agreements or understandings with any person to distribute the securities at the time of purchase. (12)David H. Jackson exercises voting and/or dispositive powers over these securities. (13)R. Haydn Silleck exercises voting and/or dispositive powers over these securities. (14)Randy J. Sasaki exercises voting and/or dispositive powers over these securities.
PLAN OF DISTRIBUTION The selling shareholders may sell some or all of their shares of common stock in one or more transactions, including block transactions: o on such public markets or exchanges as the common stock may from time to time be trading; o in privately negotiated transactions; o through the writing of options on the common stock; o in short sales; or o in any combination of these methods of distribution. The selling shareholders have set an offering price of $0.20 until our shares are quoted on the OTC Bulletin Board and thereafter at prevailing market prices or privately negotiated prices. The shares may also be sold in compliance with the Securities and Exchange Commission's Rule 144. In the event of the transfer by the selling shareholders of their shares to any pledgee, donee, or other transferee, we will amend this prospectus and the registration statement of which this prospectus forms a part by the filing of a post-effective registration statement in order to name the pledgee, donee, or other transferee in place of the selling shareholder who has transferred his shares. The selling shareholders may also sell their shares directly to market makers acting as principals or brokers or dealers, who may act as agent or acquire the common stock as a principal. Any broker or dealer participating in such transactions as agent may receive a commission from the selling shareholder or, if they act as agent for the purchaser of such common stock, from such purchaser. The selling shareholder will likely pay the usual and customary brokerage fees for such services. Brokers or dealers may agree with the selling shareholder to sell a specified number of shares at a stipulated price per share and, to the extent such broker or dealer is unable to do so acting as agent for the selling shareholder, to purchase, as principal, any unsold shares at the price required to fulfill the respective broker's or dealer's commitment to the selling shareholder. Brokers or dealers who acquire shares as principals may thereafter resell such shares from time to time in transactions in a market or on an exchange, in negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices, and in connection with such resales may pay or receive commissions to or from the purchasers of such shares. These transactions may involve cross and block transactions that may involve sales to and through other brokers or dealers. We can provide no assurance that all or any of the common stock offered will be sold by the selling shareholders. 41 If, after the date of this prospectus, a selling shareholder enters into an agreement to sell his shares to a broker-dealer as principal and the broker-dealer is acting as an underwriter, we will need to file a post-effective amendment to the registration statement of which this prospectus is a part. We will need to identify the broker-dealer, provide required information on the plan of distribution, and revise the disclosures in that amendment, and file the agreement as an exhibit to the registration statement. Also, the broker-dealer would have to seek and obtain clearance of the underwriting compensation and arrangements from the NASD Corporate Finance Department. We are bearing all costs relating to the registration of the common stock, which are estimated at $25,000. The selling shareholders, however, will pay any commissions or other fees payable to brokers or dealers in connection with any sale of the common stock. We are paying the expenses of the offering because we seek to: (i) become a reporting company with the Commission under the Securities Exchange Act of 1934 (the "1934 Act"); and (ii) enable our common stock to be traded on the NASD OTC Bulletin Board. We believe that the registration of the resale of shares on behalf of existing shareholders may facilitate the development of a public market in our common stock if our common stock is approved for trading on the NASD OTC Bulletin Board. We consider that the development of a public market for our common stock will make an investment in our common stock more attractive to future investors. In order for us to continue with our business plan, we will at some point in the near future need to raise additional capital through private placement offerings. We believe that obtaining reporting company status under the 1934 Act and trading on the OTC Bulletin Board should increase our ability to raise these additional funds from investors. The selling shareholders must comply with the requirements of the Securities Act and the Securities Exchange Act in the offer and sale of the common stock. In particular, during such times as the selling shareholders may be deemed to be engaged in a distribution of the common stock, and therefore be considered to be underwriters, they must comply with applicable law and may, among other things: o Not engage in any stabilization activities in connection with our common stock; o Furnish each broker or dealer through which common stock may be offered, such copies of this prospectus, as amended from time to time, as may be required by such broker or dealer; and o Not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities other than as permitted under the Securities Exchange Act. LEGAL MATTERS Stevenson, Wong & Co., has given an opinion on the validity of the securities. EXPERTS We have included the financial statements of the company as of December 31, 2004 and 2003, and for the years ended December 31, 2004, 2003 and 2002, in reliance upon the report of Zhong Yi (Hong Kong) C.P.A. Company Limited, an independent registered public accounting firm, to the extent and for the periods indicated in their report also incorporated by reference, and are included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION We have not previously been subject to the reporting requirements of the Securities and Exchange Commission. We have filed with the Commission a registration statement on Form S-1 under the Securities Act with respect to the shares offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to our securities 42 and us you should review the registration statement and the exhibits and schedules thereto. Statements made in this prospectus regarding the contents of any contract or document filed as an exhibit to the registration statement are not necessarily complete. You should review the copy of such contract or document so filed. You can inspect the registration statement and the exhibits and the schedules thereto filed with the commission, without charge, at the office of the Commission at 100 F Street, NE, Washington, D.C. 20549. You can also obtain copies of these materials from the public reference section of the commission at 100 F Street, NE, Washington, D.C. 20549, at prescribed rates. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Commission maintains a web site on the Internet that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission at HTTP://WWW.SEC.GOV. REPORTS TO STOCKHOLDERS As a result of filing the registration statement, we are subject to the reporting requirements of the federal securities laws, and are required to file periodic reports and other information with the SEC. We will furnish our shareholders with annual reports containing audited financial statements certified by independent public accountants following the end of each fiscal year and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year following the end of such fiscal quarter. INDEX TO FINANCIAL STATEMENTS
Unaudited Interim Consolidated Financial Statements - Nine Months Ended September 30, 2005 and 2004 Consolidated Balance Sheet September 30, 2005 (Unaudited)..................................................................F-1 Consolidated Statements of Income (Unaudited) Nine Months Ended September 30, 2005 and2004....................................................F-2 Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2005 and 2004...................................................F-3 Notes to Consolidated Financial Statements (Unaudited)..............................................F-4 Financial Statements - Years Ended December 31, 2004, 2003 and 2002 Report of Independent Registered Public Accounting Firm ............................................FF-1 Consolidated Balance Sheets December 31, 2004, 2003 and 2002................................................................FF-2 Consolidated Statement of Income Years Ended December 31, 2004, 2003 and 2002....................................................FF-4 Consolidated Statement of Stockholders' Equity Years Ended December 31, 2004, 2003 and 2002....................................................FF-6 Consolidated Statements of Cash Flows Years Ended December 31, 2004, 2003 and 2002....................................................FF-7 Notes to Consolidated Financial Statements..........................................................FF-9
43 Titanium Group Limited and its Subsidiaries Consolidated Balance Sheet As of September 30, 2005 (Original currency expressed in Hong Kong Dollars ("HK$")) (Unaudited)
2005 2005 ----- ---- US$ HK$ ASSETS Current assets: Cash and cash equivalents $ 424,541 $ 3,311,418 Accounts receivable, trade 693,780 5,411,487 Deposits 41,607 324,534 --------------- --------------- Total current assets 1,159,928 9,047,439 --------------- --------------- Property and equipment, at cost, net of accumulated depreciation Cost 140,807 1,098,293 Accumulated depreciation (38,082) (297,036) --------------- --------------- 102,725 801,257 --------------- --------------- Intangible assets 266,728 2,080,475 --------------- --------------- Total assets $ 1,529,381 $ 11,929,171 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ 98,976 $ 772,010 Accounts payable, trade 346,345 2,701,491 Taxes payable 38,164 297,683 --------------- --------------- Total current liabilities 483,485 3,771,184 --------------- --------------- Stockholders' equity: Common stock, US$0.01 (HK$0.078) par value, 100,000,000 shares authorized, 50,000,000 shares issued and outstanding 500,000 3,900,000 Additional paid-in capital 129,478 1,009,935 Retained earnings 416,418 3,248,052 --------------- --------------- 1,045,896 8,157,987 --------------- --------------- $ 1,529,381 $ 11,929,171 =============== ===============
See accompanying notes to unaudited consolidated financial statements. F-1 Titanium Group Limited and its Subsidiaries Consolidated Statements of Income Nine Months Ended September 30, 2005 and 2004 (Original currency expressed in Hong Kong Dollars ("HK$")) (Unaudited)
2005 2005 2004 -------------- -------------- -------------- US$ HK$ HK$ Revenue $ 1,271,009 $ 9,913,869 $ 3,852,368 Cost of sales 788,536 6,150,580 2,278,198 -------------- -------------- -------------- Gross profit 482,473 3,763,289 1,574,170 -------------- -------------- -------------- Selling, general and administrative expenses 454,272 3,543,321 2,060,975 -------------- -------------- -------------- 454,272 3,543,321 2,060,975 -------------- -------------- -------------- Income (loss) from operations 28,201 219,968 (486,805) -------------- -------------- -------------- Other income (expense): Other income 70,982 553,660 1,078,706 Interest expense (1,269) (9,897) (12,405) -------------- -------------- -------------- 69,713 543,763 1,066,301 -------------- -------------- -------------- Income before provision for income taxes and minority interest 97,914 763,731 579,496 Income tax 21,177 165,183 - -------------- -------------- -------------- Income before minority interest 76,737 598,548 579,496 Minority interest - - (21,653) -------------- -------------- -------------- Net income $ 76,737 $ 598,548 $ 601,149 ============== ============== ============== Per share information: Income per share - basic and diluted $0.0016 $0.0126 $0.0128 ======= ======= ======= Weighted average shares outstanding - basic and diluted 47,666,667 47,666,667 47,000,000 ============== ============== ============== Net income $ 76,737 $ 598,548 $ 601,149 Other comprehensive income (loss) Effect of foreign currency transactions 86 (1,477) (1,727) -------------- -------------- -------------- Comprehensive income $ 76,823 $ 597,071 $ 599,422 ============== ============== ==============
See accompanying notes to unaudited consolidated financial statements. F-2 Consolidated Statements of Cash Flows Nine Months Ended September 30, 2005 and 2004 (Original currency expressed in Hong Kong Dollars ("HK$")) (Unaudited)
2005 2005 2004 --------------- -------------- --------------- US$ HK$ HK$ Net cash provided by operating activities $ 81,186 $ 633,248 $ 1,178,065 Cash flows from investing activities: Acquisition of intangible assets (18,923) (147,600) (1,267,019) Acquisition of plant and equipment (100,133) (781,041) (117,401) --------------- -------------- --------------- Net cash used in investing activities (119,056) (928,641) (1,384,420) --------------- -------------- --------------- Cash flows from financing activities: Repayment of long term bank loan (2,137) (16,667) (150,000) Repayment of shareholders' loan (182,051) (1,420,000) - Proceeds from additional paid-in capital 44,479 346,935 - Proceeds from sales of common stock 535,000 4,173,000 - --------------- -------------- --------------- Net cash used in financing activities 395,291 3,083,268 (150,000) --------------- -------------- --------------- Increase (decrease) in cash 357,421 2,787,875 (356,355) Cash and cash equivalents, beginning of period 67,121 523,543 746,205 --------------- -------------- --------------- Cash and cash equivalents, end of period $ 424,542 $ 3,311,418 $ 389,850 =============== ============== ===============
See accompanying notes to unaudited consolidated financial statements. F-3 Titanium Group Limited and its Subsidiaries. Notes to Consolidated Financial Statements (Unaudited) NOTE 1 - GENERAL The Company is incorporated in the British Virgin Islands as a private limited company using the name Titanium Group Limited. The Company is incorporated on May 17, 2004 and has been dormant since incorporation. The Company's functional currency is the Hong Kong dollar. On June 22 2005, the Company acquired the entire share capital of Titanium Technology Limited from Golden Mass Technologies Limited. Titanium Technology Limited is a company incorporated in Hong Kong and is engaged in developing products utilizing biometrics technologies, licensing of technologies, professional services and project contracting. Through the acquisition of Titanium Technology Limited, the Company had also acquired Titanium Technology (Shenzhen) Company Limited, a subsidiary of Titanium Technology Limited. The accompanying financial statements present the financial position and results of operations of the Company and its subsidiary companies, Titanium Technology Limited and Titanium Technology (Shenzhen) Company Limited (collectively known as "the Group"). The Group's functional currency is the Hong Kong dollar. NOTE 2 - BASIS OF PRESENTATION OF INTERIM PERIOD The accompanying unaudited consolidated financial statements as of September 30, 2005 and 2004 and for the nine-month period then ended have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the requirements of Regulation S-X. They do not include all of the information and footnotes for complete consolidated financial statements as required by GAAP. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the period ended September 30, 2005 and 2004 presented are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the annual financial statements presented elsewhere in this registration statement. Note 3 - AMOUNT DUE FROM RELATED PARTIES The outstanding amounts represent cash advanced to a director and shareholder of the Group. The cash advanced to a shareholder was for the payment of the shareholder's non-business related expenses over the years. The cash advanced to a director relates to the temporary cash payment to the directors who will then transfer the cash to the Group's subsidiary in PRC. It forms part of the remittance procedures from the Group's subsidiary in Hong Kong to its subsidiary in PRC. As it takes a considerable time for the Group's subsidiary in Hong Kong to transfer the cash to the subsidiary in PRC through normal banking channels within the PRC, by the time when the cash was transferred, the subsidiary could have missed the payment obligations. Therefore, the F-4 Titanium Group Limited and its Subsidiaries. Notes to Consolidated Financial Statements (Unaudited) (Continued) management has opted for passing the cash to the director instead who hand carried the checks to the subsidiary. By doing so, the subsidiary could have cash available as and when required. The Company estimates that five business days were saved for each cash transfer. These amounts due from related parties are unsecured, interest free and are repayable on demand. Set out below is the movement of the amount due from related parties during each of the nine months ended September 30, 2005 and 2004: 2005 2004 HK$ HK$ Balance brought forward 1,048,685 808,330 Advances during the period 897,647 448,959 Repayment during the period - - Amount offset against the shareholders' loans (296,891) - Amount offset against the amount due to related parties (1,649,441) - ------------- ----------- Balance carried forward - 1,257,289 ============= =========== Maximum balance during the period 1,946,334 1,257,289 ============= =========== NOTE 4 - OPERATING LEASE During the period ended September 30, 2005, the Group subsidiary signed a new operating lease effective from July 1, 2005. The future minimum lease payments for the next three years under the lease are HK$106,627 for 2005, HK$284,340 for 2006, HK$284,340 for 2007 and HK$142,170 for 2008. NOTE 5 - STOCKHOLDERS' EQUITY On September 30, 2005, certain shareholders agreed to forgive loans made to the Group though that date. The amount of the forgiveness (net of loans made to the shareholders) was contributed to the capital of the Company and aggregated approximately HK$1,123,106 (US$143,988). During the period, the Company sold 3,000,000 shares of common stock at US$0.20 per share through a private placement and received aggregate gross proceeds of HK$4,680,000 (US$600,000). Expenses of the offering were approximately HK$507,000 (US$65,000). In addition, the Company issued 3,000,000 common stock purchase warrants to the investors. Each common stock purchase warrant entitles the investor to purchase one share of common stock at an exercise price of US$0.50 per share through June 30, 2008. F-5 Titanium Group Limited and its Subsidiaries. Notes to Consolidated Financial Statements (Unaudited) (Continued) NOTE 6 - INCOME PER SHARE Basic income per share is computed by dividing income attributable to holders of common stock by the weighted average number of common stock outstanding during the period. Diluted income per common stock reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. No shares were deemed to be converted. NOTE 7 - SUBSEQUENT EVENT During November, 2005, the Company adopted a stock option plan under which options to purchase up to 5,000,000 shares of common stock may be granted. The board of directors will determine the exercise price for each option at the time an option is granted. The exercise price for shares will be no less than 100% of the fair value of the common stock at the date such option is granted. The board will also determine when options become exercisable. The term of an option would be no more than 10 years from the date of grant. No option would be exercised after the expiration of its term. F-6 9TH FLOOR, CHINACHEM HOLLYWOOD CENTRE, 1-13 HOLLYWOOD ROAD, CENTRAL, HONG KONG TEL. : (852) 2573 2296 FAX.: (852) 2384 2022 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Titanium Group Limited and its subsidiaries We have audited the accompanying consolidated balance sheets of Titanium Group Limited and its subsidiaries as of December 31, 2002, 2003 and 2004, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Titanium Group Limited and its subsidiaries as of December 31, 2002, 2003 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, 2003 and 2004 in conformity with accounting principles generally accepted in the United States of America. /s/ ZHONG YI (HONG KONG) C.P.A. COMPANY LIMITED. Zhong Yi (Hong Kong) C.P.A. Company Limited. Certified Public Accountants Hong Kong, China August 31, 2005 FF-1 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004, 2003 AND 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002 ---- ----- ---- ---- US$ HK$ HK$ HK$ ASSETS Current assets: Cash and cash equivalents $ 67,121 $ 523,543 $ 746,205 $ 500,852 Accounts receivable, trade 184,346 1,437,898 1,203,161 1,552,623 Amount due from related parties 134,447 1,048,685 808,330 385,534 Inventories 2,686 20,953 - - Deposits 14,291 111,469 47,860 20,210 ---------------- -------------- -------------- -------------- Total current assets 402,891 3,142,548 2,805,556 2,459,219 ---------------- -------------- -------------- -------------- Plant and equipment Computer system 28,012 218,495 133,720 73,232 Decoration 4,671 36,430 - - Furniture and fixtures 2,521 19,660 19,000 19,000 Office equipment 5,470 42,667 42,667 23,012 ---------------- -------------- -------------- -------------- 40,674 317,252 195,387 115,244 Less: accumulated depreciation (18,238) (142,253) (72,836) (30,262) ---------------- -------------- -------------- -------------- Plant and equipment, net 22,436 174,999 122,551 84,982 ---------------- -------------- -------------- -------------- Intangible assets 312,925 2,440,815 999,677 38,000 ---------------- -------------- -------------- -------------- Total assets $ 738,252 $ 5,758,362 $ 3,927,784 $ 2,582,201 ================ ============== ============== ==============
See accompanying notes to consolidated financial statements. FF-2 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) AS OF DECEMBER 31, 2004, 2003 AND 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002 ---- ---- ---- ---- US$ HK$ HK$ HK$ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ 8,058 $ 62,850 $ 211,264 $ 1,215 Current portion of bank borrowings 2,137 16,667 200,000 - Amount due to related parties 27,025 210,797 290,085 194,265 Accounts payable 111,629 870,706 1,215,076 1,350,983 Taxes payable 17,482 136,360 14,706 95,884 -------------- -------------- -------------- -------------- Total current liabilities 166,331 1,297,380 1,931,131 1,642,347 -------------- -------------- -------------- -------------- Long-term debt Long term portion of bank Borrowings - - 16,667 - Shareholders' loans 182,051 1,420,000 920,000 - -------------- -------------- -------------- -------------- 182,051 1,420,000 936,667 - -------------- -------------- -------------- -------------- Minority interest 922 7,190 37,760 (2,455) -------------- -------------- -------------- -------------- Stockholders' equity: Common stock, US$0.01 (HK$0.78) par value, Authorized - 100,000,000 shares, issued and outstanding - 47,000,000 shares 50,000 390,000 390,000 390,000 Retained earnings 339,374 2,647,120 633,127 552,219 Accumulated other comprehensive Income (426) (3,328) (901) 90 -------------- -------------- -------------- -------------- 388,948 3,033,792 1,022,226 942,309 -------------- -------------- -------------- -------------- Total liabilities and stockholders' equity $ 738,252 $ 5,758,362 $ 3,927,784 $ 2,582,201 ============== ============== ============== ==============
See accompanying notes to consolidated financial statements. FF-3 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002 ---- ----- ---- ---- US$ HK$ HK$ HK$ Revenue - Projects $ 741,160 $ 5,781,049 $ 3,826,091 $ 3,935,171 Maintenances 72,846 568,203 531,603 332,170 -------------- -------------- ------------- -------------- 814,006 6,349,252 4,357,694 4,267,341 -------------- -------------- ------------- -------------- Cost of sales - Projects (457,833) (3,571,098) (2,691,355) (1,955,434) Maintenances - - - (9,426) -------------- -------------- ------------- -------------- (457,833) (3,571,098) (2,691,355) (1,964,860) -------------- -------------- ------------- -------------- Gross profit 356,173 2,778,154 1,666,339 2,302,481 -------------- -------------- ------------- -------------- Expenses Selling, general and administrative expenses (241,641) (1,884,804) (2,095,078) (1,117,729) Research and development costs - - (694,918) (662,500) -------------- -------------- ------------- -------------- (241,641) (1,884,804) (2,789,996) (1,780,229) -------------- -------------- ------------- -------------- Income (loss) from operations 114,532 893,350 (1,123,657) 522,252 -------------- -------------- ------------- -------------- Other income (expenses) Interest expenses (2,119) (16,532) (6,877) - Grant and subsidy income 157,634 1,229,545 1,182,435 90,159 Other income 3,134 24,449 1,153 2,064 -------------- -------------- ------------- -------------- Total other income 158,649 1,237,462 1,176,711 92,223 -------------- -------------- ------------- -------------- Income before provision for income taxes and minority interest 273,181 2,130,812 53,054 614,475 Income tax (18,896) (147,389) (11,931) (95,884) -------------- -------------- ------------- -------------- Income before minority interest 254,285 1,983,423 41,123 518,591 Minority interest 3,919 30,570 39,785 2,455 -------------- -------------- ------------- -------------- Net profit $ 258,204 $ 2,013,993 $ 80,908 $ 521,046 ============== ============== ============= ============== Net income per share $ 0.01 $ 0.04 $ 0.00 $ 0.01 ============== ============== ============= ============== Weighted average shares Outstanding Basic 47,000,000 47,000,000 47,000,000 47,000,000 ============== ============== ============= ============== Diluted 47,000,000 47,000,000 47,000,000 47,000,000 ============== ============== ============= ============== FF-4 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (CONTINUED) YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 Net income $ 258,204 $ 2,013,993 $ 80,908 $ 521,046 Other comprehensive income (loss) Effect of foreign transactions (311) (2,427) (991) 90 -------------- -------------- ------------- -------------- Comprehensive income $ 257,893 $ 2,011,566 $ 79,917 $ 521,136 ============== ============== ============= ==============
See accompanying notes to consolidated financial statements. FF-5 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Common stock Accumulated comprehensive Retained SHARES AMOUNT INCOME PROFITS TOTAL At 1 January 2002 47,000,000 390,000 - 31,173 421,173 Cumulative foreign - - 90 - 90 currency translation Profit for the year - - - 521,046 521,046 ------------- ------------- -------------- ------------- ------------- At 31 December 2002 47,000,000 390,000 90 552,219 942,309 Cumulative foreign - - (991) - (991) currency translation Profit for the year - - - 80,908 80,908 ------------- ------------- -------------- ------------- ------------- At 31 December 2003 47,000,000 390,000 (901) 633,127 1,022,226 Cumulative foreign - - (2,427) - (2,427) currency translation Profit for the year - - - 2,013,993 2,013,993 ------------- ------------- -------------- ------------- ------------- At 31 December 2004 47,000,000 390,000 (3,328) 2,647,120 3,033,792 ============= ============= ============== ============= =============
See accompanying notes to consolidated financial statements. FF-6 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002 ---- ---- ---- ---- US$ HK$ HK$ HK$ CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 258,204 $ 2,013,993 $ 80,908 $ 521,046 Adjustments: Depreciation and amortization 91,942 717,148 282,505 20,520 Minority interest in earnings of Subsidiaries (3,919) (30,570) 40,215 (2,455) Loss on disposals of long term assets - - - 18,868 Decrease/ (increase) in: Inventories (2,686) (20,953) - - Trade and other receivables (30,094) (234,737) 349,462 (1,470,128) Deposits (8,155) (63,609) (27,650) 12,270 Amount due from related parties (30,815) (240,355) (422,796) (385,534) Increase/ (decrease) in: Trade and other payables (63,177) (492,784) 74,142 1,327,900 Amount due to related parties (10,166) (79,288) 95,820 107,053 Tax payable 15,597 121,654 (81,178) 95,884 Shareholders loan 64,103 500,000 920,000 - -------------- -------------- ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 280,834 2,190,499 1,311,428 245,424 -------------- -------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities - - - (187,727) Disposal of investment securities - - - 170,381 Investment in subsidiary - - - (30,000) Purchases of fixed assets (15,624) (121,865) (80,143) (56,534) Increase of intangible assets (267,804) (2,088,869) (1,201,608) (40,000) -------------- -------------- ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (283,428) (2,210,734) (1,281,751) (143,880) -------------- -------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES : Increase in share capital - - - 390,000 Proceeds from long term debt - - 300,000 - Repayments of long term debt (25,641) (200,000) (83,333) - -------------- -------------- ------------- ------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (25,641) (200,000) 216,667 390,000 -------------- -------------- ------------- ------------- EFFECT OF EXCHANGE GAIN / (LOSS) ON CASH AND CASH EQUIVALENTS (311) (2,427) (991) 90 -------------- -------------- ------------- ------------- NET INCREASED/ (DECREASED) IN CASH AND CASH EQUIVALENTS (28,546) (222,662) 245,353 491,634 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 95,667 746,205 500,852 9,218 -------------- -------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 67,121 $ 523,543 $ 746,205 $ 500,852 ============== ============== ============= =============
See accompanying notes to consolidated financial statements. FF-7 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31 2004, 2003 AND 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002 ---- ---- ---- ---- US$ HK$ HK$ HK$ Other information Interest paid on bank overdraft and bank borrowing $ 2,119 $ 16,532 $ 6,877 $ - ============ ============ =========== ============ Income tax paid $ 423 $ 25,735 $ 93,109 $ - ============ ============ =========== ============ Non-cash disclosure Comprehensive income / (loss) $ (311) $ (2,427) $ (991) $ 90 ============ ============ =========== ============
See accompanying notes to consolidated financial statements. FF-8 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 1. ORGANIZATION AND BASIS OF PRESENTATION Titanium Group Limited ("the Company") was incorporated as an International Business Company with limited liability in the British Virgin Island under the International Business Companies Act, Cap 291 of the British Virgin Islands on May17, 2004. The Company was established to be the holding company for Titanium Technology Limited ("TTL") and Titanium Technology (Shenzhen) Co., Limited, a subsidiary in which TTL has a 92% equity interest, (collectively known as "the Operating Enterprises"). The Operating Enterprises are distinct legal entities with limited liability The following are the particulars of the Operating Enterprises included in the consolidated financial statements: Titanium Technology Limited ("TTL") TTL was incorporated in Hong Kong on February 14, 2001 by certain individuals. The issued ordinary share capital of TTL was HK$30,000. TTL is engaged in developing products utilizing biometrics technology, licensing of technologies, professional services and project contracting. Listed below are the technology and products which TTL has developed and sold during the year ended December 31, 2004: - Technology Ti-Face Ti-Face is the core face recognition engine developed and implemented by TTL. The technology is capable of selecting intelligently specific areas of the face, such as the eyes or mouth, which in turn are used as distinguishable features for recognition. Products ProAccess Applying TTL's Ti-Face technology, the ProAccess suite is a high-performance, secure, user-friendly solution to enhance the authentication method of physical door, personal computer, and mobile phones by advance recognition technology. ProFacer ProFacer is a biometrically integrated surveillance system. TTL employs a full range of technology to enhance and automate existing surveillance techniques. The characteristic processes enabling ProFacer to function effectively are detection, alignment, normalization, representation and matching. Besides, TTL also provides consulting services to its customers. TTL's consulting team works with the client from the earliest stages of the project and takes accountability for the success of the project. In generally, TTL provides consulting services in the areas of security service and system integration/development projects. FF-9 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) TTL's principal markets/customer base as well as the geographic area served can be summarized as below: - Hong Kong, including Hong Kong government and commercial sectors; - China, mainly the government; - Macau, mainly casinos; and - For Japan and the US markets, TTL has formed distribution partnership with the local agents to sell its products. Customers in Japan came from both retail and commercial sectors. Titanium Technology (Shenzhen) Limited ("TTLSZ") TTLSZ was registered in Shenzhen, the People's Republic of China ("PRC") on September, 20 2002. The registered and contributed capital of TTLSZ was HK$1,000,000. TTLSZ was established by TTL and EAE Production HK Limited ("EAE"). TTL owns 92% of the registered capital of TTLSZ while EAE owns the remaining 8%. TTLSZ is responsible for the product development activities for TTL. During the years ended December 31 2004, 2003 and 2002, the Group believes that it has just one reportable segment which is engaged in developing products utilizing biometrics technology, licensing of technologies, professional services and project contracting. That reportable segment has been accounted for all of the revenue earned by the Group and more than 90% of the Group's net assets during the years ended December 31 2004, 2003 and 2002. An analysis of the Group's revenues and net assets by region are as follows: - 2004 2004 2003 2002 ---- ---- ---- ---- US$ HK$ HK$ HK$ Net assets - Hong Kong 727,158 5,671,830 3,456,697 2,551,602 - PRC 11,094 86,532 471,087 30,599 - International - - - - ----------- ---------- ----------- ----------- 738,252 5,758,362 3,927,784 2,582,201 =========== ========== =========== =========== 2004 2004 2003 2002 ---- ---- ---- ---- US$ HK$ HK$ HK$ Revenue - Hong Kong 656,893 5,123,767 4,209,989 4,267,341 - PRC 103,854 810,065 - - - International 53,259 415,420 147,705 - ----------- ---------- ----------- ----------- 814,006 6,349,252 4,357,694 4,267,341 =========== ========== =========== =========== FF-10 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) The accompanying consolidated financial statements present the consolidated assets, liabilities, results of operations and cash flows of the Company and its subsidiaries (collectively known as "the Group") as if the Company had been in existence throughout the three years ended December 31, 2004. The interest of the Company in the Operating Enterprises was acquired in exchange for shares in the Company subsequent to December 31, 2004. These transactions are considered to be transfer between entities under common control, within the meaning of generally accepted accounting principles in the United States of America ("US GAAP"). Accordingly, the assets and liabilities transferred have been accounted for at historical cost or at their "fair value" at the date of their original acquisition and have been included in the foregoing financial statements as of the beginning of the periods presented. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation The consolidated financial statements include the financial statements of Titanium Group Limited and its subsidiaries and have been prepared in accordance in accordance with US GAAP. All significant inter-company balances and transactions have been eliminated on consolidation. Inventories Inventories are stated at the lower of cost or market value. Cost is determined using the weighted average method for all inventories. Inventories consist of computer accessories purchased from various suppliers. Accounts receivable Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Group's best estimate of the amount of probable credit losses in the Group's existing accounts receivable. The Group determines the allowance based on historical write-off experience of the Group. The Group reviews its allowance for doubtful accounts on a regular basis. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by industry. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Group does not have any off-balance-sheet credit exposure related to its customers. No general provision of bad and doubtful debts has been made in these consolidated financial statements. The management considers that the accounts receivables are from reputable customers and expects to collect their outstanding balances in full. Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalent include cash on hand, amounts due from banks and highly liquid investments with a remaining contractual maturity at the date of purchase of three months or less. FF-11 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) Plant and equipment Plant and equipment are stated at cost less accumulated depreciation. Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The estimated useful life of machinery and equipment is 5 years. Total depreciation for each of the three years ended December 31, 2002, 2003 and 2004 was HK$18,520, HK$42,574 and HK$69,417 respectively. Intangible assets Costs incurred in connection with the registration of patent rights have been capitalized and are being amortized using the straight-line method over a period of 20 years. Revenue recognition The principal activities of the Group are software development and software sales. It generates revenues through license sales of its products, all of which utilize the proprietary technology that it has developed as well as consulting services that the Group provides to its customers in connection with its products. Revenue from software license sales is recognized as revenue when the Group has fulfilled all conditions and obligations under the agreements. Revenue from the provision services is recognized at the time when the consulting services have been rendered to the customers. Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable. Research and development costs Research costs are expensed as incurred. Product development expenses, consist primarily of labor cost. The products are developed by in-house technicians who perform research and development, enhance and maintain existing products and provide quality assurance. Product development costs are required to be capitalized when a product's technological feasibility has been established by completion of a working model of the product and ending when a product is available for general release to customers. To date, management considers that the products, "ProAccess" and "ProFacer" have reached this stage of development, therefore, they have capitalized HK$1,185,678 and HK$2,022,379 of product development costs associated with ProAccess ProFacer as intangible assets for the years ended December 2003 and 2004 respectively. These intangible assets are being amortized using the straight-line method over a period of 5 years. Amortization amounted to HK$237,135 and HK$641,610 and was charged to operations for the years ended December 31, 2003 and 2004 respectively. Grant and subsidy income Grant and subsidy income represents subsidy from the Government of Hong Kong Special Administrative Region ("HKSAR") for assisting the Group in development of products of innovative nature. The products developed under this subsidy plan include ProAccess and ProFacer. Pursuant to the agreements made between the Group and the Government of Hong Kong Special Administrative Region ("HKSAR"), the Government of HKSAR will provide funding to the Group for product development. The funding will be made available to the specific project in accordance with the milestones as established by the Group and is subject to a ceiling of HK$2,000,000. FF-12 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) The Group is not required to repay the Government grant. However, the Group is required to contribute approximately 50% of the overall project cost in accordance with the grant agreement. The Group has contributed HK$2,309,313 for the ProAccess and ProFacer projects. Upon completion of the project, the Group will have to tender to the Government its pro rata share of the residual funds remaining in the project account. Beside that, the Group will have to pay the Government a royalty fee of 5% on the gross revenue earned from any activities in connection with the project. The royalty fee paid by the Group for each of the years ended December 31, 2003 and 2004 amounted to HK$32,647 and HK$34,532 respectively. The Group is entitled to retain ownership of the intellectual property resulting from the project. Advertising costs The Group expenses advertising costs as incurred in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position 93-7, "Reporting for Advertising Costs". Advertising expenses amounted to HK$129,573, HK$80,303 and HK$45,643 for the year ended December 31, 2002, 2003 and 2004 respectively. Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Comprehensive income Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income, as presented in the accompanying consolidated statement of stockholder's equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit. Foreign currency translation methodology The Group's functional currency is the Hong Kong dollar because the majority of the Group's revenues, capital expenditure and operating and borrowing costs are either denominated in Hong Kong dollars or linked to the Hong Kong dollar exchange rate. Accordingly, transactions and balances not already measured in Hong Kong dollars (primarily transactions involving the United States dollar and the PRC Yuan) have been re-measured into Honk Kong dollars in accordance with the relevant provisions of Statement of Financial Accounting Standards (`SFAS") No. 52, "Foreign Currency Translation". The objective of this re-measurement process is to produce largely the same results that would have been reported if the accounting records had been kept in Hong Kong dollars. The exchange rate adopted throughout the consolidated financial statement where US dollars are presented was US$1 / HK$7.8. FF-13 Cash, receivables, payables, and loans are considered monetary assets and liabilities and have been translated using the exchange rate as of the balance sheet dates. Non-monetary assets and liabilities, including non-current assets and shareholders' equity, are stated at their actual dollars costs or are restated from their historic cost, by applying the historical exchange rate as monthly average exchange rates to underlying transactions. Equity-based compensation The Company adopted Statement of Financial Accounting Standard ("FAS") No. 123 ("FAS 123"), Accounting for Stock-Based Compensation beginning at its inception. Upon adoption of FAS 123, the Company continued to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by Accounting Principals Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company did not pay any stock based compensation during any period presented. Use of estimates The preparation of the consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment, intangibles and goodwill; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; valuation of derivative instruments; and assets and obligations related to employee benefits. Actual results could differ from those estimates. Paid vacation leave and long service leave obligation No accrual for paid vacation leave and long service leave obligation has been provided in the financial statements of the Group. Pursuant to Hong Kong law, Hong Kong employees are generally only entitled to severance pay upon their retirement or upon the termination of their employment without cause provided that they have been employed by the Group for a period of more than five years. As the Group had been in existence for less than five years, the management believes that the provision for long service leave obligation is not required. For paid leave obligation, the Group has adopted a policy that employees would be entitled to take paid holiday leave in each year in accordance with their employment contracts. Any unused vacation leave is forfeited at the end of each calendar year. With the approval from the management, an employee of the PRC subsidiary is entitled to carry forward the unused annual vacation leave to the subsequent year once. Furthermore, it is also obligated to pay long service leave to employee upon termination of employment. In accordance with the PRC's rules and regulations on employment, the subsidiary is required to pay the employee a payment equals to a month salary for every full year of employment. However, the payment should not be more than twelve month of salary normally earned by that employee. Since all the employee have taken their entitlement of paid vacation leave and the management considers that the provision for long service leave obligation would be insignificant, therefore, no provision for unused annual paid vacation leave and long service leave obligation has been provided in the financial statements for the year ended December 31, 2004. FF-14 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) Provision for products warranties The Group's standard warranty for its software products generally covers a twelve-month period and warrants against substantial non-conformance to the published documentation at time of delivery. The Group has not experienced any material returns where it was under obligation to honor this standard warranty provision. Warranty claims on hardware deficiencies are covered by the particular hardware suppliers. As such, no warranty provision has been provided in the accompanying consolidated balance sheet or reflected in the result of operations for the three years ended December 31, 2004, 2003 and 2002. Impairment of long-lived assets In accordance with Statement 144, long-lived assets, such as plant, and equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Intangible assets are tested annually for impairment and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit. Recently issued accounting standards In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), SHARE-BASED PAYMENT, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. This Statement is a revision to Statement 123 and supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related implementation guidance. For nonpublic companies, this Statement will require measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock options. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized. This Statement will be effective for the Company as of January 1, 2006. The adoption of FASB No. 123 did not have a material impact on the Group's financial position, cash flow or results of operations. In December 2004, the FASB issued FASB Statement No.151, INVENTORY COSTS, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Under this Statement, such items will be recognized as current-period charges. In addition, the Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement will be effective for the Company for inventory costs incurred on or after January 1, 2006. The adoption of FASB No. 151 did not have a material impact on the Group's financial position, cash flows or results of operations. FF-15 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) In December 2004, the FASB issued FASB Statement No. 153, EXCHANGES OF NON-MONETARY ASSETS, which eliminates an exception in APB 29 for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. This Statement will be effective for the Company for non-monetary asset exchanges occurring on or after January 1, 2006. The adoption of FASB No. 153 did not have a material impact on the Group's financial position, cash flows or results of operation. 3. AMOUNT DUE FROM RELATED PARTIES The outstanding amounts represent cash advanced to a director and shareholder of the Group. The cash advanced to a shareholder was for the payment of the shareholder's non-business related expenses over the years. The cash advanced to a director relates to the temporary cash payment to the directors who will then transfer the cash to the Group's subsidiary in PRC. It form part of the remittance procedures from the Group's subsidiary in Hong Kong to its subsidiary in PRC. These amounts due from related parties are unsecured, interest free and are repayable on demand. Set out below are the movement of the amount due from related companies during each of the three years ended December 31, 2002, 2003 and 2004: 2004 2003 2002 ---- ---- ---- HK$ HK$ HK$ Balance brought forward $ 808,330 $ 385,534 $ - Advances during the year 679,725 471,237 385,534 Repayment during the year (439,370) (48,441) - ------------ ------------ ----------- Balance carried forward $ 1,048,685 $ 808,330 $ 385,534 ============ ============ =========== Maximum balance during the year $ 1,408,685 $ 808,330 $ 385,534 ============ ============ =========== 4. INTANGIBLE ASSETS
As of December 31, 2004 ----------------------------------------------------- Weighted Gross average carrying amortization Accumulated amount period amortization ------ ------ ------------ HK$ HK$ Intangible assets: Products development costs $3,208,057 5 years $878,745 Patent and license right registration fee 122,420 20 years 10,917 --------------- ------------ $3,330,477 $889,662 =============== ============
FF-16 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) Aggregate amortization expense for intangible assets was HK$2,000, HK$239,931 and HK$647,731 for the years ended December 31, 2002, 2003 and 2004 respectively. 5. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The board of directors considers that the estimated fair value of the Group's financial instruments at December 31, 2002, 2003 and 2004 are their respective carrying amount. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents, trade accounts receivable, amounts due from related parties, bank borrowings, trade accounts payable and shareholders' loan. Except shareholders' loan, the carrying amount of the other financial instruments approximates fair value because of their short maturity. The fair value of non-current shareholder loans (discussed in Note 6) could not be reasonably estimated as there are no fixed repayment dates associated with the instruments. 6. LONG TERM BORROWINGS
2004 2003 2002 ---- ---- ---- HK$ HK$ HK$ Bank borrowings $ - $216,667 $ - Current portion of bank borrowings - (200,000) - -------------- -------------- --------------- Long term portion of bank borrowings - 16,667 - -------------- -------------- --------------- Loan from shareholders 1,420,000 920,000 - -------------- -------------- --------------- $ 1,420,000 $936,667 $ - ============== ============== ===============
In 2003, TTL entered into a financing agreement with a financial institution in which the financial institution would lend the Group HK$300,000 (US$38,462). The bank borrowings were unsecured and bearing interest at 5.5% per annum. The loan was to be repaid by 18 monthly installments of HK$18,042 (US$2,313). The financing agreement was secured by personal guarantees given by TTL's directors. The loans from shareholders are unsecured, interest free and are not repayable within the next twelve months. FF-17 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 7. COMMON STOCK The description of the Company's shares is as follows: Each outstanding share of common stock is entitled to one vote. The common stockholders do not have cumulative voting rights in the election of directors, and accordingly, holders of a majority of shares voting are able to elect all of the directors. Holders of common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of funds legally available therefore as well as distributions to the stockholders. At the time of incorporation, the Company's authorized capital was 1,000,000 shares of common stock, par value US$0.05. On June 20, 2005, the authorized capital was changed to 100,000,000 shares of common stock, par value US$0.01. Pursuant to a share exchange agreement dated June 22, 2005, the Company issued 47,000,000 shares in exchange for the then outstanding shares of TTL and TTL then became a wholly owned subsidiary of the Company. Subsequent to the balance sheet date, the Company sold 3,000,000 shares of common stock through a private placement and received aggregate gross proceeds of HK$4,680,000 (US$600,000). Expenses of the offering were approximately HK$507,000 (US$65,000). In addition, the Company issued 3,000,000 common stock purchase warrants to the investors. Each common stock purchase warrant entitles the investor to purchase one share of common stock at an exercise price of US$0.50 per share through June 30, 2008. 8. INCOME TAXES Income tax consists of: 2004 2003 2002 ---- ---- ---- HK$ HK$ HK$ Hong Kong Profit Tax: - current year $ 147,389 $ 11,931 $ 95,884 ========== ========= ========= Income tax is calculated at 17.5% based on the estimated assessable profit for each year. No income tax has been provided for the Group's subsidiary registered in the PRC as the subsidiary has no profit earned which is subject to tax in accordance with the relevant law and regulation in the PRC. As the tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 2004, 2003 and 2002 is immaterial to the Group; therefore, no provision for deferred tax has been made in these consolidated financial statements. A reconciliation between total income tax expense and the amount computed by applying the statutory income tax rate to income before tax is as follows: - FF-18 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 2004 2003 2002 ---- ---- ---- Statutory rate 17.50% 17.50% 16.00% Temporary book - tax difference (10.58%) 4.99% (0.40%) ---------- --------- ---------- Effective tax rate 6.92% 22.49% 15.60% ========== ========= ========== 9. OPERATING LEASE COMMITMENTS At December 31, 2004 the Group had total future minimum lese payments under non-cancelable operating leases falling due as follows: 2004 2005 235,656 2006 58,914 2007 - 2008 - 2009 - ----------- 294,570 =========== The Group expenses rental payments as incurred and is included in administrative expenses in the consolidated statement of income. Rental payments amounted to HK$45,587, HK$99,052 and HK$207,088 for the years ended December 31, 2002, 2003 and 2004 respectively. 10. RELATED PARTY TRANSACTIONS For each of the years in the three-year period ended December 31, 2002, 2003 and 2004, TTL had sold goods to Ericorps Creation (HK) Limited amounting to HK$500,000, HK$825,820 and HK$266,791 respectively. Ericorps Creation (HK) Limited is owned by certain beneficial shareholders of the Group who control an aggregate of 10% of the outstanding shares. 11. SUBSEQUENT EVENTS On May 13, 2005, the Group subsidiary signed a new operating lease effective from July 1, 2005. The future minimum lease payments for the next three years under the lease are HK$106,627 for 2005, HK$284,340 for 2006, HK$284,340 for 2007 and HK$142,170 for 2008. On June 30, 2005, certain shareholders agreed to forgive loans made to the Group though that date. The amount of the forgiveness (net of loans made to the shareholders) was contributed to the capital of the Company and aggregated approximately HK$387,000. FF-19 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 12. OPERATING RISK Concentration of credit risk The carrying amount of cash and cash equivalents, trade receivables and due from related parties represented the Group's maximum exposure to credit risk in relation to financial assets. The majority of the Group's trade receivables relate to sales of goods/provision of services to third party customers. The Group does not have fixed credit period for its trade receivables. The Group performs ongoing credit evaluations of its customer's financial condition and generally does not require collateral on trade receivables. No other financial assets carry a significant exposure to credit risk. Exchange risk The Group cannot guarantee that the current exchange rate will remain steady, therefore there is a possibility that the Group could post the same amount of profit for two comparable periods and because of the fluctuating exchange rate actually post higher or lower profit depending on exchange rate of HK$ converted to US$ on that date. The exchange rate could fluctuate depending on changes in political and economic environments without notices. FF-20 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses to be paid by the registrant in connection with the securities being registered are as follows: Securities and Exchange Commission filing fee........$ 234.36 Accounting fees and expenses......................... 70,000.00 Blue sky fees and expenses........................... 1,000.00 Legal fees and expenses.............................. 25,000.00 Transfer agent fees and expenses..................... 5,550.00 Printing expenses.................................... 2,000.00 Miscellaneous expenses............................... 1,215.64 -------------- Total................................................$ 105,000.00 ============== All amounts are estimates except the SEC filing fee. The Selling Stockholders will be bearing the cost of its own brokerage fees and commissions and its own legal and accounting fees. Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under the International Business Companies Act of the British Virgin Islands, the registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). Section 74 of the registrant's Articles of Association (Exhibit 3.2 hereto) states that every officer and director shall be entitled to be indemnified out of the assets of the registrant against all losses or liabilities which he may sustain or incur in or about the execution of the duties of his office or otherwise in relation thereto, and no director or other officer shall be liable for any loss, damage, or misfortune which may happen to, or be incurred by the registrant in the execution of the duties of his office, or in relation thereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Within the past three years, the registrant has issued and sold the unregistered securities set forth in the tables below.
- ---------------------------------------------------------------------------------------------------------------------- PERSONS OR CLASS OF DATE PERSONS SECURITIES CONSIDERATION EXEMPTION CLAIMED - ---------------------------------------------------------------------------------------------------------------------- May 2004 5 persons 5,000,000 shares of common $50,000 Section 4(20 stock - ---------------------------------------------------------------------------------------------------------------------- June 2005 Golden Mass 42,000,000 shares of common Shares of capital stock of Section 4(2) Technolo- stock Titanium Technology Limited gies Ltd. - ---------------------------------------------------------------------------------------------------------------------- July 2005 - 64 2,460,000 Units, each Unit $492,000 aggregate offering Rule 506 August 2005 accredited consisting of one share of price; selling commissions of investors common stock and one common $49,200 stock purchase warrant - ---------------------------------------------------------------------------------------------------------------------- II-1 - ---------------------------------------------------------------------------------------------------------------------- PERSONS OR CLASS OF DATE PERSONS SECURITIES CONSIDERATION EXEMPTION CLAIMED - ---------------------------------------------------------------------------------------------------------------------- July 2005 - 13 non-U.S. 540,000 Units, each Unit $108,000 aggregate offering Regulation S August 2005 Persons consisting of one share of price; selling commissions of common stock and one common $10,800 stock purchase warrant - ----------------------------------------------------------------------------------------------------------------------
No underwriters were used in the recapitalization and reorganization of the registrant. Underwriters were used in connection with the sale of the Units made from July 2005 to August 2005. The registrant relied upon the exemption from registration contained in Section 4(2) as to all of the transactions except for the sales of Units to accredited investors. The registrant relied upon Rule 506 and Regulation S for the sales of Units from July 2005 to August 2005, as all of the purchasers were either accredited investors or non-US persons. With regard to the transactions made in reliance on the exemption contained in Section 4(2), the purchasers were deemed to be sophisticated with respect to the investment in the securities due to their financial condition and involvement in the registrant's business. Restrictive legends were placed on the stock certificates evidencing the securities issued in all of the above transactions. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES - -------------------------------------------------------------------------------- REGULATION S-K NUMBER EXHIBIT - -------------------------------------------------------------------------------- 3.1 Memorandum of Association, as amended (1) - -------------------------------------------------------------------------------- 3.2 Articles of Association, as amended (1) - -------------------------------------------------------------------------------- 4.1 Form of Warrant - -------------------------------------------------------------------------------- 4.2 Form of Subscription Agreement - -------------------------------------------------------------------------------- 5.1 Opinion of Stevenson, Wong & Co. - -------------------------------------------------------------------------------- 10.1 Employment agreement with Jason Ma dated January 1, 2005 (1) - -------------------------------------------------------------------------------- 10.2 Employment agreement with Humphrey Cheung dated January 1, 2005 (1) - -------------------------------------------------------------------------------- 10.3 Employment agreement with Billy Tang dated January 1, 2005 (1) - -------------------------------------------------------------------------------- 10.4 Office lease dated June 22, 2005 (1) - -------------------------------------------------------------------------------- 10.5 2005 Stock Plan - -------------------------------------------------------------------------------- 10.6 Technical Service Agreement with IBM China/Hong Kong Limited dated October 5, 2004 and Amendment to Supplier Agreement dated December 3, 2004 - -------------------------------------------------------------------------------- 10.7 Technology Partnership and Research & Development Contract with China Scientific Automation Research Center dated June 15, 2005 - -------------------------------------------------------------------------------- 10.8 Technology Research and Development Contract with Tsing Hua University dated November 4, 2005 - -------------------------------------------------------------------------------- II-2 - -------------------------------------------------------------------------------- REGULATION S-K NUMBER EXHIBIT - -------------------------------------------------------------------------------- 21 Subsidiaries of the registrant (1) - -------------------------------------------------------------------------------- 23.1 Consent of Stevenson, Wong & Co. - -------------------------------------------------------------------------------- 23.2 Consent of Zhong Yi (Hong Kong) C.P.A. Company Limited - -------------------------------------------------------------------------------- - ------------------ (1) Filed as an exhibit to the initial filing of the registration statement on September 14, 2005. ITEM 28. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted to directors, officers and controlling persons of the issuer pursuant to the foregoing provisions, or otherwise, the issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes to: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hong Kong, on December 9, 2005. TITANIUM GROUP LIMITED By: /s/ JASON MA ---------------------------------------- Jason Ma, Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE Chief Executive Officer (Principal /s/ JASON MA Executive Officer) December 9, 2005 - -------------------------------------------- Jason Ma Chairman of the Board of Directors (Principal Financial and Accounting Officer) /s/ DR. JOHNNY NG December 9, 2005 - -------------------------------------------- Dr. Johnny Ng /s/ HUMPHREY CHEUNG Director December 9, 2005 - -------------------------------------------- Humphrey Cheung /s/ BILLY TANG Director December 9, 2005 - -------------------------------------------- Billy Tang
II-4 EX-4 3 exh4-1_warrant.txt EXH 4-1 FORM OF WARRANT EXHIBIT 4.1 FORM OF WARRANT Warrant No. W- * * Warrants to Purchase Common Stock ----- --------- TITANIUM GROUP LIMITED (incorporated under the International Business Companies Act (CAP 291) of the British Virgin Islands) CERTIFICATE FOR WARRANTS TO PURCHASE COMMON STOCK EXERCISABLE AT ANY DATE PRIOR TO 5:00 P.M., MOUNTAIN TIME (UNITED STATES OF AMERICA), JUNE 30, 2008 THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY. THIS CERTIFIES THAT, for value received NAME OF HOLDER (the "Holder"), as registered owner of the above indicated number of Warrants, is entitled to at any time until 5:00 p.m., Mountain Time (United States of America), June 30, 2008, or at such later date as the Company, by authorization of its Board of Directors, shall determine (the "Exercise Period"), to subscribe for, purchase, and receive up to NUMBER OF SHARES IN WORDS (NUMBER) shares of Common Stock, US$0.01 par value per share, fully paid and nonassessable (the "Common Stock"), of TITANIUM GROUP LIMITED, a company incorporated under the International Business Companies Act (CAP 291) of the British Virgin Islands (the "Company"), at the price of US$0.50 per share (the "Exercise Price"), upon presentation and surrender of this Warrant and upon payment of the Exercise Price for such shares of the Common Stock to the Company at the principal office of the Company; provided, however, that if the Company shall change the number of shares of its Common Stock issued and outstanding during the term of this Warrant by dividend, split, reverse split, or recapitalization, a proportionate adjustment shall be made to the number of shares of Common Stock to be issued upon the exercise of this Warrant, and to the Exercise Price herein stated. In lieu of issuing fractional shares, fractional amounts shall be rounded to the nearest whole share. Upon exercise of the Warrant, the form of election hereinafter provided for must be duly executed and the instructions for registration of the Common Stock acquired by such exercise must be completed. If the subscription rights represented hereby shall not have been exercised by the expiration of the Exercise Period, this Warrant shall become void and without further force or effect, and all rights represented hereby shall cease and expire. In the event of the exercise or assignment hereof in part only, the Company shall cause to be delivered to the Holder a new warrant of like tenor to this Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of shares of the Common Stock purchasable hereunder as to which this Warrant has not been exercised or assigned. In no event shall this Warrant (or the shares of the Common Stock issuable upon full or partial exercise hereof) be offered or sold except in conformity with the United States Securities Act of 1933, as amended. The Company may deem and treat the registered Holder of this Warrant at any time as the absolute owner hereof for all purposes, and the Company shall not be affected by any notice to the contrary. By acceptance of this Warrant, Holder represents that this Warrant and all shares of Common Stock acquired upon exercise hereof are acquired and will be acquired for the Holder's own account for investment and with no intention at the time of such purchase or acquisition of distributing or reselling the same or any part thereof to the public and, in furtherance of this representation, agrees to execute and deliver to the Company a subscription agreement containing customary investment intent representations and agrees that this Warrant and any Common Stock issued upon exercise hereof may be legended to prohibit transfer, sale, or other disposition except in the compliance with such investment letter. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officer and to be sealed with the seal of the Company this ___ day of September, 2005. TITANIUM GROUP LIMITED S E A L By: -------------------------------------- Jason Ma, Chief Executive Officer EXERCISE FORM (To be executed by the Holder to exercise the right to purchase common stock evidenced by the within Warrant) The undersigned hereby elects irrevocably to exercise the within Warrant and to purchase _______________ shares of the Common Stock of the Company called for thereby, and hereby makes payment of $______________ (at the rate of US$0.50 per share of the Common Stock) in payment of the Exercise Price pursuant thereto. Please issue the shares of the Common Stock as to which this Warrant is exercised in accordance with the instructions given below. Dated: Name (Printed): ------------------- -------------------------------- Signature: ------------------------------------- Signature: ------------------------------------- Signature Guaranteed: -------------------------- INSTRUCTIONS FOR REGISTRATION OF STOCK Name: -------------------------------------------------------------------------- Address: ----------------------------------------------------------------------- Social Security or Tax Identification Number: ---------------------------------- ================================================================================ ASSIGNMENT FORM (To be executed by the registered Holder to effect a transfer of the within Warrants:) FOR VALUE RECEIVED, ____________________________________________, does hereby sell, assign and transfer unto ____________________________________________ the right to purchase ____________________shares of Common Stock of the Company evidenced by the within Warrant, and does hereby irrevocably constitute and appoint ________________ ______________________________ attorney to transfer such right on the books of the Company with full power of substitution in the premises. Dated: Name (Printed): ------------------- -------------------------------- Signature: ------------------------------------- Signature: ------------------------------------- Signature Guaranteed: -------------------------- ******************** NOTICE: THE SIGNATURE(S) TO THE EXERCISE FORM OR ASSIGNMENT FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN WARRANT IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A BANK, OTHER THAN A SAVINGS BANK, OR BY A TRUST COMPANY, OR BY A FIRM HAVING MEMBERSHIP ON A REGISTERED NATIONAL SECURITIES EXCHANGE. EX-4 4 exh4-2_subagmt.txt EXH 4-2 FORM OF SUBSCRIPTION AGMT EXHIBIT 4.2 FORM OF SUBSCRIPTION AGREEMENT TITANIUM GROUP LTD. SUBSCRIPTION AGREEMENT Agreement, made as of this _____ day of ______________, 2005, by and between TITANIUM GROUP LTD., an international business company pursuant to the International Business Companies Act of the British Virgin Islands (the "Company"), and _______________________________ ("Subscriber"). In consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: ARTICLE I SUBSCRIPTION 1.01 SUBSCRIPTION OFFER. Subject to the terms and conditions hereof and to acceptance by the Company, Subscriber hereby irrevocably offers to purchase ______________ Units at a purchase price of $0.20 (U.S.) per Unit for a total of $___________________ (U.S.). The purchase price is payable in full by check, money order, or wire transfer to the Company. Each Unit consists of one share of the Company's common stock and one warrant to purchase one share of the Company's common stock at a price of $0.50 per share through June 30, 2008. The Units, the common stock and warrants comprising the Units and the shares of common stock which may be acquired upon exercise of the warrants are collectively referred to herein as the "Securities." The shares of common stock and warrants which are being offered as part of the Units will be immediately detachable. 1.02 RESTRICTIONS ON SECURITIES. (a) The Securities have not been registered under the Securities Act of 1933 (the "Act") or any applicable state securities laws. (b) The Securities are "restricted securities" as that term is defined in Rule 144 under the Act. (c) All certificates evidencing the Securities shall bear a restrictive legend in substantially the language set forth below: The securities represented by this Certificate have not been registered under the Securities Act of 1933 (the "Act"), and are "restricted securities" as that term is defined in Rule 144 under the Act. The securities may not be offered for sale, sold, or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration the availability of which is to be established to the satisfaction of the Company. (d) The Company shall, from time to time, make stop transfer notations in the Company's records to ensure compliance in connection with any proposed transfer of the Securities, with the Act, and all applicable state securities laws. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.01 STATUS OF SUBSCRIBER. Subscriber, if an individual, is at least 21 years of age. If an association, each individual member of the association is at least 21 years of age. 2.02 ACCESS TO INFORMATION. By virtue of Subscriber's review of the Confidential Private Placement Memorandum dated June 22, 2005 (the "Memorandum"), by reason of Subscriber's preexisting business or personal relationship with the Company or with the officers and directors of the Company, and/or by reason of the business or financial experience of Subscriber or his professional advisors who are unaffiliated with and who are not compensated by the Company, or any affiliate thereof, Subscriber has the capacity to protect his own interests in connection with the offer and sale of the Securities. Subscriber has had access to all material and relevant information necessary to enable Subscriber to make an informed investment decision. All data Titanium Group Ltd. Subscription Agreement - Page 1 requested by Subscriber from the Company or its representatives concerning the business and financial condition of the Company and the terms and conditions of the offering has been furnished to Subscriber's satisfaction. Subscriber has had the opportunity to ask questions of and receive answers from the Company concerning the terms and conditions of this offering, and to obtain from the Company any additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy of the information he has received. 2.03 UNDERSTANDING OF INVESTMENT RISKS. Subscriber understands that there is no market for the Company's common stock. Subscriber also understands that there is no assurance that a market for the common stock will be established, and that realization of the objectives of the Company is subject to significant economic and business risks. 2.04 RESIDENCE OF SUBSCRIBER. The residence of Subscriber set forth below is the true and correct residence of Subscriber and Subscriber has no present intention of becoming a resident or domiciliary of any other state, country, or jurisdiction. 2.05 UNDERSTANDING OF NATURE OF SECURITIES. Subscriber understands that: (a) the Securities have not been registered under the Act and/or any state securities laws and must be held indefinitely unless they are subsequently registered under the Act and/or applicable state securities laws, or exemptions from such registration are available; (b) the Securities are "restricted securities" as that term is defined in Rule 144 under the Act; (c) the Securities cannot be sold or transferred for value without registration under the Act and applicable state laws or exemption therefrom; (d) the certificates evidencing the Securities shall include provisions substantially in the form of the legend set forth in Section 1.02(c) hereof, which Subscriber has read and understands; (e) only the Company can register the Securities under the Act and applicable state securities laws; (f) there are stringent conditions for Subscriber's obtaining an exemption for the resale of the Securities under the Act and any applicable state securities laws; and (h) the Company may, from time to time, make stop transfer notations in the Company's records to insure compliance with the Act and any applicable state securities laws. 2.06 INVESTMENT INTENT. Subscriber represents and warrants that: (a) Subscriber is acquiring the Securities for the Subscriber's own account and not for or on behalf of any other person; (b) Subscriber is acquiring the Securities for investment and not for distribution or with the intent to divide Subscriber's participation with others or of reselling or otherwise distributing the Securities; and (c) Subscriber will not sell the Securities without registration under the Act and any applicable state securities laws or exemption therefrom. 2.07 FURTHER ASSURANCES. Subscriber will execute and deliver to the Company any document, or do any other act or thing, which the Company may reasonably request in connection with the acquisition of the Securities. 2.08 NON-DISCLOSURE. Subscriber has not distributed any written materials furnished to Subscriber by the Company to anyone other than Subscriber's professional advisors. Titanium Group Ltd. Subscription Agreement - Page 2 2.09 ABILITY TO BEAR ECONOMIC RISK. Subscriber is able to bear the economic risk of an investment in the Securities and to maintain his investment in the Securities for an indefinite period of time, and, further, could bear a total loss of the investment and not change his standard of living which existed at the time of such investment. 2.10 EVALUATION OF INVESTMENT. Subscriber, or Subscriber together with his purchaser representative, if any, has such knowledge and experience in financial and business matters that Subscriber and such representative are capable of evaluating the merits and risks of an investment in the Securities and of making an informed investment decision. 2.11 FOR PARTNERSHIPS, CORPORATIONS, TRUSTS, OR OTHER ENTITIES ONLY. If Subscriber is a partnership, corporation, trust, or other entity: (a) Subscriber represents and warrants that it was not organized or reorganized for the specific purpose of acquiring the Securities; (b) Subscriber has enclosed with this Agreement appropriate evidence of the authority of the individual executing this Agreement to act on its behalf (i.e., if a trust, a copy of the trust agreement; if a corporation, a certified corporate resolution authorizing the signature and a copy of the articles of incorporation; or if a partnership, a copy of the partnership agreement); (c) the undersigned has the full power and authority to execute this Subscription Agreement on behalf of such entity and to make the representations and warranties made herein on its behalf and this investment in the Company has been affirmatively authorized by the governing board of such entity and is not prohibited by the governing documents of the entity; and (d) Subscriber has completed the Entity Subscription Questionnaire, attached hereto as Schedule "B", and represents and warrants that the information contained therein is true and correct. 2.12 AFFILIATE RELATIONSHIPS. Subscriber has disclosed below any relationship (including family and business, such as being an officer, director, or shareholder of an entity which owns shares of the Company) between the Subscriber and the Company and its officers, directors and shareholders. (Check the applicable box). [ ] Subscriber IS NOT related to an officer, director or shareholder of the Company. [ ] Subscriber IS related to an officer, director or shareholder of the Company. Please describe any such relationship(s): ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 2.14 ACCREDITED INVESTOR. Subscriber has completed the Accredited Investor Questionnaire, attached hereto as Schedule "C", and represents and warrants that the information contained therein is true and correct. 2.15 INDEMNIFICATION. Subscriber understands that the Company and its advisors, including its legal counsel, are relying upon the representations and warranties of Subscriber contained in this Agreement. Subscriber agrees to indemnify and hold harmless the Company, its officers, directors and agents (including the Company's legal counsel) for any and all damages, liabilities, costs, or expenses incurred as a result of or arising out of any inaccuracy of any of Subscriber's representations and warranties contained herein. Titanium Group Ltd. Subscription Agreement - Page 3 ARTICLE III REGISTRATION 3.01 The Company has agreed to file with the Securities and Exchange Commission under the Act, a registration statement covering the resale of the shares included in the Units after closing of the offering. 3.02 The Subscriber shall furnish to the Company such information and take such reasonable action as the Company reasonably requests regarding the Subscriber and the intended method of disposition of the shares as shall be reasonably required to effect the registration of the shares. 3.03 All expenses, other than underwriting discounts and commissions and fees for the Subscriber's professional advisors, incurred in connection with the registration and sale of the shares, shall be borne by the Company. Underwriting discounts and commissions with respect to the Subscriber's shares, and the fees and expenses of the Subscriber's professional advisors, shall be borne by the Subscriber. ARTICLE IV MISCELLANEOUS PROVISIONS 4.01 CAPTIONS AND HEADINGS. The Article and Section headings throughout this Agreement are for convenience of reference only and shall in no way be deemed to define, limit or add to any provision of this Agreement. 4.02 ENTIRE AGREEMENT; AMENDMENT. This Agreement states the entire agreement and understanding of the parties and shall supersede all prior agreements and understandings. No amendment of the Agreement shall be made without the express written consent of the parties. 4.03 SEVERABILITY. The invalidity or unenforceability of any particular provision of this Agreement shall not affect any other provision hereof, which shall be construed in all respects as if such invalid or unenforceable provision were omitted. 4.04 VENUE; GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 4.05 NOTICES. All notices, requests, demands, consents, and other communications hereunder shall be transmitted in writing and shall be deemed to have been duly given when hand delivered or sent by certified mail, postage prepaid, with return receipt requested, addressed to the parties as follows: to the Company, 10/F, Tianjin Building, 167 Connaught Road West, Hong Kong, and to Subscriber, at the address indicated below. Any party may change its address for purposes of this Section by giving notice as provided herein. [THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.] Titanium Group Ltd. Subscription Agreement - Page 4 IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written.
"Subscribers" Name(s) exactly as you wish your interest in the Company to be registered (1) ------------------------------------------------- (please print) (2) ------------------------------------------------- (please print) Title, if Subscriber is not a natural person (1) ------------------------------------------------- (2) ------------------------------------------------- Signatures (1) ------------------------------------------------- (Signature) (2) ------------------------------------------------- (Signature) Primary Residence (1) ------------------------------------------------- ------------------------------------------------- (2) ------------------------------------------------- ------------------------------------------------- Mailing Address (if different from above) (1) ------------------------------------------------- ------------------------------------------------- (2) ------------------------------------------------- ------------------------------------------------- Contact Telephone Number(s) (1) ------------------------------------------------- (2) ------------------------------------------------- Social Security or Tax Identification Number (1) ------------------------------------------------- (2) -------------------------------------------------
DISPOSITION OF SUBSCRIPTION AGREEMENT: The foregoing Subscription Agreement (is___) (is not___) accepted this _____ day of ______________________, 2005. TITANIUM GROUP LTD. BY: --------------------------------------- Authorized Officer Titanium Group Ltd. Subscription Agreement - Page 5 EX-10 5 exh10-5_stockplan.txt EXH 10-5 2005 STOCK PLAN EXHIBIT 10.5 ---------------------------------------- TITANIUM GROUP LIMITED 2005 STOCK OPTION PLAN ---------------------------------------- Adopted by the Resolution of the Directors on 22 November 2005 Certified true by: NG Kit Chong (Director of Titanium Group Limited) TABLE OF CONTENTS PAGE 1. PURPOSE .................................................................1 2. DEFINITIONS .............................................................1 3. NUMBER OF SHARES AVAILABLE FOR OPTIONS...................................5 4. VESTING LIMITATIONS FOR ISOS.............................................5 5. CONDITIONS FOR GRANT OF OPTIONS..........................................6 6. EXERCISE PRICE...........................................................7 7. EXERCISE OF OPTIONS......................................................7 8. EXERCISABILITY OF OPTIONS................................................8 9. TERMINATION OF OPTION EXERCISE PERIOD....................................9 10. ADJUSTMENT OF SHARES, MERGER.............................................9 11. TRANSFERABILITY OF OPTIONS..............................................11 12. ISSUANCE OF SHARES......................................................11 13. REDEMPTION OF SHARES BY THE COMPANY.....................................12 14. ADMINISTRATION..........................................................12 15. WITHHOLDING OR DEDUCTION FOR TAXES......................................13 16. INTERPRETATION..........................................................14 17. AMENDMENT AND TERMINATION OF THE PLAN...................................14 18. RIGHTS AS AN EMPLOYEE OR NON-EMPLOYEE...................................14 19. SUCCESSORS AND ASSIGNS..................................................14 i TITANIUM GROUP LIMITED 2005 STOCK OPTION PLAN --------------------------------- 1. PURPOSE. The Titanium Group Limited 2005 Stock Option Plan has been established by Titanium Group Limited, a British Virgin Islands corporation (the "COMPANY"), to advance the interests of the Company by providing an additional incentive to attract and retain qualified and competent persons who are key to the Company, including key employees of and consultants or advisors to, the Company and its Subsidiaries (as defined below), if any, and upon whose efforts and judgment the success of the Company is largely dependent, through the encouragement of stock ownership in the Company by such persons. 2. DEFINITIONS. As used herein, the following terms shall have the meanings indicated. (a) "AFFILIATE" shall mean a person, entity or organization which is controlled by, under common control with, controlling, or is an Officer or Director of, beneficial owner of five percent or greater of the equity or voting securities of, or, through contract relationship or otherwise exerts substantial influence over or is substantially influence by, the Company. (b) "BOARD" shall mean the board of directors of the Company. (c) "CAUSE" shall mean any of the following: (i) a determination by the Company that there has been a willful, reckless or grossly negligent failure by the Optionee to perform his or her duties as an Employee or Non-Employee Eligible Individual; (ii) a willful breach by the Optionee of any of the material terms or provisions of his or her employment agreement; (iii) any conduct by the Optionee that either results in his or her conviction of a felony under the laws of the United States of America or any state thereof, or of an equivalent crime under the laws of any other jurisdiction; (iv) the commission by the Optionee of an act or acts involving fraud, embezzlement, misappropriation, theft, breach of fiduciary duty or material dishonesty against the Company or its Subsidiary, their properties or personnel; (v) any act by the Optionee that the Company determines to be in willful or wanton disregard of the Company's best interests, or which results, or it intended to result, directly or indirectly, in improper gain or personal enrichment of the Optionee at the expense of the Company; 1 (vi) a determination by the Company that there has been a willful, reckless or grossly negligent failure by the Optionee to comply with any rules, regulations, policies or procedures of the Company or any Subsidiary, or that the Optionee has engaged in any act, behavior or conduct showing willful or wanton disregard of the best interests of the Company or any Subsidiary or occasioned by a deliberate and material violation or disregard of standards of behavior that the Company or any Subsidiary has a right to expect of its Employees or Non-Employee Eligible Individuals; or (vii) if the Optionee, while employed by or in the service of the Company or any Subsidiary, and for two years thereafter, violates a confidentiality, non-solicitation and/or noncompete agreement with the Company or any Subsidiary, or fails to safeguard, divulges, communicates, uses to the detriment of the Company or any Subsidiary or for the benefit of any person or persons, or misuses in any way, any Confidential Information; PROVIDED, HOWEVER, if the Optionee is subject to an employment agreement which defines "Cause," then "Cause" shall have the meaning set forth in such employment agreement. (d) "CHANGE OF CONTROL" shall mean any of the following events: (i) any "person", as such term is used in section 14(d) of the Securities Exchange Act, other than the Company, any employee benefit plan of the Company or any Affiliate, any Affiliate of the Company, or any shareholder of the Company as of the Effective Date, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act (or any successor rule), directly or indirectly, of fifty percent (50%) or more of the combined voting power of the Company's common stock; (ii) any consolidation or merger of the Company, other than a consolidation or merger with the sole purpose of reorganizing the Company into another form of entity, changing the Company's state of organization or where the shareholders of the Company immediately before the merger or consolidation own fifty percent (50%) or more of the issued and outstanding shares of stock of the resulting entity after the merger or consolidation; or (iii) any sale, lease, exchange or other transfer (in one or a series of related transactions) of all, or substantially all, of the assets of the Company other than any sale, lease, exchange or other transfer to any entity which the Company or its stockholders own, directly or indirectly, all of the outstanding voting securities of such entity after such transfer. (e) "CODE" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. (f) "COMMITTEE" shall mean the compensation committee appointed by the Board pursuant to Section 14 hereof to administer the Plan or, if not appointed, the Board. (g) "COMMON STOCK" shall mean the Company's Common Stock, par value $0.001 per share. (h) "COMPANY" shall mean Titanium Group Limited, a corporation incorporated under the laws of the British Virgin Islands. 2 (i) "CONFIDENTIAL INFORMATION" shall mean any and all information pertaining to the Company (including, without limitation, information relating to its products, services, marketing practices, production practices, management agreements, clients, customers, prospects, sources of prospects, suppliers, financial condition, results of operations, costs and methods of doing business, owners and ownership structure) that is not generally available to the public. (j) "COVERED EMPLOYEE" shall mean any individual who as of the close of the Company's taxable year in which an Option is granted is (i) the Chief Executive Officer of the Company or is acting in such capacity ("CEO"); (ii) among the four highest compensated officers of the Company (other than the CEO) whose compensation is required to be reported to Shareholders under the Securities Exchange Act; or (iii) otherwise considered to be a "Covered Employee" within the meaning of Section 162(m) of the Code. (k) "DIRECTOR" shall mean a member of the Board. (l) "DISABILITY" shall have the same meaning as a "total and permanent (mental or physical) disability" as set forth in Section 22(e)(3) of the Code, as determined by a medical doctor selected by the Committee. (m) "EMPLOYEE" shall mean any person, including an officer or a director, who is employed by the Company, or any Subsidiary. (n) "FAIR MARKET VALUE" of a Share on any date of reference shall be the Closing Price of a share of Common Stock on such date, unless the Committee in its sole discretion shall determine otherwise in a fair and uniform manner. For this purpose, the "CLOSING PRICE" of the Common Stock on any business day shall be (i) if the Common Stock is listed or admitted for trading on any United States national securities exchange, or if actual transactions are otherwise reported on a consolidated transaction reporting system, the last reported sale price of the Common Stock on such exchange or reporting system, as reported in any newspaper of general circulation; (ii) if the Common Stock is quoted on the National Association of Securities Dealers Automated Quotations System ("NASDAQ"), or any similar system of automated dissemination of quotations of securities prices in common use, the mean between the closing high bid and low asked quotations for such day of the Common Stock on such system; or (iii) if neither clause (i) nor (ii) is applicable, the mean between the high bid and low asked quotations for the Common Stock as reported by the National Quotation Bureau, Incorporated if at least two securities dealers have inserted both bid and asked quotations for the Common Stock on at least five of the 10 preceding days. If the information set forth in clauses (i) through (iii) above is unavailable or inapplicable to the Company (E.G., if the Company's Common Stock is not then publicly traded or quoted), then the "FAIR MARKET VALUE" of a Share shall be the fair market value (I.E., the price at which a willing seller would sell a Share to a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of all relevant facts) of a share of the Common Stock on the business day immediately preceding such date as the Committee in its sole and absolute discretion shall determine in a fair and uniform manner. 3 (o) "INCENTIVE STOCK OPTION" shall mean an incentive stock option as defined in Section 422 of the Code. (p) "NON-EMPLOYEE ELIGIBLE INDIVIDUAL" shall mean an advisor or consultant to the Company or any Subsidiary who contributes or has an opportunity to contribute to the success of the Company or any Subsidiary. (q) "NON-STATUTORY STOCK OPTION" shall mean an Option which is not an Incentive Stock Option. (r) "OFFICER" shall mean the Company's chairman, president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any unit, division or Subsidiary president, any vice-president of the Company in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the Company. Officers of Subsidiaries shall be deemed Officers of the Company if they perform such policy-making functions for the Company. As used in this paragraph, the phrase "policy-making function" does not include policy-making functions that are not significant. (s) "OPTION" shall mean a stock option to purchase Shares granted pursuant to this Plan. (t) "OPTION AGREEMENT" shall mean the agreement between the Company and the Optionee pursuant to which Options are granted. (u) "OPTIONEE" shall mean a person to whom an Option is granted under this Plan or any person who succeeds to the rights of such person under this Plan by reason of the death of such person or otherwise. (v) "OUTSIDE DIRECTOR" shall mean a member of the Board who: (i) is not a current employee of the Company or any Affiliate, (ii) is not a former employee of the Company or any Affiliate who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (iii) has not been an officer of the Company or any Affiliate; (iv) does not receive remuneration either directly or indirectly, in any capacity other than as a director; and (v) satisfies any other conditions that shall from time to time be required to qualify as an "outside director" under Section 162(m) of the Code and the regulations thereunder and also as a "Non-Employee Director" under Rule 16b-3 promulgated under the Securities Exchange Act. For this purpose, "remuneration" shall have the meaning afforded that term pursuant to Treasury Regulations issued under Section 162(m) of the Code, and shall exclude any de minimis remuneration excluded under those Treasury Regulations. (w) "PLAN" shall mean the Titanium Group Limited 2005 Stock Option Plan, effective November 22, 2005. 4 (x) "RETIREMENT" shall mean the occurrence of an Optionee's termination of employment or service with the Company and its Subsidiaries after completing at least five years of service and attaining age 65. (y) "RULE 16B-3" shall mean Rule 16b-3 promulgated under the Securities Exchange Act. (z) "SECURITIES EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (aa) "SHARE" shall mean one share of Common Stock, as adjusted in accordance with Section 10 of this Plan. (bb) "SUBSIDIARY" shall mean any corporation (other than the Company), partnership, joint venture or other entity (collectively referred to as "entities") in any unbroken chain of entities beginning with the Company if, at the time of the granting of the Option, each of the entities other than the last entity in the unbroken chain owns equity possessing 50 percent or more of the profits interest or total combined voting power of all classes of equity in one of the other equities in such chain. 3. NUMBER OF SHARES AVAILABLE FOR OPTIONS. The Company may grant to Optionees from time to time Options to purchase an aggregate of up to [5,000,000] Shares, as further adjusted by Section 10; PROVIDED, however, that if any Option granted under this Plan is not exercised in the time allowed for such exercise, or if any such Option shall terminate, expire or be canceled, forfeited or surrendered as to any Shares, the Shares relating to such lapsed Option shall be available for issuance pursuant to new Options subsequently granted under this Plan. Upon the grant of any Option hereunder, authorized and unissued, or treasury, Shares shall be reserved for issuance to permit exercise under this Plan. An Option granted hereunder shall be either an Incentive Stock Option or a Non-Statutory Stock Option as determined by the Committee at the time of grant of such Option and the Option Agreement shall clearly state whether it is an Incentive Stock Option or Non-Statutory Stock Option or, failing a clear indication, be deemed a Non-Statutory Stock Option. All Incentive Stock Options shall be granted within 10 years from the effective date of this Plan. 4. VESTING LIMITATION FOR INCENTIVE STOCK OPTIONS. Options otherwise qualifying as Incentive Stock Options hereunder will not be treated as Incentive Stock Options to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the Shares, with respect to which Options meeting the requirements of Code Section 422(b) are exercisable for the first time by any individual during any calendar year (under all stock option or similar plans of the Company and any Subsidiary), exceeds $100,000. 5 5. CONDITIONS FOR GRANT OF OPTIONS. (a) Each Option shall be evidenced by a written Option Agreement in the form of Exhibit A attached hereto that may contain any term deemed necessary or desirable by the Committee, provided such terms are not inconsistent with this Plan or any applicable law. (b) Optionees shall be selected by the Committee from: (i) all Employees (including Directors and Officers who are Employees); (ii) Non-Employee Eligible Individuals; and (iii) former or prospective Employees and Non-Employee Eligible Individuals. (c) In granting Options, the Committee shall take into consideration the contribution the person has made, or is expected to make, with respect to the success of the Company or its Subsidiaries and such other factors as the Committee shall determine. The Committee shall also have the authority to consult with and receive recommendations from Officers and other personnel of the Company and its Subsidiaries with regard to these matters. The Committee may from time to time prescribe such terms and conditions concerning such Options as it deems appropriate, including, without limitation: (i) the exercise price or prices of the Option or any installments thereof; (ii) the date or dates on which the Option becomes and/or remains exercisable; (iii) providing that the Option vests or becomes exercisable in installments over a period of time, and/or upon the attainment of certain standards, specifications or goals; (iv) conditioning the exercise of an Option on the continued employment or service of the Optionee for a specified period of time; or (v) other conditions or termination events with respect to the exercisability of any Option, provided that such other conditions or events are not more favorable to an Optionee than those expressly permitted herein. (d) The Options granted to Employees or Non-Employee Eligible Individuals under this Plan shall be in addition to regular salaries, pension, life insurance or other benefits related to their employment with or service to the Company or its Subsidiaries. (e) Notwithstanding any other provisions of this Plan to the contrary, an Incentive Stock Option shall not be granted to any person owning directly or indirectly (through attribution under Section 424(d) of the Code) at the date of grant, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or of its parent or subsidiary, as those terms are defined in Section 424 of the Code, at the date of grant) unless the option price of such Option is at least 110% of the Fair Market Value of the Shares subject to such Option on the date the Option is granted, and such option by its terms is not exercisable after the expiration of five years from the date such Option is granted. (f) Notwithstanding any other provision of this Plan, and in addition to any other requirements of this Plan, the aggregate number of Shares with respect to which Options may be granted to any one Optionee may not exceed sixty percent (60%) of authorized Options, subject to adjustment as provided in Section 10(a) hereof. (g) Notwithstanding any other provision of this Plan and in addition to any other requirements of this Plan, Options may not be granted to a Covered Employee unless the grant of 6 such Option is authorized by and all of the terms are determined by a Committee that is appointed in accordance with Section 14 of the Plan and all of whose members are Outside Directors. (h) Incentive Stock Options may be granted only to Employees. (i) The Committee may, in its sole discretion, condition the grant of an Option upon the execution and delivery of confidentiality, non-competition and other restrictive covenants and agreements, all of which may be incorporated into the Option Agreement. (j) The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination to grant such Option. Notice of the determination shall be given to each Optionee within a reasonable time after the date of such grant. 6. EXERCISE PRICE. (a) Except as provided in this Section 6 and Section 10, the exercise price per Share of any Option shall be the price determined by the Committee at the time the Option is granted, provided it is in excess of the Share's par value. (b) Subject to Section 5(e), the exercise price of any Incentive Stock Option shall not be less than the Fair Market Value of the Share underlying the Option (as determined in the sole and absolute discretion of the Committee in a fair and uniform manner) on the date such Incentive Stock Option is granted. 7. EXERCISE OF OPTIONS. (a) An Option shall be deemed exercised when: (i) the Company has received written notice of such exercise in accordance with the terms of the Option; (ii) full payment of the exercise price for all of the Shares as to which the Option is exercised has been made; (iii) the Optionee has agreed to be bound by the terms, provisions and conditions of any applicable shareholders' agreement; and (iv) arrangements that are satisfactory to the Committee in its sole discretion have been made for the Optionee's payment to the Company of the amount that is necessary for the Company or the Subsidiary employing the Optionee to withhold in accordance with applicable Federal or state tax withholding requirements. Unless further limited by the Committee in any Option Agreement, the exercise price of any Option may be paid in cash, by certified or official bank check, by personal check (with the approval of the Committee), by money order, with Shares owned by the Optionee that have been owned by the Optionee for more than 6 months on the date of surrender or such other period as may be required to avoid a charge to the Company's earnings for financial accounting purposes, by authorization for the Company to withhold Shares issuable upon exercise of the Option, by arrangement with a broker that is acceptable to the Committee where payment of the exercise price is made pursuant to an irrevocable direction to the broker to deliver all or a part of the proceeds from the sale of the Option Shares to the Company in payment of the exercise price or by a combination of the above, or by promissory note (as described below). If the exercise price is paid in whole or in part with Shares, 7 the value of the Shares surrendered shall be their Fair Market Value on the date the Option is exercised. (b) Subject to compliance with Federal and State laws (including corporate governance laws), the Company in its sole discretion may, on an individual basis or pursuant to a general program established in connection with this Plan, lend money to an Optionee, guarantee a loan to an Optionee, or otherwise assist an Optionee to obtain the financing necessary to exercise all or a portion of an Option granted hereunder or to pay any tax liability of the Optionee attributable to such exercise. If the exercise price is paid in whole or in part with the Optionee's promissory note, such note shall: (i) provide for full recourse to the maker; (ii) be collateralized by the pledge of the Shares that the Optionee purchases upon exercise of such Option; (iii) bear interest at the prime rate of the Company's principal lender, plus two percent; and (iv) contain such other terms as the Board or Committee in its sole discretion shall reasonably require. (c) No Optionee shall be deemed to be a holder of any Shares subject to an Option unless and until a stock certificate or certificates for such Shares are issued to such person(s) under the terms of this Plan (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). Until the issuance of the stock certificate evidencing the Shares as to which an Option has been exercised, no right to vote or to receive dividends or any other rights as a shareholder shall exist with respect to such Shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, notwithstanding the exercise of such Option, except as expressly provided in Section 10 hereof. 8. EXERCISABILITY OF OPTIONS. (a) Except as otherwise provided in this Section 8 and subject to Section 12, an Option shall become exercisable in such amounts, at such vesting intervals, upon such events or occurrences, and upon such other terms and conditions as shall be provided in the individual's Option Agreement. (b) Subject to Section 5(e), the expiration date(s) of an Option shall be determined by the Committee at the time of grant, but in no event shall an Option be exercisable after the expiration of 10 years from the date of grant of the Option. (c) Unless otherwise expressly provided in any Option Agreement, and notwithstanding the exercise schedule set forth in any Option Agreement, each outstanding Option, may, in the sole discretion of the Committee, become fully exercisable upon or immediately prior to the date of the occurrence of any Change of Control or the Optionee's termination of employment with the Company by reason of Retirement, death or Disability. 8 9. TERMINATION OF OPTION EXERCISE PERIOD. (a) Unless otherwise expressly provided in any Option Agreement, the unexercised portion of any Option granted to an Optionee shall automatically and without notice immediately terminate at the earliest to occur of the following: (i) one year after the date on which the Optionee's employment or service is terminated for any reason, other than by reason of: (A) Cause; (B) voluntary termination of employment or service by the Optionee; or (C) the Optionee's death; (ii) immediately upon the termination by the Company of the Optionee's employment or service for Cause; (iii) thirty (30) days after the voluntary termination of employment or service by the Optionee; (iv) one year after the date of the Optionee's death PROVIDED, that with respect to the death of an Optionee who previously terminated his employment or his service by reason of Disability, the option exercise period shall expire at the later to occur of one year following the date on which the Optionee's employment or service with the Company was terminated due to Disability, or one month following the Optionee's death. (b) Unless otherwise expressly provided in any Option, the Committee in its sole discretion may, by giving written notice ("cancellation notice") to the Optionee, cancel, effective upon the date of the consummation of any Change of Control, any Option that remains unexercised on such date. Such cancellation notice shall be given within a reasonable period of time prior to the proposed date of such cancellation and may be given either before or after approval of such corporate transaction. (c) Upon termination of an Option (or portion thereof) pursuant to the foregoing provisions of this Section 9, any Option (or portion thereof) not previously exercised shall be canceled. 10. ADJUSTMENT OF SHARES; MERGER. (a) If, at any time while this Plan is in effect or unexercised Options are outstanding, there shall be any increase or decrease in the number of issued and outstanding Common Stock through the declaration of a stock dividend, through any recapitalization, reclassification, stock split-up, merger, combination or exchange of Common Stock (other than any such exchange or issuance of Common Stock through which Common Stock is issued to effect an acquisition of another business or entity or the Company's purchase of Common Stock to exercise a "call" purchase option), then and in such event, at the discretion of the Committee: 9 (i) appropriate adjustment shall be made in the maximum number of Shares available for grant under this Plan, so that the same percentage of the Company's issued and outstanding Shares shall continue to be subject to being so optioned; and (ii) appropriate adjustment shall be made in the number of Shares and the exercise price per Share thereof then subject to any outstanding Option, so that the same percentage of the Company's issued and outstanding Shares shall remain subject to purchase at the same aggregate exercise price. (b) Such adjustments shall be made by the Committee, whose determination shall be final, binding and conclusive. (c) Subject to the specific terms of any Option Agreement, the Committee may change the terms of Options outstanding under this Plan, with respect to the option price or the number of Shares subject to the Options, or both, when, in the Committee's sole judgment and discretion, such adjustments become appropriate by reason of a Change of Control. (d) Except as otherwise expressly provide herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into or exchangeable for shares of its capital stock of any class, either in connection with a direct or underwritten sale or upon the exercise of rights or warrants to subscribe therefor or purchase such shares, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of or exercise price of Shares then subject to outstanding Options granted under this Plan. (e) Without limiting the generality of the foregoing, the existence of outstanding Options granted under this Plan shall not affect in any manner the right or power of the Company to make, authorize or consummate: (i) any or all adjustments, recapitalizations, reclassifications, reorganizations or other changes in the Company's capital structure or its business; (ii) any merger or consolidation of the Company or to which the Company is a party; (iii) any issuance by the Company of debt securities, or preferred or preference stock, that would rank senior to or above the Shares subject to outstanding Options; (iv) any purchase or issuance by the Company of Shares or other classes of common stock or common equity securities; (v) the dissolution or liquidation of the Company; (vi) any sale, transfer, encumbrance, pledge or assignment of all or any part of the assets or business of the Company; or (vii) any other corporate act or proceeding, whether of a similar character or otherwise. (f) In the event of a merger in which the Company's shareholders immediately before the merger own fifty percent (50%) or more of the issued and outstanding shares of stock of the resulting entity after the merger, then existing Options of the Company shall automatically convert into options to receive stock of the resulting entity. This Plan shall survive such merger as described in the immediately preceding sentence, and in such case, the term "Option" herein shall refer to an option for shares of stock of the surviving entity. In such case, the Committee (or such similar body of the resulting entity) shall determine whether adjustments are necessary to the exercise price of existing Options. 10 (g) The Optionee shall receive written notice within a reasonable time prior to the consummation of such action advising the Optionee of any of the foregoing. The Committee may, in the exercise of its sole discretion, in such instances declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise her or his Option. 11. TRANSFERABILITY OF OPTIONS. (a) No Option shall be subject to alienation, assignment, pledge, charge or other transfer other than by the Optionee by will or the laws of descent and distribution, and any attempt to make any such prohibited transfer shall be void; PROVIDED, however, that a Non-Statutory Stock Option may be transferred to a family member or trust for the benefit of a family member if the Committee's prior written consent is obtained (which consent may be obtained at the time an Option is granted) and provided the transaction does not violate the requirements of Rule 16b-3. Each Option shall be exercisable during the Optionee' lifetime only by the Optionee, or in the case of a Non-Statutory Stock Option that has been assigned or otherwise transferred with the Committee's prior written consent, only by the assignee consented to by the Committee. (b) Unless the Committee's prior written consent is obtained (which consent may be obtained at the time an Option is granted), and provided the transaction does not violate the requirements of Rule 16b-3, no Shares acquired by an Officer, as that term is defined under Rule 16b-3, or Director pursuant to the exercise of an Option may be sold, assigned, pledged or otherwise transferred prior to the expiration of the six-month period following the date on which the Option was granted. 12. ISSUANCE OF SHARES. (a) Notwithstanding any other provision of this Plan, the Company shall not be obligated to issue any Shares unless it is advised by counsel of its selection that it may do so without violation of the applicable Federal and State laws pertaining to the issuance of securities, and may require any stock so issued to bear a legend, may give its transfer agent instructions, and may take such other steps, as in its judgment are reasonably required to prevent any such violation. (b) As a condition of any sale or issuance of Shares upon exercise of any Option, the Committee may require such agreements or undertakings, if any, as the Committee may deem necessary or advisable to assure compliance with any law, regulation, agreement or other applicable restriction, including, but not limited to, the following: (i) a representation and warranty by the Optionee to the Company, at the time any Option is exercised, that he is acquiring the Shares to be issued to him for investment and not with a view to, or for sale in connection with, the distribution of any such Shares; and (ii) (A) an agreement and undertaking to comply with all of the terms, restrictions and provisions set forth in any then applicable shareholders' agreement relating to the Shares, including without limitation any restrictions on transferability, any rights of first refusal 11 and any option of the Company to "call" or purchase such Shares under then applicable agreements, and (B) any restrictive legend or legends, to be embossed or imprinted on Share certificates, that are, in the discretion of the Committee, necessary or appropriate to comply with the provisions of any securities law or other restriction applicable to the issuance of the Shares. 13. REDEMPTION OF SHARES BY THE COMPANY. (a) RIGHT TO REDEEM. Subject to any restrictions under applicable corporate or other laws, and notwithstanding any other provisions of this Plan to the contrary, the Company shall have the right to redeem any Shares issued to any Optionee upon the exercise by such Optionee of the Option granted to him under the Plan immediately upon the termination of Optionee's employment or service arising from (i) a Disability; (ii) the death of the Optionee; (iii) the voluntary termination of employment or services of the Optionee; or (iv) the termination of employment or services of the Optionee for Cause (each an "Event of Redemption"). (b) REDEMPTION PRICE. (i) The purchase price (the "Redemption Price"), to be paid by the Company at the Redemption Closing (as defined herein) for the Shares of the Optionee upon the occurrence of an Event of Redemption pursuant to Section 13(a)(i)-(iii), shall be the Fair Market Value of the Shares on the date of the Event of Redemption, as determined in accordance with Section 2(n) hereof. (ii) In the event of an Event of Redemption set forth in Section 13(a)(iv), the Redemption Price shall be zero, and the Optionee shall immediately surrender the Shares to the Company without payment of any further compensation for his Shares. (c) REDEMPTION CLOSING. The closing (the "Redemption Closing") shall take place no later than thirty (30) days after the date of the occurrence of the Redemption Event. At the Redemption Closing: (i) the Optionee shall deliver to the Company the share certificate or certificates evidencing the ownership of the Shares together with duly executed stock powers endorsed in blank and such other documents as the Company shall require; and (ii) the Company shall pay to the Optionee the Redemption Price (if any) by wire transfer, certified check or, in the Company's sole discretion, by delivery of a promissory note to the Optionee in the principal amount of the Redemption Price and payable on such terms as the Company may deem appropriate. 14. ADMINISTRATION. (a) This Plan shall be administered by the Committee, which shall consist of not less than two Directors, each of whom shall be Outside Directors. The Committee shall have all of the powers of the Board with respect to this Plan. Any member of the Committee may be removed at any time, with or without cause, be resolution of the Board, and any vacancy occurring in the membership of the Committee may be filled by appointment by the Board. 12 (b) Subject to the provisions of this Plan, the Committee shall have the authority, in its sole discretion, to: (i) grant Options; (ii) determine the Fair Market Value per Share; (iii) determine the exercise price per Share at which Non-Statutory Stock Options may be exercised; (iv) determine the Optionees to whom, and the time or times at which, Options shall be granted; (v) determine the number of Shares subject to each Option; (vi) determine the terms, conditions and provisions of each Option granted (which need not be identical); (vii) with the consent of the holder thereof, modify or amend each Option; (viii) defer (with the consent of the Optionee) or accelerate the exercise date of any Option; and (ix) make all other determinations deemed necessary or advisable for the administration of this Plan. (c) Each determination or other action made or taken pursuant to the Plan, including interpretation of the Plan and the specific conditions and provisions of the Options granted hereunder by the Committee, shall be final and conclusive for al purposes and upon all persons including, but without limitation, the Company, the Committee, the Board, Officers, and any affected Employees or consultants to the Company, Optionees and the respective successors in interest of any of the foregoing. (d) Any and all decisions or determinations of the Committee shall be made either: (i) by a majority vote of the members of the Committee at a meeting of the Committee; or (ii) without a meeting by the unanimous written approval of the members of the Committee. (e) The Board may reserve to itself the power to grant Options to Employees or Directors or directors of any Subsidiary who are not Covered Employees. If and to the extent that the Board reserves such powers, then all references herein to the Committee shall refer to the Board with respect to the Options granted by the Board. (f) No member of the Committee, or any Officer or Director, shall be personally liable for any act or omission made in good faith in connection with this Plan. (g) The inability of the Company to obtain authority from any regulatory body having jurisdiction over the grant of options under the Plan, which authority is deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 15. WITHHOLDING OR DEDUCTION FOR TAXES. If at any time specified herein for the making of any issuance or delivery of any Option or Common Stock to any Optionee, any law or regulation of any governmental authority having jurisdiction in the premises shall require the Company to withhold, or to make any deduction for, any taxes or take any other action in connection with the issuance or delivery then to be made, such issuance or delivery shall be deferred until such withholding or deduction shall have been provided for by the Optionee or beneficiary, or other appropriate action shall have been taken, as determined by the Committee in its sole discretion. 13 16. INTERPRETATION. (a) This Plan shall be administered and interpreted so that all Incentive Stock Options granted under this Plan will qualify as Incentive Stock Options under Section 422 of the Code. If any provision of this Plan should be held invalid for the granting of Incentive Stock Options or illegal for any reason, such determination shall not affect the remaining provisions hereof, and this Plan shall be construed and enforced as if such provision had never been included in this Plan. (b) As it is the intent of the Company that the Plan comply in all respects with Rule 16b-3, any ambiguities or inconsistencies in construction of the Plan shall be interpreted to give effect to such intention, and if any provision of the Plan is found not to be in compliance with Rule 16b-3, such provision shall be deemed null and void to the extent required to permit the Plan to comply with Rule 16b-3. The Board and the Committee each may from time to time adopt rules and regulations under, and amend, the Plan in furtherance of the intent of the foregoing. (c) This Plan shall be governed by the internal laws of the British Virgin Islands. (d) Headings contained in this Plan are for convenience only and shall in no manner be construed as part of this Plan or affect the meaning or interpretation of any part of this Plan. (e) Any reference to the masculine, feminine, or neuter gender shall be a reference to such other gender as is appropriate. 17. AMENDMENT AND TERMINATION OF THE PLAN. Either the Board or the Committee may from time to time amend or terminate this Plan or any Option without approval of the shareholders of the Company, unless shareholder approval is required by Rule 16b-3, applicable stock exchange or quotation systems, or applicable Code provisions; PROVIDED, however, that, except to the extent provided in Section 9, no amendment or termination of this Plan or any Option issued hereunder shall substantially impair any Option previously granted to any Optionee without the consent of such Optionee. 18. RIGHTS AS AN EMPLOYEE OR NON-EMPLOYEE. Neither the Plan nor any Option granted pursuant thereto shall be construed to give any person the right to remain in the employ or service of the Company or any Affiliate, or to affect the right of the Company or any Affiliate to terminate such individual's employment or service at any time with or without cause. The grant of an Option shall not entitle the Optionee to, or disqualify the Optionee from, participation in the grant of any other Option under the Plan or participation in any other benefit plan maintained by the Company or any Affiliate. 19. SUCCESSORS AND ASSIGNS. The Plan shall be binding upon the Company's successors and assigns and shall inure to the benefit of any representative, executor, administrator, heir, or legatee of the Optionee. 14 EX-10 6 exh10-6_agmt.txt EXH 10-6 AGREEMENT EXHIBIT 10.6 IBM CHINA/HONG KONG LIMITED 10/F PCCW Tower Taikoo Place, 979 King's Road Quarry Bay, Hong Kong AMENDMENT TO SUPPLIER AGREEMENT - -------------------------------------------------------------------------------- Name and Address of Supplier TITANIUM TECHNOLOGY LIMITED Agreement No. 4904HK0668 10/F, Tianjin Building 167 Connaught Road West, SOW No. 4904HK 0669 Hong Kong Amendment No. 001 - -------------------------------------------------------------------------------- This Amendment amends the SOW as follows. All other terms and conditions of the SOW shall remain unchanged. ORDER OF PRECEDENCE In case of conflict between any of the terms and conditions of the Agreement, SOW and this Amendment, the terms and conditions of this Amendment will prevail. The validity of the SOW is extended from December 31, 2004 to December 31, 2005 and stated as follows: The Supplier would partner with IBM to provide professional services ("Services") for the Hong Kong Government of HKSAR (the "Customer") under the Information Technology Professional Services Arrangement referenced ITS 5/3/1/1 - - T1 (the "ITPSA") from Jun 24, 2002 to Dec 31, 2005 ("Term"), and with an option to extend for a further period of no more than 18 months. The Supplier will be informed 3 months before the expiry of the first 30 months whether IBM will exercise the option of extension. THE PARTIES ACKNOWLEDGE THAT THE THEY HAVE READ THIS AMENDMENT, UNDERSTANDS IT AND AGREES TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, THE PARTIES AGREE THAT THIS AMENDMENT, TOGETHER WITH ANY OTHER APPLICABLE IBM AGREEMENTS, CERTIFICATIONS, ADDENDUM, SUPPLEMENTS AND ANY EXHIBITS OR ATTACHMENTS THERETO, REFERENCING THIS AMENDMENT OR EXPRESSLY MADE A PART HEREOF THAT ARE DULY SIGNED BY THE PARTIES, SUPERSEDING ALL PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN, AND OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER OF THIS AMENDMENT.
ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: IBM China/Hong Kong Limited Titanium Technology Limited By: /s/ CATHERINE CHUI DECEMBER 3, 2004 By: /s/ PATRICK LO DEC 9, 2004 ------------------------------------------- ------------------------------------------------ Authorized Signature Date Authorized Signature Date CATHERINE CHUI PATRICK LO - ---------------------------------------------- --------------------------------------------------- Printed Name Printed Name PROCUREMENT MANAGER EXECUTIVE DIRECTOR - -------------------------------------------------------- --------------------------------------------------- Title & Organization Title & Organization
Page 1 of 1 TECHNICAL SERVICE AGREEMENT Agreement #4904HK0668 This Base Agreement ("BASE AGREEMENT") dated as of October 5, 2004 ("EFFECTIVE DATE"), between IBM CHINA/HONG KONG KONG LIMITED ("BUYER") and TITANIUM TECHNOLOGY LIMITED ("SUPPLIER"), establishes the basis for a multinational procurement relationship under which Supplier will provide Buyer the Deliverables and Services described in SOW's issued under this Base Agreement. Deliverables and Services acquired by Buyer on or after the Effective Date will be covered by this Base Agreement. This Base Agreement will remain in effect until terminated. 1.0 DEFINITIONS "AFFILIATES" means entities that control, are controlled by, or are under common control with, a party to this Agreement. "AGREEMENT" means this Base Agreement and any relevant Statements of Work ("SOW"), Work Authorizations ("WA"), and other attachments or appendices specifically referenced in this Agreement. "APPEARANCE DESIGN" means the appearance presented by an object, formed in hardware or by software that creates a visual impression on an observer. Appearance Design refers to the ornamental and not the functional aspects of an object. "DELIVERABLES" means items that Supplier prepares for or provides to Buyer as described in a SOW. Deliverables include Developed Works, Preexisting Materials, and Tools. "DEVELOPED WORKS" means all work product (including software and its Externals) developed in the performance of this Agreement as described in a SOW. Developed Works do not include Preexisting Materials, Tools, or items specifically excluded in a SOW. "ELECTRONIC SELF-HELP" means a process where Supplier electronically disables, removes, or otherwise prevents the use of its software product without the Buyer's or Buyer's Customer's cooperation or consent. Electronic Self-Help could be done through electronic or other means (for example: remotely through "back doors" or hidden entrances in the software or through hidden shut-down commands in the software that can be activated by phone or in other ways). "EXTERNALS" means any pictorial, graphic, audiovisual works, reports or data generated by execution of code and any programming interfaces, languages or protocols implemented in the code to enable interaction with other computer programs or end users. Externals do not include the code that implements them. "INVENTIONS" means ideas, designs, concepts, techniques, inventions, discoveries or improvements, whether or not patentable, conceived or reduced to practice by Supplier Personnel in performance of this Agreement. "JOINT INVENTIONS" means Inventions made by Supplier Personnel jointly with Buyer Personnel. "PARTICIPATION AGREEMENT" OR "PA" means an agreement signed by one or more Affiliates which incorporates by reference the terms and conditions in this Base Agreement, any relevant SOWs, and other attachments or appendices specifically referenced in the PA. "PERSONNEL" means agents, employees or subcontractors engaged or appointed by Buyer or Supplier. "PREEXISTING MATERIALS" means items including their Externals, contained within a Deliverable, in which the copyrights are owned by a third party or that Supplier prepared or had prepared outside the scope of this Agreement. Preexisting Materials exclude Tools, but may include material that is created by use of Tools. "PRICES" means the agreed upon payment and currency for Deliverables and Services, including all applicable fees, payments and taxes, as specified in the relevant SOW and/or WA. "SERVICES" means work that Supplier performs for Buyer as described in a SOW. "STATEMENT OF WORK" or "SOW" means any document that: 1. identifies itself as a statement of work; 2. is signed by both parties; 3. incorporates by reference the terms and conditions of this Base Agreement; and 4. describes the Deliverables and Services, including any requirements, specifications or schedules. "TAXES" means any and all applicable taxes, charges, fees, levies or other assessments imposed or collected by any governmental entity worldwide or any political subdivision thereof and however designated or levied on sales of Deliverables or Services, or sales, use, transfer, goods and services or value added tax or any other duties or fees related to any payment made by Buyer to Supplier for Deliverables and/or Service provided by Supplier to Buyer under or pursuant to this Agreement; exclusive, however, of taxes imposed upon the net income or capital of Supplier or taxes in lieu of such net income taxes or such other taxes which are to be borne by the Supplier under law. Supplier shall also bear sole responsibility for all taxes, assessments, or other levies on its own leased or purchased property, equipment or software. "TOOLS" means software that is not commercially available, and its Externals, required for the development, maintenance or implementation of a software Deliverable. "WORK AUTHORIZATION" OR "WA" means Buyer's authorization in either electronic or tangible form for Supplier to conduct transactions under this Agreement in accordance with the applicable SOW (i.e., a purchase order, bill of lading, or other Buyer designated document). A SOW is a WA only if designated as such in writing buy Buyer. 2.0 STATEMENT OF WORK Form Title: Technical Service Agreement Page 1 of 9 Form Release: 08/98 Form Owner: Global Procurement Revision: 3/04 TECHNICAL SERVICE AGREEMENT Agreement #4904HK0668 Supplier will provide Deliverables and Services as specified in the relevant SOW only when specified in a WA. Supplier will begin work only after receiving a WA from Buyer. Buyer may request changes to a SOW and Supplier will submit to Buyer the impact of such changes. Changes accepted by Buyer will be specified in an amended SOW or change order signed by both parties. Supplier agrees to accept all WA's that conform with the terms and conditions of this Agreement. 3.0 PRICING Supplier will provide Deliverables and Services to Buyer for the Prices. The Prices for Deliverables and Services specified in a SOW and/or WA and accepted by Buyer plus the payment of applicable Taxes will be the only amount due to Supplier from Buyer. The relevant SOW or WA shall contain Prices for each country receiving Deliverables and Services under this Agreement. 4.0 TAXES Supplier's invoices shall state applicable taxes owed by the Buyer, if any, by tax jurisdiction and with a proper breakdown between taxable and non-taxable Deliverables and Services. Supplier shall remit such tax payments to the appropriate jurisdiction. Supplier agrees to use its best efforts to properly calculate any applicable Taxes at the time of invoice. Supplier and Buyer agree to cooperate to minimize any applicable Taxes, including reasonable notice and cooperation in connection with any audit. Any incremental taxes shall be Supplier's responsibility. If Buyer provides certification of an exemption from Tax or reduced rate of Tax imposed by an applicable taxing authority, then Supplier shall not invoice for nor pay over any such Tax unless and until the applicable taxing authority assesses such Tax, at which time Supplier shall invoice and Buyer shall pay any such Tax that is legally owed. Buyer shall withhold taxes, if required under the law to be withheld on payments made to Supplier hereunder and shall be required to remit to Supplier only the net proceeds thereof. Buyer shall remit the taxes withheld to the appropriate government authority and agrees to provide Supplier in a timely manner with properly executed documentation or other information or receipts or certificates evidencing Buyers payment of any such withholding tax. Supplier will indemnify Buyer from any claims by any jurisdiction relating to Taxes paid by Buyer to Supplier; and for any penalties, fines, additions to tax or interest therein imposed as a result of Supplier's failure to timely remit the Tax payment to the appropriate taxing jurisdiction. Supplier also shall indemnify Buyer for any claims made by a taxing jurisdiction for penalties, fines, additions to tax and the amount of interest thereon imposed with respect to Supplier's failure to invoice Buyer for the correct amount of Tax. 5.0 PAYMENTS AND ACCEPTANCE Terms for payment will be specified in the relevant SOW and/or WA. Payment of invoices will not be deemed acceptance of Deliverables or Services, but rather such Deliverables or Services will be subject to inspection, test, acceptance or rejection in accordance with the acceptance or completion criteria as specified in the relevant SOW and/or WA. Buyer may, at its option, either reject Deliverables or Services that do not comply with the acceptance or completion criteria for a refund, or require Supplier, upon Buyer's written instruction, to repair or replace such Deliverables or re-perform such Service, without charge and in a timely manner. Unless otherwise provided by local law without the possibility of contractual waiver or limitation, Supplier will submit invoices, corrected invoices, or other such claims for reimbursement, to Buyer within (1) year from the date of acceptance of Deliverables or the satisfactory completion of Services. Exceptions must be specifically authorized by Buyer. 6.0 ELECTRONIC COMMERCE To the extent permitted by local law, the parties will conduct transactions using an electronic commerce approach under which the parties will electronically transmit and receive legally binding purchase and sale obligations ("Documents"), including electronic credit entries transmitted by Buyer to the Supplier account specified in the relevant SOW and/or WA. The parties will enter into a separate agreement governing the transmission of such electronic transactions and associated responsibilities of the parties. Form Title: Technical Service Agreement Page 2 of 9 Form Release: 08/98 Form Owner: Global Procurement Revision: 3/04 TECHNICAL SERVICE AGREEMENT Agreement #4904HK0668 7.0 WARRANTIES 7.1 ONGOING WARRANTIES Supplier makes the following ongoing representations and warranties: 1. it has the right to enter into this Agreement and its performance of this Agreement will comply, at its own expense, with the terms of any contract, obligation, including any between Supplier and its end-users; or any law, regulation or ordinance to which it is or becomes subject; 2. no claim, lien, or action exists or is threatened against Supplier that would interfere with Buyer's rights under this Agreement; 3. Deliverables and Services do not infringe any privacy, publicity, reputation or intellectual property right of a third party; 4. all authors have agreed not to assert their moral rights (personal rights associated with authorship of a work under applicable law) in the Deliverables, to the extent permitted by law; 5. Deliverables are safe for use consistent with and will comply with the warranties, specifications and requirements in this Agreement; 6. Deliverables do not contain harmful code; 7. Services will be performed using reasonable care and skill and in accordance with the relevant SOW and/or WA; 8. it will not engage in Electronic Self-Help; 9. Deliverables and Services which interact in any capacity with monetary data are euro ready such that when used in accordance with their associated documentation they are capable of correctly processing monetary data in the euro denomination and respecting the euro currency formatting conventions (including the euro sign); 10. it is knowledgeable with, and is and will remain in full compliance with all applicable export and import laws, regulations, orders, and policies (including, but not limited to, securing all necessary clearance requirements, export and import licenses and exemptions from, and making all proper filings with appropriate governmental bodies and/or disclosures relating to the release or transfer of technology and software to non U.S. nationals in the U.S., or outside the U.S., release or transfer of technology and software having U.S. content or derived from U.S. origin software or technology); it is knowledgeable with applicable supply chain security recommendations issued by applicable governments and industry standards organizations and will make best efforts to comply with such recommendations; 11. it will not export, directly or indirectly, any technology, software or commodities of U.S. origin or having U.S. content provided by Buyer or their direct product to any of the countries or to nationals of those countries, wherever located, listed in U.S. Export Administration Regulations, as modified from time to time, unless authorized by appropriate government license or regulations; 12. it will not use, disclose, or transfer across borders any information that is processed for Buyer that may identify an individual (Personal Data), except to the extent necessary to perform under this Agreement; and 13. it will comply with all applicable data privacy laws and regulations, will implement and maintain appropriate technical and other protections for the Personal Data, will report any breaches of protection of Personal Data, and will cooperate fully with Buyer's requests for access to, correction of, and destruction of Personal Data in Supplier's possession. THE WARRANTIES IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER WARRANTIES AND CONDITIONS, EXPRESS OR IMPLIED, INCLUDING THOSE WARRANTIES OR CONDITIONS OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 7.2 WARRANTY REDEMPTION Subject to Section 10.0 Supplier Liability for Third Party Claims, if Deliverables or Services do not comply with the warranties in this Agreement, Supplier will repair or replace Deliverables or re-perform Services, without charge and in a timely manner. If Supplier fails to do so, Buyer may repair or replace Deliverables or re-perform Services and Supplier will reimburse Buyer for actual and reasonable expenses. 8.0 DELIVERY Deliverables and Services will be delivered as specified in the relevant SOW and/or WA. If Supplier cannot comply with a delivery commitment, Supplier will promptly notify Buyer of a revised delivery date and Buyer may: 1. cancel without charge Deliverables or Services not yet delivered; and 2. exercise all other remedies provided at law, in equity and in this Agreement. 9.0 INTELLECTUAL PROPERTY 9.1 WORKS MADE FOR HIRE All Developed Works belong exclusively to Buyer and are works made for hire. If any Developed Works are not considered works made for hire owned by operation of law, Supplier assigns the ownership of copyrights in such works to Buyer. 9.2 PREEXISTING MATERIALS Supplier will not include any Preexisting Materials in any Deliverable unless they are listed in the relevant SOW. Supplier grants Buyer a nonexclusive, worldwide, perpetual, irrevocable, paid-up, license to prepare and have prepared derivative Form Title: Technical Service Agreement Page 3 of 9 Form Release: 08/98 Form Owner: Global Procurement Revision: 3/04 TECHNICAL SERVICE AGREEMENT Agreement #4904HK0668 works of Preexisting Materials and to use, have used, execute, reproduce, transmit, display, perform, transfer, distribute, and sublicense Preexisting Materials or their derivative works, and to grant others the rights granted in this Subsection. 9.3 TOOLS Supplier will not include Tools in Deliverables unless the are listed in the relevant SOW. Supplier grants Buyer a nonexclusive, worldwide, perpetual, irrevocable, paid-up, license to prepare and have prepared derivative works of Tools, and to use, have used, execute, reproduce, transmit, display and perform Tools or their derivative works. 9.4 INVENTION RIGHTS Supplier will promptly provide to Buyer a complete written disclosure for each Invention which identifies the features or concepts which Supplier believes to be new or different. Supplier assigns all of its right, title and interest in Inventions (including any patent applications filed on or patents issues claiming Inventions) to Buyer. 9.5 JOINT INVENTION RIGHTS Supplier assigns all of its right, title and interest in Joint Inventions (including any patent applications filed on or patents issued claiming Joint Inventions) to Buyer. 9.6 PERFECTION OF COPYRIGHTS Upon request, Supplier will provide to Buyer a "Certificate of Originality" or equivalent documentation to verify authorship of Developed Works. Supplier will confirm assignment of copyright for Developed Works using the "Confirmation of Assignment of Copyright" form and will assist Buyer in perfecting such copyrights. 9.7 PERFECTION OF INVENTION RIGHTS Supplier will identify all countries in which it will seek patent protection for each Invention. Supplier authorizes Buyer to act as its agent in obtaining patent protection for the Inventions in countries where Supplier does not seek patent protection. Supplier will, at Buyer's expense, assist in the filing of patent applications on Inventions and have required documents signed. 9.8 TRADEMARKS This Agreement does not grant either party the right to use the other party's or their Affiliates trademarks, trade names or service marks. 9.9 PATENTS Supplier grants to Buyer a nonexclusive, worldwide, perpetual, irrevocable, and paid-up license under any patents and patent applications licensable by Supplier to make, have made, use, have used, import, export, sell, and otherwise transfer the Deliverables and use the Services to the extent authorized in this Agreement. 10.0 SUPPLIER LIABILITY FOR THIRD PARTY CLAIMS 10.1 GENERAL INDEMNIFICATION Supplier will defend, hold harmless and indemnify, including legal fees, Buyer and Buyer Personnel against third party claims that arise or are alleged to have arisen as a result of negligent or intentional acts or omissions of Supplier or Supplier Personnel or breach by Supplier of any term of this Agreement. 10.2 INTELLECTUAL PROPERTY INDEMNIFICATION Supplier will defend, or at Buyer's option cooperate in the defense of, hold harmless and indemnify, including legal fees, Buyer and Buyer Personnel from third party claims that Supplier's Deliverables or Services infringe the intellectual property rights of a third party. If such a claim is or is likely to be made, Supplier will, at its own expense, exercise the first of the following remedies that is practicable: 1. obtain for Buyer the right to continue to use, sell and license the Deliverables and Services consistent with this Agreement; 2. modify Deliverables and Services so they are non-infringing and in compliance with this Agreement; 3. replace the Deliverables and Services, or other affected Deliverables or Services, with non-infringing ones that comply with this Agreement; or 4. at Buyer's request, accept the cancellation of infringing Services and the return of infringing Deliverables and refund any amount paid. Form Title: Technical Service Agreement Page 4 of 9 Form Release: 08/98 Form Owner: Global Procurement Revision: 3/04 TECHNICAL SERVICE AGREEMENT Agreement #4904HK0668 Buyer will give Supplier prompt notice of third party claims against Buyer, and cooperate in the investigation, settlement and defense of such claims. 10.3 EXCEPTIONS TO INDEMNIFICATION Supplier will have no obligation to indemnify Buyer or Buyer Personnel for claims that Supplier's Deliverables or Services infringe the intellectual property rights of a third party to the extent such claims arise as a result of: 1. Buyer's combination of Deliverables or Services with other products or services not reasonably forseeable by Supplier and such infringement or claim would have been avoided in the absence of such combination; 2. Supplier's implementation of a Buyer originated design and such infringement or claim would have been avoided in the absence of such implementation; or 3. Buyer's modification of the Deliverables and such infringement or claim would have been avoided in the absence of such modification. 11.0 LIMITATION OF LIABILITY BETWEEN SUPPLIER AND BUYER In no event will either party be liable to the other for any lost revenues, lost profits, incidental, indirect, consequential, special or punitive damages. This mutual Limitation of Liability does not limit the obligations and liability of Supplier resulting from Section 10.0 Supplier Liability for Third Party Claims. In no event will either party be liable for the respective actions or omissions of its Affiliates under this Agreement. Supplier acknowledges and agrees that all WA's or PA's issued by Buyer's Affiliate(s) are independent agreements between Supplier or Supplier Affiliate and the Buyer Affiliate. Buyer shall not be liable to Supplier or Supplier Affiliate(s) for any actions or inactions of any Buyer Affiliate(s) under a WA or PA, nor shall any actions or inactions by Buyer's Affiliate(s) constitute a breach of the Agreement between Buyer and Supplier. 12.0 SUPPLIER AND SUPPLIER PERSONNEL Supplier is an independent contractor and this Agreement does not create an agency relationship between Buyer and Supplier or Buyer and Supplier Personnel. Buyer assumes no liability or responsibility for Supplier Personnel. Supplier will: 1. ensure it and Supplier Personnel are in compliance with all laws, regulations, ordinances, and licensing requirements; 2. be responsible for the supervision, control, compensation, withholdings, health and safety of Supplier Personnel; 3. inform Buyer if a former employee of Buyer will be assigned work under this Agreement, such assignment subject to Buyer approval; 4. ensure Supplier Personnel performing Services on Buyer's premises comply with the On Premises Guidelines in Section 13.0 and upon request, provide Buyer, for export evaluation purposes, the country of citizenship and permanent residence and immigration status of those persons. Buyer retains the right to refuse to accept persons made available by Supplier for export reasons; and 5. not discriminate against any employees, applicants for employment, or any entity engaged in its procurement practices because of race, color, religion, sex, age, national origin, or any other legally protected status. 13.0 ON PREMISES GUIDELINES Supplier will ensure that Supplier Personnel assigned to work on Buyer's premises will comply with this Section. 13.1 ACCESS TO PREMISES Supplier will ensure that Supplier Personnel assigned to work on Buyer's premises will: 1. to the extent permitted by local law, participate in a preemployment criminal background check covering the counties in which the person was employed or resided for the past seven years (or longer as required by State legislation), and inform Buyer of any negative findings; 2. maintain a current and complete list of the persons' names and social security numbers; 3. obtain for each person a valid identification badge from Buyer and ensure that it is displayed to gain access to and while on Buyer's premises (it is Buyer's policy to deactivate any such badge if not used for one month); 4. maintain a signed acknowledgment that each person will comply with Buyer's Safety & Security Guidelines; 5. ensure that each person with regular access to Buyer's premises complies with all parking restrictions and with vehicle registration requirements if any; 6. inform Buyer if a former employee of Buyer will be assigned work under this Agreement, such assignment subject to Buyer approval; 7. at Buyer's request, remove a person from Buyer's premises and not reassign such person to work on Buyer's premises (Buyer is not required to provide a reason for such request); and Form Title: Technical Service Agreement Page 5 of 9 Form Release: 08/98 Form Owner: Global Procurement Revision: 3/04 TECHNICAL SERVICE AGREEMENT Agreement #4904HK0668 8. notify Buyer immediately upon completion or termination of any assignment and return Buyer's identification badge. Upon Buyer's request, Supplier will provide documentation to verify compliance with this Subsection. 13.2 GENERAL BUSINESS ACTIVITY RESTRICTIONS Supplier will ensure that Supplier Personnel assigned to work on Buyer's premises: 1. will not conduct any non-Buyer related business activities (such as interviews, hirings, dismissals or personal solicitations) on Buyer's premises; 2. will not conduct Supplier's Personnel training on Buyer's premises except for on-the-job training; 3. will not attempt to participate in Buyer benefit plans or activities; 4. will not send or receive non-Buyer related mail through Buyer's mail systems; and 5. will not sell, advertise or market any products or distribute printed, written or graphic materials on Buyer's premises without Buyer's written permission. 13.3 BUYER'S SAFETY AND SECURITY GUIDELINES Supplier will ensure that Supplier Personnel assigned to work on Buyer's premises: 1. do not bring weapons of any kind onto Buyer's premises; 2. do not manufacture, sell, distribute, possess, use or be under the influence of controlled substances (for nonmedical reasons) or alcoholic beverages while on Buyer's premises; 3. do not have in their possession hazardous materials of any kind on Buyer's premises without Buyer's authorization; 4. acknowledge that all persons, property, and vehicles entering or leaving Buyer's premises are subject to search; and 5. remain in authorized areas only (limited to the work locations, cafeterias, rest rooms and, in the event of a medical emergency, Buyer's medical facilities). Supplier sill promptly notify Buyer of any accident or security incidents involving loss of or misuse of damage to Buyer's intellectual or physical assets; physical altercations; assaults; or harassment and provide Buyer with a copy of any accident or incident report involving the above. Supplier must coordinate with Buyer access to Buyer's premises during non- regular working hours. 13.4 ASSET CONTROL In the event Supplier Personnel has access to information, information assets, supplies or other property, including property owned by third parties but provided to Supplier Personnel by Buyer ("Buyer Assets"), Supplier Personnel: 1. will not remove Buyer Assets from Buyer's premises without Buyer's authorization; 2. will use Buyer Assets only for purposes of this Agreement and reimburse Buyer for any unauthorized use; 3. will only connect with, interact with or use programs, tools or routines that Buyer agrees are needed to provide Services; 4. will not share or disclose user identifiers, passwords, cipher keys or computer dial port telephone numbers; and 5. in the event the Buyer Assets are confidential, will not copy, disclose or leave such assets unsecured or unattended. Buyer may periodically audit Supplier's data residing on Buyer Assets. 13.5 SUPERVISION OF SUPPLIER'S PERSONNEL Suppliers will provide continual supervision of its Personnel provided under this Agreement, at no additional cost to Buyer. Supplier's supervisor shall have full supervisory authority over all day-to-day employment relationship decisions relating to Supplier's Personnel, including those decisions relating to: wages, hours, terms and conditions of employment, hiring, discipline, performance evaluations, termination, counseling and scheduling. Supplier's supervisors responsible for each work location will be responsible to know that work location's planned holiday (and other closing) schedules and the impacts all such schedules have on Supplier's Personnel. Supplier will conduct orientation sessions with its Personnel before placement on an assignment with Buyer, during which orientation such Personnel will be told who their supervisor is and how that supervisor can be contacted. Supplier will, from time to time, ensure that all of its Personnel working under this Agreement continue to be aware of this information. 14.0 INSURANCE Supplier will maintain at its expense: 1. commercial general or public liability insurance with a minimum limit per occurrence or accident of 1,000,000 USD (or local currency equivalent); 2. workers' compensation or employer's liability insurance as required by local law, such policies waiving any subrogation rights against Buyer; and 3. automobile liability insurance as required by local statute but not less than 1,000,000 USD (or local currency equivalent) if a vehicle will be used in the performance of this Agreement. Form Title: Technical Service Agreement Page 6 of 9 Form Release: 08/98 Form Owner: Global Procurement Revision: 3/04 TECHNICAL SERVICE AGREEMENT Agreement #4904HK0668 Insurance required under clauses (1) and (3) will name Buyer as an additional insured with respect to Buyer's insurable interest, will be primary or noncontributory regarding insured damages or expenses, and will be purchased from insurers with an AM Best Rating of B+ or better and a financial class rating of 11 or better. 15.0 TERMINATION 15.1 TERMINATION OF THIS BASE AGREEMENT Either party may terminate this Base Agreement, without any cancellation charge, for a material breach of this Agreement by the other party or if the other party becomes insolvent or files or has filed against it a petition in bankruptcy ("Cause"), to the extent permitted by law. Such termination will be effective at the end of a thirty (30) day written notice period if the Cause remains uncured. Either party may terminate this Base Agreement without Cause when there are no outstanding SOW's or WA's. 15.2 TERMINATION OF A SOW OR WA Buyer may, upon written notice to Supplier, terminate a SOW or WA: 1. with Cause effective immediately; or 2. without Cause. Upon termination, in accordance with Buyer's written direction, Supplier will immediately: 1. cease work; 2. prepare and submit to Buyer an itemization of all completed and partially completed Deliverables and Services; 3. deliver to Buyer Deliverables satisfactorily completed up to the date of termination at the agreed upon Prices in the relevant SOW and/or WA; and 4. deliver upon request any work in process. In the event Buyer terminates without Cause, Buyer will compensate Supplier for the actual and reasonable expenses incurred by Supplier for work in process up to and including the date of termination, provided such expenses do not exceed the Prices. 16.0 GENERAL 16.1 AMENDMENTS This Agreement may only be amended by a writing specifically referencing this Agreement which has been signed by authorized representatives of the parties. 16.2 ASSIGNMENT Neither party will assign their rights or delegate or subcontract their duties under this Agreement to third parties or Affiliates without the prior written consent of the other party, such consent not to be withheld unreasonably, except that either party may assign this Agreement in conjunction with the sale of a substantial part of its business utilizing this Agreement or any intellectual property assigned or licensed under this Agreement. Any unauthorized assignment of this Agreement is void. 16.3 CHOICE OF LAW AND FORUM; WAIVER OF JURY TRIAL; LIMITATION OF ACTION This Agreement and the performance of transactions under this Agreement will be governed by the laws of the country where the Buyer entering into the relevant agreement or PA is located, except: (i) in Australia, this Agreement will be governed by the laws of the State or Territory in which the transaction occurs; (ii) in the United Kingdom, this Agreement will be governed by the laws of England; (iii) in Albania, Armenia, Azerbaijan, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Former Yugoslav Republic of Macedonia, FR Yugoslavia, Georgia, Hungary, Kazakhstan, Krygyzstan, Moldova, Poland, Romania, Russia, Slovakia, Slovenia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan, this Agreement will be governed by the laws of Austria; (iv) in Estonia, Latvia, and Lithuania, Finnish law will apply; (v) in Canada, the laws of the Province of Ontario govern this Agreement; (vi) in the United States (including if any part of the transaction occurs within the United States) and Puerto Rico, and People's Republic of China, the laws of the State of New York applicable to contracts executed in and performed entirely within that State govern this Agreement. The United Nations Convention on Contracts for the International Sale of Goods does not apply. The parties expressly waive any right to a jury trial regarding disputes related to this Agreement. Unless otherwise provided by local law without the possibility of contractual waiver or limitation, any legal or other action related to a breach of this Agreement must be commenced no later than two (2) years from the date on which the cause of action arose. 16.4 COMMUNICATIONS All communications between the parties regarding this Agreement will be conducted through the parties' representative as specified in the relevant SOW and/or WA. All notices required in writing under this Agreement will be made to the appropriate contact(s) listed in the relevant SOW and/or WA and will be effective upon actual receipt. Notices may be Form Title: Technical Service Agreement Page 7 of 9 Form Release: 08/98 Form Owner: Global Procurement Revision: 3/04 TECHNICAL SERVICE AGREEMENT Agreement #4904HK0668 transmitted electronically, by registered or certified mail, or courier. All notices, with the exception of legal notices, may also be provided by facsimile. 16.5 COUNTERPARTS This Agreement may be signed in one or more counterparts, each of which will be deemed to be an original and all of which when taken together will constitute the same agreement. Any copy of this Agreement made by reliable means (for example, photocopy or facsimile) is considered an original. 16.6 EXCHANGE OF INFORMATION All information exchanged is not confidential. If either party requires the exchange of confidential information, it will be made under a separate signed confidentiality agreement between the parties. The parties will not publicize the terms of this Agreement, or the relationship, in any advertising, marketing or promotional materials without prior written consent of the other party except as may be required by law, provided the party publicizing obtains any confidentiality treatment available. Supplier will use information regarding this Agreement only in the performance of this Agreement. For any business personal information relating to Supplier Personnel that Supplier provides to Buyer, Supplier has obtained the agreement of the Supplier Personnel to release the information to Buyer and to allow Buyer to use such information in connection with this Agreement. 16.7 FREEDOM OF ACTION This Agreement is nonexclusive and either party may design, develop, manufacture, acquire or market competitive products or services. Buyer will independently establish prices for resale of Deliverables or Services and is not obligated to announce or market any Deliverables or Services and does not guarantee the success of its marketing efforts, if any. 16.8 FORCE MAJEURE Neither party will be in default or liable for any delay or failure to comply with this Agreement due to any act beyond the control of the affected party, excluding labor disputes, provided such party immediately notifies the other. 16.9 OBLIGATIONS OF AFFILIATES Affiliates will acknowledge acceptance of the terms of this Agreement through the signing of a PA before conducting any transaction under this Agreement. 16.10 PRIOR COMMUNICATIONS AND ORDER OF PRECEDENCE This Agreement replaces any prior oral or written agreements or other communication between the parties with respect to the subject matter of this Agreement, excluding any confidential disclosure agreements. In the event of any conflict in these documents, the order of precedence will be: 1. the quantity, payment and delivery terms of the relevant WA; 2. the relevant SOW; 3. this Base Agreement; and 4. the remaining terms of the relevant WA. 16.11 RECORD KEEPING AND AUDIT RIGHTS Supplier will maintain (and provide to Buyer upon request) relevant business and accounting records to support invoices under this Agreement and proof of required permits and professional licenses, for a period of time as required by local law, but not for less than three (3) years following completion or termination of the relevant SOW and/or WA. All accounting records will be maintained in accordance with generally accepted accounting principles. 16.12 SEVERABILITY If any term in this Agreement is found by competent judicial authority to be unenforceable in any respect, the validity of the remainder of this Agreement will be unaffected, provided that such unenforceability does not materially affect the parties' rights under this Agreement. 16.13 SURVIVAL The provisions set forth in the following Sections and Subsections of this Base Agreement will survive after termination or expiration of this Agreement and will remain in effect until fulfilled: "Taxes", "Ongoing Warranties", "Intellectual Property", "Supplier Liability for Third Party Claims", "Limitation of Liability between Supplier and Buyer", "Record Form Title: Technical Service Agreement Page 8 of 9 Form Release: 08/98 Form Owner: Global Procurement Revision: 3/04 TECHNICAL SERVICE AGREEMENT Agreement #4904HK0668 Keeping and Audit Rights", "Choice of Law and Forum; Waiver of Jury Trial; Limitation of Action", "Exchange of Information", and "Prior Communications and Order of Precedence". 16.14 WAIVER An effective waiver under this Agreement must be in writing signed by the party waiving its right. A waiver by either party of any instance of the other party's noncompliance with any obligation or responsibility under this Agreement will not be deemed a waiver of subsequent instances.
ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: IBM China/Hong Kong Limited Titanium Technology Limited By: /s/ CATHERINE CHUI OCTOBER 5, 2004 By: /s/ PATRICK LO OCTOBER 9, 2004 --------------------------------------------------------------------------------------------------------- Buyer Signature Date Supplier Signature Date CATHERINE CHUI PATRICK LO - ------------------------------------------------------------------------------------------------------------- Printed Name Printed Name PROCUREMENT MANAGER EXECUTIVE DIRECTOR, TITANIUM TECHNOLOGY LIMITED - ------------------------------------------------------------------------------------------------------------- Title & Organization Title & Organization - ------------------------------------------------------------------------------------------------------------- Buyer Address: Supplier Address: 10/F, PCCW Tower, Taikoo Place, 10/F., Tianjin Building, 979 King's Rod, Quarry Bay, Hong Kong October 9, 2004
Form Title: Technical Service Agreement Page 9 of 9 Form Release: 08/98 Form Owner: Global Procurement Revision: 3/04 EX-10 7 exh10-7_agmt.txt EXH 10-7 AGREEMENT EXHIBIT 10.7 TECHNOLOGY PARTNERSHIP AND RESEARCH & DEVELOPMENT CONTRACT PROJECT NAME: FACIAL RECOGNITION OPERATING SYSTEM PARTY A: TITANIUM GROUP LTD. PARTY B: CHINA SCENTIFIC AUTOMATION RESEARCH CENTER DATE: 6-15-2005 PLACE CONTRACT SIGHED: BEIJING EFFECTIVE DATE: 6-15-2005 TO 6-14-2006 Contract signed is in compliance with the contract laws of the Peoples' Republic of China. Both parties mutually agree upon all terms below. (A) Content Research for application of facial recognition operation technology (i) Facial recognition in surveillance application (ii) Facial recognition for logical access control (B) Joint venture method (i) Party A provide capital and operational technicians (ii) Party B provide location and technical technicians (C) Ownership of newly developed intellectual properties rights (i) Both parties agreed all facial recognition technology that was developed and own by either party prior to this contract shall belong to the developed party respectively (ii) Any new facial recognition technology that's develop after this contract is signed shall become the property of the joint venture (D) Cost and payment method for the joint venture (i) Party A agree to pay party B a total of one hundred thousand dollars RMB(100,000.00 RMB) (ii) Ten days after this contract is signed, Party A agree to pay party B fifty thousand dollars RMB (50,000.00 RMB) (iii) Three months after this contract is signed, party A agree to pay the balance of fifty thousand dollars RMB (50,000.00 RMB) to party B (E) Effective date Contract will be effective for twelve months after Party a deposit the first payment to party B (F) Confidentiality (i) Both parties shall at anytime after this agreement is signed keep all information in this contract confidential. Unless any disclosure of this contract is agree upon by related party before any disclosure. If disclosure is forced by law, all disclosed parties shall be notify immediately, content of disclosure shall be notified to related party too (ii) All information provided to Party B by Party A shall consider as confidential. (This information shall include but not limited to customer list, strategy of company, pricing, know how and idea) None of the said information shall disclose to any third party. (iii) All information provided to Party A by Party B shall consider as confidential. This information shall include but not limited to technical know how, code name and calculating formula. None of the said information shall disclose to any third party. (iv) Both parties shall not use any provided information from the opposite party to do harm and go against the opposite party. If there is harm or any damage occur, the party that cause the harm or damage shall compensate the opposite party. (v) This agreement (F) shall not be affected by the termination of this contract. All information provided by both parties shall remain confidential until all information become public from an unrelated party. This information shall not come from either party in this agreement. (vi) Confidential information shall not include any information that was disclosed before the signing of this contract. (G) Breach of contract (i) If this contract is breached due to the following situation by any party, The opposite party shall have the right to terminate this contract by writing thirty days prior to the incident, (a) If any party go bankrupt voluntary of involuntary, or if a creditor is taking over the business and dissolve the business (b) If the breaching party does not try to fulfill the obligation of this contract thirty days after receiving the notice. (Assuming the breaching party has the ability to fulfill this contract) (ii) Both party agreed that if either party breach this contract it will give The non-breaching party harms and unforeseeable damage. The non-breaching party therefore shall have the right to claim all loses and damages by taking the case to the court. All legal fees shall be the responsibility of the breaching party. (iii) If during the research period any technology is expose to the public by an unrelated party this joint venture shall consider as meaningless and either party has the right to terminate this contract. (H) Settlement of disagreement If any disagreement comes up within the time frame of this contract, both parties agree to try to settle the dispute with a friendly manor before taking it to litigation. (I) Unforeseen interruption (i) Unforeseen interruption means any event happens to interrupt the ongoing process of this contract, that's beyond the control of both parties. These events could include government interference, earthquake, fire, typhoon, flood, war or any other similar events. (ii) If any of the above happened, the affected shall notify the other party right away. Details of event like date, nature and estimate duration of event etc. also what kind of effect will have for the affected party to fulfill this contract shall be addressed. (iii) Affected party shall update the opposite party constantly. If event got settled, a written notification shall be sent to the opposite party immediately. (iv) If section B & C of this contract has been fulfilled by the affected party before any event happened, affected party has the right to terminate its obligation temporary until the event got settled. Affected party shall not be responsible for any lose of damage that is caused. Affected party shall try it's best to fulfill the obligation again after the event ended. (v) Affected party shall provide official document to verify the event that had happened if no official document is provided, affected party shall be responsible for all loses and damages that was caused by the said event. Others (i) Five copies of contract are produced, party A keeps two copies, party B keeps three copies, and all copies shall be legally recognized. (ii) Any other amendment or attachment that is sign after this contract will become part of this document if document is sign and stamp by both parties. Party A Legal Representative - Johnny Ng Phone No. 852-3427-3177 Fax No. 852-2776-2257 Address: 10/F Tianjin Building 167 Connaught Road West Hong Kong Hong Kong Party B Legal Representative - Tam Tik Nu Phone No. 010-4262-6787 Fax No. 010-6265-9350 Address: 96 Chun Lun Village Road Beijing City 100080 Peoples' Republic of China Banker: Bank of Beijing Acct No. 0200049609088100325 EX-10 8 exh10-8_agmt.txt EXH 10-8 AGREEMENT EXHIBIT 10.8 TECHNOLOGY RESEARCH AND DEVELOPMENT CONTRACT Project name: Facial recognition for logical access control Party A: Titanium Group Ltd Party B: Tsing Hua University (Shenzhen research campus) Place contract signed: Shenzhen, Guongdong Province Date signed: 11-4-2005 Effective Date: 11-4-2005 to 11-4-2006 CONTRACT VERIFY BY GOVERNMENT SCIENTIFIC RESEARCH AND DEVELOPMENT DEPARTMENT Contract is signed mutually by both parties and is compliance with the contract law of the Peoples' Republic of China. Contract will be base on Party B's Set Top Box Technology, since party A is well aware of the back bone of this technology, both parties now agree to do a joint research on Multi-media home intelligence system. (A) Requirement for technology content Basic requirement for research of Multi-media home intelligence system, it can be divided into the following four sections. (i) Receive digital TV signals (ii) OSD capable (iii) PVR capable (iv) Blue tooth facial recognition capable For the above content (i) Party A will bare all research cost (ii) Party B provide technician, and report to party A during the whole process and testing result (iii) End result should be a developed software for Multi-media home intelligence system (iv) Both parties promise for more joint venture in the future (B) Standard for research (i) Base on IBM power pc405 (ii) Good quality, make sure receiving of sound and picture quality is good with any interruption (iii) Base on LINUX system All research and development work will be done by party B, party A shall corporate. All results shall be tested and verify by an expert in this technology and support party A's operation system, hardware and software. (C) Target date for finished product Party B Shall have a finished product to satisfy Party A's requirement by 11-04-2006. (D) Research and development cost, compensation and terms of payment (i) Research and development cost means the cost for the research and development. Compensation means the reward for all involved technicians and supporting staffs. (ii) All payments will be in RMB (iii) Total cost for the research and development and compensation shall be two hundred thousand RMB (200,00.00 RMB). Party A will provide the full amount (E) Method of payment (i) Two hundred thousand RMB (200,000.00 RMB) shall pay in full on or before 12-30-2005 (ii) Installment - no applicable (F) Procession of properties that is purchased for the research. All properties that are purchased for the research and development of this project will be party B's properties after the project is finished. (G) Date, location and how to fulfill this contract. This contract will be executed between 11-4-2005 to 11-4-2006 at Tsing Hua University Shenzhen research and development center. This contract will be funded by party A and party B will be responsible for the research and development (H) Confidentiality Both parties agreed the confidentiality of this contract should not affect by any change or termination of this contract. This is a long-term confidentiality contract (I) Rick factor During the research and development stage if any party get into any unsolvable technical problem that cause any lose, both parties will bare the lose. That will include lose of money, time and labor. If any party foresee such a problem that might come up, this party should notify the other party right away in order to minimize any lose that might occur. If this party fails to do so, the said party shall be responsible for all loses (J) Ownership of new intellectual property After the fulfillment of this contract, party B will be the sole owner of the said intellectual property and party A has the right to use the property (K) Acceptance standard All results (section B's requirement) shall use the standard that was set on this contract. All costs shall be pay by party A and reports shall be coming from a recognized expert in this technology. If party A does not arrange expert to test the product by 12-30-2006, it is assume that party A accepted the end product (L) Breach of contract and penalties The contract law of The Peoples' Republic of China governs this contract (i) If party A delay payment and cause any interruption for party B's progress, party A everyday shall pay an extra 2% of the contract amount. If payment is delayed for two months other than paying an extra 2% everyday, party A shall pay an extra 10% of the contract amount and party B shall have the right to request a termination of the said contract (ii) If party B dose not start the research and development two moths after receive party A's payment. Party A has the right to terminate the contract and party B shall pay a 10% penalty on the amount of the contract and return all money to Party A (iii) If any party breach other contents of this contract, breach party shall pay a reasonable amount of penalty and the total amount shall not exceed the total amount of the whole contract (M) Settlement for disagreement If and disagreement comes up, both parties shall try to settle the disagreement in a friendly manor and a mediator can be bring in if necessary. If no agreement can be made, the case shall be bring to the court of Shenzhen to get justify. Both parties shall be obligated to the judgment in a good manor (N) Others Any amendment or attachment to this contract shall be notify by both parties to the Government Scientific Research and Development Department and validated by the said party Party A - Titanium Group Ltd Representative: Johnny Ng Address: 4/F, BOCG Insurance Tower 134-136 Des Voeux Road Central Hong Kong SAR China Phone No: 852-3427-3177 Party B - Tsing Hua University (Shenzhen research campus) Contact: Chung Yuk Tuen Phone No: 0755-26036771 Address: Tsing Hua University (Shenzhen research campus) Banker: Commercial Bank of Shenzhen Acct No: 0142100324889 EX-23 9 exh23-1.txt EXH 23-1 CONSENT EXHIBIT 23.1 CONSENT OF STEVENSON, WONG & CO. [LETTERHEAD OF STEVENSON, WONG & CO.] OUR REF: YOUR REF: DATE: CWC/HLO(P)/63052/05Cor.Fin. 9 December 2005 REPLY FAX: BY HAND The Directors Titanium Group Limited 4th Floor, BOCG Insurance Tower 134 - 136 Des Voeux Road Central Hong Kong Dear Sirs CONSENT OF ATTORNEYS Reference is made to the Registration Statement of Titanium Group Limited (the "Company") on Form S-1 whereby certain shareholders of the Company propose to sell up to 9,956,000 shares of the Company's common stock. Reference is also made to Exhibit 5 included in the Registration Statement relating to the validity of the securities proposed to be sold. We hereby consent to the use of our opinion concerning the validity of the securities to be sold. Yours faithfully, /s/ STEVENSON, WONG & CO. STEVENSON, WONG & CO. EX-23 10 exh23-2.txt EXH 23-2 CONSENT EXHIBIT 23.2 CONSENT OF ZHONG YI (HONG KONG) C.P.A. COMPANY LIMITED ZHONG YI (HONG KONG) C.P.A. COMPANY LIMITED CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Titanium Group Limited: We consent to the reference to our firm under the caption "Experts" and to the use of our reports on the consolidated financial statements of Titanium Group Limited dated August 31, 2005, in the Registration Statement on Form S-1 and related Prospectus of Titanium Group Limited for the registration of shares of its common stock. /s/ ZHONG YI (HK) C.P.A. COMPANY LIMITED ZHONG YI (HONG KONG) C.P.A. COMPANY LIMITED December 9, 2005 Hong Kong, China 9TH FL., CHINACHEM HOLLYWOOD CENTRE, 1-13 HOLLYWOOD RD., CENTRAL, HONG KONG Tel: 2573 2296 Fax: 2384 2022 CORRESP 11 filename11.txt [LETTERHEAD OF DILL DILL CARR STONBRAKER & HUTCHINGS] CHRISTOPHER W. CARR DANIEL J. CARR JOHN J. COATES KEVIN M. COATES H. ALAN DILL ROBERT A. DILL 455 SHERMAN STREET, SUITE 300 THOMAS M. DUNN DENVER, COLORADO 80203 JOHN A. HUTCHINGS PHONE: 303-777-3737 STEPHEN M. LEE FAX: 303-777-3823 FAY M. MATSUKAGE* ADAM P. STAPEN JON STONBRAKER CRAIG A. STONER DILL DILL CARR STONBRAKER & HUTCHINGS, P.C. PATRICK D. TOOLEY *Also licensed in Nevada December 9, 2005 Barbara C. Jacobs Assistant Director Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0405 RE: TITANIUM GROUP LIMITED REGISTRATION STATEMENT ON FORM S-1 FILED ON SEPTEMBER 14, 2005 FILE NO. 333-128302 Dear Ms. Jacobs: On behalf of Titanium Group Limited (the "Company"), Amendment No. 1 to the registration statement on Form S-1 is being filed. The comments of the Staff in its letter dated October 11, 2005, have been addressed in this filing pursuant to your request. The comments are set forth below, together with the Company's responses, which refer to the EDGAR page, which contains revised disclosure. To assist the staff in its review of this Amendment, we are sending two hard copies of this letter, together with two hard copies of the Amendment, marked to show all of the changes. The circled numbers appearing in the right margin of the marked copy correspond to the comment number. GENERAL 1. WE NOTE THAT YOU ARE A BRITISH VIRGIN ISLANDS COMPANY WITH OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA. PLEASE TELL US WHETHER THE RECENT PUBLICATION OF CIRCULARS 11 AND 29 BY THE STATE ADMINISTRATION OF FOREIGN EXCHANGE, OR SAFE, APPLIES TO THE COMPANY AND WHAT EFFECTS, IF ANY, SUCH REGULATIONS COULD HAVE ON YOUR BUSINESS OR THE HOLDINGS OF INVESTORS. RESPONSE: Circulars 11 and 29 focused on the tightening of approval requirements and registration procedures for both foreign investments made by domestic residents of China as well as for merger and acquisitions of domestic enterprises by foreign companies controlled by domestic residents of China. The Circulars were applicable to "domestic residents," which has been interpreted to apply to citizens of the People's Republic of China. Therefore, these Circulars do not affect investors who are not citizens of China. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 2 Those Circulars, however, failed to provide specific criteria or procedures concerning examination and registration. Accordingly, SAFE is expected to issue a new notice soon to replace Circulars 11 and 29. A draft of the new notice indicates that it will apply only to domestic residents of China. 2. THROUGHOUT THE FILING YOU HAVE INCLUDED STATEMENTS REGARDING YOUR COMPETITIVE POSITION, THE QUALITY OF YOUR PRODUCTS AND THE INNOVATION OF YOUR TECHNOLOGY THAT DO NOT APPEAR TO BE SUPPORTED BY THE INFORMATION IN THE FILING. THE LIST BELOW INCLUDES SEVERAL EXAMPLES OF SUCH STATEMENTS BUT IS NOT COMPREHENSIVE. WITH YOUR NEXT AMENDMENT, PLEASE PROVIDE SUPPLEMENTAL INFORMATION SUPPORTING EACH SUCH STATEMENT AND REVISE YOUR FILING TO PROVIDE THE FACTUAL BASIS FOR THESE STATEMENTS, OR REVISE AS NECESSARY: o "TO DATE, TI-FACE SDK IS WIDELY-ADOPTED AS THE DEVELOPMENT PLATFORM FOR GOVERNMENTS, UNIVERSITIES AND INSTITUTIONS," PAGE 11; o "ALTHOUGH DIFFERENT BIOMETRICS . . . MAY BE WIDELY EMPLOYED IN SIMILAR APPLICATIONS, FACE RECOGNITION IS THE BEST AMONG THE EXISTING ALTERNATIVES," PAGE 13; o ". . . USERS HAVE LESS CONCERN ON PRIVACY ISSUES WITH REGARD TO FACIAL PICTURES AND THE MARKET ACCEPTANCE IS MUCH HIGHER," PAGE 13; o "FROM COAST TO COAST AND AROUND THE WORLD, PRO ACCESS FACE ATTEND IS EASING CONCERNS AND BOOSTING SECURITY BY ENSURING THAT THE PEOPLE ON-SITE ACTUALLY BELONG THERE," PAGE 14; o ". . . THE SOUTHERN PART OF CHINA HAS BECOME ARGUABLY THE LARGEST NETWORK OF FACTORIES," PAGE 14; o "EXISTING CLIENTS . . . ARE SATISFIED WITH THIS HIGHLY ACCURATE, PROMPT RESPONSE, TIME COST EFFECTIVE SURVEILLANCE SYSTEM," PAGE 16; o "IT IS BELIEVED THAT POLICE FORCES WILL BE INTERESTED IN THIS ADVANCED APPLICATION," PAGE 16; o "WE ARE A CLOSE PARTNER WITH IBM OFFERING SECURITY TO ITS CUSTOMERS," PAGE 16; o "WE ARE RESPONSIBLE FOR BUSINESS SYSTEMS CRITICAL TO THE RUNNING OF SOME OF THE WORLD'S LEADING COMMERCIAL AND PUBLIC SECTOR ORGANIZATIONS, AS WELL AS LARGE-SCALE TECHNICAL SYSTEMS DESIGNED TO OPERATE TO THE HIGHEST LEVELS OF RELIABILITY IN DEMANDING CONDITIONS," PAGE 16; o "MANY POTENTIAL BUYERS HAVE BEEN PUT OFF BY THE COMPROMISES AND WORKAROUNDS DEMANDED BY WHAT IS AVAILABLE IN THE MARKET, AND THEY ARE WAITING FOR A BETTER ALTERNATIVE TO ARRIVE," PAGE 18. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 3 RESPONSE: Complied. The foregoing statements have been revised to provide the factual basis for the statements. In one case, the statement was omitted, as it did not add to the disclosure. See pages 15 to 23. 3. AS A FOLLOW-UP TO THE COMMENT ABOVE, WHILE WE NOTE THAT YOU HAVE INCLUDED SEVERAL OPINIONS OF THE COMPANY, SUCH AS THE ONES LISTED BELOW, WE WOULD EXPECT TO SEE SUPPLEMENTAL SUPPORT FOR THESE STATEMENTS, AS WELL. o "BASED ON THESE BREAKTHROUGH ABILITIES, MANAGEMENT BELIEVES THAT THE COMPANY IS NOW A LEADER IN THIS TECHNOLOGY, WORLDWIDE," PAGE 9; o ". . . ENABLE OUR CUSTOMERS TO COST-EFFECTIVELY ACHIEVE WHAT WE BELIEVE TO BE INDUSTRY-LEADING ACCURACY RATES AND PERFORMANCE," PAGE 11; o ". . . WE BELIEVE WE ARE A LEADING PROVIDER OF AUTOMATIC FACE RECOGNITION SYSTEMS, OR AFRS, AND OTHER BIOMETRIC AND SECURITY SOLUTIONS TO GOVERNMENTS, LAW ENFORCEMENT AGENCIES, GAMING COMPANIES, AND OTHER ORGANIZATIONS WORLDWIDE," PAGE 11; o "WE BELIEVE WE ARE ONE OF THE LEADING DIGITAL SECURITY SERVICES PROVIDERS. ..," PAGE 16; o "WE PROJECT THAT BY THE END OF THIS YEAR, THE NUMBER OF MAJOR CUSTOMERS WILL GROW TO CLOSE TO 20 FROM A VARIETY OF INDUSTRIES," PAGE 17. RESPONSE: Complied. Enclosed with the hard copy of this letter is the following supplemental information to support the above statements: o "Based on these breakthrough abilities..." - See the article entitled, "Face Authentication Competition on the BANCA Database." o "...enable our customers to cost-effectively..." - See the article entitled, "Face Authentication Competition on the BANCA Database." o "...we believe we are a leading provider..." - This statement has been revised to one that the Company believes it can support. See page 15. Reference is made to the discussion under "Customers" in the "Business" portion of the prospectus. o "We believe we are one of the leading digital..." - This statement has been revised to one that the Company believes it can support. See page 21. Reference is made to the discussion under "Customers" in the "Business" portion of the prospectus. o "We project that by the end of this year..." - This statement has been revised to one that the Company believes it can support. See page 22. PROSPECTUS SUMMARY, PAGE 3 4. PLEASE INCLUDE THE TELEPHONE NUMBER OF THE COMPANY, AS REQUIRED BY ITEM 503(B) OF REGULATION S-K. RESPONSE: Complied. See page 3. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 4 5. PLEASE EXPAND THIS SECTION TO PROVIDE MORE INFORMATION ABOUT THE STRUCTURE OF YOUR COMPANY, INCLUDING WHEN IT WAS FORMED, WHEN YOUR OPERATIONS BEGAN AND WHY YOUR COMPANY IS INCORPORATED IN THE BRITISH VIRGIN ISLANDS WHILE YOUR OPERATIONS ARE CONDUCTED IN CHINA. ADDITIONALLY, EXPAND THE DISCUSSION OF YOUR RELATIONSHIP WITH TSINGHUA UNIVERSITY AND THE CHINESE ACADEMY OF SCIENCE TO BETTER EXPLAIN HOW SUCH RELATIONSHIP AFFECTS YOUR BUSINESS. RESPONSE: Complied. See page 3. RISK FACTORS, PAGE 4 6. PLEASE ENSURE THAT ALL OF THE RISK FACTOR SUBHEADINGS CLEARLY INDICATE THE RISK POSED TO INVESTORS. FOR EXAMPLE, THE SUBHEADING "WE FACE COMPETITION FROM EXISTING AND POTENTIAL COMPETITORS" DOES NOT CLEARLY DESCRIBE WHAT THE RISK OF COMPETITION IS TO YOUR BUSINESS OR INVESTORS. IS THE RISK THAT YOU COULD LOSE POTENTIAL REVENUES OR CUSTOMERS? PLEASE REVISE HERE AND THROUGHOUT THIS SECTION AS APPROPRIATE. ADDITIONALLY, WHERE APPLICABLE, REVISE THROUGHOUT THIS SECTION TO CLARIFY HOW EACH RISK RELATES TO THE COMPANY ITSELF, AS OPPOSED TO BEING A RISK TO ALL COMPANIES GENERALLY. FOR EXAMPLE, WE NOTE THAT YOUR RISK FACTOR ENTITLED, "UNLESS WE KEEP PACE WITH CHANGING TECHNOLOGIES, WE COULD LOSE CUSTOMERS AND FAIL TO WIN NEW CUSTOMERS," DOES NOT APPEAR TO DISCUSS ANY SPECIFIC RISK TO THE COMPANY BUT RATHER RELATES TO A RISK FACED BY MOST COMPANIES. PLEASE REVISE TO PROVIDE MORE SPECIFIC INFORMATION ABOUT THE RISK TO YOUR COMPANY HERE AND THROUGHOUT THIS SECTION AS APPROPRIATE. RESPONSE: Complied. See pages 4 to 8. The risk factor about keeping pace with changing technologies has been deleted, as it is applicable to all companies generally. 7. PLEASE REVISE TO INCLUDE A SEPARATE RISK FACTOR DESCRIBING ANY MATERIAL FOREIGN CURRENCY OR EXCHANGE RATE RISKS ASSOCIATED WITH DOING BUSINESS IN SEVERAL DIFFERENT COUNTRIES. ADDITIONALLY, IF YOU ARE SUBJECT TO ANY MATERIAL FOREIGN EXCHANGE REGULATIONS AS A RESULT OF DOING BUSINESS IN THE PRC, YOU SHOULD INCLUDE A SEPARATE RISK FACTOR DESCRIBING THOSE RISKS AND THEIR AFFECTS ON YOUR COMPANY, AS WELL. RESPONSE: Complied. See page 8. 8. WE NOTE FROM YOUR MD&A AND BUSINESS SECTIONS THAT YOU RELY ON A SOLE DISTRIBUTOR IN JAPAN AND OTHER DISTRIBUTORS THROUGHOUT DIFFERENT REGIONS OF THE WORLD. PLEASE REVISE THIS SECTION TO PROVIDE DISCLOSURE REGARDING ANY MATERIAL RISKS ASSOCIATED WITH YOUR DEPENDENCE ON THESE DISTRIBUTORS. FOR EXAMPLE IF YOU LOST YOUR JAPANESE DISTRIBUTOR WOULD SUCH LOSS HAVE A MATERIAL IMPACT ON REVENUES? REVISE OR ADVISE AS APPROPRIATE. RESPONSE: The Company does not believe that material risks are presented because of the Company's distributorship arrangements. The Company believes that an exclusive arrangement provides motivation for the distributors to expand the market. The Company believes that its interests are adequately protected through its evaluation of the distributor prior to granting the exclusive arrangement, its ongoing review to monitor the progress of the distributor, and the fact that the distributor agreement normally does not exceed one year. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 5 "OUR SUCCESS AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE . . ." PAGE 4 9. YOUR DISCLOSURE UNDER "INTELLECTUAL PROPERTY-PATENTS," ON PAGE 17, INDICATES THAT YOU HAVE ONLY ONE PATENT THAT APPEARS TO HAVE BEEN ISSUED IN HONG KONG. PLEASE EXPAND BOTH THE TEXT OF THIS RISK FACTOR AND THE DISCUSSION ON PAGE 17 TO ADDRESS WHETHER AND WHY TITANIUM'S MANAGEMENT DEEMS A PATENT IN HONG KONG SUFFICIENT PROTECTION OF ITS TECHNOLOGY. IN THIS REGARD, WE NOTE THAT WHILE TITANIUM'S OFFICES ARE IN HONG KONG, IT INTENDS TO MARKET ITS PRODUCTS WORLD-WIDE. PLEASE REVISE OR ADVISE. RESPONSE: Complied. See pages 4 and 23. "THE LOSS OF OUR OFFICERS AND DIRECTORS OR OUR FAILURE TO ATTRACT . . ." PAGE 4 10. WE NOTE THAT WHILE THE SUBHEADING OF THIS RISK FACTOR INDICATES THAT THE LOSS OF OFFICERS AND DIRECTORS COULD ADVERSELY AFFECT YOUR BUSINESS, THE TEXT OF THE RISK FACTOR INDICATES THAT THIS "WOULD HAVE A MATERIAL ADVERSE AFFECT" ON YOU. PLEASE REVISE THE SUBHEADING TO CONFORM TO THE TEXT OF THE RISK FACTOR AND INDICATE THAT SUCH LOSS WOULD HAVE A MATERIAL AFFECT ON THE COMPANY. ADDITIONALLY, WE NOTE YOUR STATEMENT THAT YOU STRONGLY BELIEVE THAT THE STABILITY OF THE CORE TEAM WILL BE MAINTAINED FOR A LONG PERIOD OF TIME. PLEASE REVISE TO PROVIDE A THOROUGH DISCUSSION REGARDING THE BASIS FOR THIS BELIEF. RESPONSE: Complied. See page 5. "WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM A FEW CUSTOMERS. . . ." PAGE 5 11. PLEASE REVISE THE TEXT OF THIS RISK FACTOR TO IDENTIFY THE EIGHT CUSTOMERS RESPONSIBLE FOR 75% OF LAST YEAR'S REVENUES AND REVISE THE SUBHEADING TO QUANTIFY THE "SIGNIFICANT PORTION" OF REVENUES TO WHICH YOU REFER. SIMILARLY, REVISE THE SUBHEADING OF YOUR RISK FACTOR ENTITLED, "A LIMITED NUMBER OF STOCKHOLDERS WILL COLLECTIVELY CONTINUE TO OWN A MAJORITY OF OUR COMMON STOCK . . ." TO QUANTIFY THE "MAJORITY" OF COMMON STOCK THAT WILL CONTINUE TO BE HELD BY YOUR OFFICERS AND DIRECTORS. RESPONSE: While the subheadings were revised, the eight customers were not identified. The Company did not consider the identities to be critical, as the largest customers have changed from period to period. Instead this fact has been disclosed in the revised text. See page 5. "THERE IS A LACK OF A PUBLIC MARKET FOR OUR COMMON SHARES . . ." PAGE 6 12. REVISE TO DISCLOSE WHETHER YOU HAVE APPLIED FOR LISTING ON THE OTCBB OR ANY OTHER MARKET, AND WHETHER YOU HAVE ANY PLANS TO DO SO. ADDITIONALLY, PLEASE ADVISE OF THE NEED FOR ANY BLUE SKY REGISTRATION. Response: Complied. See page 6. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 6 "OUTSTANDING COMMON STOCK PURCHASE WARRANTS MAY NEGATIVELY IMPACT . . ." PAGE 6 13. YOU INDICATE IN THE TEXT OF THIS RISK FACTOR THAT SO LONG AS THE WARRANTS REMAIN OUTSTANDING, THE TERMS UNDER WHICH YOU MAY BE ABLE TO OBTAIN ADDITIONAL CAPITAL FINANCING MAY BE ADVERSELY AFFECTED. PLEASE REVISE TO EXPLAIN WHY SUCH TERMS MAY BE ADVERSELY AFFECTED. RESPONSE: Complied. See pages 6 and 7. "SINCE NEITHER NONE OF OUR OFFICERS AND DIRECTORS IS A UNITED STATES RESIDENT . .. ." PAGE 6 14. PLEASE EXPAND THIS RISK FACTOR TO ADDRESS ALL OF THE RISKS ASSOCIATED WITH YOUR OFFICERS AND DIRECTORS RESIDING IN HONG KONG AND, IF NECESSARY, BREAK THIS RISK FACTOR UP INTO SEPARATE RISK FACTORS IN ORDER TO ADEQUATELY DESCRIBE ALL OF THE RELATED RISKS. FOR EXAMPLE, EXPAND YOUR DISCUSSION OF SERVICE OF PROCESS AND DESCRIBE OTHER ISSUES SUCH AS ENFORCEABILITY OF U.S. JUDGMENTS AND THE DUTIES OF OFFICERS AND DIRECTORS. IN THIS REGARD, WE NOTE FROM PAGE 28 THAT UNDER BVI LAW, LIABILITY OF A CORPORATE DIRECTOR TO THE CORPORATION IS PRIMARILY LIMITED TO CASES OF WILLFUL MALFEASANCE IN THE PERFORMANCE OF HIS DUTIES OR TO CASES WHERE THE DIRECTOR HAS NOT ACTED HONESTLY AND IN GOOD FAITH AND WITH A VIEW TO THE BEST INTERESTS OF THE COMPANY. RESPONSE: Complied. This risk factor has been moved so that it is located with the others discussed in comment 15 below. A specific risk factor has been added about the duties of the officers and directors under BVI law. See pages 7 and 8. "WE ARE A BRITISH VIRGIN ISLANDS COMPANY . . ." PAGE 7 15. WE NOTE THAT THIS RISK FACTOR ADDRESSES SEVERAL DISTINCT RISKS POSED BY BEING A BVI COMPANY, SUCH AS THE FACT THAT BVI COMMON LAW IS LIMITED AS COMPARED WITH SIMILAR U.S. LAW, THE BVI HAS A LESS DEVELOPED BODY OF SECURITIES LAWS AS COMPARED WITH THE U.S., BVI COMPANIES MAY NOT HAVE STANDING TO INITIATE SHAREHOLDER DERIVATIVE ACTIONS IN THE U.S. COURTS AGAINST THE COMPANY, AND THERE IS NO STATUTORY RECOGNITION IN THE BVI OF JUDGMENTS OBTAINED IN THE U.S. PLEASE REVISE TO ADDRESS EACH OF THESE RISKS AS SEPARATE RISK FACTORS AND ENSURE THAT YOU THOROUGHLY DISCUSS EACH RISK AND ITS POTENTIAL AFFECTS ON INVESTORS. RESPONSE: Complied. This risk factor has been broken down into several risk factors. See pages 7 and 8. DETERMINATION OF OFFERING PRICE 16. PLEASE REVISE YOUR FILING TO PROVIDE ALL OF THE INFORMATION REQUIRED BY ITEM 504 OF REGULATION S-K REGARDING THE MANNER IN WHICH YOU DETERMINED YOUR OFFERING PRICE. ENSURE THAT THIS DISCUSSION ADDRESSES THE FACT THAT YOU HAVE OUTSTANDING WARRANTS WITH AN EXERCISE PRICE OF $.50/SHARE AND EXPLAINS WHY YOU CHOSE A DIFFERENT PRICE FOR YOUR PUBLIC OFFERING. RESPONSE: Complied. See page 9. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 7 SUPPLEMENTARY FINANCIAL INFORMATION 17. REVISE THE FILING TO INCLUDE QUARTERLY FINANCIAL DATA PURSUANT TO ITEM 302 OF REGULATION S-K. RESPONSE: The Company does not believe that it is required to include quarterly financial data, as Item 302 of Regulation S-K makes this applicable to registrants that have securities registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, PAGE 8 18. PLEASE COMPREHENSIVELY REVISE THIS SECTION TO PROVIDE ALL INFORMATION REQUIRED BY ITEM 303 OF REGULATION S-K, INCLUDING THE RELATED INSTRUCTIONS. SEE ALSO SEC RELEASE 33-8350. IN THIS REGARD, WE WOULD EXPECT TO SEE MORE INFORMATION REGARDING YOUR OPERATING HISTORY AND HOW YOUR BUSINESS HAS CHANGED OVER THE PAST THREE YEARS. FOR EXAMPLE, IT IS NOT CLEAR WHAT "PROJECTS REVENUES" ARE OR HOW THEY HAVE AFFECTED YOUR COMPANY IN THE PAST OR WILL AFFECT IT IN THE FUTURE. ADDITIONALLY, YOUR CURRENT DISCLOSURE DOES NOT CLEARLY DISCUSS HOW YOU GENERATE REVENUES. IN THIS REGARD, WE NOTE FROM YOUR FINANCIAL STATEMENTS THAT YOU MAINLY RECOGNIZE REVENUE THROUGH THE LICENSING OF YOUR SOFTWARE, BUT NOTE FROM YOUR BUSINESS SECTION THAT YOU APPEAR TO ALSO PERFORM CONSULTING AND DISTRIBUTION SERVICES. REVISE TO CLEARLY DISCLOSE THE LINES OF BUSINESS IN WHICH YOU ARE INVOLVED AND HOW THEY AFFECT YOUR RESULTS OF OPERATIONS. WE WOULD ALSO EXPECT TO SEE MORE COMPREHENSIVE LINE-ITEM DISCUSSIONS REGARDING MATERIAL CHANGES BETWEEN PERIODS, INCLUDING QUANTIFIED INFORMATION REGARDING THE REASONS FOR SUCH CHANGES. FURTHERMORE, YOU SHOULD BETTER EXPLAIN YOUR RELATIONSHIP WITH THIRD PARTIES, SUCH AS YOUR DISTRIBUTORS AND THE CHINESE ACADEMY OF SCIENCE AND HOW SUCH RELATIONSHIPS HAVE OR WILL AFFECT YOUR RESULTS OF OPERATIONS. FINALLY, ENSURE THAT YOUR REVISED DOCUMENT INCLUDES A DISCUSSION OF ANY MATERIAL PRICING PRESSURES AND WHETHER CHANGES IN REVENUES BETWEEN PERIODS HAVE BEEN THE RESULT OF A CHANGE IN PRICING OR VOLUME. IN THIS REGARD, WE NOTE THE RISK FACTOR ON PAGE 5 THAT INDICATES THAT YOU MAY BE FORCED TO OFFER LOWER PRICES TO COMPETE. ALL OF THESE ISSUES SHOULD BE ADDRESSED IN YOUR NEXT AMENDMENT. RESPONSE: Complied. See pages 10 to 14. 19. AS A FOLLOW-UP TO THE COMMENT ABOVE, WE NOTE YOUR DISCUSSIONS ON PAGES FF-11 AND FF-12 REGARDING THE COMPANY'S GRANT AND SUBSIDY INCOME. YOUR MD&A, INCLUDING YOUR LIQUIDITY DISCUSSION, SHOULD BE REVISED TO INCLUDE SIMILAR DISCLOSURE, AS THE GRANT AND SUBSIDY INCOME YOU HAVE RECEIVED APPEARS TO HAVE PROVIDED CASH FOR YOUR OPERATIONS THAT WILL NOT CONTINUE INDEFINITELY, AND AS IT APPEARS THAT YOU WILL BE REQUIRED TO PAY THE HONG KONG GOVERNMENT A 5% ROYALTY ON ALL GROSS REVENUE EARNED FROM ANY ACTIVITIES IN CONNECTION WITH GRANT-FUNDED PROJECTS. RESPONSE: Complied. See pages 11 and 12. 20. WE NOTE THE STATISTICS YOU CITE ON PAGE NINE AND THE CORRESPONDING FOOTNOTE YOU HAVE PROVIDED. PLEASE REVISE TO REMOVE THE FOOTNOTE AND PROVIDE THE SUPPORTING INFORMATION WITH Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 8 THE TEXT OF THE STATISTICS. ADDITIONALLY, PLEASE SUPPLEMENTALLY PROVIDE THE ARTICLE TO WHICH YOU REFER AND TELL US WHETHER IT IS PUBLICLY AVAILABLE FOR FREE OR FOR A NOMINAL AMOUNT. RESPONSE: Complied. See page 10. The articles appears to be available from CFO Magazine, but for a nominal amount. 21. WE NOTE THAT THE FILING DOES NOT CONTAIN A DISCUSSION OF THE COMPANY'S CRITICAL ACCOUNTING POLICIES. REVISE THE FILING TO INCLUDE A DISCUSSION OF YOUR CRITICAL ACCOUNTING POLICIES. SEE SEC RELEASE NO. 33-8040 AND FR-60 FOR GUIDANCE. RESPONSE: Complied. See pages 11 and 12. 22. CURRENTLY, YOUR DISCUSSION OF MD&A AND LIQUIDITY AND CAPITAL RESOURCES ARE IN US$ WHILE YOUR AUDITED FINANCIAL STATEMENTS ARE IN HK$. REVISE THE FILING TO PRESENT ALL DISCUSSIONS IN THE REPORTING CURRENCY OF THE COMPANY'S AUDITED FINANCIAL STATEMENTS (I.E., HK$). RESPONSE: As most of the selling shareholders are in the United States, the Company expects that the prospectus will be used extensively in the United States. Accordingly, the Company is presenting all discussions in both US dollars and HK dollars. 23. REVISE THE FILING TO INCLUDE THE FIVE-YEAR HISTORY OF EXCHANGE RATES SETTING FORTH RATES AT PERIOD END, AVERAGE, HIGHS AND LOWS IN ACCORDANCE WITH RULE 3-20(B)) OF REGULATION S-X. RESPONSE: Complied. See page 10. RESULTS OF OPERATIONS, PAGE 9 24. WE NOTE YOUR DISCLOSURE REGARDING THE FACT THAT THE SALES OF PROACCESS FACEOK IN 2004 "MARKED THE POINT WHERE THE COMPANY NO LONGER RELIED SOLELY UPON PROJECT-BASED OR CONSULTANCY INCOME." AS A FOLLOW-UP TO THE FIRST MD&A COMMENT ABOVE, PLEASE REVISE THIS SECTION AND MD&A GENERALLY TO BETTER EXPLAIN WHAT YOUR PROJECT-BASED AND CONSULTANCY INCOME IS AND HOW IT RELATES TO YOUR OPERATIONS AND THE PRODUCTION OF YOUR BIOMETRICS SOFTWARE. RESPONSE: This statement has been deleted. See pages 11 and 12. 25. WE NOTE FROM YOUR DISCLOSURE ON PAGE 10 THAT YOU COMMENCED "A FEW LARGE PROJECTS OUTSIDE OF HONG KONG." AS A FOLLOW-UP TO THE FIRST MD&A COMMENT ABOVE, PLEASE REVISE TO BETTER EXPLAIN WHAT THESE PROJECTS ARE AND HOW THEY HAVE OR WILL AFFECT YOUR RESULTS OF OPERATIONS. RESPONSE: Complied. See page 12. 26. AS A FOLLOW-UP TO THE FIRST MD&A COMMENT ABOVE, WE NOTE THAT YOU ATTRIBUTE CHANGES IN CERTAIN CONSOLIDATED FINANCIAL STATEMENT LINE ITEMS TO MORE THAN ONE FACTOR AND THAT CERTAIN LINE ITEMS ARE NOT DISCUSSED. FOR INSTANCE, WE NOTE YOU DISCLOSE THE 10.3% DECREASE IN GROSS MARGIN AT DECEMBER 31, 2004, WITHOUT DISCUSSING THE REASON FOR THE DECREASE. REVISE YOUR MD&A TO Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 9 ALLOW INVESTORS TO SEE YOUR COMPANY THROUGH THE EYES OF MANAGEMENT. FOR EXAMPLE, DISCUSS THE METRICS MANAGEMENT USES IN EVALUATING OPERATING RESULTS, THE BUSINESS REASONS FOR PERIOD TO PERIOD CHANGES IN YOUR FINANCIAL STATEMENT LINE ITEMS AND EACH FACTOR THAT RESULTED IN THOSE CHANGES. WE REFER YOU TO SEC RELEASE NO. 33-6835 AND 33-8350. RESPONSE: Complied. See pages 12 and 13. LIQUIDITY AND CAPITAL RESOURCES, PAGE 10 27. WE NOTE FROM PAGE 24 THAT CERTAIN OF YOUR OFFICERS AND DIRECTORS HAVE PROVIDED LOANS TO THE COMPANY SINCE 2001 AND THAT THE SAME OFFICERS GUARANTEED A LOAN FROM A FINANCIAL INSTITUTION. PLEASE REVISE THIS SECTION TO PROVIDE DISCLOSURE REGARDING ALL OF THESE LOANS, INCLUDING THE NAME OF THE FINANCIAL INSTITUTION FROM WHICH YOU BORROWED FUNDS. RESPONSE: Complied. See page 13. 28. WE NOTE YOUR DISCLOSURE OF MATERIAL CHANGES RELATING TO ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND OTHER BALANCES IN YOUR DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES. PLEASE REVISE YOUR DISCUSSION TO FOCUS ON THE PRIMARY DRIVERS OF AND OTHER MATERIAL FACTORS NECESSARY TO UNDERSTANDING YOUR COMPANY'S CASH FLOWS. IN ADDITION, DISCUSS ALL KNOWN TRENDS, EVENTS OR UNCERTAINTIES, WHICH ARE REASONABLY LIKELY TO IMPACT FUTURE LIQUIDITY, AS NECESSARY. WE REFER YOU TO SECTION IV OF SEC RELEASE NO. 33-8350. RESPONSE: Complied. See pages 13 and 14. 29. WE NOTE YOUR DISCLOSURE THAT YOU BELIEVE EXISTING CASH FLOWS, BASED UPON YOUR SIGNED CONTRACTS FOR ORDERS, WILL BE ADEQUATE TO FUND EXPENDITURES FOR DEVELOPMENT OF BIOMETRICS PRODUCTS. TELL US THE AMOUNT OF BACKLOG ORDERS BELIEVED TO BE FIRM AS OF JUNE 30, 2005 AND REVISED TO DISCLOSE THIS INFORMATION IN THE BUSINESS SECTION OF YOUR FILING PURSUANT TO ITEM 101(C)(VIII) OF REGULATION S-K. RESPONSE: Complied. See pages 14 and 22. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 30. PLEASE REVISE YOUR FILING TO PROVIDE ALL OF THE INFORMATION REQUIRED BY ITEM 304 OF REGULATION S-K. RESPONSE: Complied. See page 15. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 31. PLEASE REVISE YOUR FILING TO PROVIDE ALL OF THE INFORMATION REQUIRED BY ITEM 305 OF REGULATION S-K. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 10 RESPONSE: The Company does not believe that disclosure of market risk is warranted because it is not subject to interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. The Company does not have any long-term debt, except for shareholders' loans that are interest-free. As noted in the new section entitled "Historical Exchange Rates," the Hong Kong dollar has been pegged to the U.S. dollar at HK$7.80 to US$1.00 since 1983. Further, the Company `s business does not involve commodities or other items sensitive to market rate or price risks. BUSINESS, PAGE 11 32. THROUGHOUT THIS SECTION AND IN OTHER PLACES IN THE FILING, YOU REFER TO CERTAIN AWARDS THAT YOUR PRODUCTS HAVE RECEIVED. FOR EXAMPLE, WE NOT YOUR STATEMENT THAT PROACCESS FACEOK WAS AWARDED THE "BEST OF COMDEX FINALIST 2003" IN LAS VEGAS. EACH PLACE YOU REFER TO AN AWARD, YOU SHOULD ALSO INCLUDE A DESCRIPTION OF THE AWARD, THE ENTITY THAT GIVES THE AWARD AND ITS MEANING IN YOUR INDUSTRY IN ORDER TO PUT THE SIGNIFICANCE OF THE AWARD IN CONTEXT FOR INVESTORS. REVISE THROUGHOUT AS APPROPRIATE. ADDITIONALLY, WHERE YOU REFER TO CONTRACT AWARDS, YOU SHOULD PROVIDE SIMILAR INFORMATION. FOR EXAMPLE, WE NOTE YOUR STATEMENT ON PAGE 12 THAT TITANIUM TECHNOLOGY WAS SELECTED BY THE HKSAR GOVERNMENT AS ONE OF THE SUPPLIERS OF PC/LAN BULK TENDER IN CATEGORY C. REVISE TO EXPLAIN WHAT THIS MEANS AND WHAT COMPETITION FOR THE CONTRACT EXISTED AT THE TIME. RESPONSE: Complied. See pages 16 and 22. 33. WE NOTE THAT YOU HAVE SEVERAL GOVERNMENT CUSTOMERS. ACCORDINGLY, PLEASE ENSURE THAT YOUR NEXT AMENDMENT INCLUDES ALL OF THE INFORMATION REQUIRED BY PARAGRAPH (C)(1)(IX) OF ITEM 101 OF REGULATION S-K, REGARDING ANY MATERIAL PORTION OF YOUR BUSINESS THAT MAY BE SUBJECT TO RENEGOTIATION OF PROFITS OR TERMINATION OF CONTRACTS AT THE ELECTION OF THE GOVERNMENT. RESPONSE: See page 22. The Company has added disclosure that its contracts are not subject to termination at the election of the government. 34. PLEASE REVISE TO PROVIDE ALL OF THE INFORMATION REGARDING THE ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS REQUIRED BY ITEM 101(G) OF REGULATION S-K. RESPONSE: Complied. See page 24. BUSINESS DEVELOPMENT, PAGE 11 35. PLEASE REVISE HERE AND THROUGHOUT THE DOCUMENT AS APPROPRIATE TO BETTER EXPLAIN THE ORGANIZATION AND HISTORY OF THE COMPANY. FOR EXAMPLE, WE NOTE FROM PAGE F-4 THAT TITANIUM TECHNOLOGY (SHENZHEN) COMPANY LIMITED IS A SUBSIDIARY OF TITANIUM TECHNOLOGY LIMITED, BUT SUCH RELATIONSHIP IS NOT CLEARLY DISCLOSED HERE, IN YOUR PROSPECTUS SUMMARY OR IN MD&A. ADDITIONALLY, IT IS NOT CLEAR WHO EAE PRODUCTIONS (HK) LIMITED IS OR HOW SUCH ENTITY IS RELATED TO THE COMPANY. FINALLY, IT IS NOT CLEAR WHETHER BOTH TITANIUM TECHNOLOGY AND TITANIUM Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 11 TECHNOLOGY (SHENZHEN) ARE OPERATING COMPANIES. PLEASE REVISE TO BETTER EXPLAIN THE RELATIONSHIP BOTH COMPANIES HAVE WITH EACH OTHER AND WITH THE COMPANY AS A WHOLE. RESPONSE: Complied. See page 15. PRODUCTS, PAGE 12 36. PLEASE REVISE THIS SECTION AND MD&A, IF APPROPRIATE, TO MORE CLEARLY DESCRIBE THE PRODUCTS THE COMPANY CURRENTLY OFFERS AND THE PRODUCTS THAT ARE IN THE DEVELOPMENT PHASE. IN THIS REGARD, WE NOTE THAT YOUR DESCRIPTIONS OF PRODUCTS SUCH AS THE PROFACER IDVR AND PROFACER IDCONTROL SEEM TO INDICATE THAT YOU ARE CURRENTLY OFFERING THE PRODUCTS, BUT WE NOTE NO SIMILAR DISCLOSURE IN MD&A. ADDITIONALLY, WE NOTE YOUR STATEMENT ON PAGE 15 REGARDING THE PROFACER IDVR WHICH INDICATES THAT "[A] PILOT PROJECT HAS BEEN LAUNCHED IN GUANGXI PEOPLE'S BANK OF CHINA." PLEASE REVISE TO EXPLAIN THIS STATEMENT. FOR EXAMPLE, ARE YOU DERIVING REVENUES FROM THE BANK OR IS THIS PRODUCT STILL BEING TESTED? REVISE AS APPROPRIATE. RESPONSE: Complied. See the tables appearing on pages 17 and 20. DISTRIBUTION AND MARKETS, PAGE 17 37. PLEASE REVISE THIS SECTION AND MD&A TO BETTER EXPLAIN YOUR DISTRIBUTOR BUSINESS. FOR EXAMPLE, WHAT TYPES OF SOFTWARE DO YOU DISTRIBUTE TO YOUR CUSTOMERS? WHAT PORTION OF YOUR REVENUES DOES YOUR DISTRIBUTOR BUSINESS ACCOUNT FOR? ADDITIONALLY, REVISE TO BETTER EXPLAIN YOUR RELATIONSHIPS WITH THE LARGER VENDORS, SUCH AS MICROSOFT AND NOVELL. DO YOU BUY SOFTWARE FROM THESE VENDORS TO DISTRIBUTE IN HONG KONG OR DO YOU DISTRIBUTE SOFTWARE TO THESE VENDORS? RESPONSE: Complied. See page 22. CUSTOMERS, PAGE 17 38. WE NOTE THAT EIGHT CUSTOMERS ACCOUNTED FOR APPROXIMATELY 75% OF YOUR FISCAL 2004 REVENUES AND THAT SALES TO BEACON BASE SOFTWARE AND INFORMATION SECURITY ONE WERE 13.32% AND 21.02%, RESPECTIVELY. IF ANY OTHER CUSTOMER ACCOUNTED FOR 10% OR MORE OF TITANIUM'S REVENUES, PLEASE REVISE TO IDENTIFY SUCH CUSTOMER AND TO INDICATE THE PERCENTAGE OF REVENUES FOR WHICH IT WAS RESPONSIBLE. RESPONSE: No customer accounted for 10% or more of the Company's revenues, other than Information x Security One (HK) Ltd. and Beacon Base Software Ltd. MANAGEMENT OFFICERS, DIRECTORS AND KEY EMPLOYEES, PAGE 19 39. PLEASE REVISE THIS DISCLOSURE TO INCLUDE THE SPECIFIC FIVE-YEAR EMPLOYMENT HISTORY FOR EACH NAMED PERSON, AS REQUIRED BY ITEM 401(E)(1) OF REGULATION S-K. IN THIS REGARD, WE WOULD Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 12 EXPECT TO SEE THE NAMES OF THE COMPANIES AT WHICH THE OFFICERS AND DIRECTORS WORKED PRIOR TO THEIR EMPLOYMENT WITH THE COMPANY, AS WELL AS ALL OTHER INFORMATION REQUIRED BY 401(E)(1). RESPONSE: Complied. See pages 25 to 26. 40. AS A FOLLOW-UP TO COMMENT 2 ABOVE, PLEASE REVISE THE DESCRIPTION OF DR. NG'S EXPERIENCE TO PROVIDE THE FACTUAL BASIS FOR THE STATEMENTS YOU MAKE REGARDING HIS STANDING WITHIN THE BIOMETRICS COMMUNITY. FOR EXAMPLE, WE NOTE STATEMENTS SUCH AS, "DR. NG IS ONE OF THE REPUTABLE ENTREPRENEURS IN CHINA," "DR. NG HAS RECEIVED A GREAT DEAL OF RECOGNITION FOR HIS EXTRAORDINARY ACCOMPLISHMENTS" AND "[H]E IS A HIGHLY SOUGHT AFTER SPEAKER AT HIGH LEVEL INDUSTRY CONFERENCES AND A FREQUENT COMMENTATOR IN THE MEDIA." ADDITIONALLY, YOU SHOULD REVISE TO PUT THE SIGNIFICANCE OF THE AWARDS HE HAS RECEIVED IN CONTEXT FOR INVESTORS. RESPONSE: Complied. See page 25. CONFLICTS OF INTEREST, PAGE 20 41. WE NOTE THAT THE LAST SENTENCE OF THE FIRST PARAGRAPH OF THIS SECTION INDICATES THAT YOU ANTICIPATE THAT THE OTHER BUSINESS ACTIVITIES OF YOUR OFFICERS AND DIRECTORS WILL NOT INTERFERE IN ANY SIGNIFICANT FASHION WITH THE AFFAIRS OF THE BUSINESS. REVISE TO EXPLAIN THE BASIS FOR THIS BELIEF. ADDITIONALLY, REVISE YOUR RISK FACTORS SECTION TO PROVIDE A SEPARATE DISCUSSION REGARDING THE RISKS ASSOCIATED WITH YOUR OFFICERS AND DIRECTORS BEING ALLOWED TO ENGAGE IN COMPETING BUSINESSES, AND THE FACT THAT YOU HAVE NO RIGHT OF FIRST REFUSAL PERTAINING TO OPPORTUNITIES THAT COME TO THEIR ATTENTION AND RELATED TO THE OPERATIONS OF THE COMPANY. RESPONSE: Complied. See pages 8 and 26. EXECUTIVE COMPENSATION, PAGE 21 42. PLEASE REVISE YOUR EXECUTIVE COMPENSATION TABLE TO PROVIDE THE INFORMATION REQUIRED BY ITEM 402(B)(2) OF REGULATION S-K FOR ALL NAMED EXECUTIVE OFFICERS. RESPONSE: Complied. See page 27. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, PAGE 22 43. NOTES 3 AND 4 TO THE OWNERSHIP TABLE INCLUDE WHAT APPEARS TO BE CONFLICTING DISCLOSURE REGARDING THE BENEFICIAL OWNERSHIP OF GOLDEN MASS TECHNOLOGIES LTD. PLEASE REVISE OR ADVISE, AS NECESSARY. RESPONSE: Complied. Note 3 has been revised and note 4 has been eliminated. See page 29. 44. IT APPEARS FROM YOUR DISCLOSURE THAT THE BENEFICIAL OWNERSHIP OF THE PARTIES LISTED IN THIS TABLE MAY NOT HAVE BEEN CALCULATED IN ACCORDANCE WITH RULE 13D-3 OF THE SECURITIES EXCHANGE ACT OF Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 13 1934. IN THIS REGARD, WE NOTE THAT THE WARRANTS APPEAR EXERCISABLE WITHIN 60 DAYS, BUT THAT FOOTNOTE 2 INDICATES THAT THE CALCULATION WAS DONE ASSUMING NO EXERCISE OF THE WARRANTS. ADDITIONALLY, FOOTNOTES FIVE THROUGH SEVEN SEEM TO INDICATE THAT YOU CALCULATED THE BENEFICIAL OWNERSHIP OF CERTAIN INDIVIDUALS BASED ON THEIR PERCENTAGE OWNERSHIP OF LARGER SHAREHOLDERS. INSTEAD, IN ACCORDANCE WITH RULE 13D-3, BENEFICIAL OWNERSHIP OF SECURITIES SHOULD BE BASED ON WHETHER A PERSON HAS VOTING OR INVESTMENT CONTROL OVER SUCH SECURITIES. PLEASE REVISE AS NECESSARY OR ADVISE. ADDITIONALLY, IN RESPONSE TO THIS COMMENT, PLEASE EXPLAIN HOW YOU CALCULATED THE BENEFICIAL OWNERSHIP PERCENTAGES THAT WILL BE LISTED IN YOUR AMENDED FILING. RESPONSE: Complied. The table has been revised to disclose beneficial ownership in accordance with Rule 13d-3. None of the shareholders listed in this table own warrants, but note 2 has been clarified to indicate that this would affect only the number of shares outstanding for the purpose of calculating percentage ownership. See page 29. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, PAGE 24 45. WE NOTE THAT YOU SOLD GOODS TO AN ENTITY OWNED BY A 10% SHAREHOLDER OF YOUR COMPANY. PLEASE REVISE TO DESCRIBE THE NATURE OF THE GOODS SOLD AND TO DISCUSS HOW THE TERMS OF YOUR SALES TO THIS ENTITY COMPARED WITH THE TERMS OF SIMILAR TRANSACTIONS WITH THIRD PARTIES. RESPONSE: Complied. See page 30. 46. WE NOTE YOUR DISCLOSURE THAT YOU HAVE PAID THE "NON-BUSINESS RELATED EXPENSES" OF GOLDEN MASS SINCE 2002. PLEASE REVISE TO PROVIDE MORE INFORMATION REGARDING THE NATURE OF THESE EXPENSES. ADDITIONALLY, TELL US WHETHER THE PAYMENT OF SUCH EXPENSES IS ONGOING. RESPONSE: Complied. See page 30. 47. AS A FOLLOW-UP TO THE COMMENT ABOVE, YOUR DISCLOSURE REGARDING THE AMOUNTS OWED TO THE COMPANY BY GOLDEN MASS AND OWED BY THE COMPANY TO CERTAIN OF ITS OFFICERS AND DIRECTORS SHOULD BE REVISED TO MORE CLEARLY EXPLAIN THE CURRENT STATUS OF THE TRANSACTIONS. FOR EXAMPLE, BASED ON YOUR CURRENT DISCLOSURE, IT APPEARS THAT TITANIUM GROUP AND/OR ITS SUBSIDIARIES HAVE ADVANCED MORE TO THE OFFICERS AND DIRECTORS THAT THESE OFFICERS AND DIRECTORS HAVE ADVANCED TO TITANIUM GROUP. THEREFORE, THE OFFSET DISCLOSED IN THE FOURTH PARAGRAPH WOULD APPEAR TO HAVE BEEN INCOMPLETE AND THE DISCLOSURE SHOULD REFLECT THE AMOUNT STILL OUTSTANDING. IF THAT AMOUNT HAS BEEN FORGIVEN, IT SHOULD BE REFLECTED, AS APPLICABLE, IN THE "ALL OTHER COMPENSATION" COLUMN OF THE EXECUTIVE COMPENSATION TABLE ON PAGE 21. PLEASE SEE ITEM 402 OF REGULATION S-K. RESPONSE: Complied. See pages 30 and 31 for the revised disclosure. 48. PLEASE DISCLOSE THE REMUNERATION, IF ANY, THAT MESSRS. TANG, NG, AND CHEUNG RECEIVED FOR THEIR GUARANTEE OF TITANIUM'S INSTALLMENT LOAN, AS DISCUSSED IN THE FINAL PARAGRAPH. RESPONSE: Complied. See page 31. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 14 DESCRIPTION OF SECURITIES, PAGE 26 49. WE NOTE THAT THE SECOND PARAGRAPH OF THIS SECTION INDICATES THAT IT INCLUDES A SUMMARY OF MATERIAL DIFFERENCES BETWEEN THE CORPORATE LAWS OF THE UNITED STATES AND THOSE OF THE BRITISH VIRGIN ISLANDS AND THAT YOU HAVE IDENTIFIED CERTAIN SITUATIONS IN WHICH SUCH LAWS VARY. PLEASE EXPAND YOUR DISCUSSION OF THESE DIFFERENCES TO PROVIDE A MORE DIRECT AND DETAILED COMPARISON OF SHAREHOLDERS' RIGHTS AND OTHER CORPORATE GOVERNANCE MATTERS UNDER BVI LAW AND, FOR EXAMPLE, DELAWARE LAW. CONSIDER PROVIDING THIS INFORMATION IN TABULAR FORM. FOR EXAMPLE, BUT WITHOUT LIMITATION, EXPLAIN WHETHER BVI LAW ALLOWS SHAREHOLDERS TO APPROVE CORPORATE MATTERS BY WRITTEN CONSENT OR ALLOWS FOR THE ISSUANCE OF PREFERRED STOCK OR THE ADOPTION OF OTHER "POISON PILL" MEASURES THAT COULD PREVENT A TAKEOVER ATTEMPT AND THEREBY PRECLUDE SHAREHOLDERS FROM REALIZING A POTENTIAL PREMIUM OVER THE MARKET VALUE OF THEIR SHARES. RESPONSE: Complied. See pages 33 to 37. SELLING STOCKHOLDERS, PAGE 28 50. DESCRIBE THE TRANSACTIONS IN WHICH THE SELLING STOCKHOLDERS ACQUIRED THE SHARES BEING OFFERED UNDER THE REGISTRATION STATEMENT. INCLUDE ALL MATERIAL TERMS OF THE TRANSACTION SUCH AS PRICE, DATE AND THE EXEMPTION(S) FROM REGISTRATION UPON WHICH TITANIUM RELIED. SEE ITEM 507 OF REGULATION S-K. RESPONSE: Complied. See page 38. 51. DISCLOSE WHETHER ANY OF THE SELLING STOCKHOLDERS ARE REGISTERED BROKER-DEALERS OR AFFILIATES OF A REGISTERED BROKER-DEALER. IF ANY SELLING STOCKHOLDER IS A REGISTERED BROKER-DEALER, OTHER THAN THOSE WHO RECEIVED THE SHARES BEING OFFERED AS COMPENSATION FOR INVESTMENT BANKING SERVICES, SUCH SELLING STOCKHOLDER SHOULD BE NAMED AS AN UNDERWRITER WITH RESPECT TO THE SHARES BEING OFFERED ON ITS BEHALF. ADDITIONALLY, IF ANY SELLING STOCKHOLDER IS AFFILIATED WITH A REGISTERED BROKER-DEALER, STATE WHETHER THE SELLING STOCKHOLDER ACQUIRED THE SECURITIES TO BE RESOLD IN THE ORDINARY COURSE OF BUSINESS AND WHETHER, AT THE TIME OF ACQUISITION, IT HAD ANY AGREEMENTS OR UNDERSTANDINGS, DIRECTLY OR INDIRECTLY, WITH ANY PERSON TO DISTRIBUTE THE SECURITIES AT THE TIME OF PURCHASE. RESPONSE: Complied. See footnote 11 on page 41. 52. FOR EACH LEGAL ENTITY THAT IS A NON-REPORTING SELLING STOCKHOLDER, SUCH AS DEVRIES PROPERTIES, PONDEROSA INVESTMENT PARTNERS, INC., THE IRREVOCABLE SEVEN OAKS TRUST, AND DECH'IN STRATEGIC CONSULTING LLC, IDENTIFY THE NATURAL PERSONS WHO EXERCISE VOTING AND/OR DISPOSITIVE POWERS OVER THE SECURITIES. SEE INTERPRETATION I.60 OF THE JULY 1997 MANUAL OF PUBLICLY AVAILABLE CF TELEPHONE INTERPRETATIONS, AS WELL AS INTERPRETATION 4S OF THE REGULATION S-K PORTION OF THE MARCH 1999 SUPPLEMENT TO THE CF TELEPHONE INTERPRETATION MANUAL. RESPONSE: Complied. See pages 39 to 41. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 15 PLAN OF DISTRIBUTION, PAGE 31 53. WE NOTE THAT THE SELLING STOCKHOLDERS MAY ENGAGE IN SHORT SALES OF YOUR COMMON STOCK. PLEASE CONFIRM THAT YOU ARE AWARE OF CORPORATION FINANCE TELEPHONE INTERPRETATION A.65. ADDITIONALLY, IN THE RESPONSE LETTER DESCRIBE THE STEPS THE ISSUER AND THE SELLING STOCKHOLDERS HAVE TAKEN TO ENSURE COMPLIANCE WITH REGULATION M. RESPONSE: The Company is aware of Corporation Finance Telephone Interpretation A.65. The issuer has reminded selling stockholders of the provisions of Regulation M. In addition, the restrictive legend will be removed from the stock certificate of a selling stockholder only after sale and after receiving a letter from the stockholder confirming compliance with prospectus delivery requirements. FINANCIAL STATEMENTS UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - SIX MONTHS ENDED JUNE 30, 2005 AND 2004 54. WE NOTE THAT YOU HAVE INCLUDED A CONVENIENCE TRANSLATION IN THE FILING FOR THE MOST RECENT FISCAL YEAR AND MOST RECENT INTERIM FISCAL PERIOD, HOWEVER, A TRANSLATION FOR THE JUNE 30, 2005 STATEMENT OF CASH FLOWS HAS BEEN OMITTED. PLEASE REVISE THE FILING TO INCLUDE A CONVENIENCE TRANSLATION FOR THE JUNE 30, 2005 STATEMENT OF CASH FLOWS. RESPONSE: Complied. See page F-3. The interim financial statements for the nine months ended September 30, 2005 include a convenience translation for the 2005 Statement of Cash Flows. NOTE 3. AMOUNT DUE FROM RELATED PARTIES, PAGE F-4 55. WE NOTE FROM YOUR DISCLOSURES THAT CASH ADVANCED TO A DIRECTOR WILL BE TRANSFERRED TO THE GROUP'S SUBSIDIARY IN THE PRC. TELL US THE BUSINESS REASONS FOR TRANSFERRING CASH TO YOUR SUBSIDIARY VIA A DIRECTOR AS OPPOSED TO TRANSFERRING THE CASH DIRECTLY TO YOUR SUBSIDIARY IN THE PRC. IN YOUR RESPONSE, TELL US THE AMOUNT OF CASH THAT YOU TRANSFERRED TO THE DIRECTORS IN FISCAL 2005, 2004 AND 2003 AND THE JOURNAL ENTRIES RECORDED TO ACCOUNT FOR THESE TRANSACTIONS. RESPONSE: It takes a considerable time for the Company to transfer cash to its subsidiary in the People's Republic of China ("PRC") through normal banking channels within the PRC. The subsidiary runs a risk of missing payment obligations due to the delay in the receipt of funds. Therefore, management has opted to transfer the cash through a director instead, who hand carries the checks to the subsidiary. By doing so, the Company insures that the subsidiary will have the cash as and when required. Approximately five business days are saved by transferring funds using this method. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 16 The amounts transferred to the director during the three years were as follows: Fiscal 2005 HK$Nil (US$Nil) Fiscal 2004 HK$673,464 (US$86,342) Fiscal 2003 HK$440,537 (US$56,479) Fiscal 2002 HK$Nil (US$Nil) The journal entries recorded to account for these transactions were a debit to "Advance to the director" and a credit to "Bank". 56. YOU DISCLOSE THE MOVEMENTS IN AMOUNTS DUE FROM RELATED COMPANIES AS OF JUNE 30, 2005 AND 2004. TELL US HOW YOU ARE RELATED TO THESE COMPANIES AND WHETHER ANY OF THESE COMPANIES ARE YOUR SUBSIDIARIES. IF THEY ARE SUBSIDIARIES, TELL US WHY THEY $1,043,714 DUE FROM RELATED COMPANIES AT JUNE 30, 2004 WAS NOT ELIMINATED IN CONSOLIDATION. RESPONSE: The amounts represent cash advanced to the director as mentioned in comment 55 above and to a shareholder of the Company. As these related parties were not subsidiaries of the Company, they were not eliminated in consolidation. FINANCIAL STATEMENTS - YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, PAGE FF-1 57. THE AUDIT FIRM ZHONG YI IS NOT RECOGNIZED BY THE STAFF OF THE SEC. FOREIGN AUDITORS THAT WISH TO PRACTICE BEFORE THE SEC ARE EXPECTED TO DEMONSTRATE THEIR KNOWLEDGE AND EXPERIENCE IN APPLYING U.S. GAAP, PCAOB STANDARDS, SEC FINANCIAL REPORTING RULES AND SEC REQUIREMENTS PRIOR TO INCLUSION OF THEIR AUDIT REPORTS IN SEC FILINGS. THE DEMONSTRATION OF AN AUDITOR'S KNOWLEDGE AND EXPERIENCE IN ADVANCE OF FILING GENERALLY APPLIES TO ALL FINANCIAL STATEMENTS PRESENTED IN SEC FILINGS, INCLUDING FINANCIAL STATEMENTS PROVIDED PURSUANT TO RULE 3-09 OF REGULATION S-X. PLEASE NOTE THAT REGISTRATION WITH THE PCAOB DOES NOT SUPERSEDE EXISTING MEANS BY WHICH A FIRM DEMONSTRATES ITS KNOWLEDGE AND EXPERIENCE IN APPLYING US GAAP, PCAOB STANDARDS, SEC FINANCIAL REPORTING RULES AND SEC INDEPENDENCE REQUIREMENTS. YOU MAY REFER TO THE INTERNATIONAL REPORTING AND DISCLOSURE ISSUES OUTLINE AVAILABLE ON OR WEBSITE AT THE FOLLOWING LOCATION FOR ADDITIONAL INFORMATION: HTTP://WWW.SEC.GOV/DIVISIONS/CORPFIN/INTERNATL/CFIRDISSUES1104.HTM#P313 _42976. WE MAY BE UNABLE TO COMPLETE OUR REVIEW AND ACCEPT THE REPORT OF ZHONG YI UNTIL THE FIRM HAS DEMONSTRATED THIS KNOWLEDGE AND EXPERIENCE TO THE OFFICE OF THE CHIEF ACCOUNTANT. IN ORDER TO BEGIN THIS PROCESS, ZHONG YI SHOULD INQUIRE WITH THE OFFICE OF THE CHIEF ACCOUNTANT (202-551-5300) AND REQUEST THE INFORMATION TO BEGIN THIS PROCESS. UPON RECEIPT OF THIS REQUEST, THE OFFICE OF THE CHIEF ACCOUNTANT WILL PROVIDE A LETTER OUTLINING THE STEPS AND INFORMATION NECESSARY TO COMPLETE THE REVIEW. PLEASE ADVISE US OF ZHONG YI'S PLANS TO COMPLETE THIS PROCESS. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 17 RESPONSE: The Company has been advised that Zhong Yi has initiated contact with the Officer of the Chief Accountant and responded to requests for information to complete the credentialing process. 58. TELL US IF YOU HAVE HAD YOUR FILINGS REVIEWED BY A DESIGNATED "FILING REVIEWER" FROM A US FIRM OR INTERNATIONAL ORGANIZATION KNOWLEDGEABLE ABOUT US GAAP, US GAAS, US AUDITOR INDEPENDENCE AND SEC REPORTING REQUIREMENTS. IF YOU HAVE, PLEASE PROVIDE US WITH WRITTEN CONFIRMATION THAT THE FILING REVIEWER'S PROCEDURES WERE APPLIED TO YOUR SUBMISSION. YOUR RESPONSE SHOULD INCLUDE THE NAME OF THE DESIGNATED FILING REVIEWER. REFER TO RULE 3400T IN PCAOB RELEASE NO. 2003-006 FOR GUIDANCE. RESPONSE: The filings have been reviewed by James Scheifley, P.C., a designated "filing reviewer" from a US firm knowledgeable about US GAAP, US GAAS, US auditor independence and SEC reporting requirements. The Company hereby confirms that the filing reviewer's procedures were applied to the submission. CONSOLIDATED STATEMENTS OF INCOME, PAGES F-2 AND FF-4 59. REVISE THE FILING TO SEPARATELY DISCLOSE SALES FROM PRODUCTS AND SERVICES OR EXPLAIN WHY A REVISION IS NOT NECESSARY. IN ADDITION, STATE SEPARATELY THE COSTS AND EXPENSES APPLICABLE TO EACH CATEGORY OF SALES AND REVENUES. REFER TO RULE 5-03 OF REGULATION S-X FOR GUIDANCE. RESPONSE: Complied. The audited consolidated statements of income have been revised to separately disclose sales from projects, which is products, and maintenance, which is services. Also, the costs and expenses related to each category of sales and revenues are set forth separately. See page FF-4. The sales from projects were not separately stated in the unaudited consolidated statement of income, as the sales from maintenance were not material. NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION, PAGE FF-8 60. WE NOTE THAT THE COMPANY IS INCORPORATED IN THE BRITISH VIRGIN ISLANDS. WE ALSO NOTE FROM DISCLOSURES IN YOUR FILING THAT YOU HAVE ASSETS AND OPERATIONS IN A JURISDICTION THAT RESTRICTS THE TRANSFER OF ASSETS OR DIVIDENDS OUTSIDE THE COUNTRY (I.E., THE PRC). TELL US HOW YOU CONSIDERED INCLUDING A SCHEDULE OF CONDENSED FINANCIAL INFORMATION PURSUANT TO RULE 5-04 OF REGULATION S-X. RESPONSE: Rule 5-04 of Regulation S-X states that a schedule of condensed financial information shall be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. In this case, the Company has a consolidated subsidiary registered in a jurisdiction that restricts the transfer of assets or dividends outside the country, but the assets of that consolidated subsidiary represent approximately 3% of the consolidated net assets as of December 31, 2004. Accordingly, it is not necessary to include this schedule. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 18 61. YOU DISCLOSE THAT YOUR INTEREST IN THE OPERATING ENTERPRISES WAS ACQUIRED IN DECEMBER 31, 2004 AND THAT THIS TRANSACTION IS CONSIDERED TO BE TRANSFERS BETWEEN ENTITIES UNDER COMMON CONTROL. TELL US THE NATURE OF THE CONTROL RELATIONSHIP BETWEEN YOU AND THE OPERATING ENTITIES AND THE AUTHORITATIVE ACCOUNTING LITERATURE THAT SUPPORTS YOUR ACCOUNTING. RESPONSE: The BVI parent company acquired all of the outstanding shares of Titanium Technology Limited in exchange for its shares. The shareholding structure of the BVI parent is exactly the same as that of Titanium Technology prior to the shares exchange. Therefore, it is considered a reverse acquisition and is allowed in accordance with SFAS 141, Business Combinations (paragraph 17). NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PAGE FF-10 62. REVISE TO DISCLOSE YOUR ACCOUNTING POLICY FOR OPERATING SEGMENTS. IF YOU HAVE ONE OPERATING SEGMENT TELL US HOW YOU MADE THAT DETERMINATION. IN ADDITION, DISCLOSE ENTERPRISE-WIDE INFORMATION PURSUANT TO PARAGRAPHS 26 THROUGH 29 OF SFAS 131. RESPONSE: Complied. See page FF-10. This note has been revised to disclose the basis for determining that there is only one operating segment, as well as net assets and revenues by geographic region. ACCOUNTS RECEIVABLE, PAGE FF-10 63. YOU DISCLOSE THAT NO GENERAL PROVISION OF BAD AND DOUBTFUL DEBTS HAS BEEN MADE AND THAT MANAGEMENT EXPECTS THAT ACCOUNTS RECEIVABLES BALANCES WILL BE COLLECTED IN FULL. TELL US THE ACCOUNTS RECEIVABLE BALANCES, IF ANY, THAT WERE WRITTEN OFF IN FISCAL 2005, 2004 AND 2003. IF YOU HAVE WRITTEN OFF ACCOUNTS RECEIVABLE IN THESE PRIOR PERIODS TELL US WHY AN ALLOWANCE IS UNNECESSARY. RESPONSE: There were no accounts receivable written off in fiscal 2005, 2004 and 2003. As the trade debtors have fully settled their respective outstanding amounts in the subsequent year, the Company believes that no provision for bad and doubtful debts is required. CASH AND CASH EQUIVALENTS, PAGE FF-10 64. REVISE THE FILING TO DISCLOSE YOUR ACCOUNTING POLICY FOR DETERMINING WHAT ITEMS ARE TREATED AS CASH EQUIVALENTS PURSUANT TO PARAGRAPH 10 OF SFAS 95. RESPONSE: Complied. See page FF-11. This note has been revised to disclose the accounting policy for determining what items are treated as cash equivalents. INTANGIBLE ASSETS, PAGE FF-10 65. WE NOTE THAT PATENTS ARE AMORTIZED OVER A TWENTY YEAR PERIOD. IN ADDITION, WE NOTE FROM DISCLOSURES ON PAGE 17 OF YOUR FILING THAT CERTAIN PATENTS ARE DUE TO EXPIRE IN 2010. EXPLAIN Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 19 YOUR BASIS FOR AMORTIZING PATENTS OVER TWENTY YEARS AND HOW YOU CONSIDERED THE EXPIRATION DATE OF PATENTS IN DETERMINING THE AMORTIZATION PERIOD. RESPONSE: Management considered that the patent rights application fees have an infinite life. Although certain patents are due to expire in 2010, they can be renewed. Management is committed to renew these patent rights upon expiration of the initial term as they consider that these patent rights are vital for the Company's product development. Management expects that they can renew the patent rights without objection. Based on the above rationale, the Company elected to amortize the patent rights over a period of twenty years. REVENUE RECOGNITION, PAGE FF-11 66. CLARIFY FOR US EACH OF THE COMPANY'S REVENUE STREAMS, THE NATURE AND TERMS OF YOUR ARRANGEMENTS WITH CUSTOMERS AND THE RELATED REVENUE RECOGNITION POLICY FOR EACH REVENUE SOURCE (I.E., LICENSE FEES, MAINTENANCE AGREEMENTS, MULTI-ELEMENT ARRANGEMENTS, HARDWARE SALES, INSTALLATION, TRAINING, SOFTWARE INTEGRATION SERVICES, DISTRIBUTOR SALES, ETC.). CITE THE ACCOUNTING LITERATURE THAT SUPPORTS YOUR ACCOUNTING. FOR MULTIPLE ELEMENT ARRANGEMENTS TELL US HOW YOU ESTABLISH FAIR VALUE FOR EACH ELEMENT AND HOW YOU ALLOCATE THE ARRANGEMENT FEE TO EACH ELEMENT. REVISE YOUR NOTES, AS NECESSARY, TO DISCLOSE YOUR REVENUE RECOGNITION POLICY FOR DIFFERENT REVENUE STREAMS AND MULTIPLE ELEMENT ARRANGEMENTS. RESPONSE: The Company earns revenue from two major sources - either from projects or from the provision of maintenance services. For income from projects, the Company recognizes the revenue at the time when the projects have been completed, delivered, and accepted by the customers. Actually, the project itself is the sale of a system utilizing biometrics technology, which includes software and hardware. In most cases, the customer may require the Company to carry out some minor modification or customization of the software. When the software is modified, the Company takes a few days to test-run in-house to ensure that the product runs per the customer's requirement. The system, both software and hardware, is delivered to the customer after the test-run. Upon delivery, the Company installs the system at the customer's premises. In accordance with the standard sales contracts used by the Company, the customer is deemed to have accepted the system upon the earlier of: (1) The date the Company demonstrates to the customer, by the successful completion of acceptance tests or otherwise, that the deliverables substantially conform to the acceptance criteria specified in the Request for Proposal; or (2) The date that the customer uses the system for any purpose other than performing acceptance tests. Once the system has been delivered to the customer and the customer has signified its acceptance of the system, the Company issues an invoice to the customer in accordance with the amount as specified in the sales contract. The customer is requested to settle the outstanding amount within the credit terms as granted in the contract. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 20 For income from the provision of maintenance services, the Company recognizes the revenue at the time when the maintenance services have been rendered to the customer. If the maintenance service has a duration of more than a year, the revenue will be prorated over that period. The Company believes that its revenue recognition policy is in accordance with the Statement of Position 97-2. In accordance with paragraph 8 of Statement of Position 97-2, the basic revenue recognition criteria are: (1) Persuasive evidence of an arrangement exists. (2) Delivery has occurred. (3) The vendor's fee is fixed or determinable (4) Collectibility is probable. The Company has followed the above criteria for its policy on revenue recognition. (1) PERSUASIVE EVIDENCE OF AN ARRANGEMENT EXISTS. All sales transactions have to be initialized by a purchase order from customers. The purchase orders give specifications of the system to be purchased. (2) DELIVERY HAS OCCURRED. Upon the time when the system is delivered to the customer, the customer is required to sign on the delivery note, confirming that it has received and accepted the system. (3) THE VENDOR'S FEE IS FIXED OR DETERMINABLE. The price is fixed at the time when the purchase order is accepted by both the customer and the Company. (4) COLLECTIBILITY IS PROBABLE. Once the product is accepted by the customer, it is obligated to settle the amount outstanding within the credit term as granted. The Company believes that the revenue from projects should not be accounted as Long-term construction-type contracts. In accordance with paragraph 7 of Statement of Position 97-2, "Software arrangements range from those that provide a license for a single software product to those that, in addition to the delivery of software or a software system, require significant production, modification, or customization of software. If an arrangement to delivery software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the entire arrangement should be accounted for in conformity with Accounting Research Bulletin (ARB) No. 45, Long-Term Construction-Type Contracts, using the relevant guidance herein, and in SOP 81-1 Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Although customers might require the Company to slightly modify the systems to meet their own specifications, it is considered that the modifications are not a major overhaul to the Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 21 system. The majority of the systems' design and specifications remain unchanged. Therefore, the condition under paragraph 7 of SOP 97-2 should not be applied. 67. WE NOTE FROM DISCLOSURES WITHIN THE FILING THAT YOUR CUSTOMERS INCLUDE "GOVERNMENT CLIENTS" AND THAT SALES TO THESE CLIENTS ARE SIGNIFICANT. TELL US HOW YOU CONSIDERED PARAGRAPHS 32 - 33 OF SOP 97-2 IN ACCOUNTING FOR FISCAL FUNDING CLAUSES, IF ANY, INCLUDED IN YOUR SOFTWARE ARRANGEMENTS. ALSO TELL US HOW FISCAL FUNDING CLAUSES OR OTHER GOVERNMENT CONTRACT CONTINGENCIES IMPACT YOUR REVENUE RECOGNITION FOR OTHER SERVICES AND PRODUCTS YOU PROVIDE. RESPONSE: The Company does not believe that paragraph 32-33 of SOP 97-2 should be considered for recognizing the income for sales to the government clients. The sales contracts to these government clients do not include a condition similar to fiscal funding clauses. The government clients are obligated to pay once delivery has been accepted. Therefore, paragraph 32-33 of SOP 97-2 should not be applied to the Company. 68. WE NOTE FROM DISCLOSURES WITHIN YOUR FILING THAT YOU UTILIZE DISTRIBUTORS TO SELL YOUR PRODUCTS. TELL US HOW YOU RECOGNIZE REVENUE ON SALES TO DISTRIBUTORS AND WHETHER YOU OFFER THESE DISTRIBUTORS ANY RIGHTS-OF-RETURN OR OTHER INCENTIVES (I.E. DISCOUNTS, PRICE CONCESSIONS, ETC.). FOR ANY DISTRIBUTOR INCENTIVE OFFERED, TELL US HOW YOU DETERMINE THAT YOUR FEE IS FIXED AND DETERMINABLE UPON THE PRODUCT'S SHIPMENT TO THE DISTRIBUTOR. IN ADDITION, DESCRIBE YOUR ABILITY TO REASONABLY ESTIMATE THE EFFECTS OF THE VARIOUS PROGRAMS OFFERED TO RESELLERS. WE REFER YOU TO SAB TOPIC 13A(4)(B), SFAS 48 AND EITF 01-9. RESPONSE: The Company recognizes sales to distributors at the time when the products are delivered to the distributors, as this is when the risk and reward have substantially passed to the distributors. The selling prices to the distributors have been predetermined in accordance with the distribution agreements, and are approximately 30% to 40% off the recommended retail prices. Once the products are shipped and the distributor has accepted the products, the Company bills the distributor and the distributor is obligated to settle the bill accordingly within the credit period granted. In all cases, there is no right-of-return or other incentives given to the distributors. Based on the above circumstances, the Company believes that is has properly recognized its revenue in accordance with paragraph 6 of SFAS 48. RESEARCH AND DEVELOPMENT COSTS, PAGE FF-11 69. YOU DISCLOSE THAT HK$1,185,678 AND HK$2,022,379 OF RESEARCH AND DEVELOPMENT COSTS ASSOCIATED WITH "PROACCESS" AND "PROFACER" WERE CAPITALIZED IN 2004 AND 2003. TELL US WHEN THESE PRODUCTS WERE AVAILABLE FOR GENERAL RELEASE AND WHETHER YOU CEASED CAPITALIZATION OF RESEARCH AND DEVELOPMENT AT THAT TIME. IN ADDITION, TELL US WHETHER YOU INCURRED COSTS FOR DEVELOPMENT OF OTHER PRODUCTS IN FISCAL 2005, 2004 AND 2003. IF SO, EXPLAIN WHY YOU HAVE NOT REPORTED ANY RESEARCH AND DEVELOPMENT COSTS IN YOUR FISCAL 2005 AND 2004 FINANCIAL STATEMENTS. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 22 RESPONSE: Generally speaking, ProAccess and ProFacer were launched in late 2003 and 2004, respectively. However, the Company has further developed two separate modules making use of the ProAccess technology. These two products, ProAccess FaceOK and ProAccess FaceGuard, were launched during mid-2004. In addition, the Company has also developed two other products making use of the ProFacer technology. These two products, ProFacer iDVR and ProFacer iWatchGuard, were launched during 2005. The Company ceased to capitalize the research and development costs as soon as these products were ready for general release. Once the products are launched, the Company incurs ongoing expenses for maintaining these products. Except for those amounts disclosed in the statement of income for the years ended December 31, 2002, 2003, and 2004, the Company has not incurred costs for development of other products. 70. EXPLAIN YOUR BASIS FOR AMORTIZING CAPITALIZED RESEARCH AND DEVELOPMENT COSTS OVER FIVE YEARS. IN ADDITION, TELL US WHERE AMORTIZATION EXPENSE IS RECORDED. IF IT IS NOT CLASSIFIED IN COST OF SALES, PLEASE REVISE THE FILING ACCORDINGLY, OR ADVISE AS TO WHY COST OF SALES IS NOT THE APPROPRIATE CLASSIFICATION. WE REFER YOU TO PARAGRAPH 8 OF SFAS 86 AND QUESTION 17, SFAX 86 FASB STAFF IMPLEMENTATION GUIDE FOR GUIDANCE. RESPONSE: Management of the Company believes that the product life cycle for these products is approximately 5 years. The technology adopted in developing these products should become obsolete by then. Therefore, management opted to amortize the research and development costs over 5 years. The amortization expenses have now been reclassified as cost of sales and the filing has been revised to effect these changes. See page FF-4. GRANT AND SUBSIDY INCOME, PAGE FF-11 71. WE NOTE THAT YOU HAVE RECEIVED GOVERNMENT GRANTS FOR RESEARCH AND DEVELOPMENT. EXPLAIN YOUR BASIS FOR AMORTIZING THESE FUNDS INTO INCOME. EXPLAIN WHY YOU HAVE AMORTIZED HK$2,502,139 (PER CONSOLIDATED STATEMENT OF INCOME) CONSIDERING YOUR DISCLOSURE THAT THE GRANT WAS FOR HK$2,000,000. TELL US WHY YOU HAVE CLASSIFIED THIS AS OTHER INCOME AS OPPOSED TO A REDUCTION IN RESEARCH AND DEVELOPMENT EXPENSE AND WHETHER ANY GRANT AND SUBSIDY AMOUNTS RECEIVED WERE OFFSET AGAINST RESEARCH AND DEVELOPMENT EXPENSES CAPITALIZED. TO THE EXTENT AMOUNTS HAVE BEEN MATERIAL TO OPERATIONS, REVISE THE FILING TO INCLUDE THE IMPACT OF THESE FUNDS ON OPERATIONS IN YOUR MD&A SECTION. AS A FOLLOW-UP TO COMMENT 19 ABOVE, YOU SHOULD ALSO INCLUDE IN YOUR LIQUIDITY SECTION ANY CONTRACTUAL OBLIGATIONS YOU MAY HAVE WITH REGARDS TO ROYALTY PAYMENTS OR REIMBURSEMENTS OF ANY OF THESE FUNDS. RESPONSE: HK$2 million is the maximum amount that the government will give the Company on each project for which it has applied for the subsidy. During the three years ended December 31, 2004, the Company has submitted several grant applications to assist it in conducting research and development. The amount of HK$2,502,139 was actually the sum that the Company has received over the three years on several grant applications. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 23 In accordance with the agreements entered into between the Company and the government, the Company would have to tender to the government its pro rata share of the residual funds remaining in the project account. In rare circumstances, the Company would have to pay the government in full if the Company could not reach an agreement with the government on the progress of the projects. In light of these facts, the Company believes that the amounts received as government grants are not of the same nature as research and development costs. Therefore, the amount was not offset against research and development costs. 72. REVISE THE FILING TO INCLUDE A DISCUSSION RELATING TO THE IMPACT THAT ADOPTION OF EACH RECENTLY ISSUED ACCOUNTING STANDARD IS EXPECTED TO HAVE ON THE FINANCIAL STATEMENTS IN ACCORDANCE WITH SAB TOPIC 11M. RESPONSE: Complied. The filing has been revised to include a discussion relating to the impact of adoption of each recently issued accounting standard. See pages FF-15 to FF-16. NOTE 6 - LONG TERM BORROWINGS, PAGE FF-16 73. YOU DISCLOSE THAT LOANS FROM SHAREHOLDERS ARE UNSECURED, INTEREST FREE AND ARE NOT REPAYABLE WITHIN THE NEXT TWELVE MONTHS. TELL US WHEN THE SHAREHOLDERS' LOANS ARE DUE AND DISCLOSE THIS INFORMATION IN YOUR FINANCIAL STATEMENT NOTES. RESPONSE: There was no written agreement in existence for the loan from shareholders. However, it was verbally confirmed by the shareholders that they would not call for the Company to repay the loan for at least two years. 74. CONSIDERING YOUR DISCLOSURE THAT LOANS FROM SHAREHOLDERS ARE INTEREST FREE TELL US WHY INTEREST WAS NOT IMPUTED. EXPLAIN WHY, AS DISCLOSED IN NOTE 5, THE CARRYING AMOUNT OF THE SHAREHOLDERS' LOANS APPROXIMATES FAIR VALUE CONSIDERING THESE LOANS ARE INTEREST FREE. WE REFER YOU TO APB 21 AND SFAS 107. RESPONSE: The Company believes that no imputation of interest is required, since the shareholder loans were made in cash and have no fixed repayment dates. Since the loans are to be repaid in cash and no discount is deemed appropriate, the Company believes that the fair value is equivalent to the face amount of the notes. The filing has been revised to explain why the carrying value of the shareholders' loans approximates fair value. See Note 5 on page FF-17. NOTE 7, COMMON STOCK, PAGE FF-17 75. EXPLAIN HOW YOU HAVE CONSIDERED EITF 00-19 IN DETERMINING THAT WARRANTS ISSUED IN CONNECTION WITH THE PRIVATE PLACEMENT SUBSEQUENT TO THE BALANCE SHEET DATE SHOULD BE CLASSIFIED IN EQUITY. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 24 RESPONSE: The Company does not believe that the warrants are an instrument covered by EITF 00-19, as the exercise price in not variable in nature. NOTE 8. INCOME TAXES, PAGE FF-17 76. REVISE YOUR FILING TO INCLUDE A RECONCILIATION OF THE DIFFERENCES BETWEEN THE STATUTORY TAX RATE AND THE EFFECTIVE INCOME TAX RATE. WE REFER YOU TO PARAGRAPH 47 OF SFAS 109. RESPONSE: Complied. See pages FF-18 and F-19. The filing has been revised to include a reconciliation of the differences between the statutory tax rate and the effective income tax rate. 77. WE NOTE YOUR DISCLOSURE THAT THE COMPANY HAS DETERMINED THAT THE AMOUNT OF DEFERRED TAX ASSETS AND LIABILITIES THAT ARISE AS A RESULT OF TEMPORARY DIFFERENCES IS IMMATERIAL TO THE GROUP. SUPPLEMENTALLY PROVIDE US WITH YOUR ANALYSIS THAT QUANTIFIES THESE DIFFERENCES AS OF EACH BALANCE SHEET DATE. RESPONSE: The temporary differences arise mainly from the difference between the tax-based carrying amounts of plant and equipment and their reported amounts in the financial statements. An analysis that quantifies these differences as of each balance sheet date is set forth below:
2004 2003 2002 ---- ---- ---- HK$ HK$ HK$ ------------------------------------------------------------------------------------------------------------ Tax-based carrying amount of plant and equipment 53,809 33,657 27,626 Carrying amount of plant and equipment as reported in consolidated financial statements 174,999 121,551 84,982 ------------------------------------------------------------------------------------------------------------ Temporary differences 121,190 87,894 57,356 ============================================================================================================ Tax effect on temporary differences at respective statutory tax rates 21,208 15,381 9,176 Percentage to income before provision for income taxes and minority interest 1.00% 28.99% 1.50%
As it is noted, except for the year ended December 31, 2003, the impact of the temporary difference is not significant in comparison to income before provision for income taxes and minority interest. As of December 31, 2004, the cumulative effect of the temporary differences is approximately 1% of income before provision for income taxes and minority interest. Therefore, it is considered that no provision for deferred tax liability is required. Barbara C. Jacobs Assistant Director Securities and Exchange Commission December 9, 2005 Page 25 NOTE 9. OPERATING LEASE COMMITMENTS, PAGE FF-18 78. WE NOTE YOUR DISCLOSURE FOR OPERATING LEASE COMMITMENTS AND THAT IT IS LIMITED TO 2005 AND THEREAFTER. REVISE TO DISCLOSE YOUR OPERATING LEASE COMMITMENTS FOR EACH OF THE FIVE YEARS SUBSEQUENT TO DECEMBER 31, 2004. WE REFER YOU TO PARAGRAPH 16 OF SFAS 13. RESPONSE: Complied. See page FF-19. The filing has been revised to disclose the operating lease commitments for each of the five years subsequent to December 31, 2004. EXHIBITS 79. WE NOTE THAT THROUGHOUT THE FILING YOU HAVE REFERRED TO WHAT APPEAR TO BE SEVERAL MATERIAL AGREEMENTS, INCLUDING YOUR COLLABORATION AGREEMENTS WITH TSINGHUA UNIVERSITY AND THE CHINESE ACADEMY OF SCIENCE, YOUR SOLE DISTRIBUTOR AGREEMENT REGARDING JAPAN, YOUR PARTNERSHIP WITH IBM, YOUR RELATIONSHIPS WITH LARGE VENDORS SUCH AS MICROSOFT AND NOVELL, YOUR RELATIONSHIP WITH EAE PRODUCTIONS AND THE LOAN DOCUMENTS BETWEEN THE COMPANY AND ITS OFFICERS AND DIRECTORS. PLEASE FILE THESE AGREEMENTS AS EXHIBITS TO YOUR NEXT AMENDMENT OR ADVISE. SEE ITEM 601(B)(10) OF REGULATION S-K. ADDITIONALLY, YOU SHOULD FILE ALL AGREEMENTS GOVERNING THE TERMS OF THE SECURITIES HELD BY THE SELLING STOCKHOLDERS, INCLUDING ANY PURCHASE AGREEMENTS, REGISTRATION RIGHTS AGREEMENTS, UNITS OR WARRANTS. SEE ITEM 601(B)(4) OF REGULATION S-K. RESPONSE: Complied. See Item 16 on page II-2. The only agreements that govern the terms of the securities held by the selling shareholders are the warrants and form of subscription agreement, which are being filed as exhibits. Please contact the undersigned with any additional questions or comments you may have. Sincerely, /s/ FAY M. MATSUKAGE Fay M. Matsukage Enclosures Cc: Titanium Group Limited Zhong Yi (Hong Kong) C.P.A. Company Limited -----END PRIVACY-ENHANCED MESSAGE-----