-----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, B1nbnFEfg9OREunXV1yXHUXRIWOimDE16uyDvrPNwkwfs2o7oc/PedENJx2UUV1y lzB33T4u3YY9gI5XTmfGEA== 0000949353-06-000054.txt : 20061019 0000949353-06-000054.hdr.sgml : 20061019 20060126125928 ACCESSION NUMBER: 0000949353-06-000054 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20060126 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: 06552771 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 s-1_amd2.txt TITANIUM S-1 AMD 2 As filed January 26, 2006 File No. 333-128302 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 2 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 January 26, 2006 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 43 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. ____________, 2006 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...............................................................10 USE OF PROCEEDS...............................................................10 SELECTED FINANCIAL DATA.......................................................10 HISTORICAL EXCHANGE RATES.....................................................11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL.............................11 CONDITION AND RESULTS OF OPERATIONS...........................................11 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.................................18 ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................18 BUSINESS......................................................................18 MANAGEMENT....................................................................28 EXECUTIVE COMPENSATION........................................................31 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................33 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................34 TAXATION......................................................................36 DESCRIPTION OF SECURITIES.....................................................37 SELLING STOCKHOLDERS..........................................................43 PLAN OF DISTRIBUTION..........................................................46 LEGAL MATTERS.................................................................47 EXPERTS.......................................................................48 ADDITIONAL INFORMATION........................................................48 REPORTS TO STOCKHOLDERS.......................................................48 INDEX TO FINANCIAL STATEMENTS.................................................49 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 network of expertise, comprising over 30 IT practitioners and researchers, enabling us to provide what we believe are quality biometrics products and professional services. In order to ensure the sustainability of technological development, 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 both United States Dollars (US$) and Hong Kong Dollars (HK$)) is derived from the unaudited financial statements for the nine-month period ended September 30, 2005 and the fiscal years ended December 31, 2004, 2003 and 2002 for Titanium Technology, included elsewhere in this offering memorandum. In June 2005, we acquired 100% ownership of Titanium Technology, but did not have 3 any operations prior to the acquisition. Accordingly, for accounting purposes, the historical financial statements of Titanium Technology will be the historical financial statements of the company. We have prepared the financial statements in accordance with generally accepted accounting principles. Our results of operations for any interim period do not necessarily indicate our results of operations for the full year. You should read this summary financial data in conjunction with "Management's Discussion and Analysis or Plan of Operation," "Business," and our financial statements. As stated in United States dollars:
INCOME STATEMENT DATA: NINE MONTHS YEAR ENDED DECEMBER 31, ENDED ----------------------------------------------------- SEPTEMBER 30, 2005 2004 2003 2002 (US$) (US$) (US$) (US$) ---------------------------------------------------------------------- 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: SEPTEMBER 30, DECEMBER 31, ----------------------------------------------------- 2005 2004 2003 2002 (US$) (US$) (US$) (US$) ---------------------------------------------------------------------- Working capital $ 675,522 $ 236,560 $ 112,106 $ 104,727 Total assets $ 1,528,459 $ 738,252 $ 503,562 $ 331,051 Long-term debt $ - $ 182,051 $ 120,086 $ - Stockholders' equity $ 1,044,974 $ 388,948 $ 131,055 $ 120,809
As stated in Hong Kong dollars:
INCOME STATEMENT DATA: NINE MONTHS YEAR ENDED DECEMBER 31, ENDED ----------------------------------------------------- SEPTEMBER 30, 2005 2004 2003 2002 (HK$) (HK$) (HK$) (HK$) ---------------------------------------------------------------------- Revenues $ 9,913,869 $ 6,349,252 $ 4,357,694 $ 4,267,341 Net income $ 598,548 $ 2,013,993 $ 80,908 $ 521,046 Net income per common share (proforma)(1) $ .01 $ .04 $ .00 $ .01 BALANCE SHEET DATA: SEPTEMBER 30, DECEMBER 31, ----------------------------------------------------- 2005 2004 2003 2002 (HK$) (HK$) (HK$) (HK$) ---------------------------------------------------------------------- Working capital $ 5,269,066 $ 1,845,168 $ 874,425 $ 816,872 Total assets $ 11,921,982 $ 5,758,362 $ 3,927,784 $ 2,582,201 Long-term debt $ - $ 1,420,000 $ 936,667 $ - Stockholders' equity $ 8,150,798 $ 3,033,792 $ 1,022,226 $ 942,309 - ------------------------
(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 that discuss the material risks related to an investment in us, 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. 4 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. 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. The following two customers were each over 10%: Information Security One (HK) Ltd. and Beacon Base Software Ltd. accounted for 20.0% and 12.7% of our revenues, respectively. 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. 5 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. 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. 6 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 US$5.00 per share or whose tangible net worth is less than US$2,000,000 (HK$15,600,000). 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 US$0.50 per share through June 30, 2008. The warrants are redeemable at US$0.001 per warrant if the common stock is then listed on a recognized stock exchange or trading at US$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 US$0.50 per share. As the market price of the stock exceeds US$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 obtain financing through the sale of our stock, but only at prices below US$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. 7 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 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. 8 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. 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 Only the resale of the shares purchased in the private placement and certain shares owned by existing shareholders is being registered. The selling shareholders have set an offering price of US$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 and that this may be the best indicator or market price. They may not have perceived an increase in value of their shares since the date of purchase. 9 The shares issuable upon exercise of the warrants sold in the private placement are not being registered. Most of the selling shareholders have warrants to purchase common stock exercisable at US$0.50 per share, but the warrants are exercisable until June 30, 2008. As the warrants are exercisable for some period of time, they may not have an urgency to exercise the warrants in the near future. DIVIDEND POLICY To date, we have not declared or paid any dividends on our common stock. We do not intend to declare or pay any dividends on our common stock in the foreseeable future, but rather to retain any earnings to finance the growth of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual and legal restrictions and other factors the board of directors deems relevant. USE OF PROCEEDS We will not receive any of the proceeds from the selling stockholders of shares of our common stock. However, we may receive the sale price of any common stock we sell to the selling stockholders upon exercise of the warrants. We expect to use the proceeds received from the exercise of warrants, if any, for general working capital purposes. SELECTED FINANCIAL DATA The following summary financial data (expressed in both United States Dollars (US$) and Hong Kong Dollars (HK$)) is derived from the unaudited financial statements for the nine-month period ended September 30, 2005 and the fiscal years ended December 31, 2004, 2003 and 2002 for Titanium Technology, included elsewhere in this offering memorandum. In June 2005, we acquired 100% ownership of Titanium Technology, but did not have any operations prior to the acquisition. Accordingly, for accounting purposes, the historical financial statements of Titanium Technology will be the historical financial statements of the company. We have prepared the financial statements in accordance with generally accepted accounting principles. Our results of operations for any interim period do not necessarily indicate our results of operations for the full year. You should read this summary financial data in conjunction with "Management's Discussion and Analysis or Plan of Operation," "Business," and our financial statements. As stated in United States dollars:
INCOME STATEMENT DATA: NINE MONTHS YEAR ENDED DECEMBER 31, ENDED ----------------------------------------------------- SEPTEMBER 30, 2005 2004 2003 2002 (US$) (US$) (US$) (US$) ---------------------------------------------------------------------- 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: SEPTEMBER 30, DECEMBER 31, ------------------------------------------------------ 2005 2004 2003 2002 (US$) (US$) (US$) (US$) ----------------------------------------------------------------------- Working capital $ 675,522 $ 236,560 $ 112,106 $ 104,727 Total assets $ 1,528,459 $ 738,252 $ 503,562 $ 331,051 Long-term debt $ - $ 182,051 $ 120,086 $ - Stockholders' equity $ 1,044,974 $ 388,948 $ 131,055 $ 120,809 10 As stated in Hong Kong dollars: INCOME STATEMENT DATA: NINE MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------------------------------------ SEPTEMBER 30, 2005 2004 2003 2002 (HK$) (HK$) (HK$) (HK$) ----------------------------------------------------------------------- Revenues $ 9,913,869 $ 6,349,252 $ 4,357,694 $ 4,267,341 Net income $ 598,548 $ 2,013,993 $ 80,908 $ 521,046 Net income per common share (proforma)(1) $ $ $ $ .01 .04 .00 .01 BALANCE SHEET DATA: SEPTEMBER 30, DECEMBER 31, ------------------------------------------------------ 2005 2004 2003 2002 (HK$) (HK$) (HK$) (HK$) ----------------------------------------------------------------------- Working capital $ 5,269,066 $ 1,845,168 $ 874,425 $ 816,872 Total assets $ 11,921,982 $ 5,758,362 $ 3,927,784 $ 2,582,201 Long-term debt $ - $ 1,420,000 $ 936,667 $ - Stockholders' equity $ 8,150,798 $ 3,033,792 $ 1,022,226 $ 942,309 - --------------------------- (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 are 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. If that happens, the research and development costs are never recouped. Titanium Technology 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. For example, during the year ended December 31, 2002, revenues were US$547,095 (HK$4,267,341) and the gross profit was US$295,190 (HK$2,302,481). This amount was sufficient to sustain our selling, general and administrative expenses of US$143,299 (HK$1,117,729), as well as our research and development costs of US$84,936 (HK$662,500). As compared to companies located in the United States, we believe that we have lower personnel costs, which are our primarily costs of doing business. We believe that this has been the main reason for our having generated net income for the last three fiscal years. 11 While we have been able to develop proprietary products mainly based on proceeds from sales revenues and from subsidy income received from the Hong Kong government, we believe that external funding from investors can stimulate and accelerate product development and marketing 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 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 US$1 billion, but is expected to grow due to concerns about identity theft and security. Third, the company has achieved what it believes to be a major breakthrough in its technology recently. In April 2005, we developed a facial recognition engine that achieves a very low false acceptance rate and a very high verification rate. Moreover, we believe that this technology can be utilized in a one-to-many application as well be deployed in all indoor lighting conditions. Based on this developed technology, management believes that the company should try to market its products and services in areas outside of Asia and compete in a larger market. We raised net proceeds of US$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 deliver facial recognition software solutions primarily to commercial and government customers. We recognize revenue when persuasive evidence of a sale arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectibility is reasonably assured. Revenue is classified into project revenue and maintenance revenue. PROJECT REVENUE. Project revenue consists of revenue from sales of products and services. Product revenue mainly consists of sales of digital video recorders, face recognition equipment, our off-the-shelf ProAccess and ProFacer software, ProAccess and ProFacer software keys, and other software products, such as those we distribute for other vendors. Revenue on products is recognized when the customers accept the products. We also provide consulting services primarily to customers primarily in connection with their implementation and use of our products. Revenue from services is recognized as the services are rendered. Expenses on all services are recognized when the costs are incurred. During the three years ended December 31, 2002, 2003 and 2004, we adopted the provisions of Emerging Issues Task Force 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF 00-21 governs how to determine whether separate units of accounting exist in a revenue arrangement with multiple deliverables and, if so, how the arrangement consideration should be allocated among separate units of accounting. When elements such as products and services are contained in a single arrangement, or in related arrangements with the same customer, we allocate revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. The price charged when the element is sold separately generally determines fair value. We enter into contracts with customers who require the production of tailor-made facial recognition solutions. Under these contracts, the first element usually consists of hardware, system design, implementation and training, which is accounted for as equipment and related executory services in accordance with SFAS No. 13. The second element consists of customized software, which is accounted for as a long-term contract in accordance with AICPA Statement of Position 97-2, "Software Revenue Recognition," on a unit of delivery method of measurement. Nonperformance of training, consumables management and support services would prevent receipt of payment for the costs incurred in the customization, design and installation of the system. EITF 00-21 limits the amount of revenue allocable to the customization, design and installation of the system to the amount that is not contingent upon the function of the products. Revenue on these contracts under EITF 00-21 is earned based on, and is contingent upon, the full function of the products. Due to the contingent performance of function of the products, 12 we defer revenue recognition for the system design and installation phase of such contracts, including customized software and equipment, and recognize revenue when we obtain an acceptance certificate from the user. MAINTENANCE REVENUE. We also provide maintenance services primarily to customers purchasing products. There are two types of maintenance contracts: the fixed price maintenance contracts and the one-off maintenance contracts. Revenue from the fixed price maintenance contracts is recorded ratably over the maintenance contract term, while the revenue for the one-off maintenance contracts are recorded when the services are rendered. SALES TO AUTHORIZED DISTRIBUTORS. We also use authorized distributors to resell certain of our products and only the authorized distributors are allowed to resell those products. We require the authorized distributors to purchase the products and then sell through the authorized distributors' own distribution channels to end customers. From our prospective, the authorized distributors are ordinary customers and so the same revenue recognition policy as described above applies. The sales prices to distributors are predetermined in accordance with the distribution agreements, and are approximately 30% to 40% off the recommended retail prices. Once the products are delivered 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. POST-CONTRACT CUSTOMER SUPPORT. Under the terms of the contracts, we will provide post-contract customer support ("PCS") to the customers for a period of three months free of charge and then enter into maintenance contracts as the discretion of the customers. The nature of the PCS is the provision of a technical support telephone hotline to the customers. As the usage of this hotline is infrequent, we did not maintain any specific personnel to operate this hotline. As a result, the cost of the PCS during the free support period is insignificant and no reserve for the cost of PCS is required. 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 US$152,010 (HK$1,185,678) and US$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 US$30,402 (HK$237,135) and US$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. The HKSAR government has set up an Innovation and Technology Fund in the Hong Kong Special Administration Regions to support projects that contribute to innovation and technology advancements in industry. The Small Entrepreneur Research Assistance Programme (SERAP) under the Innovation and Technology Fund provides funding support on a matching basis to small companies with promising research ideas to assist them in developing their technology through to successful commercialization. When applying for funding, the applicant must submit a completed proposal that details the specifications of the project's technology, a marketing plan, the expected budget of the project and the personnel involved in the project. The funding is subject to a ceiling of US$256,410 (HK$2,000,000) per project. In addition to the government funding, the applicant must contribute capital to the project on a dollar-for-dollar matching basis. The matching funds from the applicant can be in the form of money or in any other resources which are essential to the project. Under most circumstances, the application will be processed within two months after receiving all the 13 required information in connection to the project. Upon approval, the government will then release the funding to the applicant according to a fixed payment schedule as stipulated in the Phase Fund Agreement. The SERAP program involves two phases. Phase 1 will last for around six months and upon successful completion of Phase 1, Phase 2 will take the project forward for not more than 18 additional months. The applicant will be required to refund the HKSAR government's contribution to the government if revenue shall be derived from the services or products attributable to the deliverables or the applicant shall fail to enter into an agreement for the Phase 2 project. In our case, all of our projects have entered into a Phase 2 Fund Agreement. On successful commercialization of the project, the intellectual property rights belong to the applicant while the government is entitled to share 5% of the gross revenue earned from any activities in connection with the project as a royalty fee until the government has been repaid the amount that it funded for the project. There is no time limit to repay this amount. During the three years ended December 31, 2004, we have submitted several grant applications and have received a total of US$320,787 (HK$2,502,139). We have contributed US$296,066 (HK$2,309,313) on the dollar-for-dollar matching part of the program 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 to the 5% royalty fee on the gross revenue earned from any activities in connection with the project. We paid royalty fees of US$4,186 (HK$32,647) and US$4,427 (HK$34,532) for the 2003 and 2004 fiscal years, respectively. 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. As discussed above, we were able to generate sufficient revenues during 2002 to sustain company operations and research and development efforts. Three customers accounted for approximately 69.25% of our sales. The receipt of grant and subsidy income in the amount of US$11,559 (HK$90,159) did not materially impact the results of operations. We launched the ProAccess FaceOK in the third quarter of 2003. Project revenues decreased slightly US$13,985 (HK$109,080) to US$490,524 (HK$3,826,091) in 2003 from US$504,509 (HK$3,935,171) in 2002 because we devoted a substantial amount of our resources to the development of this new product and fulfilling our operational needs. As a result, our marketing efforts suffered sales did not increase significantly because the product launch occurred late in the year. 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. 14 Maintenance revenue increased by 60.0% from US$42,586 (HK$332,170) in 2002 to US$68,154 (HK$531,603) in 2003, due to the increased amount of completed installations. As a percentage of all revenues, maintenance revenue was 7.8% in 2002 and 12.12% in 2003. This resulted in an overall slight increase in revenue in 2003, as compared to 2002. Selling, general and administrative expenses increased from US$143,299 (HK$1,117,729) in 2002 to US$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 US$84,936 (HK$662,500) in 2002 to US$89,092 (HK$694,918) in 2003. The receipt of grant and subsidy income of US$151,594 (HK$1,182,435) in 2003, as compared to US$11,559 (HK$90,159) did not offset these increased expenditures in 2003. Accordingly, our net income decreased from US$66,801 (HK$521,046) in 2002 to US$10,373 (HK$80,908) in 2003. FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2003. During the 2004 fiscal year, we had the entire year to market our ProAccess FaceOK, which had obtained recognition at Comdex, an acronym for Computer Dealer's Exhibition, which was a computer and information technology exposition held in Las Vegas, Nevada. Accordingly, project revenues increased by US$250,636 (HK$1,954,958) (51.1%) comparing the 2004 fiscal year to the 2003 fiscal year, due to the beginning of significant sales of ProAccess FaceOK and other products we had developed. 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 US$145,479 (HK$1,134,736) to US$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 recognition and did not have to bid as competitively to secure contracts for projects. Maintenance revenue increased by 6.9% from US$68,154 (HK$531,603) in 2003 to US$72,847 (HK$568,203) in 2004, as with more completed installations, there was greater demand for maintenance contracts. As a percentage of all revenues, maintenance revenue was 12.2% in 2003 and 8.9% in 2004, primarily due to the significantly greater project revenues in 2004. Selling, general and administrative expenses decreased from US$299,002 (HK$2,095,078) in 2003 to US$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 US$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 US$6,040 (HK$47,110) more in grant and subsidy income in 2004 than in 2003. Accordingly, Titanium Technology generated net income of US$258,204 (HK$2,013,993) for 2004, as compared to net income of US$10,373 (HK$80,908) for 2003. NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004. Project revenues increased by US$753,580 (HK$5,877,924) (178.7%) 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 project revenues increased slightly in 2005 to 32.9% from 30.7% in 2004 because of the improving economic conditions in the region that enabled us to charge a higher price to our customers. Gross margin on project revenues in terms of dollars increased to US$386,632 (HK$3,015,732) from US$129,512 (HK$1,010,190) due to the increase in sales revenues. As a percentage of all revenues, maintenance revenue was 14.6% in 2004 and 7.5% in 2005, but increased overall in terms of dollars. 15 Selling, general and administrative expenses increased from US$264,228 (HK$2,060,975) in 2004 to US$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 US$70,982 (HK$553,660), which consisted primarily of grant and subsidy income, decreased from US$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 US$76,737 (HK$598,548) for the nine months ended September 30, 2005, as compared to US$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 US$236,560 (HK$1,845,168), as compared to US$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 US$280,834 (HK$2,190,499), while investing activities and financing activities used cash of US$283,428 (HK$2,210,734) and US$25,641 (HK$200,000), respectively. Included in the amount of cash provided by operating activities was a shareholders' loan of US$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 US$283,428 (HK$2,210,734) used for investing activities, US$267,804 (HK$2,088,869) was used for product development costs. In comparison, 2003 operating activities and financing activities provided cash of US$168,132 (HK$1,311,428) and US$27,778 (HK$216,667), respectively, while investing activities, primarily product development costs, used cash of US$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 US$152,010 (HK$1,185,678) and US$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 US$117,949 (HK$920,000). The US$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. AS OF SEPTEMBER 30, 2005. Titanium Technology had working capital of US$675,522 (HK$5,269,066) at September 30, 2005, as compared to US$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 US$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. 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. Accordingly, the net proceeds are being used as follows: o approximately US$300,000 (HK$2,340,000) for legal, accounting, and corporate consulting services necessitated by this plan of becoming a public company, such as the legal fees for preparing and filing the registration statement of which this prospectus is a part, the cost of auditing our financial statements, and guidance and advice about the stock markets in the United States; o approximately US$125,000 (HK$975,000) for setting up our Beijing office for research and development and marketing efforts in China; and o approximately US$110,000 (HK$858,000) for the purchase of tooling for the production of the ProAccess FaceGuard product. For the nine months ended September 30, 2005, operating activities used US$56,388 (HK$440,117), while US$119,056 (HK$928,641) was used in investing activities, primarily for the acquisition of plant and equipment. We used US$100,133 (HK$781,041) primarily to renovate our newly leased offices and US$18,923 (HK$147,600) 16 for product development costs. Financing activities, primarily the private placement discussed above, provided cash of US$532,863 (HK$4,156,333). In addition, non-cash financing activities included debt forgiveness by shareholders, who agreed to do so, so that a better cash position could be maintained. The amount of the forgiveness (net of loans made to the shareholders) was contributed to the capital of the Company and aggregated approximately US$44,479 (HK$346,935). In comparison, for the nine months ended September 30, 2004, US$151,034 (HK$1,178,065) was provided by operating activities, but US$177,490 (HK$1,384,420) was used for investing activities, of which US$162,438 (HK$1,267,019) was used for product development costs. We also used US$19,231 (HK$150,000) to repay a long-term bank loan. At September 30, 2005, we had contractual obligations as set forth below, as stated in United States dollars (US$):
- ---------------------------------------------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD ------------------------------------------------------------------ LESS THAN MORE THAN 5 TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS (US$) (US$) (US$) (US$) (US$) - ---------------------------------------------------------------------------------------------------------------------- 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 $91,135 Nil Nil - ----------------------------------------------------------------------------------------------------------------------
These amounts stated in Hong Kong dollars (HK$) are as follows:
- ---------------------------------------------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD ------------------------------------------------------------------ LESS THAN MORE THAN 5 TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS (HK$) (HK$) (HK$) (HK$) (HK$) - ---------------------------------------------------------------------------------------------------------------------- Long-Term Debt Obligations Nil Nil Nil Nil Nil - ---------------------------------------------------------------------------------------------------------------------- Capital (Finance) Lease Obligations Nil Nil Nil Nil Nil - ---------------------------------------------------------------------------------------------------------------------- Operating Lease Obligations $817,477 $247,026 $710,853 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 $817,477 $247,026 $710,853 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 US$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 17 US$25,000 (HK$192,000) was 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. In light of our working capital of US$675,522 (HK$5,269,066) at September 30, 2005, we believe that we have current and available capital resources sufficient to fund planned operations for a period of not less than twelve months. Our current "burn" rate is approximately $57,700 (HK$450,000) per month, without giving any effect to any revenues that we generate. We believe we will be able to fund the expenditures described above 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 US$1,026,000 (HK$8,000,000), as compared to approximately US$256,000 (HK$2,000,000) at December 31, 2004. We expect that approximately US$513,000 (HK$4,000,000) will not be filled by December 31, 2005. We expect that the above "burn" rate will increase by approximately 10% towards the end of 2006, as we plan to increase research and development efforts. 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. Most of our investors in our recently completed private placement are United States citizens. We believe that a having a corporate jurisdiction located in closer proximity to the United States made the investors feel more at ease than one located in Asia. BVI was selected as a compromise, as its laws, which are under the British system, are similar to those of Hong Kong. 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 as we have developed and sold systems 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. 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 18 acceptance rate is very low regardless of the lighting condition, and lower 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 digital (Charge Coupled Device (CCD)/Complementary Metal-Oxide-Semiconductor (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. 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 have taken innovative recognition algorithms and, using advanced methods of software engineering, turned core mathematical modules into practical applications. We believe that our proprietary mathematical algorithms, together with optimized hardware peripherals, enable our customers to cost-effectively achieve solutions that fit their requirements in terms of accuracy 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 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 delivered biometrics security products, consulting services, and systems integration services to various government offices, 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 select sets of blocks, or features, in each face that differ from other faces in a data repository with an outstanding processing speed. 19 Based on this innovative face recognition technology, our research and development group 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 various situations. 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, and performing both "one-to-one" verification and "one-to-many" identification. Independent developers can use Ti-Face SDK as a tool to build custom applications based on our proprietary face detection and recognition technology. Examples of applications include physical access control solutions that can integrate with reporting modules and alarm systems, logical access control solutions that can integrate with existing authentication systems and replace the use of passwords, and ticketing systems that can insure that a single ticket is not being shared by multiple customers. 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. We intend to develop additional modules on face recognition. 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. 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 third quarter of 2003; over 10,000 licenses sold to customers. - ------------------------------------------------------------------------------------------------------------------------- ProAccess FaceGuard Facility entry First versions completed in third quarter of 2005 and being marketed; approximately 60 systems installed. - ------------------------------------------------------------------------------------------------------------------------- ProAccess FaceAttend Time attendance recorder First versions completed third quarter of 2005 and being marketed; approximately 30 systems installed. - ------------------------------------------------------------------------------------------------------------------------- ProAccess FaceMobile Mobile computing such as PDA devices This product is under development. and mobile phones - -------------------------------------------------------------------------------------------------------------------------
PROACCESS FACEOK (PROFESSIONAL & ENTERPRISE). ProAccess FaceOK was designed to fulfill 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 20 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. We also have a module that focuses on web Single-sign on technology, which is integrated in FaceOK. 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 the small office and home office or small to medium-sized enterprises. The product is currently available in four language versions: English, traditional Chinese, simplified Chinese, and Japanese. 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" has been designed to not only provide secure access to buildings, but to also detect and identify 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. The proprietary algorithm utilized in the software is designed in such a way that the 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 we believe 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. 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. ProAccess FaceGuard is primarily being used by commercial customers for physical access controls to areas such as office premises, data centers, and server rooms. PROACCESS FACEATTEND. ProAccess FaceAttend is a stand-alone, face recognition- based time attendance recorder. It is suitable for medium and large offices, branches, factories, or other sites. ProAccess FaceAttend provides the an accurate data collection solution 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 identification technology. Using 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 eliminates "buddy-punching," the practice of employees punching in or out for other employees who are not present at work. 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, and specifically the fact that the Southern part of China houses the largest network of factories in Asia, based on gross domestic product statistics, we believe that we have a significant marketing opportunity in this region and perhaps a distinct advantage of physical and cultural proximity. To date, purchasers have installed this product primarily in factories for time attendance purposes. 21 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. 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. Digital video recording technology, coupled with our biometrics systems, enable automated real time face recognition. 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. 22 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.
- ----------------------------------------------------------------------------------------------------------------------- PRODUCT APPLICATION STATUS - ----------------------------------------------------------------------------------------------------------------------- ProFacer iDVR DVR system with face capture Deployed in four branches of the People's Bank of China - ----------------------------------------------------------------------------------------------------------------------- ProFacer iWatchGuard Automatic full-time face recognition Deployed in four branches of the People's Bank of China, a casino in Macao, and NTT Group in Japan - ----------------------------------------------------------------------------------------------------------------------- ProFacer iMugShot Image to image matching Deployed in an agency of the Hong Kong government. - ----------------------------------------------------------------------------------------------------------------------- ProFacer iDControl Live person to image matching Deployed in two government locations. - -----------------------------------------------------------------------------------------------------------------------
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. The ProFacer iDVR product was installed in the Nanning branch of GuangXi Peoples' Bank of China in March 2005 and in September 2005, we installed the product in three other branches of GuangXi People's Bank of China in the cities of BaiSe, DaiXing, and PinGuo. While this installation began as a pilot project in order to test and further refine the product, the bank paid for the product and did not simply allow the product to be installed and tested as an accommodation. 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 product 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 23 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 him/her 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. 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. As a digital security services provider, we offer 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 24 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. Our distributors purchase products from us at prices specified on our Distributor Price List in effect from time to time. The distributors sell to resellers or end-users with a mark-up in price and the profit generated from the mark-up is the compensation for the distributors. The sales prices to distributors 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. Our distributor agreement and reseller agreement dictate the terms and conditions of the relationship with us, such as pricing, warranties, exclusivity or non-exclusivity, and term. 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). 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. At times, our customers may require software that is not within Titanium's product range, but is available from these large software manufacturers and vendors. Most of the software consists of security-related products. We buy software from these vendors to resell to our customers. In most cases, we perform a certain amount of customization and system integration services with respect to the purchased software. In March 2003, Titanium Technology was selected by the HKSAR government as a supplier of PC/LAN software in Category C to all departments in HKSAR government for three years under a bulk tender. The bulk tender is an initiative from the HKSAR government with the purpose of streamlining and insuring the process and quality of the procurement of all information technology products by the government. The government selected companies that it believed to be qualified for specific categories of products. Category C is software applications. This means that the government departments have to purchase from the selected companies and that Titanium 25 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 are authorized resellers for software marketed by Microsoft, Novell, SiS International Ltd, JOS, and others. We sell to end users and we can also purchase their products at discounted prices from the suggested retail prices. 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 US$1,026,000 (HK$8,000,000), as compared to approximately US$256,000 (HK$2,000,000) at December 31, 2004. We expect that approximately US$513,000 (HK$4,000,000) will not be filled by December 31, 2005. 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. 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 26 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, US$89,092 (HK$694,918) and US$84,936 (HK$662,500), respectively, on research and development activities. 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. 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 US$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 US$25,000 (HK$192,000) was 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. 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. 27 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 US$3,050) and a monthly management fee and air conditioning charge of HK$12,863 (approximately US$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. 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 28 NAME AGE POSITION Patrick Lo 34 Director of Business Development of Titanium Technology Eric Wong 51 Consultant 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 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. Ebiz Incubation was a Hong Kong private equity fund for incubation and investment in technology-related ventures. From November 1998 to January 2000, he was the assistant marketing manager for Ball Asia Pacific Ltd., a joint venture of Ball Corporation, a publicly-held company based in Broomfield, Colorado. Ball Asia Pacific Ltd. supplies metal beverage containers in the PRC and Hong Kong. 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. His role was to lead the MSRA group to develop 29 facial recognition technologies. 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. PATRICK LO, DIRECTOR OF BUSINESS DEVELOPMENT OF TITANIUM TECHNOLOGY. Mr. Lo joined Titanium Technology in May 2003. From January 2001 to March 2003, he worked for Information Security One, a Hong Kong company that distributes security products in China, such as intrusion detection systems, firewalls, and log analysis tools. As the director for enterprise security services, he was responsible for sales operations in Hong Kong and China. ERIC WONG, CONSULTANT. Mr. Wong has over 25 years of experience in the areas of production development, sales and marketing in Southeast Asia and Europe. Accordingly, we use Mr. Wong as a consultant. For the past five years, he has been involved primarily as the chairman of BTC Consultant Co., Ltd., a company incorporated in Hong Kong that provides professional consultancy and business services with regard to foreign investment in China. It focuses on assisting multinational companies in obtaining commercial opportunities offered by China's consumer market. 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. Additionally the employment agreements with members of management state that any and all industrial property rights, including patents, to which they are or may be entitled or which are created as a result of their services under their employment agreements belong to and are the exclusive property of Titanium Technology. The 30 employment agreements also contain a non-compete provision that prohibits them from engaging or being interested in any capacity in any business whose activities are substantially similar to or compete with any of the business activities of Titanium Technology or any of its subsidiaries, being involved in any projects or products handled or produced by Titanium Technology or its subsidiaries, or dealing with any existing customers of Titanium Technology or its subsidiaries. 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 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 AS SHOWN IN UNITED STATES DOLLARS (US$)
- ----------------------------------------------------------------------------------------------------------------------- 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- $-0- - -----------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE AS SHOWN IN HONG KONG DOLLARS (HK$)
- ----------------------------------------------------------------------------------------------------------------------- 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 $138,996 $-0- $-0- $-0- -0- $-0- $-0- 2003 $323,996 $-0- $-0- $-0- -0- $-0- $-0- 2004 $237,994 $-0- $-0- $-0- -0- $-0- $-0- - ----------------------------------------------------------------------------------------------------------------------- Humphrey Cheung 2002 $138,996 $-0- $-0- $-0- -0- $-0- $-0- 2003 $459,997 $-0- $-0- $-0- -0- $-0- $-0- 2004 $400,000 $-0- $-0- $-0- -0- $-0- $-0- - ----------------------------------------------------------------------------------------------------------------------- Billy Tang 2002 $138,996 $-0- $-0- $-0- -0- $-0- $-0- 2003 $459,997 $-0- $-0- $-0- -0- $-0- $-0- 2004 $400,000 $-0- $-0- $-0- -0- $-0- $-0- - -----------------------------------------------------------------------------------------------------------------------
31 - ------------------- (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 US $2,564 (HK$20,000) for Mr. Ma, US$3,846 (HK$30,000) for Mr. Cheung, and US$3,846 (HK$30,000) 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 (HK$60,000) 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 (HK$180,000). 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. 32 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. 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) - -------------------- 33 (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 through an indirect 51% ownership in Golden Mass. Humphrey Chung and Billy Tang each own 19% of Golden Mass but do 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. 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 through their ownership of Golden Mass Technologies Ltd. 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 products and consulting services relating to system development for customized accounting software to Ericorps Creation (HK) Limited in the amounts of US$34,204 (HK$266,791) for products, US$105,874 (HK$825,552) for products, and US$64,102 (HK$500,000) for system development services, 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. We paid for these expenses as an accommodation, since Golden Mass does not maintain a bank account in Hong Kong. The amounts paid were US$705 (HK$5,500), US$705 (HK$5,500) and US$782 (HK$6,100) for the years ended December 31, 2004, 2003 and 2002, respectively. This practice has ceased effective January 1, 2006. 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 amounts paid to Humphrey Cheung for this purpose were US$110,356 (HK$860,778) and US$59,710 (HK$465,737) during the years ended December 31, 2004 and 2003, respectively. 34 The following table sets forth the advances and repayments, as stated in Hong Kong dollars (HK$):
Humphrey Golden Mass Total Cheung Cash Non-cash HKD HKD HKD - ------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 2002 - - Personal expenses paid on behalf x 19,434 6,100 25,534 Unpaid share capital x - 360,000 360,000 - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2002 19,434 366,100 385,534 Loan to director for PRC subsidiary expenses x 465,737 - 465,737 Repayment x (48,441) - (48,441) Personal expenses paid on behalf x - 5,500 5,500 - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2003 436,730 371,600 808,330 Loan to director for PRC subsidiary expenses x 674,225 - 674,225 Repayment x (79,370) - (79,370) Share capital paid up by set-off with - (360,000) (360,000) shareholder's loan x Personal expenses paid on behalf x - 5,500 5,500 - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2004 1,031,585 17,100 1,048,685 Loan to director for PRC subsidiary expenses x 860,778 - 860,778 Other advances x 30,869 - 30,869 Personal expenses paid on behalf x - 6,000 6,000 Amount setting off against "Amount due to related parties" x (1,649,441) - (1,649,441) Amount setting off against "Shareholders' Loan" x (273,791) (23,100) (296,891) - ------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 2005 - - - ========================================================================================================================
AMOUNTS DUE TO RELATED PARTIES In 2003, Johnny Ng, Billy Tang, and Goldford Consultancy Limited ("Goldford") advanced US$37,190 (HK$290,082), 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 US$27,025 (HK$210,797). During the nine months ended September 30, 2005, Johnny Ng and Billy Tang loaned us US$198,376 ($1,547,333) and we repaid them US$13,934 (HK$108,689), leaving a balance of US$211,467 (HK$1,649,441). This amount, together with the shareholders' loans, was applied in full against amounts due from related parties. The following table sets forth the movement of the amounts due to related parties in Hong Kong dollars (HK$):
Nine months ended September 30, December 31, 2005 2004 2003 2002 (HK$) (HK$) (HK$) (HK$) ------------------------------------------------------------------- Balance brought forward $ 210,797 $ 290,085 $ 194,265 $ 4,716 Advances to us during the year 1,547,333 441,512 632,957 408,404 Repayment by us during the year (108,689) (520,800) (537,137) (218,855) Amount offset against amounts due from related parties (1,649,441) - - - ------------------------------------------------------------------- Balance carried forward $ - $ 210,797 $ 290,085 $ 194,265 ===================================================================
35 SHAREHOLDERS LOANS In 2003 and 2004, Johnny Ng, Billy Tang, and Humphrey Cheung, through Golden Mass, loaned us US$117,949 (HK$920,000) and US$64,102 (HK$500,000), respectively, leaving a balance of US$182,051 (HK$1,420,000) 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 US$44,479 (HK$346,935), which is US$182,051 (HK$1,420,000) less the US$38,063 (HK$296,891) due from related parties and repayment of US$99,509 (HK$776,174), 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 US$38,462 (HK$300,000). None of these individuals received any remuneration for the guarantee. This loan was repaid in 18 monthly installments of US$2,313 (HK$18,042) 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. 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 36 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 US$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. 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. 37
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 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. 38 BRITISH VIRGIN ISLANDS DELAWARE ========================================= ============================================= 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 determining Under British Virgin Islands law, the Under Delaware law, the record date for stockholders and notice of directors of a company may fix the date determining stockholders of record at a meeting notice is given of a meeting as the meeting is a date fixed by the directors record date for determining those shares that is not more than 60 days nor less that are entitled to vote at the than 10days before such meeting. meeting. Written notice of all meetings of The company's articles of association stockholders, stating the time, place and provide that written notice of all date thereof, shall be given no less than meetings of stockholders, stating the 10 nor more than 60 days before the date place, date, time and general nature of on which the meeting is to be held to each the business to be conducted shall be stockholders entitled to vote at such given at least 7 days before the date of meeting. the proposed meeting to those persons 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 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. 39 BRITISH VIRGIN ISLANDS DELAWARE ========================================= ============================================= 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 vacancies The company's articles of association Under Delaware law, vacancies and newly 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. 40 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 British Virgin Islands law, however, sets director. 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 is entitled to be paid by the corporation for expenses incurred in defending any such 41 BRITISH VIRGIN ISLANDS DELAWARE ========================================= ============================================= 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 court 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 the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the US. 42 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 US$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 US$0.001 per warrant if the common stock is then listed on a recognized stock exchange or trading at US$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 US$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. 43
OWNERSHIP AFTER OFFERING -------------------------- 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 (7) 50,000 (2) 25,000 25,000 (4) Robert Hardaway 10,000 (2) 5,000 5,000 (4) Randy and Carol Heller (8) 30,000 (2) 15,000 15,000 (4) Ryan B. Heller and Marlana Heller (8) 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 (9) 250,000 (2) 125,000 125,000 (4) Paul E. Hinson (9) 50,000 (2) 25,000 25,000 (4) Robert S. and Michele B. Hinson (9) 50,000 (2) 25,000 25,000 (4) J Paul Consulting (10) 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 (11) 125,000 (2) 62,500 62,500 (4) 44 OWNERSHIP AFTER OFFERING -------------------------- 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 (12) 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 (13) 50,000 (2) 25,000 25,000 (4) Jeffrey C. Melnick (13) 50,000 (2) 25,000 25,000 (4) Robert A. Melnick (13) 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. (14) 50,000 (2) 25,000 25,000 (4) Edward H. Price, Inc. PS Plan (15) 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 (16) 150,000 (2) 75,000 75,000 (4) H. Howland Silleck (7) 50,000 (2) 25,000 25,000 (4) Silleck Investments, LLC (7) 100,000 (2) 50,000 50,000 (4) David Simas and Jeanne Simas (17) 100,000 (2) 50,000 50,000 (4) David Simas FBO Kasey Simas (17) 20,000 (2) 10,000 10,000 (4) Kyle P. Simas and David L. Simas (17) 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 (18) 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%. 45 (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) Sarah S. Haney and H. Howland Silleck are the adult children of R. Haydn Silleck. R. Haydn Silleck exercises voting and/or dispositive powers over the securities held in the name of Silleck Investments, LLC. (8) Ryan B. Heller is the adult child of Randy and Carol Heller. (9) Paul E. Hinson and Robert S. Hinson are the adult children of Annie S. Hinson and Bob Hinson. (10)Jeff Ploen exercises voting and/or dispositive powers over these securities. (11)Myron Leon exercises voting and/or dispositive powers over these securities. (12)Stella S.F. Liu exercises voting and/or dispositive powers over these securities. (13)Jeffrey C. Melnick and Robert A. Melnick are the adult children of Deborah A. Melnick. (14)Cory Coppage exercises voting and/or dispositive powers over these securities. (15)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. (16)David H. Jackson exercises voting and/or dispositive powers over these securities. (17)Kyle P. Simas and David L. Simas are the adult children of David Simas and Jeanne Simas. Kasey Simas is the minor child of David Simas and Jeanne Simas. (18)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 US$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 46 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. 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 US$105,000. 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. 47 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 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. 48 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 and 2004......................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 49 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 692,859 5,404,298 Deposits 41,607 324,534 ----------------- ----------------- Total current assets 1,159,007 9,040,250 ----------------- ----------------- Property and equipment, at cost, net of accumulated depreciation Cost 140,806 1,098,293 Accumulated depreciation (38,082) (297,036) ----------------- ----------------- 102,724 801,257 ----------------- ----------------- Intangible assets 266,728 2,080,475 ----------------- ----------------- Total assets $ 1,528,459 $ 11,921,982 ================= ================= 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 415,496 3,240,863 ----------------- ----------------- 1,044,974 8,150,798 ----------------- ----------------- $ 1,528,459 $ 11,921,982 ================= =================
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 - Projects Products $ 728,197 $ 5,679,936 $ 2,310,324 Services 446,971 3,486,376 978,064 -------------- -------------- -------------- 1,175,168 9,166,312 3,288,388 - Maintenance 95,841 747,557 563,980 -------------- -------------- -------------- 1,271,009 9,913,869 3,852,368 -------------- -------------- -------------- Cost of sales - Projects Products 168,301 1,312,749 1,607,009 Services 620,235 4,837,831 671,189 -------------- -------------- -------------- 788,536 6,150,580 2,278,198 - Maintenance - - - -------------- -------------- -------------- 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: Basic and diluted income (loss) per common share $ 0.0016 $ 0.0126 $ 0.0128 ============== ============== ============== Weighted average shares outstanding basic and fully 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 (189) (1,477) (1,727) -------------- -------------- -------------- Comprehensive income $ 76,548 $ 597,071 $ 599,422 ============== ============== ==============
See accompanying notes to unaudited consolidated financial statements. F-2 Titanium Group Limited and its Subsidiaries Consolidated Statement of Cash Flows Nine Months Ended September 30, 2005 and 2004 (Original currency expressed in Hong Kong Dollars ("HK$")) (Unaudited)
2005 2005 2004 ------ ------ ------ USD HK$ HK$ Net cash (used in) provided by operating activities $ (56,388) $ (440,117) $ 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) Proceeds from sales of common stock 535,000 4,173,000 - --------------- -------------- -------------- Net cash used in financing activities 532,863 4,156,333 (150,000) --------------- -------------- -------------- Increase (decrease) in cash 357,419 2,787,575 (356,355) Cash and cash equivalents, beginning of period 67,122 523,543 746,205 --------------- -------------- -------------- Cash and cash equivalents, end of period $ 424,541 $ 3,311,118 $ 389,850 =============== ============== ==============
Supplementary information of non-cash investing and financing activities: During the nine months period ended September 30, 2005, the Group entered into the following non-cash transactions: Forgiveness of loan from shareholders $ 346,935 ============= 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 HK$346,935. 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. Expenses of the offering were approximately HK$507,000. 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. 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 the options 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 options 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. As described in Note 13 to the consolidated financial statements, the accompanying 2002, 2003 and 2004 financial statements have been restated to reflect certain reclassifications made to the consolidated statements of income and cash flows. /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 (except for Note 13, as to which the date is January 25, 2006) 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$ (Restated) (Restated) (Restated) (Restated) Revenue - Projects Products $ 559,764 $ 4,366,162 $ 2,874,232 $ 2,905,458 Services 181,396 1,414,887 951,859 1,029,713 -------------- -------------- ------------- -------------- 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 Products (327,225) (2,552,379) (2,006,017) (1,223,467) Services (130,608) (1,018,719) (685,338) (731,967) -------------- -------------- ------------- -------------- (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 ============== ============== ============= ==============
See accompanying notes to consolidated financial statements. FF-4 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (CONTINUED) YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2004 2003 2002 US$ HK$ HK$ HK$ (Restated) (Restated) (Restated) (Restated) 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 ============== ============== ============= ============== 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$ (restated) (restated) (restated) 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) (600,355) (422,796) (25,534) Increase/(decrease) in: Trade and other payables (63,177) (492,784) 74,142 1,327,900 Amount due to related parties (10,166) 280,712 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 1,311,428 605,424 ------------- -------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities - - - (187,727) Disposal of investment securities - - - 170,381 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) (113,880) ------------- -------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES : 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 - ------------- -------------- ------------- ------------- 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$ (restated) (restated) (restated) 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 ============== ============= ============= ============
Supplemental information of non-cash investing and financing activities The Group has the following non-cash investing and financing activities for each of the following years: For the year ended December 31, 2002 Common stock issued by TGL but not contributed by the shareholder $ 390,000 Payment of investment in subsidiary by the shareholder on behalf of TGL (30,000) ----------- Total of non-cash investing and financing activities for the year ended December 31, 2002 $ 360,000 =========== For the year ended December 31, 2003 There was no such activity. For the year ended December 31, 2004 Netting off between the amount due from related parties with the amount due to related parties $ (360,000) ============ 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" or "the Group"). 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$30,000. TTL is engaged in developing products utilizing biometrics technology, licensing of technologies, professional services and project contracting. Listed below are the technology and products which TTL has developed and sold during the year ended December 31, 2004: - Technology Ti-Face Ti-Face is the core face recognition engine developed and implemented by TTL. The technology is capable of selecting intelligently specific areas of the face, such as the eyes or mouth, which in turn are used as distinguishable features for recognition. Products ProAccess Applying TTL's Ti-Face technology, the ProAccess suite is a high-performance, secure, user-friendly solution to enhance the authentication method of physical door, personal computer, and mobile phones by advance recognition technology. FF-9 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 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. 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$1,000,000. TTLSZ was established by TTL and EAE Production HK Limited ("EAE"). TTL owns 92% of the registered capital of TTLSZ while EAE owns the remaining 8%. TTLSZ is responsible for the product development activities for TTL. An analysis of the Group's revenues and net assets by region are as follows: -
2004 2004 2003 2002 ---- ---- ---- ---- US$ 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 Group manages its business on the basis of one reportable segment: the development of products utilizing biometrics technology, licensing of products, bundling sales of own products with third parties software products and the provision of related consulting services. The Group's chief operating decision makers use consolidated results to make operating and strategic decision. For the year ended December 31, 2004, each of Information Security One (Hong Kong) Limited, Beacon Base Software Limited and Hong Kong Academy of Medicine accounted for 20.12%, 12.74% and 9.22% of the Group's turnover for the year respectively. As of December 31, 2004, the accounts receivable for Beacon Base Software Limited amounted to HK$801,550 which was settled in full in the subsequent year. There were no amounts receivable from Information Security One (Hong Kong) Limited and Hong Kong Academy of Medicine. For the year ended December 31, 2003, each of Ericorps Creation (HK) Limited, MTR Corporation Limited and the Labor Department of Hong Kong Special Administrative Region ("HKSAR") accounted for 18.95%, 15.20% and 11.88% of the Group's turnover for the year respectively. As of December 31, 2003, the accounts receivable balances amounted to HK$268, HK$187,630 and HK$1,940 for each of Ericorps Creation (HK) Limited, MTR Corporation Limited and the Labor Department of HKSAR respectively. All of these account receivable balances were settled in full in the subsequent year. For the year ended December 31, 2002, each of MTR Corporation Limited, Hong Kong Academy of Medicine and Ericorps Creation (HK) Limited accounted for 33.38%, 24.15% and 11.72% of the Group's turnover for the year respectively. As of December 31, 2002, the accounts receivable balances amounted to HK$1,424,500, HK$10,500 and HK$273 from each of MTR Corporation Limited, Hong Kong Academy of Medicine and Ericorps Creation (HK) Limited respectively. All of these account receivable balances were settled in full in the subsequent year. The accompanying consolidated financial statements present the consolidated assets, liabilities, results of operations and cash flows of the Company and its subsidiaries (collectively known as "the Group") as if the Company had been in existence throughout the three years ended December 31, 2004. The interest of the Company in the Operating Enterprises was acquired in exchange for shares in the Company subsequent to December 31, 2004. These transactions are considered to be transfer between entities under common control, within the meaning of generally accepted accounting principles in the United States of America ("US GAAP"). Accordingly, the assets and liabilities transferred have been accounted for at historical cost or at their "fair value" at the date of their original acquisition and have been included in the foregoing financial statements as of the beginning of the periods presented. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation The consolidated financial statements include the financial statements of Titanium Group Limited and its subsidiaries and have been prepared in accordance in accordance with US GAAP. All significant inter-company balances and transactions have been eliminated on consolidation. FF-11 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 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. 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$69,417 respectively. Intangible assets Intangible assets primarily consist of completed development cost of ProAccess and ProFacer projects and patents costs. These intangible assets are amortized using the straight-line method over their estimated useful lives of 5 to 20 years. Revenue recognition The Group delivers facial recognition technology and related services primarily to commercial customers and the HKSAR government. The Group recognizes revenue when persuasive evidence of a sale arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectibility is reasonably assured. Revenue is classified into project revenue and maintenance revenue. FF-12 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) PROJECT REVENUE Product revenue on contracts where title to the products pass to the customer mainly consist of sales of OEM digital video recorders, OEM face recognition equipment, the Group's Pro-Access and Pro-Facer software pack, Pro-Access and Pro-Facer software license keys and other Microsoft, Novell, Symantec and IBM OEM software products. Revenue on products is recognized when the products are accepted by the customer. The Group also provides consulting services to its customers primarily in connection with implementation and use of the products. Revenue on time and material services is recognized as the services are rendered. Expenses on all services are recognized when the costs are incurred. During the three years ended December31, 2002, 2003 and 2004, the Group adopted the provisions of Emerging Issues Task Force 00-21, ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES, (EITF 00-21). EITF 00-21 governs how to determine whether separate units of accounting exist in a revenue arrangement with multiple deliverables and, if so, how the arrangement consideration should be allocated among separate units of accounting. When elements such as products and services are contained in a single arrangement, or in related arrangements with the same customer, the Company allocates revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. The price charged when the element is sold separately generally determines fair value. The Group enters into contracts with customers who require the production of tailor-made facial recognition solutions. Under these contracts, the first element usually consists of hardware, system design, implementation and training which is accounted for as equipment and related executory services in accordance with SFAS No. 13. The second element consists of customized software which is accounted for as a long term contract in accordance with AICPA Statement of Position 97-2, SOFTWARE REVENUE RECOGNITION, (SOP 97-2), on a unit of delivery method of measurement. Nonperformance of training, consumables management and support services would prevent receipt of payment for the costs incurred in the customization, design and installation of the system. EITF 00-21 limits the amount of revenue allocable to the customization, design and installation of the system to the amount that is not contingent upon the function of the products. Revenue on these contracts under EITF 00-21 is earned based on, and is contingent upon, the full function of the products. Due to the contingent performance of function of the products, the Group defers revenue recognition for the system design and installation phase of such contracts, including customized software and equipment, and recognizes revenue when a user acceptance certificate is obtained. MAINTENANCE REVENUE The Group also provides maintenance services, primarily to customers purchasing its products. There are two types of maintenance contracts, fixed priced maintenance contracts and one-off maintenance contracts. Revenue from the fixed priced maintenance contracts is recorded ratably over the maintenance contract term, while revenue for one-off maintenance contracts are recorded when the services are rendered. FF-13 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$")) SALES TO AUTHORIZED DISTRIBUTORS The Group also uses authorized distributors to sell certain of its products and only the authorized distributors are allowed to resell those products. The Group requires the authorized distributors to purchase the products and then sell through the authorized distributors' own distribution channel to the end customers. From the Group's perspective, the authorized distributors are ordinary customers and so the same revenue recognition policy above applies. The sales prices to 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 delivered 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. POST-CONTRACT CUSTOMER SUPPORT Under the terms of the contracts, the Group will provide post-contract customer support ("PCS") to the customers for a period of twelve months free of charge and then will at the discretion of the customers to enter into a definite maintenance contracts. The nature of the PCS is the provision of a technical support telephone hotline to the customers and as the usage of this hotline is very seldom, the Group did not maintain any specific personnel to operate this hotline. As a result, the cost of the PCS during the free support period is insignificant and no reserve for the cost of PCS is required. 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 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 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$2,000,000. FF-14 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 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$7.8. FF-15 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 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-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$")) 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-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$")) 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 ============= ============
Aggregate amortization expense for intangible assets was HK$2,000, HK$239,931 and HK$647,731 for the years ended December 31, 2002, 2003 and 2004 respectively. FF-18 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 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. 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$18,042. The financing agreement was secured by personal guarantees given by TTL's directors. The loans from shareholders are unsecured, interest free and are not repayable within the next twelve months. FF-19 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 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. Expenses of the offering were approximately HK$507,000. 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% (2003: 17.5% and 2002: 16%) 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-20 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 through 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$387,000. FF-21 TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 & 2002 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 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. 13. RESTATEMENT OF FINANCIAL STATEMENT The Group determined that the previously filed audited consolidated financial statements for the three years ended December 31, 2002, 2003 and 2004, contained classification errors that required restatement of the Group's Consolidated Statements of Income and Cash Flows. The restatement resulted primarily from changes of classification of the following transactions: 1) correction to classification of amortization of intangible assets, 2) correction to the segmental classification of revenue and cost of sales in the consolidated statement of income, 3) correction to the classification of non-cash investment and financing activities. In addition, modifications have been made to the following financial statement footnotes: Footnote 1 "Organization and Basis of Presentation", footnote 2 "Summary of Significant Accounting Policies", footnote 5 "Fair Value of Financial Instruments", footnote 8 "Income Taxes" and footnote 9 "Operating Lease Commitments". FF-22 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 components of the restatement are summarized in the table below:
AS FILED ADJUSTMENT TO RESTATED RESTATE For the year ended December 31, 2002 CONSOLIDATED STATEMENT OF CASH FLOWS Net cash provided by operating activities $ 245,424 $ 360,000 $ 605,424 Net cash used in investing activities (143,880) 30,000 (113,880) Non-cash transactions - 360,000 360,000 For the year ended December 31, 2003 AS FILED ADJUSTMENT TO RESTATED RESTATE CONSOLIDATED STATEMENT OF INCOME Cost of sales $ 2,454,220 $ 237,135 $ 2,691,355 Selling, general and administrative expenses 2,332,213 (237,135) 2,095,078 For the year ended December 31, 2004 AS FILED ADJUSTMENT TO RESTATED RESTATE CONSOLIDATED STATEMENT OF INCOME Cost of sales $ 2,929,488 $ 641,610 $ 3,571,098 Selling, general and administrative expenses 2,526,414 (641,610) 1,884,804 CONSOLIDATED STATEMENT OF CASH FLOWS Non-cash transaction - - (360,000)
FF-23 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 (stated in US dollars): 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 US$50,000 Section 4(2) stock - ------------------------------------------------------------------------------------------------------------------------ June 2005 Golden Mass 42,000,000 shares of common Shares of capital stock of Section 4(2) Technolo-gies stock Titanium Technology Limited Ltd. - ------------------------------------------------------------------------------------------------------------------------ July 2005 - 64 2,460,000 Units, each Unit US$492,000 aggregate offering Rule 506 August 2005 accredited consisting of one share of price; selling commissions of investors common stock and one common US$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 US$108,000 aggregate offering Regulation S August 2005 Persons consisting of one share of price; selling commissions of common stock and one common US$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 (2) - -------------------------------------------------------------------------------- 10.6 Technical Service Agreement with IBM China/Hong Kong Limited dated October 5, 2004 and Amendment to Supplier Agreement dated December 3, 2004 (2) - -------------------------------------------------------------------------------- 10.7 Technology Partnership and Research & Development Contract with China Scientific Automation Research Center dated June 15, 2005 (2) - -------------------------------------------------------------------------------- 10.8 Technology Research and Development Contract with Tsing Hua University dated November 4, 2005 (2) - -------------------------------------------------------------------------------- II-2 - -------------------------------------------------------------------------------- REGULATION S-K NUMBER EXHIBIT - -------------------------------------------------------------------------------- 10.9 Form of Distributor Agreement - -------------------------------------------------------------------------------- 10.10 Form of Reseller Agreement - -------------------------------------------------------------------------------- 21 Subsidiaries of the registrant (1) - -------------------------------------------------------------------------------- 23.1 Consent of Stevenson, Wong & Co. (2) - -------------------------------------------------------------------------------- 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. (2) Filed as an exhibit to Amendment No.1 to the registration statement on December 9,2005. 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 January 25, 2006. 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) January 25, 2006 - -------------------------------------------- Jason Ma Chairman of the Board of Directors (Principal Financial and Accounting Officer) /s/ DR. JOHNNY NG January 25, 2006 - -------------------------------------------- Dr. Johnny Ng /s/ HUMPHREY CHEUNG Director January 25, 2006 - -------------------------------------------- Humphrey Cheung /s/ BILLY TANG Director December 9, 2005 - -------------------------------------------- Billy Tang
II-4 EX-10 3 exh10-9_distagmt.txt EXH 10-9 AGREEMENT EXHIBIT 10.9 DISTRIBUTOR AGREEMENT Page 1 of 10 [GRAPHIC OMITTED] DISTRIBUTOR AGREEMENT THIS TITANIUM TECHNOLOGY DISTRIBUTOR AGREEMENT ("Agreement"), is entered into as of the EFFECTIVE DATE set forth below by and between Titanium Technology Limited, a Hong Kong Limited Company ("TITANIUM"), having its principal place of business 4/F., BOCG Insurance Tower, 134-136 Des Veoux Road, Central, Hong Kong SAR and the DISTRIBUTOR identified below. This Agreement consists of the following Term Sheet, the Standard Terms and Conditions and the Exhibits attached hereto. TERM SHEET 1. EFFECTIVE DATE: ----------------------------------------------------------- 2. DISTRIBUTOR: ----------------------------------------------------------- Street Address: ----------------------------------------------------------- ----------------------------------------------------------- Company URL: HTTP:// ---------------------------------------------------- Telephone: Facsimile: ------------------------ --------------------- 3. CONTACT PERSON: ----------------------------------------------------------- Title: ----------------------------------------------------------- Telephone: ----------------------------------------------------------- E-mail address: ----------------------------------------------------------- 4. START DATE OF AGREEMENT: ----------------------------------------------------------- 5. END DATE OF AGREEMENT: ----------------------------------------------------------- 6. TERRITORY: ----------------------------------------------------------- 7. INITIAL ORDER VALUE: ----------------------------------------------------------- 8. MINIMUM COMMITMENT: ----------------------------------------------------------- Rev 05122003 TITANIUM ______ DISTRIBUTOR ______ Page 2 of 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TITANIUM TECHNOLOGY LIMITED DISTRIBUTOR By: By: ------------------------------- --------------------------------- Name: Name: ----------------------------- ------------------------------- Title: Title: ---------------------------- ------------------------------ Date: Date: ----------------------------- ------------------------------- WITNESS WITNESS By: By: ------------------------------- --------------------------------- Name: Name: ----------------------------- ------------------------------- Date: Date: ----------------------------- ------------------------------- Rev 05122003 TITANIUM ______ DISTRIBUTOR ______ Page 3 of 10 STANDARD TERMS AND CONDITIONS 1. DEFINITIONS Capitalized terms used and not otherwise defined in this Agreement or the Schedules hereto shall have the meanings shown below: 1.1 "Intellectual Property" means all of the following owned by a party: (i) trademarks and service marks (registered and unregistered) and trade names, and goodwill associated therewith; (ii) patents, patentable inventions, computer programs, and software; (iii) databases; (iv) trade secrets and the right to limit the use or disclosure thereof; (v) copyrights in all works, including software programs; and (vi) domain names. The rights owned by a party in its Intellectual Property shall be defined, collectively, as "Intellectual Property Rights." 1.2 "Product(s)" shall mean those TITANIUM products that have been explicitly included in this agreement and specified on the term sheet. TITANIUM shall have the right to withdraw any Product(s) from this Agreement upon fifteen (15) days advance written notice. 1.3 "Discount" shall mean the discount applicable to Unit Price for a product as specified in the then current Distributor Price List. The now current Distributor Price List is attached to this Agreement as Exhibit A. All Distributor Price Lists are incorporated in this Agreement by this reference. 1.4 "Distributor" means the company which sells only to resellers. 1.5 "Reseller" means retail dealers only, that is companies which sell only to end-users. The term "Reseller" does not include companies which sell to distributors or purchase products for their own use. 1.6 "Territory" shall mean the distribution territory set forth on the Term Sheet attached hereto. 1.7 "Trademarks" shall mean TITANIUM's registered and unregistered trademarks, trade names and other commercial symbols. 2. APPOINTMENT AS DISTRIBUTOR 2.1 APPOINTMENT. Subject to the terms and conditions of this Agreement, TITANIUM hereby appoints DISTRIBUTOR as an EXCLUSIVE distributor for the Territory under the TITANIUM Program (the "Program"). In connection with such appointment, to the extent permitted by the laws of the Territory, TITANIUM grants DISTRIBUTOR an EXCLUSIVE and non-transferable right to promote, market, and solicit orders in the Territory from Resellers for the Products and services described in the Term Sheet. 2.2 AUTHORIZATION. DISTRIBUTOR may represent itself as a participant in the Program and as a reseller for the Products. DISTRIBUTOR shall not represent that it is otherwise affiliated with TITANIUM. DISTRIBUTOR is authorized to represent to Resellers only such facts about TITANIUM and the Products as TITANIUM posts on its Web site or as are contained in other published advertising and promotional materials. 2.3 INDEPENDENT CONTRACTORS. The relationship of TITANIUM and DISTRIBUTOR is that of independent contractors. Neither DISTRIBUTOR nor DISTRIBUTOR's employees, consultants, contractors or agents are agents, employees, partners or joint venturers of TITANIUM, nor do they have any authority to bind TITANIUM by contract or otherwise to any obligation. They will not represent to the contrary, either expressly, implicitly, by appearance or otherwise. 3. MARKETING TITANIUM PRODUCTS 3.1 DISTRIBUTOR EFFORTS. During the term of this Agreement, DISTRIBUTOR shall use its best efforts to market and promote the Products to Resellers in the Territory. Without limiting the generality of the foregoing, DISTRIBUTOR shall undertake the specific marketing activities for each Product, which are set forth in the Term Sheet. 3.2 PRODUCT RESALE. DISTRIBUTOR shall resell the Products only to Reseller. 3.3 MARKET AREA. TITANIUM shall be the sole and final arbiter of any question whether a specific Distributor is within the Territory. 3.4 INITIAL ORDER. On the effective date of this Agreement, DISTRIBUTOR shall place an irrevocable order with TITANIUM for products with a net order value after discount of at least the amount specified in the term sheet. Rev 05122003 TITANIUM ______ DISTRIBUTOR ______ Page 4 of 10 3.5 MINIMUM COMMITMENT. During each year of this Agreement, DISTRIBUTOR shall accrue and timely pay to TITANIUM the net prices for the Products licensed, sold or otherwise distributed under this Agreement. DISTRIBUTOR agrees to a volume commitment for each year of this Agreement in the amount set forth in the Term Sheet. Progress towards the annual commitment will be monitored quarterly and failure to achieve this phased commitment will be taken into account by TITANIUM when deciding about the renewal or termination of this agreement. 3.6 DISTRIBUTOR PERSONNEL. DISTRIBUTOR will train and maintain a sufficient number of capable technical and sales personnel, minimum of one full-time employee, having the knowledge and training necessary to: (i) inform potential Resellers properly concerning the features and capabilities of the Products and, if necessary, competitive products; (ii) service and support the Products in accordance with DISTRIBUTOR's obligations under this Agreement; and (iii) otherwise carry out the obligations and responsibilities of DISTRIBUTOR under this agreement. 3.7 TECHNICAL EXPERTISE. DISTRIBUTOR warrants that its staff will be conversant with the technology contained in the Products and similar technologies in general, and will develop sufficient knowledge of the industry and products competitive with the Products (including specifications, features and benefits) so as to be able to explain in detail to its Resellers the differences between the Products and competitive products. 3.8 DISTRIBUTOR COVENANTS. DISTRIBUTOR will: (i) conduct business in a manner that reflects favorable at all times on the Products and the good name, goodwill and reputation of TITANIUM; (ii) avoid deceptive, misleading or unethical practices that are or might be detrimental to TITANIUM, the Products and services or the public; (iii) make no false or misleading representations with regard to TITANIUM, or the Products; (iv) not publish or employ, or cooperate in the publication or employment of, any misleading or deceptive advertising material with regard to TITANIUM or the Products; and (v) make no representation, warranties or guarantees to potential Resellers or End Users or to the trade with respect to the specifications, features or capabilities of the Products that are inconsistent with the literature distributed by TITANIUM. 3.9 COSTS AND EXPENSES. Except as expressly provided herein or agreed to in writing by TITANIUM and DISTRIBUTOR, DISTRIBUTOR will pay all costs and expenses incurred in the performance of DISTRIBUTOR's obligations under this Agreement. 3.10 MARKETING ACTIVITIES. DISTRIBUTOR shall develop and execute a marketing plan sufficient to fulfill its obligations under this Agreement. To the extent TITANIUM offers DISTRIBUTOR the opportunity to do so, DISTRIBUTOR agrees to participate with TITANIUM in joint marketing activities with respect to certain Products. 3.11 COMPLIANCE WITH LAWS. DISTRIBUTOR will comply with all applicable international, national, state, regional and local laws and regulations in performing its duties hereunder and in any of its dealings with respect to the Products. 3.12 GOVERNMENTAL APPROVAL. If any approval with respect to this Agreement, or the notification or registration hereof, will be required at any time during the term of this Agreement, with respect to giving legal effect to this Agreement in any jurisdiction in which DISTRIBUTOR is operating, or with respect to compliance with exchange regulations or other requirements so as to assure the right of remittance from abroad of H.K. Dollars, DISTRIBUTOR will immediately take whatever steps may be necessary in this respect, and any charges incurred in connection therewith will be for the account of DISTRIBUTOR. DISTRIBUTOR will keep TITANIUM currently informed of its efforts in this connection. TITANIUM will be under no obligation to ship any Products or other materials to DISTRIBUTOR hereunder until DISTRIBUTOR has provided TITANIUM with satisfactory evidence that such approval, notification or registration is not required or that it has been obtained. 4. TECHNICAL SUPPORT 4.1 RESELLER SUPPORT. DISTRIBUTOR shall provide all technical support relating to its own products and services, and to the Products as described in the TERM SHEET, directly to its Resellers and End-Users. DISTRIBUTOR shall provide TITANIUM with a telephone number for TITANIUM to contact DISTRIBUTOR directly for DISTRIBUTOR's support under this Section 4. If TITANIUM receives such an inquiry, TITANIUM shall provide the inquiring party with the telephone number of DISTRIBUTOR, and DISTRIBUTOR shall be responsible for providing support to such party. 4.2 DISTRIBUTOR SUPPORT. TITANIUM shall provide DISTRIBUTOR with the technical support services for each Product as set forth in the TERM SHEET. 5. PURCHASE AND PAYMENT TERMS 5.1 FORECASTS, PURCHASE AND SALE. DISTRIBUTOR shall submit quarterly forecasts of its requirements for Products to TITANIUM at least forty-five (45) days in advance of each calendar quarter. DISTRIBUTOR will be required to maintain a minimum stock level of two times the monthly forecast of its requirements for Products. Rev 05122003 TITANIUM ______ DISTRIBUTOR ______ Page 5 of 10 TITANIUM agrees to sell to DISTRIBUTOR those Products order by DISTRIBUTOR at the prices and under the conditions specified in this Agreement and the applicable Distributor Price List during the term of this Agreement. Product orders will be placed by DISTRIBUTOR's issuance of a purchase order. The terms and conditions of this Agreement shall supersede the terms and conditions of any purchase order issued by DISTRIBUTOR. Any additional or conflicting purchase order terms and conditions shall be deemed null and void and shall be of no force or effect. 5.2 PAYMENTS FOR TITANIUM PRODUCTS. DISTRIBUTOR shall be responsible for invoicing Resellers and collecting invoiced amounts from Resellers for all Products licensed, sold or otherwise distributed on the basis of orders solicited by DISTRIBUTOR. For the Products licensed, sold or otherwise distributed based upon orders solicited by DISTRIBUTOR, DISTRIBUTOR will pay TITANIUM the amounts set forth in the applicable Distributor Price List, (the invoiced amount will be grossed-up to cover any withholding taxes to the applicable jurisdiction or country) in the manner and at the time set forth therein. Such amounts may be set forth as a percentage discount from TITANIUM's prices for the applicable Products. DISTRIBUTOR's payments shall not be affected by Distributors payments or non-payment for the Products ordered. 5.3 PRICE CHANGES. TITANIUM's prices for the Products as of the date of this Agreement are set forth in the applicable Distributor Price List. TITANIUM reserves the right to change the prices for any TITANIUM Product or any other product or service at any time. Price decreases shall take effect immediately upon announcement. In the event of a price increase, TITANIUM shall provide DISTRIBUTOR with fifteen (15) days' advance notice. Such changes shall not require DISTRIBUTOR's approval. DISTRIBUTOR shall determine its own market prices for the Products and for other products and services it sells, licenses or otherwise distributes or makes available. 5.4 TERMS OF PAYMENT. Amounts due TITANIUM hereunder shall be paid by DISTRIBUTOR to TITANIUM at the address set forth in paragraph 1 of this Agreement. Payment will be made via prepayment to "TITANIUM TECHNOLOGY LIMITED". DISTRIBUTOR may elect to apply for a line of credit with TITANIUM. The credit limit established by TITANIUM will be based on the credit worthiness of the DISTRIBUTOR. Acceptance of a line of credit is at the sole discretion of TITANIUM. 5.5 TAXES. DISTRIBUTOR shall pay, indemnify and hold TITANIUM harmless from (i) any sales, use, excise, import or export, value-added, or similar tax or duty, and any other tax or duty not based on TITANIUM's income, and (ii) all government permit fees, customs fees and similar fees which TITANIUM may incur with respect to this Agreement. Such taxes, fees and duties paid by DISTRIBUTOR shall not be considered a part of, a deduction from, or an offset against, payments due to TITANIUM hereunder. 6. CONFIDENTIALITY 6.1 CONFIDENTIAL INFORMATION. The parties acknowledge that in their performance of their duties hereunder either party may communicate to the other (or its designees) certain confidential and proprietary information, including without limitation information concerning DISTRIBUTOR's products and services, TITANIUM's products and services, and the know-how, technology, techniques, or business or marketing plans related thereto (collectively, the "Confidential Information") all of which are confidential and proprietary to, and trade secrets of, the disclosing party. Confidential Information does not include information that: (i) is public knowledge at the time of disclosure by the disclosing party; (ii) becomes public knowledge or known to the receiving party after disclosure by the disclosing party other than by breach of the receiving party's obligations under this Section 6 or by breach of a third party's confidentiality obligations; (iii) was known by the receiving party prior to disclosure by the disclosing party other than by breach of a third party's confidentiality obligations; or (iv) is independently developed by the receiving party. 6.2 PROTECTION OF CONFIDENTIAL INFORMATION. As a condition to the receipt of the Confidential Information from the disclosing party, the receiving party shall: (i) not disclose in any manner, directly or indirectly, to any third party any portion of the disclosing party's Confidential Information; (ii) not use the disclosing party's Confidential Information in any fashion except to perform its duties hereunder or with the disclosing party's express prior written consent; (iii) disclose the disclosing party's Confidential Information, in whole or in part, only to employees and agents who need to have access thereto for the receiving party's internal business purposes; (iv) take all necessary steps to ensure that its employees and agents are informed of and comply with the confidentiality restrictions contained in this Agreement; and (v) take all necessary precautions to protect the confidentiality of the Confidential Information received hereunder and exercise at least the same degree of care in safeguarding the Confidential Information as it would with its own confidential information, and in no event shall apply less than a reasonable standard of care to prevent disclosure. The receiving party shall promptly notify the disclosing party of any unauthorized disclosure or use of the Confidential Information arising under this Agreement. The receiving party shall cooperate and assist the disclosing party in preventing or remedying any such unauthorized use or disclosure. 6.3 INJUNCTIVE RELIEF. Both parties acknowledge that the restrictions contained in this Section 6 are reasonable and necessary to protect their legitimate interests and that any violation of these restrictions will cause irreparable damage to the other party. Each party agrees that damages are not an adequate remedy for any such violation and that the other party will be entitled to injunctive relief against each violation. Rev 05122003 TITANIUM ______ DISTRIBUTOR ______ Page 6 of 10 7. TRADEMARK RIGHTS 7.1 LICENSE. TITANIUM grants DISTRIBUTOR the nonexclusive right and license to use TITANIUM's trademarks during the term of this Agreement solely in conjunction with the marketing, promotion and resale of the Products. TITANIUM grants no rights in the Trademarks or in any other trademark, trade name, service mark, business name or goodwill of TITANIUM except as licensed hereunder or by separate written agreement of the parties. DISTRIBUTOR agrees that it will not at any time during or after this Agreement assert or claim any interest in or do anything that may adversely affect the validity of any Trademark or any other trademark, trade name or product designation belonging to or licensed to TITANIUM (including, without limitation registering or attempting to register any Trademark or any such other trademark, trade name or product designation). 7.2 NO CONFUSING USE. During the term of this Agreement, DISTRIBUTOR agrees not to use any trademark, trade name or product name confusingly similar to a trademark, trade name or product name of TITANIUM, as expressly licensed in Section 7.1. 7.3 MARKING REQUIREMENTS. DISTRIBUTOR agrees to (i) use the appropriate trademark, logo, product descriptor and trademark symbol (either "TM" or "(R)" or local equivalents), (ii) clearly indicate TITANIUM's ownership of the Trademarks whenever the Trademarks are first mentioned in any document, and (iii) comply with the other usage requirements set forth in TITANIUM's Trademark and Logo Usage Guide provided to DISTRIBUTOR from time to time. 7.4 NO CONTINUING RIGHTS. Upon expiration or termination of this Agreement, DISTRIBUTOR will immediately cease all display, advertising and use of all of the Trademarks and will not thereafter use, advertise or display any trademark, trade name or product designation which is, or any part of which is, similar to or confusing with any Trademark or with any trademark, trade name or product designation associated with TITANIUM or any Product. 8. INTELLECTUAL PROPERTY RIGHTS 8.1 OWNERSHIP. Other than the express licenses granted by this Agreement, TITANIUM grants no right or license to DISTRIBUTOR by implication, estoppel or otherwise to the Products or any Intellectual Property Rights of TITANIUM. Each party shall retain all ownership rights, title, and interest in and to its own products and services (including in the case of TITANIUM, in the Products) and all intellectual property rights therein, subject only to the rights and licenses specifically granted herein. To the extent that DISTRIBUTOR translates, or causes to be translated, any of TITANIUM's marketing materials, user manuals or other documentation, DISTRIBUTOR agrees to assign all copyrights in such translations to TITANIUM at the time of termination or expiration of this Agreement. 8.2 OBTAINING RIGHTS. TITANIUM (and not DISTRIBUTOR) shall have the sole right, but not the obligation, to pursue copyright, patent and trademark protection, in its sole discretion, for the Products and any Intellectual Property Rights incorporated therein. DISTRIBUTOR will cooperate with TITANIUM in pursuing such protection, including without limitation executing and delivering to TITANIUM such instruments as may be required to register or perfect TITANIUM's interests in any Intellectual Property Rights and any assignments thereof. 8.3 PURSUIT OF INFRINGERS. DISTRIBUTOR shall notify TITANIUM of infringements of TITANIUM's Intellectual Property Rights of which DISTRIBUTOR becomes aware. DISTRIBUTOR shall reasonably assist TITANIUM, at no cost to DISTRIBUTOR, in pursuing TITANIUM's legal rights against any such infringers. TITANIUM, at its sole discretion, shall determine whether to pursue any particular case of infringement. 8.4 PROPRIETARY MARKINGS AND COPYRIGHT NOTICES. DISTRIBUTOR shall not remove or destroy any proprietary, confidentiality, trademark, service mark, or copyright markings or notices placed upon or contained in any materials or documentation received from TITANIUM in connection with this Agreement. 9. INDEMNITIES 9.1 DISTRIBUTOR INDEMNITY. DISTRIBUTOR's indemnity obligations under Section 9.3 shall apply to any claim, suit or proceeding by a third party against TITANIUM and any of its directors, officers, agents, employees, contractors, parent companies, affiliates, and/or subsidiaries (collectively, the "TITANIUM Parties") based on or arising out of (i) the acts or omissions of DISTRIBUTOR in connection with (A) its performance or failure to perform any other obligations in this Agreement or any agreement with an Reseller or Subscriber, and (B) any other product or service provided by DISTRIBUTOR to Resellers or Subscribers; and (ii) any unauthorized representation or any misrepresentation of fact to any third party with respect to one or more of the TITANIUM Parties or the TITANIUM Products made by DISTRIBUTOR or any director, officer, agent, or employee of DISTRIBUTOR. 9.2 TITANIUM INDEMNITY. TITANIUM's indemnity obligations under Section 9.3 shall apply to any claim, suit or proceeding by a third party against DISTRIBUTOR and any of its directors, officers, agents, employees, Rev 05122003 TITANIUM ______ DISTRIBUTOR ______ Page 7 of 10 contractors, parent companies, affiliates, and/or subsidiaries (collectively, the "DISTRIBUTOR Parties") based on or arising out of (i) the acts or omissions of TITANIUM in connection with (A) its performance or failure to perform the obligations in this Agreement, and (B) any Products provided to DISTRIBUTOR under this agreement; (ii) any unauthorized representation or any misrepresentation of fact to any third party with respect to one or more of DISTRIBUTOR Parties made by TITANIUM or any director, officer, agent, or employee of TITANIUM, or (iii) any third party claims of copyright infringement or trade secret misappropriation to the extent such claims arise directly from the TITANIUM proprietary components of the Product. 9.3 NOTICES AND INDEMNITIES. Subject to the limitations set forth herein, each party (the "Indemnifying Party"), at its own expense, shall (a) defend, or at its option settle, any claim, suit, or proceeding against the other party (the "Indemnified Party") for which it has an indemnification obligation under this Agreement and (b) pay any final judgment entered or settlement against the Indemnified Party in any such suit or proceeding defended by the Indemnifying Party. An Indemnifying Party shall not take any action to settle or defend any such claim, suit, or proceeding that would in any manner impose obligations (monetary or otherwise) on an Indemnified Party without the Indemnified Party's written consent. An Indemnified Party shall have the right to participate in the defense of any claim with its own counsel and shall be responsible for all costs associated therewith. An Indemnifying Party shall have the right to control and direct the investigation, preparation, defense, and settlement of the claim, and the Indemnified Party shall reasonably cooperate with the Indemnifying Party in the defense of such claim at the Indemnifying Party's expense. In addition, an Indemnified Party shall give the Indemnifying Party prompt written notice of any claim, suit, or proceeding for which the Indemnifying Party has an indemnification obligation under this Agreement. In the event such notice is not promptly given, the Indemnifying Party's obligation hereunder shall not include any additional expenses or damages to the extent attributable to such failure or delay of notice. 10. LIMITED WARRANTY 10.1 LIMITED WARRANTY. TITANIUM warrants to the original purchaser of a Product that the hardware is free from defects in materials and workmanship for a period of twelve (12) months from the date of shipment from TITANIUM to the DISTRIBUTOR OR one (1) year from the date of purchase from the DISTRIBUTOR ("the Warranty Period") to the DISTRIBUTOR'S customer, whichever comes first. Should a Product fail to comply with this Limited Warranty at any time during the Warranty Period, the purchaser's sole and exclusive remedy is for TITANIUM, at its option, to either repair or replace the product as described below, provided that in TITANIUM's sole determination the part or Product has not been abused, misused, repaired or modified. All products will be serviced and returned via ground or sea at no charge to the purchaser. In the event TITANIUM is unable to repair or replace the product within a reasonable period of time, the purchaser's sole and exclusive remedy is to receive reimbursement of the amount the purchaser actually paid for the product. 10.2 RETURNS. All returns under this Limited Warranty require a Return Merchandise Authorization number (RMA #) provided by TITANIUM Customer Service. Products which require Limited Warranty service during the Warranty Period must be delivered to TITANIUM at the address listed below. The RMA # should be prominently displayed on the outside of the shipping container. Replacement parts or complete products will be furnished on an exchange basis only. Replaced parts or products become the property of TITANIUM. Returns Department, TITANIUM TECHNOLOGY LIMITED 4/F., BOCG Insurance Tower, 134-136 Des Veoux Road Central, Hong Kong Tel (852) 2776-2311, E-mail: info@titanium-tech.com 10.3 SHIPPING. DISTRIBUTOR agrees to pay shipping charges to TITANIUM or directly to the carrier, insure the product or assume the risk of loss or damage which may occur in transit, and to use a shipping container equivalent to the original packaging. If any labor, repair or parts replacement is required because of accident, negligence, misuse, theft, vandalism, fire, water or other peril, or because of conditions outside of specifications, including, but not limited to, electric power, temperature, humidity, or dust; or by moving, repair, relocation, or alteration not performed by TITANIUM, or by any other cause other than normal use, this Limited Warranty shall be void and shall not apply. 10.4 DUTY AND SALES TAX. DISTRIBUTOR agrees to pay any applicable duties sales taxes or similar charges. TITANIUM products are supplied to the DISTRIBUTOR FOB, Hong Kong. 10.5 APPLICABILITY. This Limited Warranty shall not be applicable to the extent that any provision of this Limited Warranty is prohibited by or contrary to, any international, federal, state or local law or regulation which cannot be preempted. This Limited Warranty gives the purchaser specific legal rights, but the purchaser may have different or additional legal rights, depending on the jurisdiction in which the purchaser is located. 11. DISCLAIMER OF WARRANTIES; LIMITATION OF LIABILITY 11.1 DISCLAIMER. EXCEPT FOR THE EXPRESS LIMITED WARRANTY PROVIDED IN THIS AGREEMENT, TITANIUM'S PRODUCTS AND SERVICES ARE PROVIDED "AS IS" WITHOUT ANY WARRANTY WHATSOEVER. TITANIUM DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, TO DISTRIBUTOR AS TO ANY MATTER WHATSOEVER, INCLUDING Rev 05122003 TITANIUM ______ DISTRIBUTOR ______ Page 8 of 10 ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS. NO ORAL OR WRITTEN INFORMATION OR ADVICE GIVEN BY TITANIUM OR ITS EMPLOYEES OR REPRESENTATIVES SHALL CREATE A WARRANTY OR IN ANY WAY INCREASE THE SCOPE OF TITANIUM'S OBLIGATIONS. 11.2 LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR TO ANY OTHER THIRD PARTY FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL, INCIDENTAL, RELIANCE, OR EXEMPLARY DAMAGES ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TITANIUM PRODUCTS, WHETHER FORESEEABLE OR UNFORESEEABLE, AND WHETHER BASED ON BREACH OF ANY EXPRESS OR IMPLIED WARRANTY, BREACH OF CONTRACT, MISREPRESENTATION, NEGLIGENCE, STRICT LIABILITY IN TORT, OR OTHER CAUSE OF ACTION (INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR LOSS OF DATA, GOODWILL, PROFITS, INVESTMENTS, USE OF MONEY, OR USE OF FACILITIES; INTERRUPTION IN USE OR AVAILABILITY OF DATA; STOPPAGE OF OTHER WORK OR IMPAIRMENT OF OTHER ASSETS; OR LABOR CLAIMS), EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. UNDER NO CIRCUMSTANCES SHALL TITANIUM'S TOTAL LIABILITY TO DISTRIBUTOR OR ANY THIRD PARTY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THE AMOUNT PAID BY DISTRIBUTOR UNDER THIS AGREEMENT TO A MAXIMUM OF ONE MILLION DOLLARS (HK$1,000,000.00), REGARDLESS OF WHETHER AN ACTION OR CLAIM IS BASED ON WARRANTY, CONTRACT, TORT OR OTHERWISE. 12. FORCE MAJEURE In no event shall either party be responsible for delays in delivery or performance when the same are the result of any cause beyond such party's control. 13. TERM AND TERMINATION 13.1 TERM AND TERMINATION. The term of this Agreement shall commence on the Start Date and, unless earlier terminated pursuant to the terms of this Agreement, will continue until the termination date as set forth in the attached "Term Sheet." Upon mutual agreement, this contract may be extended for a Renewal Period as set forth in an updated "Term Sheet." If DISTRIBUTOR has met its minimum volume commitment as set forth in paragraph 3.5 of this Agreement the Agreement can be renewed for an additional one 6 six (6) six month period, unless either party notifies the other in writing of its intention not to renew at least fifteen (15) days prior to the end of the term or the applicable renewal term. The parties agree that the Limitation of Liability provision of Section 11.2 shall apply to any termination of this Agreement by either party. DISTRIBUTOR waives any right it may have to receive any compensation or reparations on termination or expiration of this Agreement or any rights hereunder under the law of any jurisdiction, other than as expressly provided in this Agreement. 13.2 TERMINATION FOR DEFAULT. Either party may terminate this Agreement at any time on written notice to the other in the event of a material default by the other party and a failure to cure such default within a period of fifteen (15) days following receipt of written notice specifying that a default has occurred. 13.3 INSOLVENCY. Either party may terminate this Agreement at any time upon (i) the institution of any proceedings by or against the other party seeking relief, reorganization or arrangement under any laws relating to insolvency, which proceedings are not dismissed within sixty (60) days; (ii) the assignment for the benefit of creditors, or the appointment of a receiver, liquidator or trustee, of the other party's property or assets; or (iii) the liquidation, dissolution or winding up of the other party's business. 13.4 EFFECT OF TERMINATION. Upon the expiration or termination of this Agreement, DISTRIBUTOR shall cease using, marketing, promoting and soliciting orders for the Products. DISTRIBUTOR will discontinue the use of all Trademarks. Upon the expiration or termination of this Agreement, TITANIUM will provide support to Resellers, End Users, and Subscribers referred by DISTRIBUTOR. Any expiration or termination shall not discharge any obligation to make payments which have accrued or are owing as of the effective date of such expiration or termination or which accrue after expiration or termination for TITANIUM Products shipped or invoiced upon orders placed before such expiration or termination. Expiration or termination of this Agreement for any reason shall not affect any other TITANIUM Agreements with Resellers or end-users. 13.5 RETURN OF CONFIDENTIAL INFORMATION. Upon expiration or termination of this Agreement for any reason, each party shall return the other party's Confidential Information to it, or, with the prior written consent of the other party, shall destroy the other party's Confidential Information. Each party shall certify to the other in writing within thirty (30) days of expiration or termination that such party has returned or destroyed all of such Confidential Information. 13.6 SURVIVAL OF TERMS. Expiration or termination of this Agreement shall not relieve either party of any obligations that accrue prior to the date of such expiration or termination. The provisions of Sections 3.11, 3.14, 5, 6, 7, 8, 9, 10, 11, 13.1, 13.4, 13.5, 13.6, 14.1, 14.6, 14.8, and 14.9 of these Standard Terms and Conditions shall survive the expiration or termination of this Agreement for any reason. 14. MISCELLANEOUS PROVISIONS Rev 05122003 TITANIUM ______ DISTRIBUTOR ______ Page 9 of 10 14.1 GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL. This Agreement shall be governed by and construed in accordance with the laws of Hong Kong Special Administrative Region, PRC. (irrespective of its choice of law principles). 14.2 BINDING UPON SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement shall be binding upon, and inure to the benefit of, the successors, representatives and assigns of the parties hereto. This Agreement shall not be assignable by DISTRIBUTOR by operation of law (including as a result of a merger or a transfer of a controlling interest in DISTRIBUTOR's voting securities) or otherwise without the prior written authorization of TITANIUM, which shall not be unreasonably withheld. Any such purported assignment shall be void and of no effect and shall permit TITANIUM to terminate this Agreement. 14.3 SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable, the remainder of this Agreement shall be interpreted so as best to reasonably effect the intent of the parties hereto. IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT EACH AND EVERY PROVISION OF THIS AGREEMENT WHICH PROVIDES FOR A LIMITATION OF LIABILITY, DISCLAIMER OF WARRANTIES OR EXCLUSION OF DAMAGES IS INTENDED BY THE PARTIES TO BE SEVERABLE AND INDEPENDENT OF ANY OTHER PROVISION AND TO BE ENFORCED AS SUCH. 14.4 ENTIRE AGREEMENT. This Agreement, and the Exhibits and Distributor Price Lists attached hereto constitute the entire understanding and agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings between the parties. 14.5 AMENDMENT AND WAIVERS. Except as otherwise expressly provided in this Agreement, any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived, only by a writing signed by the party to be bound. 14.6 ATTORNEYS' FEES. Should suit be brought to enforce or interpret any part of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs. 14.7 NOTICES. Any notice, demand, or request with respect to this Agreement shall be in writing and shall be effective only if it is delivered by a courier service that confirms delivery in writing, or mailed, certified or registered mail, postage prepaid, return receipt requested, and in each case addressed to the parties at the addresses set forth in paragraph 1, and in the case of TITANIUM, to the attention of the Chief Executive Officer, and in the case of DISTRIBUTOR to the Contact Person as identified on the Term Sheet. Such communications shall be effective when they are received. Any party may change its address for such communications by giving notice thereof to the other party in conformity with this Section. 14.8 FOREIGN RESHIPMENT LIABILITY. THIS AGREEMENT IS EXPRESSLY MADE SUBJECT TO ANY LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS ON THE EXPORT FROM HONG KONG OF TECHNICAL INFORMATION, SOFTWARE OR INFORMATION ABOUT SUCH SOFTWARE WHICH MAY BE IMPOSED FROM TIME TO TIME BY THE H.K.S.A.R. GOVERNMENT. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO THE CONTRARY, DISTRIBUTOR AGREES THAT IT WILL NOT EXPORT OR RE-EXPORT, DIRECTLY OR INDIRECTLY, ANY TECHNICAL INFORMATION, SOFTWARE OR INFORMATION ABOUT SUCH SOFTWARE TO ANY COUNTRY FOR WHICH SUCH GOVERNMENT OR ANY AGENCY THEREOF REQUIRES AN EXPORT LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE TIME OF EXPORT OR RE-EXPORT WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL. 14.9 PUBLICITY. Neither party will disclose to third parties, other than its agents and representatives on a need-to-know basis, the terms of this Agreement or any exhibits hereto without the prior written consent of the other party, except (i) either party may disclose such terms to the extent required by law; (ii) either party may disclose the existence of this Agreement, (iii) either party may disclose such terms to the extent necessary in connection with the due diligence review of such party by potential business partners, investors or acquirers, or investment bankers, to such persons and to their employees, agents, attorneys and auditors; and (iv) either party shall have the right to disclose that DISTRIBUTOR is a participant in the Program and a DISTRIBUTOR of the Products. 14.10 NO WAIVER. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. 14.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but which collectively will constitute one and the same instrument. 14.12 DUE AUTHORIZATION. DISTRIBUTOR hereby represents and warrants to TITANIUM that the individual executing this Agreement on behalf of DISTRIBUTOR is duly authorized to execute this Agreement on behalf of DISTRIBUTOR and to bind DISTRIBUTOR hereby. 14.13 CHOICE OF LANGUAGE. The original of this Agreement has been written in English. DISTRIBUTOR waives any right it may have under the law of any jurisdiction to have this Agreement written in the language of such jurisdiction or any other language. ## END OF TERMS AND CONDITIONS ## Rev 05122003 TITANIUM ______ DISTRIBUTOR ______ Page 10 of 10 Rev 05122003 TITANIUM ______ DISTRIBUTOR ______ EX-10 4 exh10-10_reseller.txt EXH 10-10 AGREEMENT EXHIBIT 10.10 RESELLER AGREEMENT Page 1 of 12 [GRAPHIC OMITTED] RESELLER AGREEMENT THIS TITANIUM TECHNOLOGY RESELLER AGREEMENT ("Agreement"), is entered into as of the EFFECTIVE DATE set forth below by and between Titanium Technology Limited, a Hong Kong Limited Company ("TITANIUM"), having its principal place of business 6/F., Tianjin Building, 167 Connaught Road West, Hong Kong SAR and the RESELLER identified below. This Agreement consists of the following Term Sheet, the Standard Terms and Conditions and the Exhibits attached hereto. TERM SHEET 1. EFFECTIVE DATE: -------------------------------------------------------- 2. RESELLER: -------------------------------------------------------- Street Address: -------------------------------------------------------- -------------------------------------------------------- Company URL: -------------------------------------------------------- Telephone: Facsimile: -------------------- ---------------------- 3. CONTACT PERSON: -------------------------------------------------------- Title: -------------------------------------------------------- Contact Person's Telephone: -------------------------------------------------------- Contact Person's E-mail address: -------------------------------------------------------- 4. START DATE OF AGREEMENT: -------------------------------------------------------- 5. END DATE OF AGREEMENT: -------------------------------------------------------- 6. TERRITORY: -------------------------------------------------------- 7. INITIAL ORDER $ VALUE: -------------------------------------------------------- 8. MINIMUM ANNUAL $ COMMITMENT: -------------------------------------------------------- Rev 06012003 TITANIUM _______ RESELLER _______ Page 2 of 12 9. PRODUCT SCHEDULE AND DISCOUNT: -------------------------------------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TITANIUM TECHNOLOGY LIMITED RESELLER By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ Date: Date: ------------------------------- ------------------------------- Rev 06012003 TITANIUM _______ RESELLER _______ Page 3 of 12 STANDARD TERMS AND CONDITIONS 1. DEFINITIONS Capitalized terms used and not otherwise defined in this Agreement or the Schedules hereto shall have the meanings shown below: 1.1 "Intellectual Property" means all of the following owned by a party: (i) trademarks and service marks (registered and unregistered) and trade names, and goodwill associated therewith; (ii) patents, patentable inventions, computer programs, and software; (iii) databases; (iv) trade secrets and the right to limit the use or disclosure thereof; (v) copyrights in all works, including software programs; and (vi) domain names. The rights owned by a party in its Intellectual Property shall be defined, collectively, as "Intellectual Property Rights." 1.2 "Product(s)" shall mean those TITANIUM products that have been explicitly included in this agreement and specified on the term sheet. TITANIUM shall have the right to withdraw any Product(s) from this Agreement upon fifteen (15) days advance written notice. 1.3 "Discount" shall mean the discount applicable to Unit Price for a product as specified in the then current Reseller Price List. The now current Reseller Price List is attached to this Agreement as Exhibit A. All Reseller Price Lists are incorporated in this Agreement by this reference. 1.4 "Reseller" means retail dealers only, that is companies which sell only to end-users. The term "Reseller" does not include companies which sell to distributors or purchase products for their own use. 1.5 "Territory" shall mean the distribution territory set forth on the Term Sheet attached hereto. 1.6 "Trademarks" shall mean TITANIUM's registered and unregistered trademarks, trade names and other commercial symbols. 2. APPOINTMENT AS RESELLER 2.1 APPOINTMENT. Subject to the terms and conditions of this Agreement, TITANIUM hereby appoints RESELLER as a non-exclusive reseller for the Territory under the TITANIUM Program (the "Program"). In connection with such appointment, to the extent permitted by the laws of the Territory, TITANIUM grants RESELLER a non-exclusive and non-transferable right to promote, market and solicit orders in the Territory from Resellers for the Products and services described in the Term Sheet. 2.2 AUTHORIZATION. RESELLER may represent itself as a participant in the Program and as a reseller for the Products. RESELLER shall not represent that it is otherwise affiliated with TITANIUM. RESELLER is authorized to represent to Resellers only such facts about TITANIUM and the Products as TITANIUM posts on its Web site or as are contained in other published advertising and promotional materials. 2.3 INDEPENDENT CONTRACTORS. The relationship of TITANIUM and RESELLER is that of independent contractors. Neither RESELLER nor RESELLER's employees, consultants, contractors or agents are agents, employees, partners or joint venturers of TITANIUM, nor do they have any authority to bind TITANIUM by contract or otherwise to any obligation. They will not represent to the contrary, either expressly, implicitly, by appearance or otherwise. Rev 06012003 TITANIUM _______ RESELLER _______ Page 4 of 12 3. MARKETING TITANIUM PRODUCTS 3.1 RESELLER EFFORTS. During the term of this Agreement, RESELLER shall use its best efforts to market and promote the Products to End-Users in the Territory. Without limiting the generality of the foregoing, RESELLER shall undertake the specific marketing activities for each Product, which are set forth in the Term Sheet. 3.2 COMPETITIVE PRODUCTS. In consideration of the appointment as reseller extended in this agreement, the RESELLER agrees to the fullest extent permitted by the laws of the Territory, that it will not handle or promote the sale of any other product line which is competitive with the Products of TITANIUM. TITANIUM will be the sole judge of whether any product is competitive with its own Products. 3.3 PRODUCT RESALE. RESELLER shall resell the Products only to End-Users. 3.4 MARKET AREA. TITANIUM shall be the sole and final arbiter of any question whether a specific Reseller is within the Territory. 3.5 INITIAL ORDER. On the effective date of this Agreement, RESELLER shall place an irrevocable order with TITANIUM for products with a net order value after discount of at least the amount specified in the term sheet. 3.6 MINIMUM ANNUAL COMMITMENT. During each year of this Agreement, RESELLER shall accrue and timely pay to TITANIUM the net prices for the Products licensed, sold or otherwise distributed under this Agreement RESELLER agrees to a volume commitment for each year of this Agreement in the amount set forth in the Term Sheet. Progress towards the annual commitment will be monitored quarterly and failure to achieve this phased commitment will be taken into account by TITANIUM when deciding about the renewal or termination of this agreement. 3.7 RESELLER PERSONNEL. RESELLER will train and maintain a sufficient number of capable technical and sales personnel, minimum of one full-time employee, having the knowledge and training necessary to: (i) inform potential End Users properly concerning the features and capabilities of the Products and, if necessary, competitive products; (ii) service and support the Products in accordance with RESELLER's obligations under this Agreement; and (iii) otherwise carry out the obligations and responsibilities of RESELLER under this agreement. 3.8 TECHNICAL EXPERTISE. RESELLER warrants that its staff will be conversant with the technology contained in the Products and similar technologies in general, and will develop sufficient knowledge of the industry and products competitive with the Products (including specifications, features and benefits) so as to be able to explain in detail to its End Users the differences between the Products and competitive products. 3.9 RESELLER COVENANTS. RESELLER will: (i) conduct business in a manner that reflects favorable at all times on the Products and the good name, good will and reputation of TITANIUM; (ii) avoid deceptive, misleading or unethical practices that are or might be detrimental to TITANIUM, the Products and services or the public; (iii) make no false or misleading representations with regard to TITANIUM, or the Products; (iv) not publish or employ, or cooperate in the publication or employment of, any misleading or deceptive advertising material with regard to TITANIUM or the Products; and (v) make no representation, warranties or guarantees to potential Resellers or End Users or to the trade with respect to the specifications, features or capabilities of the Products that are inconsistent with the literature distributed by TITANIUM. 3.10 COSTS AND EXPENSES. Except as expressly provided herein or agreed to in writing by TITANIUM and RESELLER, RESELLER will pay all costs and expenses incurred in the performance of RESELLER's obligations under this Agreement. 3.11 MARKETING ACTIVITIES. RESELLER shall develop and execute a marketing plan sufficient to fulfill its obligations under this Agreement. To the extent TITANIUM offers RESELLER the opportunity to do so, RESELLER agrees to participate with TITANIUM in joint marketing activities with respect to certain Products. Rev 06012003 TITANIUM _______ RESELLER _______ Page 5 of 12 3.12 COMPLIANCE WITH LAWS. RESELLER will comply with all applicable international, national, state, regional and local laws and regulations in performing its duties hereunder and in any of its dealings with respect to the Products. 3.13 GOVERNMENTAL APPROVAL. If any approval with respect to this Agreement, or the notification or registration hereof, will be required at any time during the term of this Agreement, with respect to giving legal effect to this Agreement in any jurisdiction in which RESELLER is operating, or with respect to compliance with exchange regulations or other requirements so as to assure the right of remittance from abroad of H.K. Dollars, RESELLER will immediately take whatever steps may be necessary in this respect, and any charges incurred in connection therewith will be for the account of RESELLER. RESELLER will keep TITANIUM currently informed of its efforts in this connection. TITANIUM will be under no obligation to ship any Products or other materials to RESELLER hereunder until RESELLER has provided TITANIUM with satisfactory evidence that such approval, notification or registration is not required or that it has been obtained. 4. TECHNICAL SUPPORT 4.1 END-USER SUPPORT. RESELLER shall provide all technical support relating to its own products and services, and to the Products as described in the TERM SHEET, directly to its End-Users. RESELLER shall provide TITANIUM with a telephone number for TITANIUM to contact RESELLER directly for RESELLER's support under this Section 4. If TITANIUM receives such an inquiry, TITANIUM shall provide the inquiring party with the telephone number of RESELLER, and RESELLER shall be responsible for providing support to such party. 4.2 RESELLER SUPPORT. TITANIUM shall provide RESELLER with the technical support services for each Product as set forth in the TERM SHEET. 5. PURCHASE AND PAYMENT TERMS 5.1 FORECASTS, PURCHASE AND SALE. RESELLER shall submit quarterly forecasts of its requirements for Products to TITANIUM at least forty-five (45) days in advance of each calendar quarter. RESELLER will be required to maintain a minimum stock level of two times the monthly forecast of its requirements for Products. TITANIUM agrees to sell to RESELLER those Products order by RESELLER at the prices and under the conditions specified in this Agreement and the applicable Distributor Price List during the term of this Agreement. Product orders will be placed by RESELLER's issuance of a purchase order. The terms and conditions of this Agreement shall supersede the terms and conditions of any purchase order issued by RESELLER. Any additional or conflicting purchase order terms and conditions shall be deemed null and void and shall be of no force or effect. 5.2 PAYMENTS FOR TITANIUM PRODUCTS. RESELLER shall be responsible for invoicing End-Users and collecting invoiced amounts from End-Users for all Products licensed, sold or otherwise distributed on the basis of orders solicited by RESELLER. For the Products licensed, sold or otherwise distributed based upon orders solicited by RESELLER, RESELLER will pay TITANIUM the amounts set forth in the applicable Reseller Price List, (the invoiced amount will be grossed-up to cover any withholding taxes to the applicable jurisdiction or country) in the manner and at the time set forth therein. Such amounts may be set forth as a percentage discount from TITANIUM's prices for the applicable Products. RESELLER's payments shall not be affected by Resellers payments or non- payment for the Products ordered. 5.3 PRICE CHANGES. TITANIUM's prices for the Products as of the date of this Agreement are set forth in the applicable Reseller Price List. TITANIUM reserves the right to change the prices for any TITANIUM Product or any other product or service at any time. Price decreases shall take effect immediately upon announcement. In the event of a price increase, TITANIUM shall provide RESELLER with fifteen (15) days' advance notice. Such changes shall not require RESELLER's approval. RESELLER shall determine its own market prices for the Products and for other products and services it sells, licenses or otherwise distributes or makes available. Rev 06012003 TITANIUM _______ RESELLER _______ Page 6 of 12 5.4 TERMS OF PAYMENT. Amounts due TITANIUM hereunder shall be paid by RESELLER to TITANIUM at the address set forth in paragraph 1 of this Agreement. Payment will be made via prepayment to TITANIUM TECHNOLOGY LIMITED. RESELLER may elect to apply for a line of credit with TITANIUM. The credit limit established by TITANIUM will be based on the credit worthiness of the RESELLER. Acceptance of a line of credit is at the sole discretion of TITANIUM. 5.5 TAXES. RESELLER shall pay, indemnify and hold TITANIUM harmless from (i) any sales, use, excise, import or export, value-added, or similar tax or duty, and any other tax or duty not based on TITANIUM's income, and (ii) all government permit fees, customs fees and similar fees which TITANIUM may incur with respect to this Agreement. Such taxes, fees and duties paid by RESELLER shall not be considered a part of, a deduction from, or an offset against, payments due to TITANIUM hereunder. 6. CONFIDENTIALITY 6.1 CONFIDENTIAL INFORMATION. The parties acknowledge that in their performance of their duties hereunder either party may communicate to the other (or its designees) certain confidential and proprietary information, including without limitation information concerning RESELLER's products and services, TITANIUM's products and services, and the know-how, technology, techniques, or business or marketing plans related thereto (collectively, the "Confidential Information") all of which are confidential and proprietary to, and trade secrets of, the disclosing party. Confidential Information does not include information that: (i) is public knowledge at the time of disclosure by the disclosing party; (ii) becomes public knowledge or known to the receiving party after disclosure by the disclosing party other than by breach of the receiving party's obligations under this Section 6 or by breach of a third party's confidentiality obligations; (iii) was known by the receiving party prior to disclosure by the disclosing party other than by breach of a third party's confidentiality obligations; or (iv) is independently developed by the receiving party. 6.2 PROTECTION OF CONFIDENTIAL INFORMATION. As a condition to the receipt of the Confidential Information from the disclosing party, the receiving party shall: (i) not disclose in any manner, directly or indirectly, to any third party any portion of the disclosing party's Confidential Information; (ii) not use the disclosing party's Confidential Information in any fashion except to perform its duties hereunder or with the disclosing party's express prior written consent; (iii) disclose the disclosing party's Confidential Information, in whole or in part, only to employees and agents who need to have access thereto for the receiving party's internal business purposes; (iv) take all necessary steps to ensure that its employees and agents are informed of and comply with the confidentiality restrictions contained in this Agreement; and (v) take all necessary precautions to protect the confidentiality of the Confidential Information received hereunder and exercise at least the same degree of care in safeguarding the Confidential Information as it would with its own confidential information, and in no event shall apply less than a reasonable standard of care to prevent disclosure. The receiving party shall promptly notify the disclosing party of any unauthorized disclosure or use of the Confidential Information arising under this Agreement. The receiving party shall cooperate and assist the disclosing party in preventing or remedying any such unauthorized use or disclosure. 6.3 INJUNCTIVE RELIEF. Both parties acknowledge that the restrictions contained in this Section 6 are reasonable and necessary to protect their legitimate interests and that any violation of these restrictions will cause irreparable damage to the other party. Each party agrees that damages are not an adequate remedy for any such violation and that the other party will be entitled to injunctive relief against each violation. 7. TRADEMARK RIGHTS 7.1 LICENSE. TITANIUM grants RESELLER the nonexclusive right and license to use TITANIUM's trademarks during the term of this Agreement solely in conjunction with the marketing, promotion and resale of the Products. TITANIUM grants no rights in the Trademarks or in any other trademark, trade name, service mark, business name or goodwill of TITANIUM except as licensed Rev 06012003 TITANIUM _______ RESELLER _______ Page 7 of 12 hereunder or by separate written agreement of the parties. RESELLER agrees that it will not at any time during or after this Agreement assert or claim any interest in or do anything that may adversely affect the validity of any Trademark or any other trademark, trade name or product designation belonging to or licensed to TITANIUM (including, without limitation registering or attempting to register any Trademark or any such other trademark, trade name or product designation). 7.2 NO CONFUSING USE. During the term of this Agreement, RESELLER agrees not to use any trademark, trade name or product name confusingly similar to a trademark, trade name or product name of TITANIUM, as expressly licensed in Section 7.1. 7.3 MARKING REQUIREMENTS. RESELLER agrees to (i) use the appropriate trademark, logo, product descriptor and trademark symbol (either "TM" or "(R)" or local equivalents), (ii) clearly indicate TITANIUM's ownership of the Trademarks whenever the Trademarks are first mentioned in any document, and (iii) comply with the other usage requirements set forth in TITANIUM's Trademark and Logo Usage Guide provided to RESELLER from time to time. 7.4 NO CONTINUING RIGHTS. Upon expiration or termination of this Agreement, RESELLER will immediately cease all display, advertising and use of all of the Trademarks and will not thereafter use, advertise or display any trademark, trade name or product designation which is, or any part of which is, similar to or confusing with any Trademark or with any trademark, trade name or product designation associated with TITANIUM or any Product. 8. INTELLECTUAL PROPERTY RIGHTS 8.1 OWNERSHIP. Other than the express licenses granted by this Agreement, TITANIUM grants no right or license to RESELLER by implication, estoppel or otherwise to the Products or any Intellectual Property Rights of TITANIUM. Each party shall retain all ownership rights, title, and interest in and to its own products and services (including in the case of TITANIUM, in the Products) and all intellectual property rights therein, subject only to the rights and licenses specifically granted herein. To the extent that RESELLER translates, or causes to be translated, any of TITANIUM's marketing materials, user manuals or other documentation, RESELLER agrees to assign all copyrights in such translations to TITANIUM at the time of termination or expiration of this Agreement. 8.2 OBTAINING RIGHTS. TITANIUM (and not RESELLER) shall have the sole right, but not the obligation, to pursue copyright, patent and trademark protection, in its sole discretion, for the Products and any Intellectual Property Rights incorporated therein. RESELLER will cooperate with TITANIUM in pursuing such protection, including without limitation executing and delivering to TITANIUM such instruments as may be required to register or perfect TITANIUM's interests in any Intellectual Property Rights and any assignments thereof. 8.3 PURSUIT OF INFRINGERS. RESELLER shall notify TITANIUM of infringements of TITANIUM's Intellectual Property Rights of which RESELLER becomes aware. RESELLER shall reasonably assist TITANIUM, at no cost to RESELLER, in pursuing TITANIUM's legal rights against any such infringers. TITANIUM, at its sole discretion, shall determine whether to pursue any particular case of infringement. 8.4 PROPRIETARY MARKINGS AND COPYRIGHT NOTICES. RESELLER shall not remove or destroy any proprietary, confidentiality, trademark, service mark, or copyright markings or notices placed upon or contained in any materials or documentation received from TITANIUM in connection with this Agreement. 9. INDEMNITIES 9.1 RESELLER INDEMNITY. RESELLER's indemnity obligations under Section 9.3 shall apply to any claim, suit or proceeding by a third party against TITANIUM and any of its directors, officers, agents, employees, contractors, parent companies, affiliates, and/or subsidiaries (collectively, the "TITANIUM Parties") based on or arising out of (i) the acts or omissions of RESELLER in connection with (A) its performance or failure to perform any other obligations in this Agreement or any agreement with an Reseller or Subscriber, and (B) any other product or service provided by RESELLER to Rev 06012003 TITANIUM _______ RESELLER _______ Page 8 of 12 Resellers or Subscribers; and (ii) any unauthorized representation or any misrepresentation of fact to any third party with respect to one or more of the TITANIUM Parties or the TITANIUM Products made by RESELLER or any director, officer, agent, or employee of RESELLER. 9.2 TITANIUM INDEMNITY. TITANIUM's indemnity obligations under Section 9.3 shall apply to any claim, suit or proceeding by a third party against RESELLER and any of its directors, officers, agents, employees, contractors, parent companies, affiliates, and/or subsidiaries (collectively, the "RESELLER Parties") based on or arising out of (i) the acts or omissions of TITANIUM in connection with (A) its performance or failure to perform the obligations in this Agreement, and (B) any Products provided to RESELLER under this agreement; (ii) any unauthorized representation or any misrepresentation of fact to any third party with respect to one or more of RESELLER Parties made by TITANIUM or any director, officer, agent, or employee of TITANIUM, or (iii) any third party claims of copyright infringement or trade secret misappropriation to the extent such claims arise directly from the TITANIUM proprietary components of the Product. 9.3 NOTICES AND INDEMNITIES. Subject to the limitations set forth herein, each party (the "Indemnifying Party"), at its own expense, shall (a) defend, or at its option settle, any claim, suit, or proceeding against the other party (the "Indemnified Party") for which it has an indemnification obligation under this Agreement and (b) pay any final judgment entered or settlement against the Indemnified Party in any such suit or proceeding defended by the Indemnifying Party. An Indemnifying Party shall not take any action to settle or defend any such claim, suit, or proceeding that would in any manner impose obligations (monetary or otherwise) on an Indemnified Party without the Indemnified Party's written consent. An Indemnified Party shall have the right to participate in the defense of any claim with its own counsel and shall be responsible for all costs associated therewith. An Indemnifying Party shall have the right to control and direct the investigation, preparation, defense, and settlement of the claim, and the Indemnified Party shall reasonably cooperate with the Indemnifying Party in the defense of such claim at the Indemnifying Party's expense. In addition, an Indemnified Party shall give the Indemnifying Party prompt written notice of any claim, suit, or proceeding for which the Indemnifying Party has an indemnification obligation under this Agreement. In the event such notice is not promptly given, the Indemnifying Party's obligation hereunder shall not include any additional expenses or damages to the extent attributable to such failure or delay of notice. 10. LIMITED WARRANTY 10.1 LIMITED WARRANTY. TITANIUM warrants to the original purchaser of a Product that the hardware is free from defects in materials and workmanship for a period of twelve (12) months from the date of shipment from TITANIUM to the RESELLER OR one (1) year from the date of purchase from the RESELLER ("the Warranty Period") to the RESELLER'S customer, whichever comes first. Should a Product fail to comply with this Limited Warranty at any time during the Warranty Period, the purchaser's sole and exclusive remedy is for TITANIUM, at its option, to either repair or replace the product as described below, provided that in TITANIUM's sole determination the part or Product has not been abused, misused, repaired or modified. All products will be serviced and returned via ground or sea at no charge to the purchaser. In the event TITANIUM is unable to repair or replace the product within a reasonable period of time, the purchaser's sole and exclusive remedy is to receive reimbursement of the amount the purchaser actually paid for the product. 10.2 RETURNS. All returns under this Limited Warranty require a Return Merchandise Authorization number (RMA #) provided by TITANIUM Customer Service. Products which require Limited Warranty service during the Warranty Period must be delivered to TITANIUM at the address listed below. The RMA # should be prominently displayed on the outside of the shipping container. Replacement parts or complete products will be furnished on an exchange basis only. Replaced parts or products become the property of TITANIUM. Returns Department, TITANIUM TECHNOLOGY LIMITED 6/F., Tianjin Building, 167 Connaught Road West, Hong Kong Tel (852) 3427 3177, E-mail: info@titanium-tech.com 10.3 SHIPPING. RESELLER agrees to pay shipping charges to TITANIUM or directly to the carrier, insure the product or assume the risk of loss or damage which may occur in transit, and to use a shipping container equivalent to the original packaging. If any labor, repair or parts replacement is Rev 06012003 TITANIUM _______ RESELLER _______ Page 9 of 12 required because of accident, negligence, misuse, theft, vandalism, fire, water or other peril, or because of conditions outside of specifications, including, but not limited to, electric power, temperature, humidity, or dust; or by moving, repair, relocation, or alteration not performed by TITANIUM, or by any other cause other than normal use, this Limited Warranty shall be void and shall not apply. 10.4 DUTY AND SALES TAX. RESELLER agrees to pay any applicable duties sales taxes or similar charges. TITANIUM products are supplied to the RESELLER FOB, Hong Kong. 10.5 APPLICABILITY. This Limited Warranty shall not be applicable to the extent that any provision of this Limited Warranty is prohibited by or contrary to, any international, federal, state or local law or regulation which cannot be preempted. This Limited Warranty gives the purchaser specific legal rights, but the purchaser may have different or additional legal rights, depending on the jurisdiction in which the purchaser is located. 11. DISCLAIMER OF WARRANTIES; LIMITATION OF LIABILITY 11.1 DISCLAIMER. EXCEPT FOR THE EXPRESS LIMITED WARRANTY PROVIDED IN THIS AGREEMENT, TITANIUM'S PRODUCTS AND SERVICES ARE PROVIDED "AS IS" WITHOUT ANY WARRANTY WHATSOEVER. TITANIUM DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, TO RESELLER AS TO ANY MATTER WHATSOEVER, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS. NO ORAL OR WRITTEN INFORMATION OR ADVICE GIVEN BY TITANIUM OR ITS EMPLOYEES OR REPRESENTATIVES SHALL CREATE A WARRANTY OR IN ANY WAY INCREASE THE SCOPE OF TITANIUM'S OBLIGATIONS. 11.2 LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR TO ANY OTHER THIRD PARTY FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL, INCIDENTAL, RELIANCE, OR EXEMPLARY DAMAGES ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TITANIUM PRODUCTS, WHETHER FORESEEABLE OR UNFORESEEABLE, AND WHETHER BASED ON BREACH OF ANY EXPRESS OR IMPLIED WARRANTY, BREACH OF CONTRACT, MISREPRESENTATION, NEGLIGENCE, STRICT LIABILITY IN TORT, OR OTHER CAUSE OF ACTION (INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR LOSS OF DATA, GOODWILL, PROFITS, INVESTMENTS, USE OF MONEY, OR USE OF FACILITIES; INTERRUPTION IN USE OR AVAILABILITY OF DATA; STOPPAGE OF OTHER WORK OR IMPAIRMENT OF OTHER ASSETS; OR LABOR CLAIMS), EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. UNDER NO CIRCUMSTANCES SHALL TITANIUM'S TOTAL LIABILITY TO RESELLER OR ANY THIRD PARTY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THE AMOUNT PAID BY RESELLER UNDER THIS AGREEMENT TO A MAXIMUM OF ONE MILLION DOLLARS (HK$1,000,000.00), REGARDLESS OF WHETHER AN ACTION OR CLAIM IS BASED ON WARRANTY, CONTRACT, TORT OR OTHERWISE. 12. FORCE MAJEURE In no event shall either party be responsible for delays in delivery or performance when the same are the result of any cause beyond such party's control. 13. TERM AND TERMINATION 13.1 TERM AND TERMINATION. The term of this Agreement shall commence on the Start Date and, unless earlier terminated pursuant to the terms of this Agreement, will continue until the termination date as set forth in the attached "Term Sheet." Upon mutual agreement, this contract may be extended for a Renewal Period as set forth in an updated "Term Sheet." If RESELLER has met its minimum volume commitment as set forth in paragraph 3.7 of this Agreement the Agreement can be renewed for an additional one 6 six (6) six month period, unless either party notifies the other in writing of its intention not to renew at least fifteen (15) days prior to the end of the term or the applicable renewal term. The parties agree that the Limitation of Liability provision of Section 11.2 shall apply to any Rev 06012003 TITANIUM _______ RESELLER _______ Page 10 of 12 termination of this Agreement by either party. RESELLER waives any right it may have to receive any compensation or reparations on termination or expiration of this Agreement or any rights hereunder under the law of any jurisdiction, other than as expressly provided in this Agreement. 13.2 TERMINATION FOR DEFAULT. Either party may terminate this Agreement at any time on written notice to the other in the event of a material default by the other party and a failure to cure such default within a period of fifteen (15) days following receipt of written notice specifying that a default has occurred. 13.3 INSOLVENCY. Either party may terminate this Agreement at any time upon (i) the institution of any proceedings by or against the other party seeking relief, reorganization or arrangement under any laws relating to insolvency, which proceedings are not dismissed within sixty (60) days; (ii) the assignment for the benefit of creditors, or the appointment of a receiver, liquidator or trustee, of the other party's property or assets; or (iii) the liquidation, dissolution or winding up of the other party's business. 13.4 EFFECT OF TERMINATION. Upon the expiration or termination of this Agreement, RESELLER shall cease using, marketing, promoting and soliciting orders for the Products. RESELLER will discontinue the use of all Trademarks. Upon the expiration or termination of this Agreement, TITANIUM will provide support to End Users and Subscribers referred by RESELLER. Any expiration or termination shall not discharge any obligation to make payments which have accrued or are owing as of the effective date of such expiration or termination or which accrue after expiration or termination for TITANIUM Products shipped or invoiced upon orders placed before such expiration or termination. Expiration or termination of this Agreement for any reason shall not affect any other TITANIUM Agreements with Resellers or end-users. 13.5 RETURN OF CONFIDENTIAL INFORMATION. Upon expiration or termination of this Agreement for any reason, each party shall return the other party's Confidential Information to it, or, with the prior written consent of the other party, shall destroy the other party's Confidential Information. Each party shall certify to the other in writing within thirty (30) days of expiration or termination that such party has returned or destroyed all of such Confidential Information. 13.6 SURVIVAL OF TERMS. Expiration or termination of this Agreement shall not relieve either party of any obligations that accrue prior to the date of such expiration or termination. The provisions of Sections 3.11, 3.14, 5, 6, 7, 8, 9, 10, 11, 13.1, 13.4, 13.5, 13.6, 14.1, 14.6, 14.8, and 14.9 of these Standard Terms and Conditions shall survive the expiration or termination of this Agreement for any reason. 14. MISCELLANEOUS PROVISIONS 14.1 GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL. This Agreement shall be governed by and construed in accordance with the laws of Hong Kong Special Administrative Region, PRC. (irrespective of its choice of law principles). 14.2 BINDING UPON SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement shall be binding upon, and inure to the benefit of, the successors, representatives and assigns of the parties hereto. This Agreement shall not be assignable by RESELLER by operation of law (including as a result of a merger or a transfer of a controlling interest in RESELLER's voting securities) or otherwise without the prior written authorization of TITANIUM, which shall not be unreasonably withheld. Any such purported assignment shall be void and of no effect and shall permit TITANIUM to terminate this Agreement. 14.3 SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable, the remainder of this Agreement shall be interpreted so as best to reasonably effect the intent of the parties hereto. IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT EACH AND EVERY PROVISION OF THIS AGREEMENT WHICH PROVIDES FOR A LIMITATION OF LIABILITY, DISCLAIMER OF WARRANTIES OR EXCLUSION OF DAMAGES IS INTENDED BY THE PARTIES TO BE SEVERABLE AND INDEPENDENT OF ANY OTHER PROVISION AND TO BE ENFORCED AS SUCH. Rev 06012003 TITANIUM _______ RESELLER _______ Page 11 of 12 14.4 ENTIRE AGREEMENT. This Agreement, and the Exhibits and Distributor Price Lists attached hereto constitute the entire understanding and agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings between the parties. 14.5 AMENDMENT AND WAIVERS. Except as otherwise expressly provided in this Agreement, any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived, only by a writing signed by the party to be bound. 14.6 ATTORNEYS' FEES. Should suit be brought to enforce or interpret any part of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs. 14.7 NOTICES. Any notice, demand, or request with respect to this Agreement shall be in writing and shall be effective only if it is delivered by a courier service that confirms delivery in writing, or mailed, certified or registered mail, postage prepaid, return receipt requested, and in each case addressed to the parties at the addresses set forth in paragraph 1, and in the case of TITANIUM, to the attention of the Chief Executive Officer, and in the case of RESELLER to the Contact Person as identified on the Term Sheet. Such communications shall be effective when they are received. Any party may change its address for such communications by giving notice thereof to the other party in conformity with this Section. 14.8 FOREIGN RESHIPMENT LIABILITY. THIS AGREEMENT IS EXPRESSLY MADE SUBJECT TO ANY LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS ON THE EXPORT FROM HONG KONG OF TECHNICAL INFORMATION, SOFTWARE OR INFORMATION ABOUT SUCH SOFTWARE WHICH MAY BE IMPOSED FROM TIME TO TIME BY THE H.K.S.A.R. GOVERNMENT. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO THE CONTRARY, RESELLER AGREES THAT IT WILL NOT EXPORT OR RE-EXPORT, DIRECTLY OR INDIRECTLY, ANY TECHNICAL INFORMATION, SOFTWARE OR INFORMATION ABOUT SUCH SOFTWARE TO ANY COUNTRY FOR WHICH SUCH GOVERNMENT OR ANY AGENCY THEREOF REQUIRES AN EXPORT LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE TIME OF EXPORT OR RE-EXPORT WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL. 14.9 PUBLICITY. Neither party will disclose to third parties, other than its agents and representatives on a need-to-know basis, the terms of this Agreement or any exhibits hereto without the prior written consent of the other party, except (i) either party may disclose such terms to the extent required by law; (ii) either party may disclose the existence of this Agreement, (iii) either party may disclose such terms to the extent necessary in connection with the due diligence review of such party by potential business partners, investors or acquirers, or investment bankers, to such persons and to their employees, agents, attorneys and auditors; and (iv) either party shall have the right to disclose that RESELLER is a participant in the Program and a RESELLER of the Products. 14.10 NO WAIVER. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. 14.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but which collectively will constitute one and the same instrument. 14.12 DUE AUTHORIZATION. RESELLER hereby represents and warrants to TITANIUM that the individual executing this Agreement on behalf of RESELLER is duly authorized to execute this Agreement on behalf of RESELLER and to bind RESELLER hereby. 14.13 CHOICE OF LANGUAGE. The original of this Agreement has been written in English. RESELLER waives any right it may have under the law of any jurisdiction to have this Agreement written in the language of such jurisdiction or any other language. ## END OF TERMS AND CONDITIONS ## Rev 06012003 TITANIUM _______ RESELLER _______ Page 12 of 12 EXHIBIT A RESELLER/DISTRIBUTOR PRICE LIST THE FOLLOWING PRICE LIST IS ATTACHED: 1) PROACCESS FACEOK
- ------------------------------------------------------------------------------------------------------- PRODUCT CODE DESCRIPTION LIST PRICE (US$) DISTRIBUTOR PRICE (US$) - ------------------------------------------------------------------------------------------------------- PAC-FOKP300 ProAccess FaceOK - Professional 89.00 30.00 - ------------------------------------------------------------------------------------------------------- PAC-FOKE300 ProAccess FaceOK - Enterprise 119.00 40.00 - -------------------------------------------------------------------------------------------------------
2) PROGUARD
- ------------------------------------------------------------------------------------------------------- PRODUCT CODE DESCRIPTION LIST PRICE (US$) DISTRIBUTOR PRICE (US$) - ------------------------------------------------------------------------------------------------------- PGD-DE300 ProGuard Detector 5,400.00 3,402.00 - ------------------------------------------------------------------------------------------------------- PGD-BU300 ProGuard Builder 4,400.00 2,772.00 - ------------------------------------------------------------------------------------------------------- PGD-SG300 ProGuard Storage 4,400.00 2,772.00 - ------------------------------------------------------------------------------------------------------- PGD-MA300 ProGuard Matcher 11,715.00 7,380.00 - ------------------------------------------------------------------------------------------------------- PGD-DB300-01K ProGuard DB 1,000-Image 4,228.00 2,664.00 - ------------------------------------------------------------------------------------------------------- PGD-DB300-05K ProGuard DB 5,000-Image 14,078.00 8,869.00 - ------------------------------------------------------------------------------------------------------- PGD-DB300-10K ProGuard DB 10,000-Image 25,343.00 15,966.00 - ------------------------------------------------------------------------------------------------------- PGD-DB300-30K ProGuard DB 50,000-Image 50,220.00 31,638.00 - -------------------------------------------------------------------------------------------------------
Rev 06012003 TITANIUM _______ RESELLER _______ EX-23 5 exh23-2.txt EXH 23-2 CONSENT OF AUDITORS 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 January 25, 2006, 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 January 25, 2006 Hong Kong, China 9TH FL., CHINACHEM HOLLYWOOD CENTRE, 1-13 HOLLYWOOD RD., CENTRAL, HONG KONG Tel: 2573 2296 Fax: 2384 2022 CORRESP 6 filename6.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 January 26, 2006 Mark P. Shuman Branch Chief Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 RE: TITANIUM GROUP LIMITED REGISTRATION STATEMENT ON FORM S-1 AMENDMENT FILED ON DECEMBER 9, 2005 FILE NO. 333-128302 Dear Mr. Shuman: On behalf of Titanium Group Limited (the "Company"), Amendment No. 2 to the registration statement on Form S-1 is being filed. The comments of the Staff in its letter dated January 4, 2006, 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. GENERAL 1. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT. DESPITE YOUR ASSERTION THAT CIRCULARS 11 AND 29 DO NOT AFFECT INVESTORS WHO ARE NOT CITIZENS OF CHINA, PLEASE EXPAND YOUR ANALYSIS TO INCLUDE A MORE DETAILED DISCUSSION OF HOW THE CIRCULARS MIGHT AFFECT YOUR BUSINESS AND HOLDINGS OF YOUR INVESTORS. RESPONSE: The State Administration of Foreign Exchange, or SAFE, published Circular 75 on October 21, 2005, which took effect on November 1, 2005, and on the same date, Circulars 11 and 29 were repealed. The purpose of Circular 75 is to regulate certain issues concerning the foreign exchange administration of the equity financing and return investment undertaken by residents of the People's Republic of China ("PRC") via overseas special purpose vehicles. Before Circular 75, Circular 11 required SAFE's approval in order for any PRC residents to directly or indirectly establish or obtain control of a foreign company. Under Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 2 Circular 75, SAFE only requires PRC residents to register with SAFE rather than obtain SAFE's approval. Basically, Circular 75 does not affect the business of the Company nor does it affect all of the investors of the Company. It only affects the investors who are PRC residents and who, according to Circular 75, will have to comply with the proper foreign exchange registrations. Accordingly, we do believe that this has any impact on the Company. 2. PLEASE SPECIFICALLY DISCLOSE THE FACTUAL BASIS FOR AND THE CONTEXT OF ALL YOUR BELIEFS, UNDERSTANDINGS, ESTIMATES, AND OPINIONS. THIS PARTICULARLY PERTAINS TO YOUR DISCLOSURE OF ALL PROJECTIONS, STATISTICS, AND ASSERTIONS. UNLESS YOU CAN SUBSTANTIATE ON A REASONABLE BASIS ALL OF THE PROJECTIONS, STATISTICS AND ASSERTIONS THAT YOU CITE, PLEASE REMOVE THEM. TO THE EXTENT YOU RELY ON INDUSTRY ANALYSES, PLEASE DISCLOSE WHETHER THE SOURCE IS PUBLICLY AVAILABLE. IF THE SOURCE IS NOT AVAILABLE FOR NO OR NOMINAL CHARGE, THEN THE COMPANY MUST ADOPT THE INFORMATION AS THE COMPANY'S OWN OR PROVIDE A CONSENT FOR ITS USE. ALSO, SUPPLEMENTALLY PROVIDE THE STAFF WITH COPIES OF ALL SOURCES UTILIZED FOR YOUR DISCLOSURE OF STATISTICS. SOME EXAMPLES INCLUDE THE FOLLOWING. THIS IS NOT AN EXHAUSTIVE LIST. o THE STATEMENTS AT THE BEGINNING OF THE THIRD PARAGRAPH ON PAGE 10; o THE LAST THREE SENTENCES OF THE FOURTH PARAGRAPH ON PAGE 10; o THE DISCLOSURE ON PAGE 14 REGARDING "INDUSTRY-LEADING ACCURACY RATES AND PERFORMANCE"; o THE DISCLOSURE REFERENCING "PROVEN CAPABILITIES" IN THE LAST SENTENCE OF THE PARAGRAPH IMMEDIATELY PRECEDING THE "TI-FACE" SUBSECTION (PAGE 15); o THE SECOND SENTENCE IN THE "BEST TECHNOLOGY" SUBSECTION ON PAGE 17; o THE STATEMENT ON PAGE 17 THAT PROACCESS FACE ATTEND "GREATLY IMPROVES PAYROLL ACCURACY . . ."; o THE FIRST SENTENCE OF THE SECOND PARAGRAPH OF THE "CONSULTING" SUBSECTION (PAGE 21); o THE DISCLOSURE IN THE FINAL THREE SENTENCES OF THE FIRST PARAGRAPH OF THE "COMPETITION" SUBSECTION (PAGE 23). RESPONSE: The Company has revised most of the statements in the document to remove expressions of belief, understanding, estimates and opinion. PROSPECTUS SUMMARY, PAGE 3 3. EXPLAIN WHY YOU BELIEVE THE ESTABLISHMENT OF A BVI COMPANY TO HOLD TITANIUM TECHNOLOGY WOULD MAKE IT EASIER FOR THE COMPANY TO ATTRACT INVESTMENT CAPITAL. RESPONSE: Complied. See page 18. RISK FACTORS, PAGE 4 4. IN THE INTRODUCTORY PARAGRAPH, CLARIFY THAT YOU DISCLOSE ALL "MATERIAL" RISKS HERE. RESPONSE: Complied. See page 4. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 3 "WE DERIVE OVER HALF OF OUR REVENUES . . ." PAGE 5 5. WE NOTE YOUR REVISIONS TO OUR PRIOR COMMENT 11. TO THE EXTENT ANY OF THE FOUR CUSTOMERS THAT COMPRISED OVER 50% OF YOUR REVENUE FOR THE YEAR ENDED DECEMBER 30, 2004 ACCOUNTED FOR MORE THAN TEN PERCENT OF YOUR REVENUES IN THAT PERIOD, IDENTIFY THOSE PRINCIPAL CUSTOMERS. RESPONSE: Complied. See page 5. DETERMINATION OF OFFERING PRICE, PAGE 9 6. WE NOTE YOUR REVISIONS IN RESPONSE TO OUR PRIOR COMMENT 16 YET YOU STILL DO NOT EXPLAIN WHY YOU DETERMINED TO OFFER THE SECURITIES AT A DISCOUNT TO THE EXERCISE PRICE OF THE OUTSTANDING COMMON STOCK PURCHASE WARRANTS. REVISE OR ADVISE. RESPONSE: Complied. See pages 9 and 10. MANAGEMENT'S DISCUSSION AND ANALYSIS, PAGE 11 7. WE REISSUE OUR PRIOR COMMENT 18. YOU SHOULD SUBSTANTIALLY EXPAND YOUR DISCLOSURE IN THIS SECTION TO DISCUSS THE EVENTS, TRENDS, RISKS, AND UNCERTAINTIES THAT MANAGEMENT VIEWS AS MOST CRITICAL TO THE COMPANY'S REVENUES, FINANCIAL POSITION, LIQUIDITY, PLAN OF OPERATIONS AND RESULTS OF OPERATION. IN AN EFFORT TO ASSIST YOU IN THIS REGARD, WE REFER YOU TO THE COMMISSION'S MOST RECENT MD&A INTERPRETIVE GUIDANCE SET FORTH IN RELEASE NO. 33-8350 (DECEMBER 29, 2003). THIS GUIDANCE IS INTENDED TO ELICIT MORE MEANINGFUL DISCLOSURE IN MD&A, WITH GENERAL EMPHASIS ON THE DISCUSSION OF KNOWN TRENDS, DEMANDS, COMMITMENTS, EVENTS AND UNCERTAINTIES, AND SPECIFIC GUIDANCE ON DISCLOSURES ABOUT LIQUIDITY, CAPITAL RESOURCES AND CRITICAL ACCOUNTING ESTIMATES. FOR EXAMPLE, YOUR INTRODUCTORY DISCLOSURE IN THIS SECTION SHOULD DISCUSS KEY TRENDS AND EVENTS THAT HAVE SPECIFICALLY AFFECTED YOUR COMPANY IN THE PAST AND THE CHALLENGES AND RISKS ON WHICH YOU ARE FOCUSED IN BOTH THE SHORT AND LONG TERM AS WELL AS THE STEPS YOU ARE TAKING TO ADDRESS THEM. YOUR DISCUSSION SHOULD HIGHLIGHT THE MOST IMPORTANT MATTERS ON WHICH YOU ARE FOCUSING IN EVALUATING YOUR SPECIFIC FINANCIAL CONDITION AND OPERATING PERFORMANCE. RESPONSE: Complied. See pages 11 through 18. 8. IN RESPONSE TO OUR PRIOR COMMENT NO. 22, YOU INDICATE THAT ALL DISCUSSIONS ARE PRESENTED IN BOTH US DOLLARS AND HK DOLLARS. HOWEVER, WE NOTE CERTAIN DISCLOSURES THAT DO NOT CONTAIN INFORMATION IN THE COMPANY'S REPORTING CURRENCY (HK$) (I.E., SUMMARY FINANCIAL INFORMATION, SELECTED FINANCIAL DATA, ETC.). AS PREVIOUSLY REQUESTED, REVISE THE FILING TO PRESENT ALL DISCUSSIONS IN THE REPORTING CURRENCY OF THE COMPANY'S AUDITED FINANCIAL STATEMENTS (I.E., HK$). THE STAFF WILL NOT TAKE EXCEPTION TO PRESENTING DISCUSSIONS IN US$, IN ADDITION TO HK$. RESPONSE: Complied. Both currencies are presented in most discussions. In one or two areas, presentation is made only in Hong Kong dollars. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 4 GRANT AND SUBSIDY INCOME, PAGE 11 9. DISCLOSE THE DURATION OF YOUR AGREEMENTS WITH THE HONG KONG GOVERNMENT AND THE STEPS INVOLVED IN APPLYING AND RECEIVING THE REFERENCED FUNDING. HOW LONG IS THE COMPANY REQUIRED TO PAY THE 5% ROYALTY FEE ON THE GROSS REVENUE EARNED FROM ANY ACTIVITIES IN CONNECTION WITH THE PROJECT? RESPONSE: Complied. See pages 13 to 14. RESULTS OF OPERATIONS 10. TELL US WHY YOU DELETED THE DISCLOSURE THAT SERVED AS THE BASIS FOR OUR PRIOR COMMENT 24 OR REPLACE THE DISCLOSURE AND REVISE YOUR DISCLOSURE IN ACCORDANCE WITH OUR PRIOR COMMENT. RESPONSE: Prior comment 24 pertained to an earlier statement about the Company no longer relying solely upon project-based or consultancy income. After consideration, this statement was deleted as the terminology was not consistent with the financial statements. LIQUIDITY AND CAPITAL RESOURCES, PAGE 13 11. WE NOTE FROM YOUR DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES THAT $117,949 OF SHAREHOLDER LOANS WERE INCLUDED IN 2003 OPERATING ACTIVITIES. EXPLAIN WHY SHAREHOLDER LOANS ARE INCLUDED IN OPERATING ACTIVITIES AS OPPOSED TO FINANCING ACTIVITIES AND HOW THIS PRESENTATION COMPLIES WITH SFAS 95. REVISE YOUR DISCUSSION AND CONSOLIDATED STATEMENTS OF CASH FLOWS IN YOUR ANNUAL AND INTERIM FINANCIAL STATEMENTS, AS NEEDED. RESPONSE: The Consolidated Statements of Cash Flows in our annual and interim financial statements have been revised. See pages F-3, FF-7 and FF-8. 12. IN YOUR DISCUSSION OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 YOU DISCLOSE THAT $182,051 WAS USED TO REPAY SHAREHOLDERS' LOANS. TELL US WHETHER YOU USED CASH TO REPAY THESE SHAREHOLDERS' LOANS OR WHETHER THE SHAREHOLDERS' FORGAVE THE LOANS AS DISCLOSED IN NOTE 5 TO YOUR INTERIM FINANCIAL STATEMENTS. REVISE YOUR DISCUSSION, AS NECESSARY, TO PROPERLY DISCLOSE THE NATURE OF THIS TRANSACTION AND THE IMPACT ON YOUR LIQUIDITY AND CAPITAL RESOURCES. RESPONSE: Complied. See page 17. 13. REVISE THE LIQUIDITY AND CAPITAL RESOURCES SECTION TO STATE CLEARLY WHETHER YOUR CURRENT AND AVAILABLE CAPITAL RESOURCES ARE SUFFICIENT TO FUND PLANNED OPERATIONS FOR A PERIOD OF NOT LESS THAN TWELVE MONTHS FROM THE DATE OF THE PROSPECTUS. TO THE EXTENT YOU DO NOT HAVE SUFFICIENT RESOURCES TO FUND PLANNED OPERATIONS FOR THE 12-MONTH PERIOD, STATE THE ESTIMATED DEFICIENCY IN DOLLAR TERMS AND DISCUSS HOW YOU PLAN TO ADDRESS THE DEFICIENCY. IN DISCUSSING YOUR EXPECTED LIQUIDITY NEEDS, PLEASE STATE THE EXTENT TO WHICH YOU ARE CURRENTLY USING FUNDS IN YOUR OPERATIONS ON A MONTHLY BASIS, AND INDICATE WHETHER THE EXPECTED RATE AT WHICH CAPITAL IS USED IN OPERATIONS OVER THE 12 MONTH PERIOD WILL VARY FROM THAT AMOUNT, BY HOW MUCH AND WHY. IN Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 5 PREPARING THIS DISCLOSURE, CONSIDER THE EXTENT TO WHICH YOUR CURRENT LIABILITIES EXCEED CURRENT ASSETS AND EXPLAIN HOW YOUR NEED TO DISCHARGE CURRENT LIABILITIES WITHIN THE TWELVE MONTHS WILL IMPACT THE RATE AT WHICH YOU USE FINDS IN OPERATIONS AND YOUR NEED FOR CAPITAL. RESPONSE: Complied. See page 18. 14. WE REISSUE OUR PRIOR COMMENT 28. 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 17 to 18. 15. EXPAND THE DISCLOSURE RELATING TO THE USES OF THE PROCEEDS GAINED FROM THE PRIVATE PLACEMENT OF THE COMPANY'S SECURITIES WHICH, WE NOTE, NETTED THE COMPANY APPROXIMATELY $535,000. DISCLOSURE THAT THE FUNDS ARE BEING USED FOR WORKING CAPITAL, LEGAL, ACCOUNTING, AND CORPORATE CONSULTING SERVICES FAILS TO PROVIDE INVESTORS WITH A MEANINGFUL EXPLANATION OF THE BUSINESS ACTIVITIES THAT ARE BEING FUNDED WITH THOSE OFFERING PROCEEDS. RESPONSE: Complied. Additional details have been provided. See page 17. BUSINESS, PAGE 14 16. PLEASE REVISE YOUR DISCLOSURE IN THIS SECTION AND THROUGHOUT YOUR REGISTRATION STATEMENT TO CLARIFY THE CURRENT STATUS OF YOUR BUSINESS OPERATIONS, YOUR PROPRIETARY TECHNOLOGY, AND YOUR PRODUCTS/SERVICES. YOUR CURRENT DESCRIPTION OF YOUR BUSINESS COMPRISES A LARGELY PROMOTIONAL DISCUSSION OF HOW YOU BELIEVE YOUR PRODUCTS AND SERVICES WILL PROVIDE INNOVATIVE SOLUTIONS UTILIZING BIOMETRICS TECHNOLOGIES. YOUR DISCLOSURE, HOWEVER, IS VAGUE AND DOES LITTLE TO PROVIDE A POTENTIAL INVESTOR WITH A CLEAR SENSE OF THE COMMERCIAL FEASIBILITY OF YOUR PRODUCTS AND SERVICES AND THE ABILITY OF YOUR COMPANY TO SURVIVE IN THE SHORT AND LONG TERMS. YOUR DISCLOSURE IN THIS SECTION SHOULD BE SUBSTANTIALLY REVISED TO DESCRIBE CLEARLY YOUR COMPANY'S BUSINESS AND ITS PRODUCTS AND SERVICES IN THE MANNER REQUIRED BY ITEM 101 OF REGULATION S-K. DESCRIBE MORE SPECIFICALLY EACH ACTIVITY THAT IS ESSENTIAL TO THE FUNCTIONING AND DISTRIBUTION OF EACH OF YOUR PRODUCTS. DISCUSS THE EXTENT TO WHICH YOU HAVE MADE ARRANGEMENTS WITH THIRD PARTIES AND DESCRIBE THE SIGNIFICANT TERMS OF ALL MATERIAL ARRANGEMENTS WITH THE THIRD PARTIES YOU INTEND TO RELY UPON. RESPONSE: More specific disclosure about the number of licenses or installations has been provided in the table shown on pages 20 and 23. The Company has limited ability to disclose the identity of the customers who have purchased large systems, due to privacy concerns. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 6 BUSINESS DEVELOPMENT, PAGE 14 17. WHAT IS THE BASIS FOR YOUR BELIEF THAT YOU ARE A LEADING PROVIDER OF AUTOMATIC FACE RECOGNITION SYSTEMS AND OTHER BIOMETRIC AND SECURITY SOLUTIONS TO GOVERNMENTS, LAW ENFORCEMENT AGENCIES, GAMING COMPANIES, AND OTHER ORGANIZATIONS IF CHINA AND OTHER PARTS OF THE WORLD. REFER TO DISCLOSURE ON PAGE 14. RESPONSE: The sentence in question has been reworded to state that Titanium believes it is a leading provider since it has developed and sold systems to governments, law enforcement agencies, gaming companies, and other organizations. See page 18. 18. EXPAND THE DISCLOSURE RELATING TO YOUR DISTRIBUTION NETWORKS IN CHINA, AUSTRALIA, AND JAPAN. RESPONSE: Complied. This disclosure appears in the "Distribution and Markets" section. See page 25. TI-FACE SDK 3.0 FOR WINDOWS, PAGE 16 19. PLEASE PROVIDE EXAMPLES OF THE CUSTOM APPLICATIONS THAT INDEPENDENT DEVELOPERS CAN BUILD USING TI-FACE SDK. RESPONSE: Complied. See page 20. 20. PLEASE PROVIDE THE STATUS OF THE LIP-MOVEMENT IDENTIFIER TECHNOLOGY. IF THIS DISCLOSURE IS CURRENTLY SPECULATIVE AND YOU HAVE NO PRESENT RESEARCH AND DEVELOPMENT UNDERWAY REGARDING THIS ASPECT OF YOUR OPERATIONS, PLEASE REMOVE THE DISCLOSURE. RESPONSE: Complied. Disclosure has been removed as there is no present research and development underway regarding this technology. PRODUCTS, PAGE 16 21. WE REISSUE OUR PRIOR COMMENT 32 AS IT PERTAINS TO THE FOLLOWING DISCLOSURE: "[B]OTH OF THEM HAVE WON BOTH LOCAL AND INTERNATIONAL PRIZES . . . ." ALSO, EXPLAIN THE SIGNIFICANCE OF THE SELECTION BY THE HKSAR GOVERNMENT AS ONE OF THE SUPPLIERS OF PC/LAN BULK TENDER IN CATEGORY C. RESPONSE: Reference to the awards has been deleted from this section, as the awards have been discussed elsewhere in the "Business" section. The disclosure regarding the HKSAR government PC/LAN bulk tender is located entirely in the "Distribution and Markets" section on page 25. The Company cannot provide disclosure about the competition for the contract that existed at the time, since this information is not available. The government keeps the selection process confidential to the public. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 7 22. WE NOTE THE TABULAR PRESENTATION ON PAGE 16. PLEASE ADD MORE SPECIFIC DISCLOSURE TO THE INFORMATION IN THE "STATUS" COLUMN. ADD SIMILAR APPROPRIATE DISCLOSURE TO THE TABLE ON PAGE 20. RESPONSE: See the response to comment 16 above. 23. ON PAGE 17, DEFINE THE ACRONYMS "SOHO" AND "SME". TO MAKE YOUR DOCUMENT READILY UNDERSTANDABLE, REFRAIN FROM USING SPECIALIZED VOCABULARY OF THIS TYPE AND INSTEAD USE BRIEF DESCRIPTIVE PHRASES TO REFER TO THOSE CONCEPTS. RESPONSE: The acronyms have been replaced with their definitions: small office-home office and small to medium enterprises. See page 21. 24. YOUR DISCLOSURE REGARDING "CLEVER" SOFTWARE ON PAGE 17 IS NOT READILY UNDERSTANDABLE OR SUPPORTED. REVISE TO REPLACE STATEMENTS OF THIS NATURE WITH MEANINGFUL EXPLANATIONS THAT YOU CAN FACTUALLY SUPPORT. RESPONSE: Complied. See page 21. 25. EXPAND THE DISCLOSURE RELATED TO YOUR STATEMENT ON PAGE 20 THAT A PILOT PROJECT FOR THE PROFACER IDVR "HAS BEEN LAUNCHED IN GUANG XI PEOPLES' BANK OF CHINA AND GENERATED REVENUES." RESPONSE: Complied. See page 23. DISTRIBUTION AND MARKETS, PAGE 21 26. PLEASE FILE THE DISTRIBUTION AGREEMENTS WITH THE ENTITIES IDENTIFIED IN THE FIRST PARAGRAPH OF THIS SUBSECTION AND DISCLOSE HERE THE MATERIAL TERMS OF THE AGREEMENTS. REFER TO OUR PRIOR COMMENT 79. RESPONSE: Complied. The Company's forms of Distributor Agreement and Reseller Agreement are filed as exhibits 10.9 and 10.10, respectively. 27. PLEASE PROVIDE MORE SPECIFIC DISCLOSURE WITH RESPECT TO THE FOLLOWING STATEMENT ON PAGE 22: "[W]E PROJECT THAT OUR CUSTOMER LIST WILL CONTINUE TO GROW AND SPAN THROUGH A VARIETY OF INDUSTRIES BASED ON OUR HISTORY TO DATE." CURRENTLY, YOUR DISCLOSURE IS TOO GENERAL. RESPONSE: The sentence has been deleted, as it did not add any significant disclosure for the investor. 28. WE REISSUE OUR PRIOR COMMENT 37 BECAUSE YOUR REVISED DISCLOSURE DOES NOT APPEAR TO EXPLAIN COMPREHENSIVELY YOUR DISTRIBUTOR BUSINESS. DESCRIBE THE TYPES OF SOFTWARE YOU DISTRIBUTE AND REVISE TO BETTER EXPLAIN YOUR RELATIONSHIPS WITH LARGE VENDORS SUCH AS MICROSOFT AND NOVELL. DO Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 8 YOU BUY SOFTWARE FROM THESE VENDORS TO DISTRIBUTE IN HONG KONG OR DO YOU DISTRIBUTE SOFTWARE TO THESE VENDORS? RESPONSE: Complied. See page 25. MANAGEMENT, PAGE 25 OFFICERS, DIRECTORS, AND KEY EMPLOYEES, PAGE 25 29. WE NOTE DISCUSSION ON YOUR WEBSITE OF THE ROLES AND RESPONSIBILITIES OF MESSRS. WONG AND LO. EXPLAIN WHY THESE INDIVIDUALS SHOULD NOT BE IDENTIFIED AS SIGNIFICANT EMPLOYEES FOR WHICH APPROPRIATE ITEM 401 DISCLOSURE WOULD BE REQUIRED. ALSO, EXPLAIN WHETHER THESE PERSONS ARE "EXECUTIVE OFFICERS" WITHIN THE MEANING OF RULE 405. RESPONSE: Both Messrs. Wong and Lo are identified in this section. See pages 29 and 30. 30. WIT RESPECT TO MR. MA'S EXPERIENCE, PLEASE DISCLOSE THE BUSINESS NATURE OF EBIZ INCUBATION CO., LTD. AND BALL ASIA PACIFIC LTD. RESPONSE: Complied. See page 29. 31. PLEASE EXPAND THE DISCLOSURE RELATED TO PROF. STAN LI'S ROLE AS A RESEARCHER AT MICROSOFT RESEARCH ASIA. RESPONSE: Complied. See pages 29 and 30. CONFLICTS OF INTEREST, PAGE 26 32. WE NOTE YOUR REVISIONS IN RESPONSE TO OUR PRIOR COMMENT 41 YET WE STILL BELIEVE THAT POTENTIAL CONFLICTS OF INTEREST MAY ARISE AS A RESULT OF MANAGEMENT'S SEVERAL BUSINESS AFFILIATIONS. PLEASE ADD DISCLOSURE ADDRESSING THE MECHANISMS MANAGEMENT HAS IN PLACE TO MINIMIZE ALL POTENTIAL CONFLICTS. ADDITIONALLY, WE REISSUE THE LATTER PORTION OF OUR PRIOR COMMENT 41BECAUSE WE CANNOT LOCATE YOUR REVISIONS TO THE RISK FACTORS SECTION WHERE WE ASKED FOR DISCLOSURE ADDRESSING THE RISKS ASSOCIATED WITH MANAGEMENT'S ABILITY TO ENGAGE IN COMPETING BUSINESSES AS WELL AS THE RISKS ATTENDANT TO THE LACK OF RIGHTS OF FIRST REFUSAL PERTAINING TO POTENTIAL BUSINESS OPPORTUNITIES. REVISE OR ADVISE. RESPONSE: Additional disclosure has been added pertaining to certain provisions present in employment agreements with members of management. See pages 30 to 31. The last risk factor, entitled "Investors in the company could be harmed if management should engage in competing businesses" was added in response to prior comment 41. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 9 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, PAGE 29 33. GIVEN THE DISCLOSURE CONTAINED IN FOOTNOTES (3) AND (4) TO THE BENEFICIAL OWNERSHIP TABLE CONTAINED IN THE INITIAL FORM S-1, WE DO NOT FOLLOW THE CURRENT DISCLOSURE REGARDING THE BENEFICIAL OWNERSHIP OF THE 37,835,000 SHARES IDENTIFIED IN THE TABLE. PLEASE CLARIFY FOR US THE OWNERSHIP RELATIONSHIPS BETWEEN THE SHARES IDENTIFIED AND THE FOLLOWING ENTITIES AND/OR PERSONS: GOLDEN MASS TECHNOLOGIES, LTD.; GOLDEN EMPEROR INVESTMENTS LTD.; GOLDFORD BUSINESS INC.; CHRISTINE LA; JOHNNY NG; HUMPHREY CHEUNG, BILLY TANG; ERIC WONG; HONG TAI HOLDINGS CO. LTD., PATRICK LO. IDENTIFY THE NATURAL PERSONS WHO EXERCISE SOLE OR SHARED VOTING AND INVESTMENT POWER OVER THOSE SHARES AND PRESENT THE INFORMATION SO THAT THE BENEFICIAL OWNERSHIP IS EXPRESSED IN A CONCISE AND UNDERSTANDABLE MANNER. RESPONSE: The disclosure contained in the initial Form S-1 was based on ownership percentages of various entities. The disclosure contained in the amended registration statement is based on an analysis of who actually has the right to vote or dispose of the securities. Item 403 of Regulation S-K states that beneficial ownership shall be determined in accordance with Rule 13d-3 under the Exchange Act. Rule 13d-3 bases beneficial ownership on the right to vote and/or dispose of the shares. Golden Mass Technologies, Ltd. is the holder of record of 37,835,000 shares. Golden Mass is 51% owned by Golden Emperor Investments Ltd., a BVI company ("Golden Emperor"). Golden Emperor is 80% owned by Goldford Business Inc., a BVI company ("Goldford") and 20% owned by Ms. Christine Lau. Goldford is 100% owned by Mr. Ng. Accordingly, Mr. Ng effectively has the sole voting and dispositive power as to the shares owned of record by Golden Mass. The following own the remaining 49% of Golden Mass: Billy Tang (19%), Humphrey Cheung (19%), Hong Tai Holdings Co. Ltd. (10%), and Patrick Lo (1%). Eric Wong and his wife own 100% of Hong Tai Holdings Co. Ltd. While neither Humphrey Cheung nor Billy Tang have any voting or dispositive power over the shares owned of record by Golden Mass, their indirect interest has been noted in the footnotes. See page 34. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, PAGE 30 34. WE REISSUE OUR PRIOR COMMENT 45. REVISE TO DESCRIBE THE NATURE OF THE GOODS SOLD TO ERICORPS CREATION. RESPONSE: Complied. See page 34. 35. WE REISSUE OUR PRIOR COMMENT 46. REVISE TO QUANTIFY THE AMOUNT OF ANNUAL COMPANY SECRETARY FEES THAT TITANIUM GROUP PAYS FOR ON BEHALF OF GOLDEN MASS TECHNOLOGIES. ALSO, EXPLAIN THE REASONS WHY THE COMPANY IS PAYING THESE FEES. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 10 RESPONSE: Complied. See page 34. 36. PLEASE QUANTIFY THE AMOUNT OF FUNDS THAT ARE PAID TO HUMPHREY CHEUNG FOR THE PURPOSES OF SUBSIDIZING YOUR SUBSIDIARY IN THE PRC. RESPONSE: Complied. See page 34. 37. THE TABLES ON PAGE 30 DO NOT IDENTIFY THE PARTIES TO THE TRANSACTIONS AND THEREFORE PROVIDE LITTLE CONTEXT TO THE RELATED PARTY TRANSACTIONS DISCLOSURE. REVISE TO IDENTIFY THE RELATED PARTIES AND THE TRANSACTIONS GIVING RISE TO THE AMOUNTS DISCLOSED IN THE TABLES. WE ALSO REISSUE A PORTION OF OUR PRIOR COMMENT 47. REVISE TO EXPLAIN MORE CLEARLY THE CURRENT STATUS OF THE TRANSACTIONS. RESPONSE: Complied. See page 35. SELLING SHAREHOLDERS, PAGE 38 38. PLEASE DISCLOSE ANY FAMILIAL RELATIONSHIPS BETWEEN THE SELLING SHAREHOLDERS. RESPONSE: Complied. See pages 44 to 46. PLAN OF DISTRIBUTION, PAGE 41 39. WE NOTE YOUR DISCLOSURE THAT THE COSTS ASSOCIATED WITH REGISTRATION ARE $25,000. IN PART II, YOU DISCLOSE THAT EXPENSES ASSOCIATED WITH ISSUANCE AND DISTRIBUTION ARE $105,000. PLEASE RECONCILE. RESPONSE: Complied. The amount on page 47 has been revised. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 CONSOLIDATED STATEMENTS OF CASH FLOWS, PAGE F-3 40. WE NOTE YOU PRESENTED REPAYMENT OF SHAREHOLDERS' LOAN AS A FINANCING ACTIVITY. CONSIDERING YOUR DISCLOSURE IN NOTE 5 THAT THE SHAREHOLDERS FORGAVE THEIR LOANS, THE ACTIVITY RELATING TO SHAREHOLDER LOANS WOULD APPEAR TO BE A NON-CASH TRANSACTION. IF IT IS A NON-CASH TRANSACTION, REVISE YOUR CONSOLIDATED STATEMENT OF CASH FLOWS TO DISCLOSE THIS INFORMATION SUPPLEMENTALLY AS OPPOSED TO CASH USED IN FINANCING ACTIVITIES. FURTHER TELL US WHERE YOU HAVE REPORTED THE AMOUNT THAT OFFSETS REPAYMENT OF SHAREHOLDERS' LOAN WITHIN YOUR CASH FLOW STATEMENT. WE REFER YOU TO PARAGRAPH 32 OF SFAS 95. RESPONSE: See the revised Statements of Cash Flows for both the annual and interim financial statements. Initially, the Company has applied the amount due to related parties and shareholders' loan to offset the amount due from related parties. The remaining balance was then credited to the equity as additional paid-in capital. These transactions have Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 11 affected the recognized assets and liabilities but do not result in cash receipts or cash payment. Accordingly, the Company has revised the Statements of Cash Flows by disclosing these transactions as a supplementary note to the Statements of Cash Flows. Management believes that this information is properly disclosed in accordance with paragraph 32 of SFAS 95. PRIOR COMMENT NO. 56 - NOTE 3. AMOUNT DUE FROM RELATED PARTIES, PAGE F-4 41. YOUR RESPONSE TO PRIOR COMMENT NO. 56 INDICATES THAT $1,043,714 WAS NOT ELIMINATED IN CONSOLIDATION AS IT REPRESENTS "CASH ADVANCED TO DIRECTORS" AND "CASH ADVANCED TO A SHAREHOLDER." BASED ON DISCLOSURES IN THE FILING, IT APPEARS THE MAJORITY OF THIS AMOUNT RELATES TO "CASH ADVANCED TO DIRECTORS." IN ADDITION, BASED ON YOUR DISCLOSURE ON PAGE FF-16, IT DOES NOT APPEAR THAT THE MAJORITY OF MONIES ADVANCED TO YOUR DIRECTORS HAVE BEEN REPAID. CONSIDERING YOUR RESPONSE TO PRIOR COMMENT NUMBER 55, THAT THE ADVANCE TO A DIRECTOR IS PERFORMED SO THAT THE DIRECTOR MAY PHYSICALLY DELIVER THE FUNDS TO SAVE TIME, CLARIFY WHY THESE AMOUNTS WOULD BE OUTSTANDING FOR A SIGNIFICANT PERIOD OF TIME. RESPONSE: The reasons for the surplus balance kept in the hands of Humphrey Cheung is to keep extra cash on hand for emergency use in China. It is a common practice for a small private equity to have its responsible officer in charge hold cash under his own name, for easy administration and treasury control purposes. It was just incidental that such a balance existed at the end of December 31, 2004. FINANCIAL STATEMENTS - YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 PRIOR COMMENT NO 57 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, PAGE FF-1 42. WE UNDERSTAND FROM YOUR RESPONSE THAT ZHONG YI HAS BEGUN THE CREDENTIALING PROCESS WITH THE OFFICE OF THE CHIEF ACCOUNTANT. PLEASE ADVISE US WHEN ZHONG YI HAS COMPLETED THE PROCESS. AS NOTED IN OUR PRIOR COMMENT NO. 57, WE MAY BE UNABLE TO COMPLETE OUR REVIEW AND ACCEPT THE REPORT OF ZHONG YI UNTIL THE FIRM HAS COMPLETED THE CREDENTIALING PROCESS. RESPONSE: Zhong Yi has reported to the Company that it believes it has submitted all the requested information to the Office of the Chief Accountant and is awaiting comments and/or a request for further information. PRIOR COMMENT NO 59 - CONSOLIDATED STATEMENTS OF INCOME, PAGE F-2 AND FF-4 43. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT NO. 59 AND REVISIONS TO THE COMPANY'S CONSOLIDATED STATEMENT OF INCOME TO PRESENT PROJECT REVENUES AND MAINTENANCE REVENUES SEPARATELY. IF PROJECT REVENUES INCLUDE BOTH PRODUCTS AND SERVICES, EXPLAIN WHY THEY HAVE NOT BEEN PRESENTED SEPARATELY PURSUANT TO RULE 5-03 OF REGULATION S-X. ALSO, TELL US THE PRODUCTS AND SERVICES INCLUDED IN PROJECT REVENUES. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 12 RESPONSE: Rule 5-03 of Regulation S-X requires that a registrant will have to state separately in its income statement: (a) Net sales of tangible products (gross sales less discounts, returns and allowances); (b) Operating revenues of public utilities or others; (c) Income from rentals; (d) Revenues from services; and (e) Other revenues. The Company's customers generally order the products together with the consultancy services for all the system design, customization and implementation work. The Company determines that the project revenue contract has multiple elements. When elements such as products and services are contained in a single arrangement, or in related arrangements with the same customer, the Company allocates revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. The price charged when the element is sold separately generally determines fair value. The Consolidated Statements of Income have been revised to present project revenue separately by products and services. See page F-2 and FF-4. PRIOR COMMENT NO. 62 - NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PAGE FF-10 44. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT NO. 62. REVISE YOUR NOTES TO DISCLOSE ALL ENTERPRISE-WIDE INFORMATION PURSUANT TO PARAGRAPHS 36 THROUGH 39 OF SFAS 131, SUCH AS MAJOR CUSTOMERS. IN THIS REGARD WE NOTE DISCLOSURE ON PAGE 22 OF YOUR FILING THAT BEACON BASE SOFTWARE LTD. AND INFORMATION SECURITY ONE ACCOUNTED FOR 13.32% AND 21.02% OF REVENUES, RESPECTIVELY, IN FISCAL 2004. REVISE TO DISCLOSE THIS IN YOUR FINANCIAL STATEMENT NOTES PURSUANT TO PARAGRAPH 39 OF SFAS 131. ALSO IF YOU HAVE ANY CONCENTRATIONS, SUCH AS RECEIVABLES DUE FROM ONE CUSTOMER, DISCLOSE THIS INFORMATION WITHIN YOUR FINANCIAL STATEMENT NOTES PURSUANT TO SO P 94-6. RESPONSE: Complied. See the additional disclosure in note 2. PRIOR COMMENT NO. 66 - REVENUE RECOGNITION, PAGE FF-11 45. YOUR RESPONSE DOES NOT ADDRESS YOUR ACCOUNTING FOR MULTIPLE-ELEMENT ARRANGEMENTS. TELL US AND REVISE THE FILING TO DISCLOSE THE ELEMENTS INCLUDED IN MULTIPLE-ELEMENT ARRANGEMENTS AND HOW YOU ALLOCATE THE ARRANGEMENT FEE TO EACH ELEMENT. EXPLAIN HOW YOU DETERMINE VSOE FOR EACH ELEMENT (SOFTWARE, NEW PRODUCT INTRODUCTIONS, MAINTENANCE, HARDWARE, SERVICES, TRAINING, ETC.) AND WHETHER THE RESIDUAL METHOD IS APPLIED. REFER TO SOP 97-2, SOP 98-9, EITF 00-21 AND EITF 03-5. WE MAY HAVE FURTHER COMMENTS BASED ON YOUR RESPONSE. RESPONSE: Complied. See the additional disclosure in Note 2. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 13 46. WE NOTE FROM YOUR RESPONSE THAT CUSTOMERS ARE REQUESTED TO SETTLE THE OUTSTANDING AMOUNT WITHIN THE CREDIT TERMS AS GRANTED IN THE CONTRACT. TELL US YOUR NORMAL PAYMENT TERMS AND HOW EXTENDING PAYMENT BEYOND THOSE TERMS IMPACTS YOUR REVENUE RECOGNITION FOR SOFTWARE AND OTHER PRODUCTS. RESPONSE: The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectibility is reasonably assured. The normal credit term is between 60 to 90 days. Past due customers are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. 47. BASED ON DISCLOSURES IN THE FILING, IT APPEARS THAT THE COMPANY ALSO ENGAGES IN THE "DEVELOPMENT OF PRODUCTS UTILIZING LICENSING TECHNOLOGY" AND "PROJECT CONSULTING" (YOUR PAGE 15), AND "SECURITY SERVICES" AND "SYSTEM DEVELOPMENT" (YOUR PAGE 21), IN ADDITION TO THE LICENSING OF TECHNOLOGY. YOUR RESPONSE TO OUR PRIOR COMMENT NO. 66 DOES NOT ADDRESS YOUR ACCOUNTING FOR THESE ARRANGEMENTS. TELL US AND REVISE THE FILING TO CLARIFY THE NATURE OF THE SERVICES PERFORMED UNDER THESE ARRANGEMENTS. IF YOUR ONLY SERVICES RELATE TO INSIGNIFICANT SOFTWARE MODIFICATION ASSOCIATED WITH LICENSED TECHNOLOGY, ENSURE THAT THE FILING IS REVISED TO CLARIFY THIS. IF THE COMPANY DOES ENGAGE IN THE "DEVELOPMENT OF PRODUCTS UTILIZING LICENSING TECHNOLOGY" AND "PROJECT CONSULTING" APART FROM AN INSIGNIFICANT MODIFICATION OF THE LICENSED TECHNOLOGY, TELL US AND REVISE THE FILING TO CLARIFY THE COMPANY'S ACCOUNTING FOR THESE ARRANGEMENTS. CITE THE ACCOUNTING LITERATURE THAT SUPPORTS YOUR ACCOUNTING. RESPONSE: The Company provides consulting services to its customers primarily in connection with implementation and use of the products. Revenue on time and material services is recognized as the services are rendered. Expenses on all services are recognized when the costs are incurred. The Company entered into contracts with customers who require the production of tailor-made facial recognition solutions. Under these contracts, the first element usually consists of hardware, system design, implementation and training, which is accounted for as equipment and related executory services in accordance with SFAS No. 13. The second element consists of customized software which is accounted for as a long-term contract in accordance with AICPA Statement of Position 97-2, "Software Revenue Recognition," on a unit of delivery method of measurement. Nonperformance of training, consumables management and support services would prevent receipt of payment for the costs incurred in the customization, design and installation of the system. EITF 00-21 limits the amount of revenue allocable to the customization, design and installation of the system to the amount that is not contingent upon the function of the products. Revenue on these contracts under EITF 00-21 is earned based on, and is contingent upon, the full function of the products. Due to the contingent performance of function of the products, the Company defers revenue recognition for the system design and installation phase of such contracts, including customized software and equipment, and recognizes revenue when a user acceptance certificate is obtained. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 14 PRIOR COMMENT NO. 68 - REVENUE RECOGNITION, PAGE FF-11 48. WE NOTE FROM YOUR RESPONSE TO OUR PRIOR COMMENT NO. 68, THAT REVENUE IS RECOGNIZED FOR SALES TO DISTRIBUTORS AT THE TIME WHEN PRODUCTS ARE DELIVERED. TELL US WHETHER YOU GRANT PCS TO RESELLERS, AND IF SO, HOW YOU ALLOCATE THE ARRANGEMENT FEE TO PCS AND OTHER ELEMENTS. WE REFER YOU TO PARAGRAPH 62 OF SOP 97-2. RESPONSE: Complied. See the revised disclosure contained in Note 2. 49. REVISE THE FILING TO INCLUDE A SUMMARIZED DISCUSSION OF THE COMPANY'S REVENUE RECOGNITION POLICY FOR LICENSED SOFTWARE SALES AND SALES TO DISTRIBUTORS AS PROVIDED TO THE STAFF IN RESPONSE TO PRIOR COMMENTS NUMBER 66 AND 68. RESPONSE: Complied. See the revised disclosure contained in Note 2. PRIOR COMMENT NO. 69 - RESEARCH AND DEVELOPMENT COSTS, PAGE FF-11 50. WE NOTE THAT THE COMPANY RECORDED $0 IN RESEARCH AND DEVELOPMENT EXPENSE DURING THE FISCAL YEAR ENDED DECEMBER 31, 2004 AND FOR THE 9 MONTH PERIOD ENDING SEPTEMBER 30, 2005. BASED ON YOUR RESPONSE TO OUR PRIOR COMMENT NUMBER 69, THE COMPANY DEVELOPED FOUR ADDITIONAL MODULES FOR PROACCESS AND PROFACER DURING 2004 AND 2005. CLARIFY FOR US, WHY IT IS REASONABLE THAT NO AMOUNTS HAVE BEEN RECORDED TO RESEARCH AND DEVELOPMENT EXPENSE RELATING TO THESE MODULES. RESPONSE: The Company devoted substantial resources in developing the market rather than performing research and development of its products during the year ended December 2004 and the nine-month period ended September 30, 2005. As a result, no research and development costs were recognized as expense for the periods concerned. The product development costs in relation to ProAccess FaceOK, ProAccess FaceGuard, ProFacer iDVR and ProFacer iWatchGuard were capitalized as intangible assets for the years ended December 31, 2003 and December 31, 2004 and nine months ended September 30, 2005 in the amounts of $1,185,678, $2,022,379 and $147,600, respectively. PRIOR COMMENT NO. 70 - RESEARCH AND DEVELOPMENT COSTS, PAGE FF-11 51. WE NOTE YOU REVISED THE CONSOLIDATED STATEMENTS OF INCOME TO RECLASSIFY AMORTIZATION FROM OPERATING EXPENSES TO COST OF SALES. IT APPEARS THAT YOUR GROSS MARGINS AND GROW PROFIT PERCENTAGE DECREASED SIGNIFICANTLY FOR EACH YEAR PRESENTED AS A RESULT OF THE RECLASSIFICATIONS. CONSIDERING THIS, TELL US WHY YOU HAVE NOT IDENTIFIED YOUR FINANCIAL STATEMENTS AS RESTATED, DISCLOSED THE IMPACT OF THE RESTATEMENT IN THE RELATED NOTES AND WHY THE AUDITOR'S OPINION DOES NOT REFER TO THE RESTATEMENT. IN YOUR RESPONSE, TELL US HOW YOU ASSESSED THE MATERIALITY OF THE RESTATEMENT TO YOUR FINANCIAL STATEMENTS. WE REFER YOU TO APB 20, AU 561.06 AND SAB TOPIC 1M. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 15 RESPONSE: The financial statements have now been identified as restated and note 13. Restatement of Financial Statement has been added. The auditor's opinion has been amended to refer to this restatement. PRIOR COMMENT NO. 71 - GRANT AND SUBSIDY INCOME, PAGE FF-11 52. WE NOTE FROM YOUR RESPONSE TO OUR PRIOR COMMENT NUMBER 71, THAT GOVERNMENT GRANTS ARE CONSIDERED OTHER INCOME AS OPPOSED TO AN OFFSET TO RESEARCH AND DEVELOPMENT EXPENSE AS "IN RARE CIRCUMSTANCES, THE COMPANY WOULD HAVE TO PAY THE GOVERNMENT IN FULL IF THE COMPANY COULD NOT REACH AN AGREEMENT WITH THE GOVERNMENT REGARDING THE PROGRESS OF THE CONTRACT." YOUR RESPONSE DOES NOT APPEAR TO SUPPORT THE COMPANY'S ACCOUNTING. EXPLAIN THE SIGNIFICANT NATURE AND TERMS OF GRANTS RECEIVED FROM THE GOVERNMENT AND WHY, AS NOTED IN YOUR RESPONSE, THEY ARE NOT THE SAME NATURE AS RESEARCH AND DEVELOPMENT COSTS. FURTHER TELL US HOW YOU CONSIDERED PARAGRAPHS 72 AND 73 OF SOP 97-2 IN ACCOUNTING FOR GOVERNMENT GRANTS. ALSO PROVIDE THE AUTHORITATIVE LITERATURE THAT SUPPORTS THE COMPANY'S ACCOUNTING FOR GOVERNMENT GRANTS RECEIVED. RESPONSE: Please see the detailed additional disclosure provided on pages 13 and 14 in response to Comment 9 above. We refer you to paragraph 73 of SOP 97-2, which states that if technological feasibility has not been established prior to the vendor's entering into the arrangement, SFAS 68 applies. Under SFAS 68, proceeds received from the arrangement are considered either (1) a liability on the part of the vendor, with the vendor's repaying the funding party (or parties) or (2) an agreement that the vendor will perform contractual services, from which revenue will be derived. If the vendor is obligated to repay any of the funding, regardless of whether the research and development has any future economic benefit, the funding should be treated as a liability until the software is delivered and the research and development costs expensed as incurred. If there is no repayment provision or repayment depends solely on the results having a future benefit (i.e., as a royalty based solely on future sales of the developed product), the vendor should record the funding as revenue (or offset it to research and development expenses) when it is earned, generally by using contract accounting. If the vendor does not have the right to use the results of the funded software development arrangement and the financial risk associated with the arrangement rests with the funding parties, these facts clearly indicate that the arrangement should be treated as a service contract and revenue would be recognized as performed. In determining the nature of the arrangement, vendors should consider their contractual obligations, as well as other facts and circumstances. Based on the Company's understanding of the above guidance, the Company has concluded that the current accounting treatment is appropriate. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 16 PRIOR COMMENT NO. 73 - NOTE 6 - LONG TERM BORROWINGS, PAGE FF-16 53. WE NOTE FROM YOUR RESPONSE TO OUR PRIOR COMMENT NO. 73 THAT THE SHAREHOLDER HAS VERBALLY COMMITTED NOT TO CALL THEIR LOAN FOR TWO YEARS. TELL US WHETHER THE SHAREHOLDER HAS THE RIGHT TO CALL OR DEMAND PAYMENT OF THEIR LOAN WITHIN TWELVE MONTHS FROM THE BALANCE SHEET DATE. IF THEY DO NOT HAVE THE RIGHT TO CALL OR DEMAND PAYMENT OF THE LOAN, EXPLAIN HOW YOU MADE THIS DETERMINATION CONSIDERING IT APPEARS NO WRITTEN AGREEMENT EXISTS. IN ADDITION TELL US HOW YOU CONSIDERED SFAS 78 IN DETERMINING THE LONG-TERM CLASSIFICATION FOR SHAREHOLDER LOANS. RESPONSE: Although there was no written agreement available for loans from shareholder, the shareholders' verbal agreement was considered a valid contract under the Hong Kong common law system. In addition, the auditors have requested the shareholder to provide a written representation to them for substantiating that the shareholder will not call the loan within the next 12 months from the balance sheet date. In accordance with SFAS 78, a payable/loan is to be classified as a current liability unless one of the following conditions is met: 1. The creditor has waived or subsequently lost the right to demand repayment for more than one year (or operating cycle, if longer) from the balance sheet date. 2. For long-term obligations containing a grace period within which the debtor may cure the violation, it is probable that the violation will be cured within that period, thus preventing the obligation from becoming callable. The Company believes it meets the first condition, so the loan is classified as a long-term liability. Although there was no written loan agreement in existence, the written representation from the shareholder to the auditors would make it evident that the shareholder has waived its right to demand repayment from the Company for more than one year from the balance sheet date. Therefore, the Company believes that the existing classification of loans from shareholder is appropriate and properly disclosed. PRIOR COMMENT NO. 75 - NOTE 7, COMMON STOCK, PAGE FF-17 54. WE NOTE THAT YOU BELIEVE EITF 00-19 DOES NOT APPLY TO YOUR OUTSTANDING WARRANTS. THE CONSENSUSES IN EITF 00-19 ARE TO BE APPLIED TO ALL FREESTANDING DERIVATIVE FINANCIAL INSTRUMENTS (I.E., WARRANTS) THAT ARE INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK. AS PREVIOUSLY REQUESTED, EXPLAIN TO US HOW YOU HAVE CONSIDERED EITF 00-19 IN DETERMINING THAT THE WARRANTS ISSUED IN CONNECTION WITH THE PRIVATE PLACEMENT SUBSEQUENT TO THE BALANCE SHEET DATE SHOULD BE CLASSIFIED AS EQUITY. TELL US HOW YOUR CLASSIFICATION COMPLIES WITH PARAGRAPH 8 OF EITF 00-19. RESPONSE: The Company believes that the fair value of the warrants issued to purchasers of its unit offering of securities would be classified as equity based on information provided in paragraph 8 of EITF 00-19. Specifically, "Contracts that require physical settlement" should Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 17 be classed as equity. None of the additional circumstances listed in paragraphs 12 through 32 of the Task Force consensus apply. The Company has estimated the fair value of the warrants as of the date of the private placement using a Black-Scholes model with the following assumptions: ---------------------------------------------------------------- Stock Price $ 0.20 ---------------------------------------------------------------- Exercise Price $ 0.50 ---------------------------------------------------------------- Term in days 540 ---------------------------------------------------------------- Volatility 20.0% ---------------------------------------------------------------- Annual Rate of Quarterly Dividends 0.0% ---------------------------------------------------------------- Discount Rate = Bond Equivalent Yield 4.5% ---------------------------------------------------------------- Estimates used for expected term and volatility were based on guidance provided in Staff Accounting Bulletin #107. The aggregate estimated fair value of the 3,000,000 common stock purchase warrants issued in connection with the private offering is less than $100. Consequently, the Company does not propose to separately identify the warrants as a component of its stockholders' equity. PRIOR COMMENT NO. 77 - NOTE 8. INCOME TAXES, PAGE FF-17 55. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT NO. 77 AND YOUR COMPUTATION OF DEFERRED TAXES RELATING TO PROPERTY AND EQUIPMENT. PROVIDE US YOUR ANALYSIS SUPPORTING THE COMPANY'S DETERMINATION THAT UNRECORDED DEFERRED TAX ASSETS, LIABILITIES AND EXPENSE ARE NOT MATERIAL TO YOUR FINANCIAL STATEMENTS, SPECIFICALLY YOUR CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR ALL ANNUAL AND INTERIM PERIODS PRESENTED. WE REFER YOU TO SAB 99. RESPONSE: SAB 99 provides the guidance in applying materiality thresholds to the preparation and audit of financial statements filed with the SEC. The combined effect of uncorrected misstatements on various financial statement components (amounts, subtotals, or totals) must be compared to the amount that the auditor considers material to the financial statements taken as a whole. Different levels of materiality for different amounts, subtotals, or totals; qualitative considerations; and risk of further misstatement must also be considered. As a rule of thumb, a numerical threshold, such as 5%, is used as an initial step in assessing materiality. As noted in the response to the prior comment 77, the impact of the temporary difference to the financial statements as a whole is immaterial and not significant. Set forth below is an analysis of the impact of temporary differences to net income, revenue and net assets of the Company for the years ended 2004, 2003 and 2002. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 18
2004 2003 2002 ---- ---- ---- HKD HKD HKD Tax effect on temporary differences at respective statutory tax rates 21,208 15,381 9,176 =================================================== Percentage to net income before provision for income taxes and minority interest 1.00% 28.99% 1.50% Percentage to revenue 0.33% 0.35% .22% Percentage to net assets 0.37% 0.39% 0.36%
So from a quantitative perspective, the amount of cumulative timing difference is immaterial and insignificant. We have also established a quantitative threshold for materiality, which involves assessing (1) the effect on other financial statement components; (2) the effect on trends, especially trends in profitability; (3) the significant of the financial statement element or portion of the Company's business affected by the misstatement; (4) the effect on compliance; (5) the existence of statutory or regulatory requirements affecting materiality thresholds; (6) the effect on management's compensation; (7) sensitivity of the circumstances; (8) the effects of misclassifications; (9) the significance of the misstatement or disclosures in relation to known user needs; (10) the character of the misstatement; (11) the motivation of management; (12) offsetting misstatements; (13) the potential effect on future periods; and (14) the cost of making the correction. After considering all of these qualitative factors, it was concluded that the unrecorded deferred tax liabilities and expenses were not material to the financial statements. 56. TELL US WHAT COMPRISES THE BOOK/TAX DIFFERENCES IN YOUR EFFECTIVE TAX RATE RECONCILIATION DISCLOSED IN NOTE 8 TO THE ANNUAL FINANCIAL STATEMENTS. IN THIS REGARD EXPLAIN WHY THERE ARE BOOK/TAX DIFFERENCES CONSIDERING YOUR DISCLOSURE THAT NO DEFERRED TAXES ARE RECORDED. RESPONSE: The book/tax difference represents the difference in depreciation rates adopted in calculating depreciation for accounting purposes and for tax purposes, certain income which is not subject to tax and certain expenses which are not deductible for tax purposes. For accounting purposes, plant and equipment are depreciated at 20% per annum on a straight-line basis. For tax purposes, the Company can enjoy an initial allowance of 60% on the acquisition cost of the plan and equipment during the year of acquisition. Depreciable plant and equipment are then depreciated on the written down value at rates between 20% to 30% per annum on the reducing balance method. If the Company had acquired computer hardware and software, it is allowed to write off the acquisition cost in full immediately. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 19 Furthermore, interest income derived from bank deposits and dividend income from share investment are not taxable in accordance with the Hong Kong Inland Revenue Ordinance. On the other hand, there are certain expenses which are not deductible for tax purposes. Examples of these non-deductible expenses are accounting depreciation charges, donation, etc. Although there are temporary differences in existence for the years ended December 31, 2002, 2003 and 2004, it was concluded that the resulting deferred taxation was not material and not significant to the Company's financial statements. Please refer to our reply to Comment 55 for the factors that management has considered in evaluating the materiality of the unrecorded deferred taxation. Set forth below is a presentation of how the Company's profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the Company:
-------------------------------------------------------------------------------------------------------------- 2004 2003 2002 -------------------------------------------------------------------------------------------------------------- Profit before tax $2,130,812 $53,054 $614,475 -------------------------------------------------------------------------------------------------------------- Tax calculated at domestic tax rates applicable to profits in the respective 372,892 17.50% 9,283 17.50% 98,316 16.00% countries -------------------------------------------------------------------------------------------------------------- Income not subject to tax (241,652) (11.34%) (166,073) (313.03%) (330) (0.05%) -------------------------------------------------------------------------------------------------------------- Expenses not deductible for 11,441 0.54% 5,407 10.20% 3,207 0.52% tax purposes -------------------------------------------------------------------------------------------------------------- Tax allowances (15,324) (10,926) (20.60%) (5,598) (0.91%) -------------------------------------------------------------------------------------------------------------- Utilization of previous unrecognized tax losses - - - - (1,316) (0.21%) -------------------------------------------------------------------------------------------------------------- Tax losses for which no deferred tax asset was recognized 66,872 3.14% 87,032 164.04% 4,910 0.79% -------------------------------------------------------------------------------------------------------------- Others $(46,840) (2.20%) $87,208 164.03% $(3,305) (0.54%) -------------------------------------------------------------------------------------------------------------- Tax expenses $147,389 6.92% $ 11,931 22.49% $ 95,884 15.60% --------------------------------------------------------------------------------------------------------------
NOTE 10. RELATED PARTY TRANSACTIONS, PAGE FF-19 57. WE NOTE THAT SALES TO ERICORPS CREATION (HK) LIMITED WERE HK$500,000, HK$825,820 AND HK$266,791 FOR FISCAL 2002, 2003 AND 2004, RESPECTIVELY. TELL US WHETHER THERE WERE ANY TRADE RECEIVABLES DUE FROM ERICORPS AT DECEMBER 31, 2002, 2003 AND 2004. IN ADDITION, TELL US HOW YOU CONSIDERED DISCLOSING RELATED PARTY TRANSACTIONS AND BALANCES ON THE FACE OF YOUR BALANCE SHEET, INCOME STATEMENT, OR STATEMENT OF CASH FLOWS PURSUANT TO RULE 4.08(K) OF REGULATION S-X. CONSIDERING THE SIGNIFICANCE OF THESE TRANSACTIONS TELL US HOW YOU CONSIDERED DISCUSSING THESE TRANSACTIONS IN MD&A AS IT RELATES TO THEIR IMPACT ON RESULTS OF OPERATIONS AND LIQUIDITY. Mark P. Shuman Branch Chief Securities and Exchange Commission January 26, 2006 Page 20 RESPONSE: Please refer to our reply to Comment 44 for the amount of trade receivables due from Ericorps at December 31, 2003, 2003, and 2004. Pursuant to Rule 4.08(k) of Regulation S-X, all material related-party transactions should be identified and the amounts stated on the face of the balance sheet, income statement, or cash flow statement. Therefore related-party disclosures, like all other financial disclosure requirements, are subject to a general materiality threshold, which is set out in more detail in our reply to Comment 55 above. Although the sales to Ericorps represented a significant amount for the year ended December 31, 2002 and 2003, it was not that significant for the year ended December 2004. In addition, there was no preferential treatment given to Ericorps for the resulting sale transactions. All products were priced at market rates. Furthermore, Ericorps would settle the invoices within the credit period granted. The management treated Ericorps just as one of their ordinary customers, although the owners of Ericorps indirectly own, through their ownership of Golden Mass Technologies Ltd., approximately 10% of the Company's outstanding stock. Accordingly, management considered that a summary disclosure in the footnotes is adequate rather than the separate disclosure in the balance sheet, income statement and statement of cash flow. Due to the factors discussed in the preceding paragraph, the Company did not make reference to the transactions in MD&A. 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-----