-----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, QMQNCgUXZI+67wU6np6MVGBDkmghZTIa07ui2YaedXQY4sQXMB+gekpSfoYuTOBr n+/FN94UvfTT14wHocZ5QQ== 0000949353-06-000171.txt : 20061019 0000949353-06-000171.hdr.sgml : 20061019 20060308164122 ACCESSION NUMBER: 0000949353-06-000171 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20060308 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: 06673560 BUSINESS ADDRESS: STREET 1: 4/F, BOCG INSURANCE TOWER STREET 2: 134-136 DES VOEUX CENTRAL CITY: HONG KONG STATE: K3 ZIP: NONE BUSINESS PHONE: 852-3427-3177 MAIL ADDRESS: STREET 1: 4/F, BOCG INSURANCE TOWER STREET 2: 134-136 DES VOEUX CENTRAL CITY: HONG KONG STATE: K3 ZIP: NONE S-1/A 1 s1-amd3.txt S-1 AMD 3 TITANIUM As filed March 8, 2006 File No. 333-128302 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 3 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 March 8, 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 5. 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...................................................................5 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 CONDITION AND RESULTS OF OPERATIONS...........................................11 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................18 BUSINESS......................................................................18 MANAGEMENT....................................................................29 EXECUTIVE COMPENSATION........................................................31 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................33 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................34 TAXATION......................................................................36 DESCRIPTION OF SECURITIES.....................................................38 SELLING STOCKHOLDERS..........................................................43 PLAN OF DISTRIBUTION..........................................................46 LEGAL MATTERS.................................................................47 EXPERTS.......................................................................48 ADDITIONAL INFORMATION........................................................48 REPORTS TO STOCKHOLDERS.......................................................48 INDEX TO FINANCIAL STATEMENTS.................................................48 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 over 40 IT practitioners and researchers, enabling us to provide proprietary 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 primary office is 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$)) is derived from the financial statements for the fiscal years ended December 31, 2005, 2004 and 2003, included elsewhere in this prospectus. In June 2005, we acquired 100% ownership of Titanium Technology, but did not have any operations prior to the acquisition. Accordingly, for accounting purposes, the historical financial statements of Titanium Technology are the historical financial statements of the company. 3 We have prepared the financial statements in accordance with generally accepted accounting principles. You should read this summary financial data in conjunction with "Management's Discussion and Analysis or Plan of Operation," "Business," and our financial statements. As stated in United States dollars:
INCOME STATEMENT DATA: YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2005 2004 2003 (US$) (US$) (US$) 2002 (RESTATED) (RESTATED) (US$) ------------------------------------------------------------------- Revenues $ 1,710,528 $ 814,006 $ 558,679 $ 547,095 Net income (loss) $ 101,924 $ 162,844 $ (101,951) $ 66,801 Net income (loss) per common share $ 0.002 $ 0.003 $ (0.002) $ 0.00 BALANCE SHEET DATA: DECEMBER 31, ------------------------------------------------------------------- 2005 2004 2003 2002 (US$) (US$) (US$) (US$) (RESTATED) (RESTATED) ------------------------------------------------------------------- Working capital $ 777,119 $ 236,560 $ 112,106 $ 104,727 Total assets $ 1,351,479 $ 535,896 $ 394,350 $ 331,051 Long-term debt $ - $ 182,051 $ 120,086 $ - Stockholders' equity $ 1,051,859 $ 181,263 $ 18,730 $ 120,809 As stated in Hong Kong dollars: INCOME STATEMENT DATA: YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2005 2004 2003 (HK$) (HK$) (HK$) 2002 (RESTATED) (RESTATED) (HK$) ------------------------------------------------------------------- Revenues $ 13,342,121 $ 6,349,252 $ 4,357,694 $ 4,267,341 Net income (loss) $ 795,004 $ 1,270,181 $ (795,221) $ 521,046 Net income (loss) per common share $ 0.016 $ 0.027 $ (0.017) $ 0.01 BALANCE SHEET DATA: DECEMBER 31, ------------------------------------------------------------------- 2005 2004 2003 2002 (HK$) (HK$) (HK$) (HK$) (RESTATED) (RESTATED) ------------------------------------------------------------------- Working capital $ 6,061,528 $ 1,845,168 $ 874,425 $ 816,872 Total assets $ 10,541,537 $ 4,179,992 $ 3,075,927 $ 2,582,201 Long-term debt $ - $ 1,420,000 $ 936,667 $ - Stockholders' equity $ 8,204,496 $ 1,413,851 $ 146,097 $ 942,309
4 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. 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, 2005, four customers accounted for over 50% of our revenue. The following four customers were each over 10%: Elixir Group (Macau) Ltd. (13.2%), MTR Corporation Ltd. (12.0%), GuangXi Hai Tin Electric Ltd. (11.5%) and Adamson & Gonzalez SL (11.5%). 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 5 decline and could have a material adverse effect on our business. While the customers who each accounted for over 10% of our revenue for the 2004 fiscal year are not the same as the four customers for the 2005 fiscal year, this indicates that we need to expand our client base so that we will no longer be subject to this risk. WE FACE COMPETITION FROM EXISTING AND POTENTIAL COMPETITORS IN THE BIOMETRICS INDUSTRY, WHICH COULD FORCE US TO OFFER LOWER PRICES AND/OR NARROW OUR FOCUS, RESULTING IN REDUCED REVENUES. The current global political climate has heightened interest in the use of security solutions, and we expect competition in this field, which is already substantial, to intensify. Competitors in biometrics are developing and bringing to market products that use face recognition as well as eye, fingerprint, and other forms of biometric verification. Our products also will compete with other non-biometric technologies, such as certificate authorities and traditional keys, cards, surveillance systems, and passwords. Widespread adoption of one or more of these technologies or approaches in the markets we intend to target could significantly reduce the potential market for our systems and products. Due to our small size, it can be assumed that most if not all of our competitors have significantly greater financial, technical, marketing and other competitive resources. Many of our competitors and potential competitors have greater name recognition and more extensive customer bases that could be leveraged, for example, to position themselves as being more experienced, having better products, and being more knowledgeable than us. To compete, we may be forced to offer lower prices and narrow our marketing focus, resulting in reduced revenues. SECURITY BREACHES IN SYSTEMS THAT WE SELL OR MAINTAIN COULD RESULT IN THE DISCLOSURE OF SENSITIVE GOVERNMENT INFORMATION OR PRIVATE PERSONAL INFORMATION THAT COULD RESULT IN THE LOSS OF CLIENTS AND NEGATIVE PUBLICITY. Many of the systems we sell manage private personal information and protect information involved in sensitive government functions. A security breach in one of these systems could cause serious harm to our business as a result of negative publicity and could prevent us from having further access to such systems or other similarly sensitive areas for other governmental clients. Our systems may also be affected by outages, delays and other difficulties. We do not have insurance coverage that would cover losses and liabilities that may result from such events. 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, 6 investors may not be able to resell their shares at or above the price they paid for them or may not be able to sell their shares at all. Due to the registration of the shares, we will be subject to the reporting requirements of the Securities Exchange Act of 1934. As a company that files reports under this Act, our common stock will be considered a "covered security" under the National Securities Market Improvement Act of 1996 for secondary trading transactions in most states. We also intend to obtain coverage in Standard & Poor's Corporation Records, which we believe will facilitate secondary trading of our shares. REGULATIONS RELATING TO "PENNY STOCKS" MAY LIMIT THE ABILITY OF OUR SHAREHOLDERS TO SELL THEIR SHARES AND, AS A RESULT, OUR SHAREHOLDERS MAY HAVE TO HOLD THEIR SHARES INDEFINITELY. If a market develops for our common stock, our common stock would, most likely, be subject to rules promulgated by the SEC relating to "penny stocks," which apply to non-NASDAQ companies whose stock trades at less than 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 7 would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. BRITISH VIRGIN ISLANDS COMPANIES MAY NOT BE ABLE TO INITIATE SHAREHOLDER DERIVATIVE ACTIONS, THEREBY DEPRIVING SHAREHOLDERS OF THE ABILITY TO PROTECT THEIR INTERESTS. British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the US. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. AS A BRITISH VIRGIN ISLANDS CORPORATION, SHAREHOLDERS MAY HAVE DIFFICULTY IN ENFORCING JUDGMENTS AGAINST US, THEREBY RENDERING ANY JUDGMENTS USELESS. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for losses suffered. SINCE NONE OF OUR OFFICERS AND DIRECTORS IS A UNITED STATES RESIDENT, IT MAY BE DIFFICULT TO ENFORCE ANY LIABILITIES AGAINST THEM. All of our officers and directors reside in Hong Kong. Accordingly, if events should occur that give rise to any liability on the part of these persons, shareholders would likely have difficulty in enforcing such liabilities. If a 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 8 the PRC foreign exchange market during the preceding day. The PBOC also quoted the exchange rates of RMB against other foreign currencies based on the international market rate. On July 21, 2005, PBOC announced that the PRC government reformed the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of foreign currencies. As a result, RMB appreciated against U.S. dollars and Hong Kong dollars by approximately 2% on July 21, 2005. The value of RMB may continue to appreciate or depreciate in the future, subject to many factors, including future changes in the currency value of the basket of currencies with reference to which the RMB exchange rate is floated, changes in the PRC government's policy, domestic and international economic and political developments, as well as market supply and demand. Moreover, foreign exchange transactions under capital account (including principal payments in respect of foreign currency-denominated obligations) continue to be subject to foreign exchange controls and the approval of State Administration of Foreign Exchange of the PRC. The existing restrictions on the conversion of RMB into foreign currencies (and thus restrictions on the subsequent repatriation of those funds), and any tightening of such restrictions may have an adverse effect on our ability to obtain sufficient foreign currencies to meet our needs. Alternatively, in the event that RMB continues to appreciate in the future currencies (U.S. dollars, Hong Kong dollars or otherwise) and if RMB continues to appreciate in the future, we may incur exchange losses thereby affecting our profitability. INVESTORS IN THE COMPANY COULD BE HARMED IF MANAGEMENT SHOULD ENGAGE IN COMPETING BUSINESSES. Our officers and directors are not prohibited from engaging in competing businesses. We do not have a right of first refusal pertaining to opportunities that come to their attention and related to the operations of the company. While we believe that the ownership of stock in the company is sufficient to motivate management to focus primarily on the business of the company, we cannot assure you that this will not occur. The BVI corporate statute applicable to the company requires officers and directors, in performing their functions, to act honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, but this may be difficult to enforce. 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 9 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. 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$)) is derived from the financial statements for the fiscal years ended December 31, 2005, 2004 and 2003, included elsewhere in this prospectus. In June 2005, we acquired 100% ownership of Titanium Technology, but did not have any operations prior to the acquisition. Accordingly, for accounting purposes, the historical financial statements of Titanium Technology are the historical financial statements of the company. We have prepared the financial statements in accordance with generally accepted accounting principles. You should read this summary financial data in conjunction with "Management's Discussion and Analysis or Plan of Operation," "Business," and our financial statements. As stated in United States dollars:
INCOME STATEMENT DATA: YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2005 2004 2003 (US$) (US$) (US$) 2002 (RESTATED) (RESTATED) (US$) --------------------------------------------------------------------- Revenues $ 1,710,528 $ 814,006 $ 558,679 $ 547,095 Net income (loss) $ 101,924 $ 162,844 $ (101,951) $ 66,801 Net income (loss) per common share $ 0.002 $ 0.003 $ (0.002) $ 0.00 BALANCE SHEET DATA: DECEMBER 31, --------------------------------------------------------------------- 2005 2004 2003 2002 (US$) (US$) (US$) (US$) (RESTATED) (RESTATED) --------------------------------------------------------------------- Working capital $ 777,119 $ 236,560 $ 112,106 $ 104,727 Total assets $ 1,351,479 $ 535,896 $ 394,350 $ 331,051 Long-term debt $ - $ 182,051 $ 120,086 $ - Stockholders' equity $ 1,051,859 $ 181,263 $ 18,730 $ 120,809
10 As stated in Hong Kong dollars:
INCOME STATEMENT DATA: YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2005 2004 2003 (HK$) (HK$) (HK$) 2002 (RESTATED) (RESTATED) (HK$) --------------------------------------------------------------------- Revenues $ 13,342,121 $ 6,349,252 $ 4,357,694 $ 4,267,341 Net income (loss) $ 795,004 $ 1,270,181 $ (795,221) $ 521,046 Net income (loss) per common share $ 0.016 $ 0.027 $ (0.017) $ 0.01 BALANCE SHEET DATA: DECEMBER 31, --------------------------------------------------------------------- 2005 2004 2003 2002 (HK$) (HK$) (HK$) (HK$) (RESTATED) (RESTATED) --------------------------------------------------------------------- Working capital $ 6,061,528 $ 1,845,168 $ 874,425 $ 816,872 Total assets $ 10,541,537 $ 4,179,992 $ 3,075,927 $ 2,582,201 Long-term debt $ - $ 1,420,000 $ 936,667 $ - Stockholders' equity $ 8,204,496 $ 1,413,851 $ 146,097 $ 942,309
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 primarily through license sales of its products, 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 three of the last four 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 biometrics industry, especially in Hong Kong and the surrounding 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 increased awareness in the personal security area in which biometric technologies are some of the most commonly used applications. We expect the global market size 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 has exceeded our expectations in terms of false acceptance rates and verification rates. 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$517,425 (HK$4,035,915) 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 generate revenues principally from contracts for facial-based biometric identification and security projects, which typically include outside purchased workstations and live-scan devices, bundled with our proprietary software. In all cases, the customers are granted a license to use the software in perpetuity so long as the software is installed on the hardware for which it was originally intended. The contract price of our facial-based biometric identification and security projects generally includes twelve months of maintenance, which can be renewed. We also generate revenues from services performed under fixed-price and time-and-material agreements. To a lesser extent, we also generate revenues from sales of our proprietary biometrics products and re-sales of products sourced from outside third parties. We classify the revenues generated by these activities as either project products revenue, project services revenue, or maintenance services revenue. We apply the provisions of Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." For arrangements that require significant production, modification, or customization of software, we apply the provisions of Accounting Research Bulletin ("ARB") No. 45, "Long-Term Construction-Type Contracts," and SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." While these statements govern the basis for revenue recognition, significant judgment and the use of estimates are required in connection with the determination of the amount of product, maintenance and service revenue as well as the amount of deferred revenue to be recognized in each accounting period. Material differences may result in the amount and timing of our revenue for any period if actual results differ from management's judgment or estimates. PRODUCTS REVENUE. The timing of product revenue recognition is dependent on the nature of the product sold. Product arrangements comprising multiple deliverables including software, hardware, professional services, and maintenance are generally categorized into one of the following: o FACIAL-BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS THAT DO NOT REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION OF OUR SOFTWARE: Revenue associated with these arrangements, exclusive of amounts allocated to maintenance, for which we have vendor-specific objective evidence of fair value ("VSOE"), is recognized upon installation and receipt of written acceptance of the project by the customer when required by the provisions of the contract, provided that all other criteria for revenue recognition have been met. Revenue resulting from arrangements for which VSOE of the maintenance element does not exist is recognized ratably over the maintenance period. 12 o FACIAL-BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS THAT REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION OF OUR SOFTWARE: Revenue associated with these arrangements is recognized using the percentage of completion method as described by SOP 81-1. The percentage of completion method reflects the portion of the anticipated contract revenue, excluding maintenance that has VSOE, which has been earned, equal to the ratio of labor effort expended to date to the anticipated final labor effort, based on current estimates of total labor effort necessary to complete the project. Revenue resulting from arrangements for which VSOE of the maintenance element does not exist is recognized ratably over the contractual maintenance period. o SELF-DEVELOPED SOFTWARE PRODUCTS SALES AND RE-SALE OF PURCHASED THIRD PARTIES PRODUCTS: Revenue associated with the sale of these products, excluding maintenance when applicable, is recognized upon shipment to the customer. The amount of these revenues has historically not been significant. SERVICES REVENUE. Services revenue is primarily derived from computer engineering services, system design, consulting and integration and maintenance services that are not an element of an arrangement for the sale of products. These services are generally billed on a time and materials basis. The majority of our professional services are performed under time-and-materials arrangements. Revenue from such services is recognized as the services are provided. MAINTENANCE SERVICES REVENUE. Maintenance revenue consists of fees for providing technical support and software updates, primarily to customers purchasing the primary products. We recognize all maintenance revenue ratably over the applicable maintenance period. We determine the amount of maintenance revenue to be deferred through reference to substantive maintenance renewal provisions contained in the arrangement. INTEREST INCOME. Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable. REVENUE RECOGNITION CRITERIA. We recognize revenue when persuasive evidence of an arrangement exists, the element has been delivered, the fee is fixed or determinable, collection of the resulting receivable is probable and VSOE of the fair value of any undelivered element exists. A discussion about these revenue recognition criteria and their applicability to our transactions follows: o PERSUASIVE EVIDENCE OF AN ARRANGEMENT: We use either contracts signed by both the customer and us or written purchase orders issued by the customer that legally bind us and the customer as evidence of an arrangement. o PRODUCT DELIVERY: We deem delivery to have occurred when the products are installed and, when required under the terms of the arrangement, when accepted by the customer. Delivery of other re-sale products are recognized as revenue when products are shipped and title and risk of ownership has passed to the buyer. o FIXED OR DETERMINABLE FEE: We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and the payment terms are within our normal established practices. If the fee is not fixed or determinable, we recognize the revenue as amounts become due and payable. o COLLECTION IS DEEMED PROBABLE: We conduct a credit review for all significant transactions at the time of the arrangement to determine the credit-worthiness of the customer. Collection is deemed probable if we expect that the customer will pay amounts under the arrangement as payments become due. SALES TO AUTHORIZED DISTRIBUTORS. We also use authorized distributors to sell 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 the end customers. From our perspective, the authorized distributors are the ordinary customers and the only preferential treatment to them is that the sales prices to distributors have been predetermined in accordance with the 13 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. We are not required to provide training to authorized distributors. RESEARCH AND DEVELOPMENT COSTS. Research costs are expensed as incurred. The major components of these research and development costs are the labor cost. INTANGIBLE ASSETS/SOFTWARE DEVELOPMENT COSTS. Intangible assets consist primarily of capitalized software development costs. We review software development costs incurred in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") 86 "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," which requires that certain costs incurred in the development of computer software to be sold or leased be capitalized once technological feasibility is reached. We capitalized US$108,722 (HK$848,034) and US$116,735 (HK$910,536) for the years ended December 31, 2004 and 2005, respectively, for projects ProAccess and ProFacer. The purchased software license costs, patent costs, and the capitalized software development costs are amortized over an estimated economic life of five years, which is consistent with the expected life of these assets. We received government funding in the amounts of US$136,515 (HK$1,064,820), US$150,557 (HK$1,174,345) and US$97,016 (HK$756,723) for the years ended December 31, 2003, 2004 and 2005, respectively. This funding income was offset to software-development costs incurred prior to the beginning of the capitalization period. According to paragraph 73 of SOP 97-2, if capitalization of the software-development costs commences pursuant to SFAS No. 86, any income from the funding party under a funded software-development arrangement should be credited first to the development costs prior to capitalization. The following table illustrates the movement of the capitalized software development costs:
AS OF DECEMBER 31, 2005 2005 2004 2004 ---- ---- ---- ---- US$ HK$ US$ HK$ Software development costs 213,751 1,667,259 259,279 2,022,379 Grant income (97,016) (756,723) (150,557) (1,174,345) ----------------- ---------------- ---------------- ---------------- Capitalized development costs 116,735 910,536 108,722 848,034 ================= ================ ================ ================
Grant and subsidy income represents subsidy from the Government of the Hong Kong Special Administrative Region ("HKSAR") for assisting us in the development of products of innovative nature. The products developed under this subsidy plan include ProAccess and ProFacer. Pursuant to the agreements made between us and HKSAR, HKSAR is required to provide funding to us for product development. The funding is made available to us in accordance with the milestones as established by us and is subject to a ceiling of US$256,410 (HK$2,000,000). We are not required to repay the Government grant, but we are required to contribute approximately 50% of the overall project cost in accordance with the grant agreement. Also, upon completion of the project, we have to tender to the Government its pro rata share of the residual funds remaining in the project account. In addition we are obligated to pay the Government a royalty fee of 5% on the gross revenue earned from any activities in connection with the project, up to an aggregate amount equal to the amount subsidized to us. The royalty fee paid by us for each of the years ended December 31, 2003, 2004 and 2005 amounted to US$4,186 (HK$32,647), US$4,427 (HK$34,532) and US$6,166 (HK$48,092), respectively. We are entitled to retain ownership of the intellectual property resulting from the project. FOREIGN CURRENCY TRANSLATION METHODOLOGY. Our functional currency is the Hong Kong dollar because the majority of our revenues, capital expenditures, and operating and borrowing costs are either denominated in Hong Kong dollars or linked to the Hong Kong dollar exchange rate. Accordingly, transactions and balances not already measured in Hong Kong dollars, which are primarily transactions involving the United States dollar and the PRC Yuan, have been re-measured into Hong Kong dollars in accordance with the relevant provisions of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." The object of this re-measurement process 14 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, 2005 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2004. Project revenues increased by US$897,180 (HK$6,998,002) (121.1%) comparing the 2005 year to the 2004 year, 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. Sales to the Elixir Group were US$225,000 (HK$1,755,000). Prices for our products and services were constant in 2004 and 2005. Accordingly, the increase in sales was due to increased volume of products and services sold in 2005. For 2005, none of the project revenues was derived from sales of product to related parties, as compared to 4.6% of project revenues in 2004 and 21.6% in 2003. The gross margin as a percentage of project revenues showed a negligible decrease in 2005 to 45.3% from 46.0% in 2004. Gross margin on project revenues in terms of dollars increased to US$741,357 (HK$5,782,591) in 2005 from US$340,741 (HK$2,657,783) in 2004 due to the increase in sales revenues. As a percentage of all revenues, maintenance revenue was 8.9% in 2004 and 4.2% in 2005. As part of the product purchase, we provide both product warranty and post-contract customer support to our customers for a period of twelve months, free of charge and then at the discretion of the customers, enter into definite maintenance contracts. Management believes that the decrease in percentage is due to more customers opting to forego a definite maintenance contract at the end of the twelve-month period. Selling, general and administrative expenses increased from US$233,180 (HK$1,818,804) in 2004 to US$655,769 (HK$5,115,000) in 2005 due to the expansion of our operations, which included hiring more personnel. The increase in personnel and increase in outside professional fees each accounted for approximately 25% of the increase in selling, general and administrative expenses. Outside professional fees included patent application preparation and filing, product design, and testing expense. The remaining 50% of the increase can be attributed to setup expenditures for our new research and development center facility in Beijing (20%), an increase in marketing and promotional expenses (20%) and an increase of overall general expenditures because of our larger scale of operations (10%). As a percentage of revenues, these selling, general and administrative expenses increased from 28.6% in 2004 to 38.3% in 2005. Primarily as a result of the increased selling, general and administrative expenses, and to a lesser extent to research and development expenses of US$24,372 (HK$190,100) in 2005, operating income decreased 27.3% in 2005 to US$124,944 (HK$974,561) from US$171,946 (HK$1,341,182) in 2004. Other income in 2005 of US$9,806 (HK$76,491), which consisted primarily of government grant income, increased from US$8,092 (HK$63,117) in 2004. Income taxes for 2005 were 59.8% higher than in 2004. As a result, while we generated 110% more revenues in 2005, our increased operating costs and provision for income taxes resulted in net income 37.4% lower than that of 2004. 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. We benefited from both an improved pricing structure for our products in 2004 as compared to 2003, as described below, and from increased volume of projects sold. 15 The gross margin related to projects also improved as a percentage of sales in 2004, from 35.2% to 46.0%, and in terms of dollars, from US$172,782 (HK$1,347,699) to US$340,741 (HK$2,657,783), 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. In 2003, the Hong Kong economy was adversely affected by the Severe Acute Respiratory Syndrome (SARS) epidemic, which depressed the market price for software products, such as ours. When comparing the gross margin on project products revenue versus project services revenue in 2004 and 2003, it could be stated that all of the improvement in the gross margin can be attributed to an increase in the project products revenue. 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$260,138 (HK$2,029,078) in 2003 to US$233,180 (HK$1,818,804) 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. We established our research center in Shenzhen, PRC, in 2003, causing the 2003 expenses to be higher. 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. Accordingly, we reported operating income of US$171,946 (HK$1,341,182) for 2004, as compared to an operating loss of US$116,756 (HK$910,694) for 2003. Other income in 2004 was US$6,253 (HK$48,774) less in 2004 than in 2003, primarily due to a decrease in government grant income. However, we generated net income of US$162,844 (HK$1,270,181) for 2004, as compared to a net loss of US$101,951 (HK$795,221) for 2003. LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 2005 AND 2004. At December 31, 2005, we had working capital of US$777,119 (HK$6,061,528), as compared to US$236,560 (HK$1,845,168) at December 31, 2004. The increase was due primarily to the completion of the private placement, resulting in net proceeds of US$517,425 (HK$4,035,915). The proceeds from the private placement 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$280,000 (HK$2,184,000) 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. 16 In 2005, our operating activities and investing activities used cash of US$230,958 (HK$1,801,477) and US$219,422 (HK$1,711,493), respectively. Our accounts receivable increased by US$419,892 (HK$3,275,164) and our deposits and other receivables increased by US$132,394 (HK$1,032,672). We increased intangible assets by US$118,942 (HK$927,752) in 2005, with US$116,735 (HK$910,536) of the amount being capitalized product development costs. Also, we used US$100,480 (HK$783,741) primarily to renovate our newly leased offices. Financing activities provided a total of US$700,417 (HK$5,463,260), with most of the amount provided by net proceeds of our private placement. The remainder was provided by a bank overdraft. In addition, 2005 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, after offsetting against amounts due from related parties, was contributed to the capital of the company and aggregated approximately US$251,395 (HK$1,960,882). For the 2004 fiscal year, operating activities provided cash of US$85,201 (HK$664,568), primarily due to our profitable operations. Included in the US$19,434 (HK$151,586) provided by financing activities was a shareholders' loan of US$64,103 (HK$500,000) and repayment of a bank loan of US$25,641 (HK$200,000). The bank loan was personally guaranteed by our directors. Of the US$132,870 (HK$1,036,389) used for investing activities, US$117,247 (HK$914,524) was capitalized product development costs. In comparison, 2003 financing activities provided cash of US$172,656 (HK$1,346,716). Financing activities included a shareholders' loan of US$117,949 (HK$920,000) and proceeds of a loan in the amount of US$38,462 (HK$300,000) from HKCB Finance Limited, the repayment of which was personally guaranteed by our officers and directors. Operating activities used cash of US$113,262 (HK$883,441), primarily due to the net loss of US$101,951 (HK$795,221). Investing activities used US$27,812 (HK$216,931). We capitalized US$17,537 (HK$136,788) and used US$10,275 (HK$80,143) for office furniture and computer equipment. At December 31, 2005, we had contractual obligations as set forth below, as stated in United States dollars (US$):
- ----------------------------------------------------------------------------------------------------------------- PAYMENTS DUE BY PERIOD --------------------------------------------------------------- LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 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 $91,135 $36,454 $54,681 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 $91,135 $36,454 $54,681 Nil Nil - -----------------------------------------------------------------------------------------------------------------
These amounts stated in Hong Kong dollars (HK$) are as follows:
- ----------------------------------------------------------------------------------------------------------------- PAYMENTS DUE BY PERIOD --------------------------------------------------------------- LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 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 $710,850 $284,340 $426,510 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 $710,850 $284,340 $426,510 Nil Nil - -----------------------------------------------------------------------------------------------------------------
17 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 be owned by both parties. While the contract required us to have paid all of the costs by September 30, 2005, certain payment installments were delayed. Accordingly, at September 30, 2005, we had paid approximately half of the roughly US$25,000 (HK$192,000) required under the contract, and paid the remainder in February 2006. 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. In light of our working capital of US$777,119 (HK$6,061,528) at December 31, 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 fixed overhead 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 December 31, 2005, our backlog of orders believed to be firm was approximately US$1,000,000 (HK$7,800,000), as compared to approximately US$320,000 (HK$2,500,000) at December 31, 2004. We expect that approximately US$577,000 (HK$4,500,000) will not be filled by March 31, 2006. We expect that the above fixed overhead amount 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. 18 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 network of over 40 IT practitioners and researchers, enabling us to provide proprietary biometrics products and professional services. We have developed and sold Automatic Face Recognition Systems, or AFRS, and other biometric and security solutions to governments, law enforcement agencies, gaming companies, and other organizations in China and other parts of Asia. Our AFRS products enable customers to capture human face images electronically, encode facial image into searchable files (faceprint), and precisely compare a set of faces to a database containing potentially thousands of faces in seconds. Although different biometrics, e.g. finger scan, may be widely employed in similar applications, we believe that face recognition has several advantages over the existing alternatives. First, there is no direct contact between the device and users, and hence the problems of cleanliness and wear on the equipment are greatly reduced. Second, 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 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 19 services to various government offices, financial institutions, universities, telecommunication companies, and 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 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. 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 - -------------------------------------------------------------------------------------------------------------------------
20 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 a high degree of security against unauthorized access, especially when compared to authentication methods such as unsecured simple text input and unreliable memories. In addition, ProAccess FaceOK offers features such as audit trail, face learning, active user monitoring, and web-based single sign-on services and integrated with directory services. Audit Trail is enabled to capture all unauthorized login attempts (with images of trespassers and hackers) and store that information in a log file. The Face Learning function allows the user to learn the latest face whenever a login occurs. Natural facial progression does not compromise system accuracy. Active Monitoring monitors the environment actively to ensure continuous access control. The system proactively locks itself out when the authorized user is not detected. Hidden Encryption encrypts a file and masks it with an image file type so that only authorized users can retrieve its true content, while it appears as a normal file to others. Furthermore, users can logon to different Directory Services with the use of FaceOK. Those directories can be Novell eDirectory, Microsoft Active Directory, NT Domain, NDS, iPlanet and other LDAP compliant directories. 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 an accurate data collection solution by ensuring that employees must be present in order to record their attendance. 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 or clock-in. No fingerprints or palm prints are utilized. 21 ProAccess FaceAttend can be installed at convenient locations throughout a facility to make it easy for employees to clock in. Punching or clocking in 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. 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. 22 Characteristic processes enabling ProFacer to function effectively are detection, alignment, normalization, representation and matching: o DETECTION - When the system is attached to a video surveillance system, ProFacer recognition software searches the field of view of a video camera for human faces. If there is a face in the view, it is detected within a second. o ALIGNMENT - Once a face is detected, the system determines the head's position, size and pose. A face needs to be turned to an appropriate angle toward the camera for the system to register it. o NORMALIZATION - The image of the head is scaled and rotated so that it can be registered and mapped into an appropriate size and pose. Normalization is performed regardless of the head's location and distance from the camera. Light does not impact the normalization process. o REPRESENTATION - The system translates the facial data into a binary string - "Faceprint". This coding process allows for easier comparison of the newly acquired facial data to stored facial data. o MATCHING - The newly acquired facial data is compared to the stored data and linked to at least one stored facial representation. As comparisons are made, the system assigns a value to the comparison. If a score is above a predetermined threshold, a match is declared. The operator then views the two photos that have been declared a match to be certain that the computer is accurate.
- ----------------------------------------------------------------------------------------------------------------------- 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. 23 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 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 24 best protect vital information and assets both virtually on the Internet and physically without compromising productivity or endangering the bottom line. Our services include security consulting, risk assessment and penetration testing. Security training is also provided for the staffs to increase the security awareness and knowledge. Our clients include the Labour Department of Hong Kong SAR, Tokyo Bank of Mitsubishi, Citic Ka Wah Bank, Hong Kong Productivity Council, Mandatory Provident Fund Schemes Authority, and Mass Transit Railway Corp (MTRC). In addition, we agreed to partner with IBM China/Hong Kong Limited to provide professional services for the Hong Kong government, as part of our role as a service supplier to IBM China/Hong Kong Limited under a Technical Service Agreement dated October 5, 2004. That agreement outlines a general working relationship, with specific deliverables, services, and pricing to be outlined from time to time in statement of work documents. SYSTEM DEVELOPMENT/INTEGRATION. Our solution team utilizes its technical expertise to implement complex business systems, thereby reducing time and risk for our customers' mission critical projects. We work with business systems critical to the running large commercial and public sector organizations, as well as large-scale technical systems designed to operate to the highest levels of reliability in demanding conditions. To keep pace with the competitive IT world, our staff have been equipped with newly and advanced knowledge, such as Microsoft .net and J2EE, on system implementation work. DISTRIBUTION AND MARKETS We select distributors based on the potential impact of the distribution relationship. We seek to cooperate with business partners that will bring synergies, making it quicker to penetrate the target market and localization. Distributors in the United States include Elite Technology Solutions and eInfoDev Inc. Distributors in Asia include Smart Wireless (Japan), Elixir Group (Macau), Maxfair Technology Limited (Hong Kong), and Regal Cyber Group (Hong Kong and People's Republic of China). However, for major accounts that are readily accessible, we tend to handle such accounts ourselves since these corporate clients expect expert knowledge and demand flexibility. 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. 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 25 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 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%, 8% and 11% of our business in fiscal 2005, 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 For the year ended December 31, 2005, four customers accounted for over 50% of our revenue. The following four customers were each over 10%: Elixir Group (Macau) Ltd. (13.2%), MTR Corporation Ltd. (12.0%), GuangXi Hai Tin Electric Ltd. (11.5%) and Adamson & Gonzalez SL (11.5%). During the fiscal year ended December 31, 2004, eight customers accounted for approximately 75% of revenues. Sales to Beacon Base Software Ltd. and Information Security One (Hong Kong) Ltd. were 20.1% and 12.7% of revenues, respectively. In 2003, four customers accounted for 56% of our revenue and were each over 10%: Ericorps Creation (HK) Limited (19.0%), MTR Corporation Limited (15.2%), Labor Department of HKSAR (11.9%) and Hong Kong Academy of Medicine (10.1%). 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 customers who each accounted for over 10% of our revenue for a particular fiscal year are not the same as the significant customers for other fiscal years, this indicates that we need to expand our client base so that we will no longer be subject to this risk. 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 December 31, 2005, our backlog of orders believed to be firm was approximately US$1,000,000 (HK$7,800,000), as compared to approximately US$320,000 (HK$2,500,000) at December 31, 2004. We expect that approximately US$577,000 (HK$4,500,000) will not be filled by March 31, 2006. 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 26 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 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. On January 12, 2006, Identix and Viisage announced that they have entered into a definitive agreement to merge. As of the date of this prospectus, the merger has not been completed. RESEARCH AND DEVELOPMENT During the fiscal years ended December 31, 2005, 2004 and 2003, we spent $ nil, $nil and US$89,092 (HK$694,918), 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 27 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 be owned by both parties. 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 had paid approximately half of the roughly US$25,000 (HK$192,000) required under the contract, and paid the remainder in February 2006. 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 February 28, 2006, we employed a total of 47 persons, of which 40 were full-time. None of our employees is covered by a collective bargaining agreement. FACILITIES Our principal offices are located at 4/F, BOCG Insurance Tower, 134-136 Des Voeux Road, Central, Hong Kong. We have entered into a lease contract with this new property that runs through June 2008, with an option to renew for an additional term of two years. The lease requires monthly rent of HK$23,695 (approximately 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. We have another research and development center at No. 95 ZhongGuanCun East Road, Haidan District, Beijing, China. 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. 28 MANAGEMENT OFFICERS, DIRECTORS AND KEY EMPLOYEES Our executive officers, directors, and key employees are: NAME AGE POSITION Dr. Kit Chong "Johnny" Ng 31 Chairman of the Board of Directors Jason Ma 33 Chief Executive Officer Prof. Stan Li 47 Chief Scientific Advisor Kin Kwong "Humphrey" Cheung 34 Chief Technology Officer and Director Wai Hung "Billy" Tang 32 Chief Operation Officer and Director 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. KIT CHONG "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 29 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 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. KIN KWONG "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. WAI HUNG "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. 30 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 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) 2003 $41,538 $-0- $-0- $-0- -0- $-0- $-0- 2004 $30,512 $-0- $-0- $-0- -0- $-0- $-0- 2005 $-0- $-0- $-0- $-0- -0- $-0- $-0- - ----------------------------------------------------------------------------------------------------------------------- Humphrey Cheung 2003 $58,974 $-0- $-0- $-0- -0- $-0- $-0- 2004 $51,282 $-0- $-0- $-0- -0- $-0- $-0- 2005 $46,154 $-0- $-0- $-0- -0- $-0- $-0- - ----------------------------------------------------------------------------------------------------------------------- Billy Tang 2003 $58,974 $-0- $-0- $-0- -0- $-0- $-0- 2004 $51,282 $-0- $-0- $-0- -0- $-0- $-0- 2005 $46,154 $-0- $-0- $-0- -0- $-0- $-0- - -----------------------------------------------------------------------------------------------------------------------
31 SUMMARY COMPENSATION TABLE AS SHOWN IN HONG KONG DOLLARS (HK$)
- ----------------------------------------------------------------------------------------------------------------------- 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) 2003 $323,996 $-0- $-0- $-0- -0- $-0- $-0- 2004 $237,994 $-0- $-0- $-0- -0- $-0- $-0- 2005 $-0- $-0- $-0- $-0- -0- $-0- $-0- - ----------------------------------------------------------------------------------------------------------------------- Humphrey Cheung 2003 $459,997 $-0- $-0- $-0- -0- $-0- $-0- 2004 $400,000 $-0- $-0- $-0- -0- $-0- $-0- 2005 $360,000 $-0- $-0- $-0- -0- $-0- $-0- - ----------------------------------------------------------------------------------------------------------------------- Billy Tang 2003 $459,997 $-0- $-0- $-0- -0- $-0- $-0- 2004 $400,000 $-0- $-0- $-0- -0- $-0- $-0- 2005 $360,000 $-0- $-0- $-0- -0- $-0- $-0- - -----------------------------------------------------------------------------------------------------------------------
- -------------------------- (1) Mr. Johnny Ng functioned as the Chief Executive Officer from September 2001 to April 2005. Mr. Ng waived his salary for 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 32 year if the employment or consulting relationship had continued, would be exercisable within the one year period following the optionee's death by his or her estate or by the person who acquired the exercise right by bequest or inheritance. Options granted under the plan would not transferable other than by will or the laws of descent and distribution and may be exercised during the optionee's lifetime only by the optionee, except that a non-statutory stock option would be transferable to a family member or trust for the benefit of a family member if the committee's prior written consent is obtained. We anticipate that we will have the right to redeem any shares issued to any optionee upon exercise of the option granted under the plan immediately upon the termination of optionee's employment or service arising from disability, the death of the optionee, the voluntary termination of employment or services of the optionee, or the termination of employment or services of the optionee for cause. The redemption price would be the fair market value of the shares on the date of the event of redemption. In the event that our stock changes by reason of any stock split, dividend, combination, reclassification or other similar change in our capital structure effected without the receipt of consideration, appropriate adjustments shall be made in the number and class of shares of stock subject to the plan, the number and class of shares of stock subject to any option outstanding under the plan, and the exercise price for shares subject to any such outstanding option. In the event of a merger in which our shareholders immediately before the merger own 50% or more of the issued and outstanding shares of stock of the resulting entity after the merger, then existing options shall automatically convert into options to receive stock of the resulting entity. Unless otherwise expressly provided in any option, the committee in its sole discretion may cancel, effective upon the date of the consummation of any change of control, any option that remains unexercised on such date. We anticipate that the plan will authorize the board to amend, alter, suspend, or terminate the plan, or any part thereof, at any time and for any reason. However, the plan would require shareholder approval for any amendment to the plan to the extent necessary and desirable to comply with applicable laws. No such action by the board or shareholders would alter or impair any option previously granted under the plan without the written consent of the optionee. The plan would remain in effect until terminated by action of the board or operation of law. 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 33 NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER OF SHARES OWNED PERCENT OF CLASS (2) - ---------------------------------------------------------------------------------------------------------------------- Billy Tang 0 (3) -- 4/F BOCG Insurance Tower 134-136 Des Voeux Road Central Hong Kong Jason Ma 0 -- 4/F BOCG Insurance Tower 134-136 Des Voeux Road Central Hong Kong All Directors and Executive Officers As a Group (4 37,835,000 75.7% persons) - ------------------ (1) To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name. (2) Based on 50,000,000 shares outstanding as of December 5, 2005. Does not give effect to the possible exercise of the Warrants. (3) Includes 37,835,000 shares owned by Golden Mass Technologies Ltd., a British Virgin Islands company, as to which Johnny Ng has sole voting and dispositive power 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. We sell our products to distributors at prices based on the quantities purchased. The price decreases as the quantity increases. The terms that we have with Ericorps are the same as those with other third party distributors. During the years ended December 31, 2005, 2004 and 2003, we sold products to Ericorps Creation (HK) Limited in the amounts of $nil, US$34,204 (HK$266,791) and US$105,874 (HK$825,820), 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 34 Golden Mass does not maintain a bank account in Hong Kong. The amounts paid were US$769 (HK$6,000), US$705 (HK$5,500) and US$705 (HK$5,500) for the years ended December 31, 2005, 2004 and 2003, respectively. This practice has ceased effective January 1, 2006. In 2003, when we decided to establish an office in PRC, we established an annual budget for the subsidiary and we remitted cash in those budgeted amounts to Humphrey Cheung. Due to the fact that non-cash payment methods are not widely accepted in the PRC, we have advanced cash to Humphrey Cheung, who then pays expenditures for our PRC subsidiary, such as salaries, fees, and rent, in cash. This practice continued in 2003 and 2004. The amounts paid to Humphrey Cheung for this purpose were US$165,879 (HK$1,293,860), US$86,439 (HK$674,225) and US$59,710 (HK$465,737) during the years ended December 31, 2005, 2004 and 2003, respectively. In 2005, after review of its cash levels and its related party transactions, management concluded that it would discontinue this practice and would also prohibit the practice of advancing funds to related parties. The following table sets forth the advances and repayments, as stated in Hong Kong dollars (HK$):
Humphrey Golden Mass Total Cheung Cash Non-cash HKD HKD HKD - ------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 2002 - - Personal expenses paid on behalf v 19,434 6,100 25,534 Unpaid share capital v - 360,000 360,000 - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2002 19,434 366,100 385,534 Loan to director for PRC subsidiary expenses v 465,737 - 465,737 Repayment v (48,441) - (48,441) Personal expenses paid on behalf v - 5,500 5,500 - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2003 436,730 371,600 808,330 Loan to director for PRC subsidiary expenses v 674,225 - 674,225 Repayment v (79,370) - (79,370) Share capital paid up by set-off with - (360,000) (360,000) shareholder's loan v Personal expenses paid on behalf v - 5,500 5,500 - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2004 1,031,585 17,100 1,048,685 Loan to director for PRC subsidiary expenses v 1,293,860 - 1,293,860 Personal expenses paid on behalf v - 6,000 6,000 Repayment v (681,684) (681,684) Amount setting off against "Amount due to related parties" v (1,643,761) (23,100) (1,666,861) - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2005 - - - ========================================================================================================================
AMOUNTS DUE TO RELATED PARTIES In 2002 and 2003, Johnny Ng, Billy Tang, and Goldford Consultancy Limited ("Goldford") advanced US$37,190 (HK$290,085), to us, net of repayments. 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 year ended December 31, 2005, Johnny Ng and Billy Tang loaned us US$457,629 (HK$3,569,508) and we repaid them US$201,611 (HK$1,572,562), leaving a balance of US$283,044 (HK$2,207,743). Both Johnny Ng and Billy Tang agreed to offset US$213,700 (HK$1,666,861) of this amount against amounts due from related parties. Johnny Ng and Billy Tang then forgave the balance of US$69,344 (HK$540,882) and this amount was contributed to the capital of the company. The following table sets forth the movement of the amounts due to related parties in Hong Kong dollars (HK$): 35
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 3,569,508 441,512 632,957 408,404 Repayment by us during the year (1,572,562) (520,800) (537,137) (218,855) Amount offset against amounts due from related parties (1,666,861) - - - Amount forgiven and contributed to Additional paid-in capital (540,882) - - - ---------------------------------------------------------------------- Balance carried forward $ - $ 210,797 $ 290,085 $ 194,265 ======================================================================
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 year ended December 31, 2005, no additional money was loaned. These loans were unsecured, interest-free, and not repayable within the next twelve months. The whole amount of US$182,051 (HK$1,420,000) was forgiven by the shareholders and contributed to the company as additional paid-in capital in 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. On February 6, 2006, Billy Tang, Johnny Ng, and Humphrey Cheung personally guaranteed our banking facilities arrangement with the bank where we maintain our checking account. The arrangement allows us to overdraft our account up to US$256,410 (HK$2,000,000) and Messrs. Tang, Ng and Cheung have provided their personal guarantees up to that amount. 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. 36 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 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. 37 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.
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. 38 BRITISH VIRGIN ISLANDS DELAWARE ======================================== ========================================== 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. 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 10 days 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 place, date, 39 BRITISH VIRGIN ISLANDS DELAWARE ======================================== ========================================== time and general nature of nor more than 60 days before the date on the business to be conducted shall be which the meeting is to be held to each given at least 7 days before the date of stockholders entitled to vote at such 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. 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 the stockholders or the existing 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. 40 Board of director The company's articles of association Under Delaware law, vacancies and newly vacancies provide that any vacancy on the board of created directorships may be filled by a directors may be filled either by the majority of the directors then in office, stockholders or by the remaining even though less than a quorum, unless directors. otherwise provided in the certificate of incorporation or bylaws. 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 indemnified and held harmless 41 that his conduct was unlawful. The for all expenses, liability and loss, decision of the directors as to whether including attorneys' fees, judgments, fines, the person acted appropriately is, in the ERISA excise taxes or penalties and amounts absence of fraud, sufficient. 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 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. 42 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. 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. 43 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.
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) 44 OWNERSHIP AFTER OFFERING -------------------------- NUMBER OF SHARES SHARES BENEFICIALLY REGISTERED FOR NUMBER OF NAME OF SELLING SHAREHOLDER OWNED (1) RESALE (2) SHARES (3) PERCENT --------- ---------- ---------- -------- 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) 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. 45 (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%. (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. 46 The selling shareholders may also sell their shares directly to market makers acting as principals or brokers or dealers, who may act as agent or acquire the common stock as a principal. Any broker or dealer participating in such transactions as agent may receive a commission from the selling shareholder or, if they act as agent for the purchaser of such common stock, from such purchaser. The selling shareholder will likely pay the usual and customary brokerage fees for such services. Brokers or dealers may agree with the selling shareholder to sell a specified number of shares at a stipulated price per share and, to the extent such broker or dealer is unable to do so acting as agent for the selling shareholder, to purchase, as principal, any unsold shares at the price required to fulfill the respective broker's or dealer's commitment to the selling shareholder. Brokers or dealers who acquire shares as principals may thereafter resell such shares from time to time in transactions in a market or on an exchange, in negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices, and in connection with such resales may pay or receive commissions to or from the purchasers of such shares. These transactions may involve cross and block transactions that may involve sales to and through other brokers or dealers. We can provide no assurance that all or any of the common stock offered will be sold by the selling shareholders. 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, 2005, 2004 and 2003, 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. INDEX TO FINANCIAL STATEMENTS Financial Statements - Years Ended December 31, 2005, 2004 and 2003 Report of Independent Registered Public Accounting Firm.................F-1 Consolidated Balance Sheets December 31, 2005 and 2004..........................................F-2 Consolidated Statement of Income Years Ended December 31, 2005, 2004 and 2003........................F-4 Consolidated Statement of Stockholders' Equity Years Ended December 31, 2005, 2004 and 2003........................F-6 Consolidated Statements of Cash Flows Years Ended December 31, 2005, 2004 and 2003........................F-7 Notes to Consolidated Financial Statements..............................F-9 48 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Titanium Group Limited We have audited the accompanying consolidated balance sheets of Titanium Group Limited and subsidiaries ("the Company") as of December 31, 2004 and 2005, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2005. 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 subsidiaries at December 31, 2004 and 2005, and the consolidated results of operations and cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. /s/ ZHONG YI (HONG KONG) C.P.A. COMPANY LIMITED Zhong Yi (Hong Kong) C.P.A. Company Limited Certified Public Accountants Hong Kong, China March 7, 2006 TITANIUM GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
AS OF DECEMBER 31, 2005 2005 2004 (US$) (HK$) (HK$) (restated) ASSETS Current assets: Cash and cash equivalents 317,010 2,472,677 523,543 Accounts receivable from a related party - - 1,048 Accounts receivable 604,104 4,712,014 1,436,850 Amount due from related parties - - 1,048,685 Inventories 8,941 69,737 20,953 Deposits and other receivables 146,684 1,144,141 111,469 -------------- -------------- -------------- Total current assets 1,076,739 8,398,569 3,142,548 -------------- -------------- -------------- Plant and equipment Computer system 30,003 234,026 218,495 Leasehold improvements 96,424 752,110 36,430 Furniture and fixtures 2,867 22,360 19,660 Office equipment 7,188 56,067 42,667 -------------- -------------- -------------- 136,482 1,064,563 317,252 Less: accumulated depreciation (42,169) (328,924) (142,253) -------------- -------------- -------------- Plant and equipment, net 94,313 735,639 174,999 -------------- -------------- -------------- Intangible assets, net 180,427 1,407,329 862,445 -------------- -------------- -------------- Total assets 1,351,479 10,541,537 4,179,992 ============== ============== ==============
See accompanying notes to consolidated financial statements. F-2 TITANIUM GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
AS OF DECEMBER 31, 2005 2005 2004 (US$) (HK$) (HK$) (restated) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft 193,187 1,506,862 62,850 Current portion of bank borrowings - - 16,667 Amount due to related parties - - 210,797 Accounts payable 52,970 413,164 607,044 Deferred revenue - - 263,662 Income taxes payable 53,463 417,015 136,360 -------------- -------------- -------------- Total current liabilities 299,620 2,337,041 1,297,380 -------------- -------------- -------------- Long-term debt, shareholders' loans - - 1,420,000 -------------- -------------- -------------- Minority interest - - 7,190 -------------- -------------- -------------- Deferred tax liabilities - - 41,571 -------------- -------------- -------------- Stockholders' equity: Common stock, US$0.01 (HK$0.078) par value, 100,000,000 shares authorized, 47,000,000 shares and 50,000,000 shares issued and outstanding at December 31, 2004 & 2005 respectively 500,000 3,900,000 390,000 Additional paid-in capital 318,820 2,486,797 - Retained earnings 233,614 1,822,183 1,027,179 Accumulated other comprehensive Income (575) (4,484) (3,328) -------------- -------------- -------------- 1,051,859 8,204,496 1,413,851 -------------- -------------- -------------- Total liabilities and stockholders' equity 1,351,479 10,541,537 4,179,992 ============== ============== ==============
See accompanying notes to consolidated financial statements. F-3 TITANIUM GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
YEAR ENDED DECEMBER 31, 2005 2005 2004 2003 (US$) (HK$) (HK$) (HK$) (restated) (restated) Revenues Projects Products 1,009,875 7,877,028 4,099,371 2,048,412 Products sold to related parties - - 266,791 825,820 Services 628,464 4,902,023 1,414,887 951,859 -------------- -------------- -------------- -------------- 1,638,339 12,779,051 5,781,049 3,826,091 -------------- -------------- -------------- -------------- Maintenance Services 72,189 563,070 568,203 531,603 -------------- -------------- -------------- -------------- Total revenues 1,710,528 13,342,121 6,349,252 4,357,694 -------------- -------------- -------------- -------------- Cost of sales Projects Cost of products sold 431,918 3,368,963 1,975,940 1,277,876 Cost of products sold to related parties - - 128,607 515,178 Cost of services 465,064 3,627,497 1,018,719 685,338 -------------- -------------- -------------- -------------- 896,982 6,996,460 3,123,266 2,478,392 -------------- -------------- -------------- -------------- Maintenance Services 8,461 66,000 66,000 66,000 -------------- -------------- -------------- -------------- Total cost of sales 905,443 7,062,460 3,189,266 2,544,392 -------------- -------------- -------------- -------------- Gross profit 805,085 6,279,661 3,159,986 1,813,302 -------------- -------------- -------------- -------------- Expenses Selling, general and administrative expenses (655,769) (5,115,000) (1,818,804) (2,029,078) Research and development costs (24,372) (190,100) - (694,918) -------------- -------------- -------------- -------------- 680,141 (5,305,100) (1,818,804) (2,723,996) -------------- -------------- -------------- -------------- Income (loss) from operations 124,944 974,561 1,341,182 (910,694) -------------- -------------- -------------- -------------- Other income (expense) Interest expense (3,021) (23,563) (16,532) (6,877) Government grant income 8,854 69,067 55,200 117,615 Other income 3,973 30,987 24,449 1,153 -------------- -------------- -------------- -------------- Total other income 9,806 76,491 63,117 111,891 -------------- -------------- -------------- -------------- Income before provision for income taxes and minority interest 134,750 1,051,052 1,404,299 (798,803) Income tax (33,748) (263,238) (164,688) (36,203) -------------- -------------- -------------- -------------- Income before minority interest 101,002 787,814 1,239,611 (835,006) Minority interest 922 7,190 30,570 39,785 -------------- -------------- -------------- -------------- Net income 101,924 795,004 1,270,181 (795,221) ============== ============== ============== ============== Net income per share 0.002 0.016 0.027 (0.017) ============== ============== ============== ============== Weighted average shares outstanding Basic 48,250,000 48,250,000 47,000,000 47,000,000 ============== ============== ============== ============== Diluted 48,250,000 48,250,000 47,000,000 47,000,000 ============== ============== ============== ==============
See accompanying notes to consolidated financial statements. F-4 TITANIUM GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED) (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
YEAR ENDED DECEMBER 31, 2005 2005 2004 2003 (US$) (HK$) (HK$) (HK$) (restated) (restated) Net income 101,924 795,004 1,270,181 (795,221) Other comprehensive income (loss) Effect of foreign currency transactions (148) (1,156) (2,427) (991) -------------- -------------- -------------- -------------- Comprehensive income 101,776 793,848 1,267,754 (796,212) ============== ============== ============== ==============
See accompanying notes to consolidated financial statements. F-5 TITANIUM GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Common stock Additional Accumulated paid-in comprehensive Retained Shares Amount Capital Income Earnings Total ------ ------ ------- ------ -------- ----- At January 1, 2003 47,000,000 390,000 - 90 552,219 942,309 Foreign currency translation adjustment - - - (991) - (991) Loss for the year - - - - (795,221) (795,221) --------------------------- ------------ --------------- -------------- ------------ At December 31, 2003 47,000,000 390,000 - (901) (243,002) 146,097 Foreign currency translation adjustment - - - (2,427) - (2,427) Profit for the year - - - - 1,270,181 1,270,181 --------------------------- ------------ --------------- -------------- ------------ At December 31, 2004 47,000,000 390,000 - (3,328) 1,027,179 1,413,851 Private placement of common stock, net 3,000,000 234,000 3,801,915 - - 4,035,915 Forgiveness of shareholders' loan - - 1,960,882 - - 1,960,882 Par value reclassification 3,276,000 (3,276,000) - - - Foreign currency translation adjustment - - - (1,156) - (1,156) Profit for the year - - - - 795,004 795,004 --------------------------- ------------ --------------- -------------- ------------ At December 31, 2005 50,000,000 3,900,000 2,486,797 (4,484) 1,822,183 8,204,496 =========================== ============ =============== ============== ============
See accompanying notes to consolidated financial statements. F-6 TITANIUM GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
YEAR ENDED DECEMBER 31, 2005 2005 2004 2003 (US$) (HK$) (HK$) (HK$) (restated) (restated) Cash flow from operating activities: Net income 101,924 795,004 1,270,181 (795,221) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 73,952 576,825 269,316 69,542 Minority interest in earnings of subsidiaries (922) (7,190) (30,570) 40,215 Loss on disposals of long term assets 3,736 29,144 - - Changes in assets and liabilities: Accounts receivable from a related party 134 1,048 (780) 6 Accounts receivable (419,892) (3,275,164) (233,957) 349,457 Amount due from related parties - - (600,355) (422,797) Inventories (6,254) (48,784) (20,953) - Deposits and other receivables (132,394) (1,032,672) (63,609) (27,650) Amount due to related parties 176,765 1,378,770 280,712 95,820 Accounts payable (24,856) (193,880) (80,708) (663,231) Deferred revenue (33,803) (263,662) (263,662) 527,324 Deferred taxation (5,330) (41,571) 17,299 24,272 Income taxes payable 35,982 280,655 121,654 (81,178) --------------- ------------ ------------- ------------- Net cash provided by operating activities (230,958) (1,801,477) 664,568 (883,441) --------------- ------------ ------------- ------------- Cash flows from investing activities: Additions to plant and equipment (100,480) (783,741) (121,865) (80,143) Additions to intangible assets (118,942) (927,752) (914,524) (136,788) --------------- ------------ ------------- ------------- Net cash used for investing activities (219,422) (1,711,493) (1,036,389) (216,931) --------------- ------------ ------------- ------------- Cash flows from financing activities : Proceeds from long term bank loan - - - 300,000 Repayments of long term bank loan (2,137) (16,667) (200,000) (83,333) Proceeds from shareholders' loan - - 500,000 920,000 Net increase/(decrease) in bank overdraft 185,129 1,444,012 (148,414) 210,049 Net proceeds from private placement 517,425 4,035,915 - - --------------- ------------ ------------- ------------- Net cash provided by (used in) financing activities 700,417 5,463,260 151,586 1,346,716 --------------- ------------ ------------- ------------- Effect of exchange gain / (loss) on cash and cash equivalents (148) (1,156) (2,427) (991) --------------- ------------ ------------- ------------- Net increased/ (decreased) in cash and cash equivalents 249,889 1,949,134 (222,662) 245,353
See accompanying notes to consolidated financial statements. F-7 TITANIUM GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
YEAR ENDED DECEMBER 31, 2005 2005 2004 2003 (US$) (HK$) (HK$) (HK$) (restated) (restated) Cash and cash equivalents, beginning of the year 67,121 523,543 746,205 500,852 ------------- ------------ ------------- ------------- Cash and cash equivalents, end of the year 317,010 2,472,677 523,543 746,205 ============= ============ ============= ============= Supplemental cash flows information: Cash paid for interest 3,021 23,563 16,532 6,877 Income tax paid 3,073 23,971 25,735 93,109 Non-cash transactions Comprehensive income / (loss) (148) (1,156) (2,427) (991) Forgiveness of amount due to related parties and shareholders' loan 251.395 1,960,882 - - Netting off between the amount due from related parties with the amount due to related parties 134,447 1,048,685 360,000 -
See accompanying notes to consolidated financial statements. F-8 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 1. ORGANIZATION AND BUSINESS BACKGROUND Titanium Group Limited ("Company") was incorporated as an International Business Company with limited liability in the British Virgin Islands ("BVI") under the International Business Companies Act, Cap 291 of the British Virgin Islands on May17, 2004. The Company, through its subsidiary companies, Titanium Technology Limited and Titanium Technology (Shenzhen) Co., Limited, mainly focus in the development of advanced biometric technology and installation and implement of advanced facial based biometric identification and security projects for law enforcement, mass transportation, and other government and private sector customers. Facial based biometric identification and security projects are made up of two elements, the biometric products and professional services. The biometric products consist of 3 major proprietary software products 1) Ti-Face, the face recognition engine, 2) ProAccess, a facial based biometric authentication system and 3) ProFacer, a facial based biometric integrated surveillance system. These software products are always bundled with other outside purchased identification and security hardware products, including workstations and live-scan devices, to sell to customers. The professional services include the design, development and integration services of biometric identification and security solutions to customers using the products. Titanium Technology Limited also provides other professional services and technical support services to its customers, including information security consulting, remote monitoring system consulting and security audit consulting services. The Company and subsidiaries are hereinafter collectively referred to as the "Group". Details of the Company's subsidiaries as at December 31, 2005 are described below:
Place of Particulars of incorporation Principal activities issued/ Effective and kind of legal and place of registered share interest Name entity operation capital Held ---- ------ --------- ------- ---- Titanium Technology Hong Kong, company Sales and marketing 30,000 ordinary 100% Limited with limited of biometric shares of HK$1 each ("TTL") liability identification and security products and HK$30,000 (US$3,846) services Titanium Technology China, company with Development of Registered capital 92% (Shenzhen) Co., Limited limited liability biometric technology ("TTLSZ") and new products HK$1,000,000 development
F-9 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES o 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 generally accepted accounting principles in the United States of America ("US GAAP"). All significant inter-company balances and transactions have been eliminated in consolidation. The interest of the Company in the subsidiaries was acquired by means of exchange for shares in the Company pursuant to a share exchange agreement on June 20, 2005. The transaction is considered to be transfer between entities under common control, within the meaning of 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. o 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; valuation of derivative instruments; and assets and obligations related to employee benefits. Actual results could differ from those estimates. o 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. o 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. F-10 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) o 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. o Property and equipment Property and equipment are stated at cost less accumulated depreciation and provision for impairment, if any. Property and equipment are depreciated at rates sufficient to write off their cost less provision for impairment, if any, over their estimated useful lives on a straight-line basis. Management considers that property and equipment have no significant residual value. The estimated useful lives are as follows: Computer system 5 years (hardware and software) Furniture and fixtures and office 5 years equipment Leasehold improvements The shorter of their useful lives or over the lease terms Expenditure for maintenance and repairs is expensed as incurred. o Revenue recognition The Group generates revenues principally from contracts for facial based biometric identification and security projects, which typically include outside purchased workstations and live-scans devices, bundled with the Group's proprietary software. In all cases, the customers are granted a license to use the software in perpetuity so long as the software is installed on the hardware for which it was originally intended. The contract price of the Group's facial based biometric identification and security projects generally includes twelve months of maintenance, which can be renewed. The Company also generates revenues from services performed under fixed-price and time-and-material agreements. To a lesser extent, the Company also generates revenues from sales of its proprietary biometrics products and re-sales of products sourced from outside third parties. The Company classifies the revenues generated by these activities as either project products revenue, project services revenue or maintenance services revenue. The Group applies the provisions of Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." For arrangements that require significant production, modification, or customization of software, the Company applies the provisions of Accounting Research Bulletin ("ARB") No. 45, "Long-Term Construction-Type Contracts," and SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." While these statements govern the basis for revenue recognition, significant judgment and the use of estimates are required in connection with the determination of the amount of product, maintenance F-11 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) and service revenue as well as the amount of deferred revenue to be recognized in each accounting period. Material differences may result in the amount and timing of the Group's revenue for any period if actual results differ from management's judgments or estimates. (1) Products revenue The timing of product revenue recognition is dependent on the nature of the product sold. Product arrangements comprising multiple deliverables including software, hardware, professional services, and maintenance are generally categorized into one of the following: FACIAL BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS THAT DO NOT REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION OF THE GROUP'S SOFTWARE Revenue associated with these arrangements, exclusive of amounts allocated to maintenance, for which the Group has vendor-specific objective evidence of fair value ("VSOE"), is recognized upon installation and receipt of written acceptance of the project by the customer when required by the provisions of the contract, provided that all other criteria for revenue recognition have been met. Revenue resulting from arrangements for which VSOE of the maintenance element does not exist is recognized ratably over the maintenance period. FACIAL BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS THAT REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION OF THE GROUP'S SOFTWARE: Revenue associated with these arrangements is recognized using the percentage of completion method as described by SOP 81-1. The percentage of completion method reflects the portion of the anticipated contract revenue, excluding maintenance that has VSOE, which has been earned, equal to the ratio of labor effort expended to date to the anticipated final labor effort, based on current estimates of total labor effort necessary to complete the project. Revenue resulting from arrangements for which VSOE of the maintenance element does not exist is recognized ratably over the contractual maintenance period. SELF-DEVELOPED SOFTWARE PRODUCTS SALES AND RE-SALE OF PURCHASED THIRD PARTIES PRODUCTS: Revenue associated with the sale of these products, excluding maintenance when applicable, is recognized upon shipment to the customer. The amount of these revenues has historically not been significant. (2) Services revenue Services revenue is primarily derived from computer engineering services, system design, consulting and integration and maintenance services that are not an element of an arrangement for the sale of products. These services are generally billed on a time and materials basis. The majority of the Group's professional services are performed under time-and-materials arrangements. Revenue from such services is recognized as the services are provided. (3) Maintenance services revenue Maintenance revenue consists of fees for providing technical support and software updates, primarily to customers purchasing the primary products. The Group recognizes all maintenance revenue ratably over the applicable maintenance period. The Group determines the amount of maintenance revenue to be deferred through reference to substantive maintenance renewal provisions contained in the arrangement. F-12 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) (4) Interest income Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable. (5) Revenue recognition criteria The Group recognizes revenue when persuasive evidence of an arrangement exists, the element has been delivered, the fee is fixed or determinable, collection of the resulting receivable is probable, and VSOE of the fair value of any undelivered element exists. A discussion about these revenue recognition criteria and their applicability to the Group's transactions as follows: PERSUASIVE EVIDENCE OF AN ARRANGEMENT: The Group uses either contracts signed by both the customer and the Group or written purchase orders issued by the customer that legally bind the Group and the customer as evidence of an arrangement. PRODUCT DELIVERY: The Group deems delivery to have occurred when the products are installed and, when required under the terms of the arrangement, when accepted by the customer. Delivery of other re-sale products are recognized as revenue when products are shipped and title and risk of ownership has passed to the buyer. FIXED OR DETERMINABLE FEE: The Group considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment and the payment terms are within its normal established practices. If the fee is not fixed or determinable, the Group recognizes the revenue as amounts become due and payable. COLLECTION IS DEEMED PROBABLE: The Group conducts a credit review for all significant transactions at the time of the arrangement to determine the credit-worthiness of the customer. Collection is deemed probable if the Group expects that the customer will pay amounts under the arrangement as payments become due. (6) 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 the ordinary customers and the only preferential treatment to them is that 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, the Group bills 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. The Group is not required to provide training to authorized distributors. o Deferred Revenue Deferred revenue consists primarily of payments received in advance of revenue recognition from maintenance. Revenues from maintenance fees are recognized ratably over the term of the maintenance period. F-13 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) o Intangible assets / Software development costs Intangible assets consist of 1) the software licenses costs and patent costs paid to third parties and 2) the capitalized software development costs. The Group reviews software development costs incurred in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") 86 "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" which requires that certain costs incurred in the development of computer software to be sold or leased be capitalized once technological feasibility is reached. The Group capitalized HK$848,034 and HK$910,536 for the years ended December 31, 2004 and 2005, respectively, for projects ProAccess and ProFacer. The purchased software license costs, patent costs and the capitalized software development costs are amortized over an estimated economic life of 5 years which is consistent with the expected life of these assets. For a detailed breakdown of the intangible assets please refer to Note 7. The Group received government funding in the amounts of HK$1,064,820, HK$1,174,345 and HK$756,723 for the years ended December 31, 2003, 2004 and 2005 respectively. This funding income was offset to software-development costs incurred prior to the beginning of the capitalization period. According to paragraph 73 of SOP 97-2, if capitalization of the software-development costs commences pursuant to SFAS No. 86, any income from the funding party under a funded software-development arrangement should be credited first to the development costs prior to capitalization. The following table illustrates the movement of the capitalized software development costs: AS OF DECEMBER 31, 2005 2004 ---- ---- HK$ HK$ Software development costs 1,667,259 2,022,379 Grant income (756,723) (1,174,345) ------------ ------------- Capitalized development costs 910,536 848,034 ============ ============= Below is a description of the Group's government funding income: Grant and subsidy income represents subsidy from the Government of the Hong Kong Special Administrative Region ("HKSAR") for assisting the Group in development of products of innovative nature. The products developed under this subsidy plan include ProAccess and ProFacer. Pursuant to the agreements made between the Group and HKSAR, HKSAR is required to provide funding to the Group for product development. The funding is made available to the Group in accordance with the milestones as established by the Group and is subject to a ceiling of HK$2,000,000. 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. Upon completion of the project, the Group tenders to the Government its pro rata share of the residual funds remaining in the project account. In addition the Group is obligated to pay the Government a royalty fee of 5% on the gross revenue earned from any activities in connection with the project, up to an aggregate amount equal to the amount subsidized to the Group. The royalty fee paid by the Group for each of the years ended December 31, 2003, 2004 and 2005 amounted to HK$32,647 and HK$34,532 and HK$48,092 respectively. F-14 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) The Group is entitled to retain ownership of the intellectual property resulting from the project. o Research and development costs Research and development costs are expensed when incurred. The major components of these research and development costs are the labor cost. o Advertising costs The Group expenses advertising costs as incurred in accordance with the American Institute of Certified Public Accountants SOP 93-7, "Reporting for Advertising Costs". Advertising expenses amounted to HK$80,303, HK$63,143 and HK$103,749 for the years ended December 31, 2003, 2004 and 2005 respectively. o Income taxes The Group accounts for income tax using SFAS No. 109 "Accounting for Income Taxes", which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred income taxes are provided for the estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carry-forwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the years of recovery or reversal and the effect from a change in tax rates is recognized in the statement of operations in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized. For details please refer to Note 13. o Segment Reporting SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments on a basis consistent with the Group's internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Group operates in one principal business segment. o 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 stockholders' 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. F-15 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) o Foreign currency translation The Group's functional currency is the Hong Kong dollar because the majority of the Group's 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 (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 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 statements where US dollars are presented was US$1 / HK$7.8. 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 dollar cost or are restated from their historic cost, by applying the historical exchange rate as monthly average exchange rates to underlying transactions. o Equity-based compensation The Group adopted SFAS No. 123, "Accounting for Stock-Based Compensation" beginning at its inception. Upon adoption of SFAS No. 123, the Group continued to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees". The Group did not pay any stock-based compensation during any period presented. In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (R), "Share-Based Payment." SFAS No. 123 (R) amends SFAS No. 123, "Accounting for Stock-Based Compensation," and APB Opinion 25, "Accounting for Stock Issued to Employees." SFAS No. 123 (R) requires that the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. SFAS No. 123 (R) applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments (except for those held by an ESOP) or by incurring liabilities (1) in amounts based (even in part) on the price of the entity's shares or other equity instruments, or (2) that require (or may require) settlement by the issuance of an entity's shares or other equity instruments. This statement is effective (1) for public companies qualifying as SEC small business issuers, as of the first fiscal year beginning after December 15, 2005, or (2) for all other public companies, as of the first fiscal year or interim period beginning after June 15, 2005, or (3) for all nonpublic entities, as of the first fiscal year beginning after December 15, 2005. Management does not expect adoption of SFAS No. 123 (R) to have a material impact on the Group's financial statements. F-16 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) o 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. 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 employees have taken their entitlement of paid vacation leave and management considers that the provision for long service leave obligation would be insignificant, no provision for unused annual paid vacation leave and long service leave obligation has been provided in the financial statements for the years ended December 31, 2004 and 2005. o Impairment of long-lived assets In accordance with SFAS Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", long-lived assets, such as plant, and equipment and intangible assets subject to depreciation or 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. F-17 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) o Related parties For the purposes of these financial statements, parties are considered to be related if one party has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals or other entities. All material related party transactions have been disclosed in Note 14 to these financial statements. o Per share information Basic net income per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. For the period ended December 31, 2005, warrants to purchase 3,000,000 shares of common stock of the Company which were issued in connection with the sale of common stock (see Note 11) were not considered to have a dilutive effect since the exercise price of the warrants exceeded the average market price of the common stock for that period. o Recently issued accounting standards In December 2004, the FASB issued SFAS Statement No.151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS 151"), 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 Group for inventory costs incurred on or after January 1, 2006. The Group is currently evaluating the impact of SFAS 151 on its financial statements. In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153"), 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 Group for non-monetary asset exchanges occurring on or after January 1, 2006. The Group is currently evaluating the impact of SFAS 153 on its financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. These requirements apply to all voluntary changes and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for fiscal years beginning after December 15, 2005. As such, the Group is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2006. The Group is currently evaluating the impact of SFAS 154 on its financial statements. F-18 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) In February 2006, the FASB issued SFAS Statement No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140" ("SFAS 155"). This Statement amends FASB Statements No. 133, "Accounting for Derivative Instruments and Hedging Activities", and No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." This Statement permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued for the Group for fiscal years beginning after September 15, 2006. The Group is currently evaluating the impact of SFAS 155 on its financial statements. 3. RESTATEMENT OF FISCAL YEAR 2003 AND 2004 CONSOLIDATED FINANCIAL STATEMENTS We have determined that our accounting for 1) income taxes and 2) grant and subsidy income included in previous filings with the U.S. Securities and Exchange Commission was incorrect. Deferred taxation was previously not recorded as required by SFAS No. 109 "Accounting for Income Taxes" while the grant and subsidy income was not credited to the software-development costs before capitalization as required by paragraph 73 of SOP 97-2 "Software Revenue Recognition". As a result, the consolidated financial statements for the years ended December 31, 2003 and 2004 have been restated to correct the error and their effect is summarized in the table below. FOR THE YEAR ENDED DECEMBER 31, 2003
AS FILED ADJUSTMENT TO RESTATED RESTATE HK$ HK$ HK$ --- --- --- CONSOLIDATED STATEMENTS OF OPERATIONS Grant and subsidy income 1,182,435 1,064,820 117,615 Cost of sales 2,691,355 212,963 2,478,392 Income tax 11,931 24,272 36,203 CONSOLIDATED BALANCE SHEETS Intangible assets, net 999,677 851,857 147,820 Deferred taxation - 24,272 24,272
F-19 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) FOR THE YEAR ENDED DECEMBER 31, 2004
AS FILED ADJUSTMENT TO RESTATED RESTATE HK$ HK$ HK$ --- --- --- CONSOLIDATED STATEMENTS OF OPERATIONS Grant and subsidy income 1,229,545 1,174,345 55,200 Cost of sales 3,571,098 447,832 3,123,266 Income tax 147,389 17,299 164,688 CONSOLIDATED BALANCE SHEETS Intangible assets, net 2,440,815 1,578,370 862,445 Deferred taxation - 41,571 41,571
The consolidated balance sheets, consolidated statements of cash flows and consolidated statements of changes in stockholders' equity and accumulated comprehensive income are adjusted accordingly to accommodate for the restatements in the consolidated statements of operations. 4. RECLASSIFICATIONS For fiscal year 2004 and 2003, reclassifications have been made to the presentation of the following items: o Accounts receivable Certain of the items in the accounts receivable and other receivables in the consolidated balance sheets as of December 31, 2003 and 2004 were reclassified to separately present the accounts receivable from third parties and accounts receivable from a related party. The consolidated statements of cash flows are adjusted accordingly. o Accounts payable and deferred revenue Certain of the items in the accounts payable in the consolidated balance sheets as of December 31, 2003 and 2004 were reclassified to separately present the accounts payable and deferred revenue. The consolidated statements of cash flows are adjusted accordingly. o Revenue Revenue in the consolidated statements of operations for the years ended December 31, 2003 and 2004 were reclassified to separately present the revenue from third parties and revenue from related party. o Cost of sales Cost of sales in the consolidated statements of operations for the years ended December 31, 2003 and 2004 were reclassified to 1) separately present the cost of revenue for third parties and cost of revenue for related parties and 2) present the cost of maintenance service, mainly the salary cost, from selling, general and administrative expenses. These reclassifications were made to conform with the presentation for the fiscal year 2005 and did not have any impact on the Group's previously reported net income for those years. F-20 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 5. ACCOUNTS RECEIVABLE AS OF DECEMBER 31, 2005 2004 ---- ---- HK$ HK$ Accounts receivable, gross 4,712,014 1,436,850 ============= ============ No general provision of bad and doubtful debts has been made in these consolidated financial statements. The management considers that the accounts receivable are from reputable customers and expects to collect their outstanding balances in full. 6. AMOUNT DUE FROM/TO RELATED PARTIES Set out below is a summary of amounts due from/to related parties: AS OF DECEMBER 31, 2005 2004 ---- ---- HK$ HK$ Due from: Shareholder - 17,100 Director - 1,031,585 ------------- -------------- Total - 1,048,685 ============= ============== Due to: Directors - 210,797 ============= ============== The balances due from a shareholder and a director are unsecured, non-interest bearing and have no fixed terms of repayment. The amount due from a shareholder relates to the payment of the shareholder's non-business related expenses, mainly its annual company secretary fee, over the years. The amount due from a director relates to the temporary petty cash advancement to the director. The amount due to directors mainly relates to the business traveling expenses paid by the directors on behalf of the Group. F-21 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 7. INTANGIBLE ASSETS (RESTATED) AS OF DECEMBER 31, 2005 2004 ---- ---- HK$ HK$ (restated) Product development costs 1,879,428 968,892 Patent and license right registration fee 139,636 122,420 ------------ ------------ 2,019,064 1,091,312 Less accumulated amortization (611,735) (228,867) ------------ ------------ Total intangible assets, net 1,407,329 862,445 ============ ============ The amortization of the intangible assets is five years and charged to the statements of operations on a straight-line basis. 8. DEPOSITS AND OTHER RECEIVABLES AS OF DECEMBER 31, 2005 2004 ---- ---- HK$ HK$ Deposits paid 967,118 - Sundry debtors 1,932 - Prepayments 30,243 - Rental and utility deposits 144,848 111,469 ------------ ------------- 1,144,141 111,469 ============ ============= The deposits paid represented the trade deposits paid to certain vendors in PRC for the manufacture of hardware products. 9. 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 2004 and 2005 are their respective carrying amounts. 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 is no fixed repayment dates associated with the instruments. F-22 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 10. LONG TERM BORROWINGS AS OF DECEMBER 31, 2005 2004 ---- ---- HK$ HK$ Bank borrowings - 16,667 Current portion of bank borrowings - (16,667) ----------- ------------ Long term portion of bank borrowings - - ----------- ------------ Loan from shareholders - 1,420,000 ----------- ------------ - 1,420,000 =========== ============ 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 loan was fully repaid in 2004 11. COMMON STOCK 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 TTSL. They then became wholly owned subsidiaries of the Company. On September 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 HK$1,106,393. During the year ended December 31, 2005, 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$644,085, leaving a net proceeds of HK$4,035,915. 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. The Group has determined that the fair value of the warrants at their issue date is not a material amount. A reclassification of HK$3,276,000 was made to common stock and additional paid in capital to agree the cumulative amounts paid to the common stock's par value. F-23 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 12. EMPLOYEEE STOCK OPTIONS On November 22, 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 are 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 are 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. No options have been granted to any employees. 13. INCOME TAXES (RESTATED) Under the current BVI law, the Company's income is not subject to taxation. Subsidiaries operating in Hong Kong and the PRC are subject to income taxes. The provision for current income taxes of the subsidiary operating in Hong Kong has been calculated by applying the current rate of taxation of 17.5% for 2003 to 2005 to the estimated taxable income earned in or derived from Hong Kong during the period, if applicable. Deferred tax, where applicable, is provided under the liability method at the rate of 17.5% for 2003 to 2005, being the effective Hong Kong statutory income tax rate applicable to the ensuing financial year, on the difference between the financial statement and income tax bases of measuring assets and liabilities. The basic corporate tax rate for Foreign Investment Enterprises ("FIEs") in the PRC is currently 33% (30% state tax and 3% local tax). The provision for income tax consists of the following: YEAR ENDED DECEMBER 31, 2005 2004 2003 ---- ---- ---- HK$ HK$ HK$ (restated) (restated) Current tax 304,809 147,389 11,931 Deferred tax (41,571) 17,299 24,272 ------------ ------------- ------------- 263,238 164,688 36,203 ============ ============= ============= The income (loss) generated in BVI, HKSAR and PRC before income taxes for the years ended December 31, 2003, 2004 and 2005 respectively, was as follows:
YEAR ENDED DECEMBER 31, 2005 2004 2003 ---- ---- ---- HK$ HK$ HK$ (restated) (restated) Loss in British Virgin Islands before income taxes (987,760) - - Profit/(loss) in Hong Kong before income taxes 2,326,412 1,786,427 (301,480) Loss in PRC before income taxes (287,600) (382,128) (497,323) ------------- ------------- -------------- 1,051,052 1,404,299 (798,803) ============= ============= ==============
F-24 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) A reconciliation of the income tax expense to the amount computed by applying the current tax rate to the income before income taxes in the consolidated statements of income is as follows:
YEAR ENDED DECEMBER 31, 2005 2004 2003 ---- ---- ---- HK$ HK$ HK$ (restated) (restated) Income before income taxes and minority interests 1,051,052 1,404,299 (798,803) HKSAR Income tax rate 17.5% 17.5% 17.5% Income tax expenses at HKSAR tax rate on income before income tax 183,934 245,752 (139,790) Effect of BVI and PRC tax losses 223,188 66,872 87,031 Tax benefit (expenses) arising from items which are not assessable (deductible) for tax purposes (102,313) (165,235) 40,828 ---------------- ----------------- ----------------- 304,809 147,389 11,931 ================ ================= =================
The primary components of temporary differences which give rise to the Group's deferred tax liabilities are as follows: AS OF DECEMBER 31, 2005 2004 ---- ---- HK$ HK$ (restated) Plant and equipment - 41,571 ========== ============ 14. RELATED PARTY TRANSACTIONS
YEAR ENDED DECEMBER 31, 2005 2004 2003 ---- ---- ---- HK$ HK$ HK$ Sales of products to a related company (a) controlled by a shareholder of the Group - 266,791 825,820
Notes: (a) For the years ended December 31, 2003 and 2004, the Group had entered into sales contracts with Ericorps Creation (HK) Limited, a company owned by a shareholder of the Group. Pursuant to these sales contracts, the Group sold its proprietary software products to Ericorps Creation (HK) Limited. The prices were determined with reference to the market prices. As of December 31, 2004 and 2005 the balances due from Ericorps Creation (HK) Limited amounted to HK$1,048 and HK$0 respectively. F-25 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 15. SEGMENT REPORTING, GEOGRAPHICAL INFORMATION The Group considers its business activities to constitute one single segment. The Group's chief operating decision makers use consolidated results to make operating and strategic decisions. The geographic distribution of the Group's customers are: - Hong Kong, including the government and commercial sectors; - PRC, mainly the government sector; - International, mainly casino, retail and commercial sectors. An analysis of the Group's revenues and net assets by region are as follows: AS OF DECEMBER 31, 2005 2004 ---- ---- HK$ HK$ (restated) Net assets - Hong Kong 7,552,245 1,327,319 - PRC (202,238) 86,532 - International - - ------------ -------------- 7,350,007 1,413,851 ============ ============== YEAR ENDED DECEMBER 31, 2005 2004 2003 ---- ---- ---- HK$ HK$ HK$ Revenue - Hong Kong 7,081,868 5,123,767 4,209,989 - PRC 2,344,574 810,065 - - International 3,915,679 415,420 147,705 ------------- ------------ -------------- 13,342,121 6,349,252 4,357,694 ============= ============ ============== F-26 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 16. COMMITMENTS AND CONTINGENCIES Leases The Group rented offices under operating lease agreements. The net aggregate future lease payments under non-cancelable operating leases as of December 31, 2005 is as follows: 2005 HK$ 2006 284,340 2007 284,340 2008 142,170 ------------- 710,850 ============= The Group expenses rental payments as incurred and includes such payments in administrative expenses in the consolidated statements of operations. Rental payments amounted to HK$ 205,637, HK$ 207,088 and HK$ 262,518 for each of the years ended December 31, 2003, 2004 and 2005 respectively. 17. CONCENTRATIONS AND RISKS Major Customers The following is a table summarizing the revenues from customers that individually represent greater than 10% of the total revenues for the years ended December 31, 2003, 2004 and 2005 and their outstanding balances as at each year-end date:
YEAR ENDED DECEMBER 31, 2005 2004 2003 ---- ---- ---- HK$ HK$ HK$ Customer A (a) 1,755,000 - - Customer B (b) 1,538,642 - - Customer C (c) 1,532,700 - - Customer D (d) 1,606,855 351,662 662,272 Customer E (e) - 1,277,656 5,000 Customer F (f) 62,400 809,200 - Customer G (g) - 266,791 825,820 Customer H (h) 42,878 96,888 517,520 Customer I (i) 364,770 585,158 438,580
F-27 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) (a) As of December 31, 2003, 2004 and 2005, the balances due to the Group amounted to $Nil, $Nil and $1,316,250. (b) As of December 31, 2003, 2004 and 2005, the balances due to the Group amounted to $Nil, $Nil and $1,538,462. (c) As of December 31, 2003, 2004 and 2005, the balances due to the Group amounted to $Nil, $Nil and $Nil. (d) As of December 31, 2003, 2004 and 2005, the balances due to the Group amounted to $1,940, $Nil and $200,000. (e) As of December 31, 2003, 2004 and 2005, the balances due to the Group amounted to $5,000, $Nil and $Nil. (f) As of December 31, 2003, 2004 and 2005, the balances due to the Group amounted to $Nil, $801,550 and $13,750. (g) As of December 31, 2003, 2004 and 2005, the balances due to the Group amounted to $268, $1,048 and $Nil. (h) As of December 31, 2003, 2004 and 2005, the balances due to the Group amounted to $187,630, $Nil and $Nil. (i) As of December 31, 2003, 2004 and 2005, the balances due to the Group amounted to $Nil, $Nil and $50,950. Credit Risk Financial instruments that are potentially subject to credit risk consist principally of trade receivables. The Group believes the concentration of credit risk in its trade receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Group does not generally require collateral from customers. The Group evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Exchange risk The Group cannot guarantee that the current exchange rate will remain steady; therefore there is a possibility that the Group could post the same amount of profit for two comparable periods and because of the fluctuating exchange rate actually post higher or lower profit depending on exchange rate of HK$ converted to US$ on that date. The exchange rate could fluctuate depending on changes in political and economic environments without notice. F-28 TITANIUM GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$")) 18. PRODUCT WARRANTIES AND POST-CONTRACT CUSTOMER SUPPORT Under the terms of the contracts, the Group will provide both product warranty and post-contract customer support ("PCS") to its customers for a period of twelve months, free of charge and then at the discretion of the customers, enter into definite maintenance contracts. The Group's standard warranty for its software products generally covers a twelve-month period. The Group has not experienced any material returns where it was under obligation to honor this standard warranty provision. Warranty claims on hardware deficiencies are covered by the particular hardware suppliers. As such, no reserve for product warranty has been provided in the accompanying consolidated balance sheets or reflected in the result of operations for the three years ended December 31, 2003, 2004 and 2005. The nature of the PCS consists of the provision of a technical support telephone hotline to the customers. As the usage of this hotline is very seldom, the Group did not maintain any specific personnel to operate this hotline. As a result, the cost of the PCS during the free support period is insignificant and no reserve for the cost of PCS is required. F-29 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses to be paid by the registrant in connection with the securities being registered are as follows (stated in US dollars): Securities and Exchange Commission filing fee........$ 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) Technologies 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 (2) - -------------------------------------------------------------------------------- 4.2 Form of Subscription Agreement (2) - -------------------------------------------------------------------------------- 5.1 Opinion of Stevenson, Wong & Co. (1) - -------------------------------------------------------------------------------- 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 (3) - -------------------------------------------------------------------------------- 10.10 Form of Reseller Agreement (3) - -------------------------------------------------------------------------------- 10.11 Distributor Agreement with Elixir Group Limited dated January 1, 2004 - -------------------------------------------------------------------------------- 10.12 Distributor Agreement with Smart Wireless Corporation dated February 1, 2005 - -------------------------------------------------------------------------------- 10.13 Agreement with Shanghai Commercial Bank Ltd. dated February 7, 2006 - -------------------------------------------------------------------------------- 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. (3) Filed as an exhibit to Amendment No. 2 to the registration statement on January 26, 2006. 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 undersigned registrant hereby undertakes: 1. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: i. To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth 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 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. II-3 iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; 2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 4. That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. II-4 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 March 8, 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) March 8, 2006 - -------------------------------------------- Jason Ma Chairman of the Board of Directors (Principal Financial and Accounting Officer) /s/ DR. KIT CHONG NG March 8, 2006 - -------------------------------------------- Dr. Kit Chong "Johnny" Ng /s/ KIN KWONG CHEUNG Director March 8, 2006 - -------------------------------------------- Kin Kwong "Humphrey" Cheung /s/ WAI HUNG TANG Director March 8, 2006 - -------------------------------------------- Wai Hung "Billy" Tang
II-5 EX-10 3 exh10-11_distagmt.txt EXH 10-11 AGREEMENT EXHIBIT 10.11 DISTRIBUTOR AGREEMENT Page 1 of 11 [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 6/F., Tianjin Building, 167 Connaught Road West, 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: 1ST JANUARY, 2004 ----------------------------------------------------------- 2. DISTRIBUTOR: ELIXIR GROUP LIMITED ----------------------------------------------------------- Street Address: 38TH FLOOR, THE CENTRIUM, 60 WYNDHAM STREET, CENTRAL ----------------------------------------------------------- HONG KONG ----------------------------------------------------------- Company URL: HTTP:// ---------------------------------------------------- Telephone: +852 3151 3887 Facsimile: +852 2189 7898 ------------------------ --------------------- 3. CONTACT PERSON: GORDON YUEN ----------------------------------------------------------- Title: CHIEF EXECUTIVE OFFICER ----------------------------------------------------------- Telephone: +852 3151 3887 ----------------------------------------------------------- E-mail address: GORDONYUEN@ELIXIR.COM.HK ----------------------------------------------------------- 4. START DATE OF AGREEMENT: 1ST JANUARY, 2004 ----------------------------------------------------------- 5. END DATE OF AGREEMENT: 31ST DECEMBER, 2004 ----------------------------------------------------------- 6. TERRITORY: MACAU ----------------------------------------------------------- 7. INITIAL ORDER VALUE: US$0 ----------------------------------------------------------- 8. MINIMUM ANNUAL COMMITMENT: US$0 ----------------------------------------------------------- Rev 05122003 TITANIUM JNG DISTRIBUTOR GY ------ ------ Page 2 of 11 9. PRODUCT SEE EXHIBIT A SCHEDULE AND DISCOUNT: IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TITANIUM TECHNOLOGY LIMITED DISTRIBUTOR By: /s/ JOHNNY NG By: /s/ GORDON YUEN ------------------------------- --------------------------------- Name: JOHNNY NG Name: ----------------------------- ------------------------------- Title: CEO Title: ---------------------------- ------------------------------ Date: 17 FEB 2004 Date: ----------------------------- ------------------------------- WITNESS WITNESS By: By: /s/ ------------------------------- --------------------------------- Name: Name: ----------------------------- ------------------------------- Date: Date: ----------------------------- ------------------------------- Rev 05122003 TITANIUM JNG DISTRIBUTOR GY ------ ------ Page 3 of 11 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. Withdrawal of Product(s) from this Agreement shall not affect purchase orders placed by the Distributor before such withdrawal becomes effective. 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 "end-users" means purchasers who purchase the Product(s) for their own use. 1.6 "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. 1.7 "Territory" shall mean the distribution territory set forth on the Term Sheet attached hereto. 1.8 "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 and as a non-exclusive reseller for Hong Kong under the TITANIUM Program (the "Program"). Notwithstanding the different capacities held by the Distributor hereunder, the parties agree that the Distributor Price List attached hereto shall be applied to the Distributor whether as the said exclusive distributor or the non-exclusive reseller. In connection with such appointment, to the extent permitted by the laws of the Territory, TITANIUM grants DISTRIBUTOR (i) an EXCLUSIVE and non-transferable right to promote, market, and solicit orders in the Territory from resellers for the Products and any related services described in the Term Sheet and (ii) a non-exclusive and non-transferable right to promote, market, and solicit orders in Hong Kong from end-users for the Products and any related services described in the Term Sheet. 2.2 AUTHORIZATION. DISTRIBUTOR may represent itself as a participant in the Program and as a distributor or as the case may be, a reseller for the Products. DISTRIBUTOR shall not represent that it is otherwise affiliated with TITANIUM. DISTRIBUTOR is authorized to represent to resellers or as the case may be, the end-users, 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 party nor its employees, consultants, contractors or agents (collectively "Related Persons") are agents, employees, partners or joint venturers of the other party, nor do they have any authority to bind the other party by contract or otherwise to any obligation. Each party and its Related Personss 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 (i) resellers in the Territory and (ii) end-users in Hong Kong. Without limiting the generality of the foregoing, during the subsistence of this Agreement, DISTRIBUTOR shall undertake the specific marketing activities (if the same are set forth in the Term Sheet or may from time to time mutually agreed by the parties) for each Product. Rev 05122003 TITANIUM JNG DISTRIBUTOR GY ------ ------ Page 4 of 11 3.2 PRODUCT RESALE. Unless otherwise with the prior written approval from TITANIUM (which such approval shall not be unreasonably withheld), DISTRIBUTOR shall resell the Products only to (i) resellers in the Territory and (ii) end- users in Hong Kong. 3.3 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. 3.5 MINIMUM ANNUAL 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. For the avoidance of doubt, failure to achieve the said commitment will be considered by TITANIUM as a factor as to whether or not to renew or terminate this Agreement only and will not otherwise entitle TITANIUM to claim for any damages or compensation in relation to such failure or any termination of this Agreement as a result of such failure.] 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 or end-users, as the case may be, 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 provided that during the relevant training of the DISTRIBUTOR's technical and sales personnel, TITANIUM shall, if requested by the DISTRIBUTOR, provide reasonable assistance including but not limited to the provision of the operational manual or other relevant documentation at no cost to the DISTRIBUTOR or appointing its technical staff to give the relevant training to the DISTRIBUTOR's technical and sales personnel (with the relevant cost of such appointment to be borne or shared by the party or parties hereto under separate written arrangement). 3.7 TECHNICAL EXPERTISE. DISTRIBUTOR will use its reasonable endeavours to ensure that its staff will be conversant with the technology contained in the Products and similar technologies in general, and will develop reasonable knowledge of the industry and products competitive with the Products (including specifications, features and benefits provided that such information is available in the public domain) so as to be able to explain reasonably to its resellers or end-users, as the case may be, the differences between the Products and competitive products, if any. 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 use its best endeavours to participate with TITANIUM in joint marketing activities with respect to certain Products subject however to DISTRIBUTOR's budget determined at its sole discretion. 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 reasonable evidence that such approval, notification or registration is not required or that it has been obtained. Rev 05122003 TITANIUM JNG DISTRIBUTOR GY ------ ------ Page 5 of 11 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 PURCHASE AND SALE. TITANIUM agrees to sell to DISTRIBUTOR those Products ordered 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. Unless otherwise agreed by the parties in writing, any 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 its resellers or end-users and collecting invoiced amounts from such resellers or end-users 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 in the relevant purchase order placed by DISTRIBUTOR with TITANIUM. 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 its resellers' or end-users' 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 provided that price increases shall not affect purchase orders placed by DISTRIBUTOR before such increases become effective. 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 Rev 05122003 TITANIUM JNG DISTRIBUTOR GY ------ ------ Page 6 of 11 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 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 Rev 05122003 TITANIUM JNG DISTRIBUTOR GY ------ ------ Page 7 of 11 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 (not being the Products or services of TITANIUM or any part thereof) 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, 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 or services or any part thereof 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 (such consent not to be unreasonably withheld or delayed). 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 end-user of a Product that (i) the hardware is free from defects in materials and workmanship and (ii) the software is free of any inherent contaminating or destructive properties including but not limited to software virus, worm, virus macro, Trojan Horse or other such component designed to permit unauthorized access, to disable, erase or otherwise harm or maliciously alter software, hardware or data, 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 physical delivery by the DISTRIBUTOR ("the Warranty Period") to the DISTRIBUTOR's end-user or physical delivery by the DISTRIBUTOR's reseller to the end-user of such reseller, whichever the later. Should a Product fail to comply with this Limited Warranty at any time during the Warranty Period, the original end-user'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 PRODUCT OR THE RELEVANT PART thereof has not been abused, misused, repaired or modified without the authorization of TITANIUM. All products will be serviced and returned via ground or sea at no charge to the original end-user. In the event TITANIUM is unable to repair or replace the product within a reasonable period of time, the original end-user's sole and exclusive remedy is to receive reimbursement of the amount the original end-user 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) 2776-2311, E-mail: info@titanium-tech.com 10.3 SHIPPING. For any new orders, 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 Rev 05122003 TITANIUM JNG DISTRIBUTOR GY ------ ------ Page 8 of 11 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 in respect of the relevant orders. 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 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 by virtue only of the lawful 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 Rev 05122003 TITANIUM JNG DISTRIBUTOR GY ------ ------ Page 9 of 11 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. Any terminatin or expiration of this Agreement shall be without prejudice to any rights or liabilities (subject always to Section 11.2 above) of either party to the other party accrued at the date of termination or in respect of any breach of the other party of any conditions herein contained or any amount owing, due or payable under this Agreement. The covenants, conditions and provisions of this Agreement which are capable of having effect after the termination or expiration of this Agreement shall remain in full force and effect following the termination or expiration of this Agreement. 13.7 NON-SOLICITATION. TITANIUM covenants with DISTRIBUTOR that it will not, during the term of this Agreement and for a period of one year thereafter, endeavour to entice away from DISTRIBUTOR and/or employ any person who has at any time during the term of this Agreement been employed or engaged by DISTRIBUTOR. 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 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 Rev 05122003 TITANIUM JNG DISTRIBUTOR GY ------ ------ Page 10 of 11 other party, except (i) either party may disclose such terms to the extent required by law, listing rules, regulations, court orders or orders of governmental or other activities; (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 JNG DISTRIBUTOR GY ------ ------ EX-10 4 exh10-12_distagmt.txt EXH 10-12 AGREEMENT EXHIBIT 10.12 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 10/F., Tianjin Building, 167 Connaught Road West, 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: FEB 1, 2005 ----------------------------------------------------------- 2. DISTRIBUTOR: SMART WIRELESS CORPORATION ----------------------------------------------------------- Street Address: ----------------------------------------------------------- ----------------------------------------------------------- Company URL: HTTP:// ---------------------------------------------------- Telephone: Facsimile: ------------------------ --------------------- 3. CONTACT PERSON: MR. HIROYUKI SHIMADA ----------------------------------------------------------- Title: ----------------------------------------------------------- Telephone: ----------------------------------------------------------- E-mail address: ----------------------------------------------------------- 4. START DATE OF AGREEMENT: FEB 1, 2005 ----------------------------------------------------------- 5. END DATE OF AGREEMENT: JAN 31, 2006 ----------------------------------------------------------- 6. TERRITORY: JAPAN ----------------------------------------------------------- 7. INITIAL ORDER US$11,300 (ANNUAL MAINTENANCE TIFACE SDK + IR FACER SDK) VALUE: ----------------------------------------------------------- 8. MINIMUM ANNUAL US$200,000 COMMITMENT: ----------------------------------------------------------- Rev 05122003 TITANIUM JM DISTRIBUTOR HS ------ ------ Page 2 of 10 9. PRODUCT SEE EXHIBIT A SCHEDULE AND DISCOUNT: IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TITANIUM TECHNOLOGY LIMITED DISTRIBUTOR By: /s/ JASON MA By: /s/ HIROYUKI SHIMADA ------------------------------- --------------------------------- Name: JASON MA Name: HIROYUKI SHIMADA ----------------------------- ------------------------------- Title: EXECUTIVE DIRECTOR Title: PRESIDENT & CEO ---------------------------- ------------------------------ Date: 2005 MARCH 7 Date: 2005 7 MARCH ----------------------------- ------------------------------- WITNESS WITNESS By: /s/ STANLEY WONG By: /s/ STANLEY WONG ------------------------------- --------------------------------- Name: STANLEY WONG Name: STANLEY WONG ----------------------------- ------------------------------- Date: 2005 MARCH 7 Date: 2005 MARCH 7 ----------------------------- ------------------------------- Rev 05122003 TITANIUM JM DISTRIBUTOR HS ------ ------ 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 JM DISTRIBUTOR HS ------ ------ 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 JM DISTRIBUTOR HS ------ ------ 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 JM DISTRIBUTOR HS ------ ------ 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 JM DISTRIBUTOR HS ------ ------ 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 JM DISTRIBUTOR HS ------ ------ 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 JM DISTRIBUTOR HS ------ ------ 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 JM DISTRIBUTOR HS ------ ------ EX-10 5 exh-bank_ltr.txt EXH 10-13 AGREEMENT Exhibit 10.13 Agreement with Shanghai Commercial Bank Ltd. dated February 7, 2006 SHANGHAI COMMERCIAL BANK LTD. (INCORPORATED IN HONG KONG) FAX NO : (852) 28104623 12 QUEEN'S ROAD CENTRAL TEL NO : (852) 28415415 HONG KONG TELEX NO : 73390, 73650 SWIFT ADD : "SCBK HK HH XXX" WEB SITE : WWW.SHACOMBANK.COM.HK CONFIDENTIAL Our Reference: CC03/328/0600845 February 7, 2006 Dr Johnny Ng Chairman Titanium Technology Ltd 4/F, BOCG Insurance Tower 134-136 Des Voeux Road Central Hong Kong Der Dr Ng, RE: BANKING FACILITIES As discussed, we are pleased to offer the revised banking facilities ("Facilities") as described in this letter ("Facility Letter") to you subject to the provisions herein contained, the Terms and Conditions and the Appendix hereto. Please note that the Appendix forms an integral part of this Facility Letter and the terms and expressions used herein are as defined and construed in the Appendix. DESCRIPTION OF FACILITIES FEATURES O/D TO BE INCREASED FROM o Interest on O/D is to be charged at HK$1,000,000 TO HK$2,000,000 ON 1.5% p.a. over Prime or 2% p.a. over CHECKING ACCOUNT NO. 328-82- the overnight HIBOR, whichever is 43553-8 UNDER ABF BORROWING higher. At current Prime of 8% p.a., FORMULA AS DEFINED HEREIN the effective interest rate is 9.5% p.a. o The ABF Borrowing Formula is calculated as 60% of the amount of your eligible account receivables defined hereinafter or HK$2,000,000, whichever is lower, and is to be determined and approved by us at our discretion. The availability of O/D is to be reviewed and adjusted by us monthly at our discretion without further notice. o You shall deposit payments of account receivables from your debtors into your account with us. o Determination of the eligible account receivables and the availability of O/D are subject to additional terms and conditions as follows: Page 1 of 4 SHANGHAI COMMERCIAL BANK LTD (INCORPORATED IN HONG KONG) Titanium Technology Ltd. (i) Maximum credit term for your debtors must not exceed 90 days from the invoice date. (ii) Account receivables due from your group company(s) or related company(s) will not be considered as eligible. (iii) Duplicated financing on any of your account receivables and in whatever ways is prohibited. (iv) The portion of account receivables due from any single debtor exceeding 40% of the total amount of your account receivables will not be considered as eligible account receivables. (v) If the amount of past due accounts receivable exceeded 40% of your total outstanding account receivables, all of your account receivables will not be considered as eligible, and O/D will become immediately unavailable. (vi) Satisfactory credit report(s) must be obtained on your debtor(s) having more than HK$500,000 of outstanding balance, and 20% concentration into your total account receivables. Otherwise, accounts receivable of this type will not be considered as eligible. L/G NOT TO EXCEED HK$200,000 o L/G(s) up to HK$200,000 is issued in favour of The Government of HKSAR against cash deposit with us for an amount not less than 50% of L/G(s) value. If no claim is presented to us under the L/G within its validity, the said cash deposit will be released to you by crediting your Checking Account with us upon the full discharge of our liability under the L/G otherwise only the balance thereof will be released to you after deducting claims thereunder presented to us. CORPORATE CREDIT CARD(S) o Terms and conditions governing your HAVING A REVOLVING CREDIT rights and obligations in the use of) LIMITE OF HK$30,000 credit card(s) are stipulated in the relative credit card application form(s) and the Credit Card Cardholder Agreement. SECURITIES : 1. An existing all monies debenture incorporating a floating charge on all of your undertaking and all other property and assets, whatsoever and wheresoever, both present and future, and including your uncalled capital and account receivables; 2. A life policy of Dr Ng Kit Chong for HK$2,000,000 issued by Hong Kong Life Insurance Ltd denoting our interest as the Assignee; Page 2 of 4 SHANGHAI COMMERCIAL BANK LTD (INCORPORATED IN HONG KONG) Titanium Technology Ltd. 3. An all monies continuing guarantee given by Dr Ng Kit Chong, Mr Tang Wai Hung and Mr Cheung Kin Kwong jointly and severally for HK$1,000,000 in our favour; 4. An existing all monies continuing guarantee given by Dr Ng Kit Chong, Mr Tang Wai Hung and Mr Cheung Kin Kwong jointly and severally for HK$1,000,000 in our favour. For avoidance of doubts, the total joint and several liability of Dr Ng Kit Chong, Mr Tang Wai Hung and Mr Cheung Kin Kwong each under the captioned guarantees is HK$2,000,000. (Collectively, the "Security Documents") FACILITY FEE : An annual fee for HK$7,500 will be debited from your Checking Account. L/G COMMISSION: A charge of 0.75% p.a. on the L/G amount will be debited from your Checking Account upon issuance of L/G and each anniversary date. UNDERTAKING : 1. You shall deliver to us monthly (or at agreed intervals) a compliance certificate, an aging report, a list of account receivables identifying the amount of each receivable and the respective debtor in a form acceptable to us, and any other documents as may from time to time be requested by us. These documents are to be submitted to us not later than 15 days from each month end. 2. You shall keep all necessary and proper accounts of your dealings in relation to the account receivables and copies of all contracts relating to them. PLEASE INDICATE YOUR ACCEPTANCE OF THE FACILITIES BY SIGNING AND RETURNING THE ENCLOSED DUPLICATE OF THIS LETTER WITHIN 14 DAYS HEREOF, AFTER WHICH THE OFFER IN THIS LETTER WILL LAPSE. THIS LETTER SHALL SUPERSEDE OUR PREVIOUS LETTERS DATED JULY 18, 2005 AND JUNE 7, 2005. We also enclose a set of documents which should be completed and returned to us. If you have any queries regarding the completion of the required documents or this letter, please do not hesitate to contact Mr Ricky Cheung, Relationship Manager at 28415318 or Mr Alex Ng, Senior Relationship Officer at 28415547. Page 3 of 4 SHANGHAI COMMERCIAL BANK LTD (INCORPORATED IN HONG KONG) Titanium Technology Ltd. We offer an array of wealth management and insurance products to meet your corporate and personal needs. Your designated officer will be glad to introduce our professional staff to you for tailoring the most suitable insurance and investment plan at your choice so you can secure yourselves with various types of protection and grow your wealth continuously. Yours sincerely, For and on behalf of Shanghai Commercial Bank Ltd /s/ Cheung Yung-yin /s/ Tam Chung-ming CHEUNG Yung-yin (A-246) TAM Chung-ming (A-201) Authorized Signatures
WE AGREE TO ACCEPT THE FACILITIES AND BE I AGREE TO BE BOUND BY THE ABOVE TERMS BOUND BY ALL THE TERMS AND CONDITIONS AS THE GUARANTOR. AS THE BORROWER AND CHARGOR. For and on behalf of TITANIUM TECHNOLOGY LIMITED /s/ Ng Kit Chong /s/ Tang Wai Hung /s/ Ng Kit Chong - --------------------------------------------- ---------------------------------------- Authorized Signature(s) Guarantor: Ng Kit Chong Borrower and Titanium Technology Ltd Date: Chargor: Date: I AGREE TO BE BOUND BY THE ABOVE TERMS I AGREE TO BE BOUND BY THE ABOVE TERMS AS THE GUARANTOR. AS THE GUARANTOR. /s/ Cheung Kin Kwong /s/ Tang Wai Hung - --------------------------------------------- ----------------------------------------- Guarantor: Cheung Kit Kwong Guarantor: Tang Wai Hung Date: Date:
Page 4 of 4 EX-23 6 exh23-2.txt EXH 23-2 CONSENT EXHIBIT 23.2 CONSENT OF ZHONG YI (HONG KONG) C.P.A. COMPANY LIMITED ZHONG YI (HONG KONG) C.P.A. COMPANY LIMITED [GRAPHIC OMITTED] 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 March 7, 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 March 7, 2006 Hong Kong, China 9TH FL., CHINACHEM HOLLYWOOD CENTRE, 1-13 HOLLYWOOD RD., CENTRAL, HONG KONG Tel: 2573 2296 Fax: 2384 2022 CORRESP 7 filename7.txt [LETTERHEAD OF DILL DILL CARR STONBRAKER & HUTCHINGS] CHRISTOPHER W. CARR DANIEL W. 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 March 8, 2006 Mark P. Shuman Branch Chief Securities and Exchange Commission Mail Stop 4561 100 F Street, N.E. Washington, D.C. 20549 RE: TITANIUM GROUP LIMITED REGISTRATION STATEMENT ON FORM S-1 AMENDMENT FILED ON JANUARY 26, 2006 FILE NO. 333-128302 Dear Mr. Shuman: On behalf of Titanium Group Limited (the "Company"), Amendment No. 3 to the registration statement on Form S-1 is being filed. The comments of the Staff in its letter dated February 13, 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 REISSUE OUR PRIOR COMMENT 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 IN THE FIRST PARAGRAPH ON PAGE 13 RELATING TO YOUR "INTERNAL RESEARCH"; Mark P. Shuman Branch Chief Securities and Exchange Commission March 8, 2006 Page 2 o THE STATEMENTS IN THE PARAGRAPH STARTING "ALTHOUGH DIFFERENT BIOMETRICS . . ." ON PAGE 18; o THE STATEMENTS IN THE PARAGRAPH IMMEDIATELY PRECEDING THE "TI-FACE" SUBSECTION ON PAGE 19; RESPONSE: The Company has reviewed the statements throughout the document and revised the statements, as they cannot be supported with independent studies or analyses. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, PAGE 11 2. PLEASE EXPAND THE FIFTH PARAGRAPH TO PROVIDE A QUANTITATIVE AND QUALITATIVE CONTEXT FOR YOUR PRODUCT PERFORMANCE CLAIMS AS TO A "VERY LOW ACCEPTANCE RATE" AND "A VERY HIGH VERIFICATION RATE". IN THE COMPETITION SUBSECTION OF "BUSINESS", INDICATE HOW THE PERFORMANCE OF THE COMPANY'S PRODUCTS COMPARES TO THE OFFERINGS OF ITS COMPETITORS. RESPONSE: This statement has been revised, as the product performance claims are based only on the Company's own internal testing. Such results would not be meaningful unless compared to the test results of competitors' products. The Company is unable to obtain test result of competitors' products conducted by any independent sources. Therefore the statement referred to in this comment has been revised. 3. IN THE RESULTS OF OPERATIONS DISCUSSION, YOU SOMETIMES REFER TO TWO OR MORE FACTORS OR EVENTS THAT CONTRIBUTED TO A MATERIAL CHANGE THAT IS DISCUSSED. WHERE A CHANGE FROM ONE PERIOD TO THE NEXT IS THE RESULT OF TWO OR MORE FACTORS OR EVENTS, PLEASE STATE THE AMOUNT OF THE CHANGES THAT WAS ATTRIBUTABLE TO EACH SEPARATE FACTOR OR EVENT. FOR EXAMPLE, WHAT PORTION OF THE INCREASED SG&A EXPENSES IN 2004 WAS DUE TO INCREASES IN THE NUMBER OF EMPLOYEES, AND WHAT PORTION WAS DUE TO ESTABLISHING A NEW RESEARCH CENTER. RESPONSE: Complied. Wherever possible, the Results of Operations discussion has been revised to quantify the amount of change that is attributable to various factors. See pages 15 and 16. 4. IN DISCUSSING THE CHANGES IN REVENUES FROM ONE PERIOD TO THE NEXT, PLEASE INDICATE THE EXTENT TO WHICH CHANGES IN YOUR REVENUES WERE ATTRIBUTABLE TO CHANGES IN PRICES CHARGED FOR PRODUCTS OR SERVICES, AS OPPOSED TO VOLUMES OF PRODUCTS OR SERVICES PROVIDED IN EACH PERIOD. IF PRICES FOR YOUR PRODUCTS AND SERVICES WERE CONSTANT IN 2004 AND 2005, PLEASE SO STATE. RESPONSE: Complied. The Results of Operations discussion has been revised to state that the Company's prices for products were constant in 2004 and 2005, but the pricing for products was lower in 2003. See pages 15 and 16. PRIOR COMMENT NO. 11 LIQUIDITY AND CAPITAL RESOURCES 5. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT NO. 11 AND YOUR REVISED DISCUSSION OF SHAREHOLDER LOANS IMPACTING YOUR 2003 OPERATING ACTIVITIES. AS REQUESTED IN OUR PRIOR Mark P. Shuman Branch Chief Securities and Exchange Commission March 8, 2006 Page 3 COMMENT, EXPLAIN WHY SHAREHOLDER LOANS ARE INCLUDED IN OPERATING ACTIVITIES AS OPPOSED TO FINANCING ACTIVITIES AND HOW THIS PRESENTATION COMPLIES WITH SFAS 95. IN YOUR RESPONSE CLEARLY ADDRESS THE PROVISIONS OF SFAS 95 THAT PERMIT CLASSIFICATION OF A LOAN AS AN OPERATING ACTIVITY. IN ADDITION PROVIDE THIS INFORMATION IN YOUR RESPONSE, AS OPPOSED TO REFERRING TO REVISIONS IN YOUR FILING AND REVISE YOUR FILING AS NEEDED. RESPONSE: The Statement of Cash Flows has been corrected, as shareholder loans should not have been included in operating activities. See page F-7. 6. WE NOTE THAT YOU USE THE TERM "BURN RATE" IN YOUR DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES. TELL US HOW YOU CONSIDERED ITEM 10(E) OF REGULATION S-K REGARDING NON-GAAP MEASURES AS IT RELATES TO YOUR USE OF THE TERM "BURN RATE". FURTHER TELL US WHETHER "BURN" RATE IS A MEASURE OF LIQUIDITY OR PERFORMANCE AND HOW THIS METRIC IS COMPUTED. RESPONSE: Instead of using the term "burn rate," the discussion refers to the term "fixed overhead." See page 18. 7. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 16, SPECIFICALLY, THAT YOU HAVE LIMITED YOUR DISCLOSURE RELATING TO THE IDENTITY OF CUSTOMERS WHO HAVE PURCHASED LARGE SYSTEMS BECAUSE OF PRIVACY CONCERNS. PLEASE BE ADVISED THAT YOUR MAJOR CUSTOMERS, SPECIFICALLY THOSE THAT ACCOUNT FOR 10% OR MORE OF YOUR CONSOLIDATED REVENUES, MUST BE IDENTIFIED PURSUANT TO ITEM 101(C) OF REGULATION S-K. REVISE OR ADVISE. RESPONSE: Those customers that account for 10% or more of the Company's consolidated revenues are identified in "Business - Customers". See page 26. BUSINESS, PAGE 18 8. PROVIDE QUANTITATIVE CONTEXT FOR YOUR CLAIM IN THE THIRD PARAGRAPH THAT YOU ARE A LEADING PROVIDER OF AUTOMATIC FACE RECOGNITION SYSTEMS. IN PARTICULAR, HOW DID YOUR REVENUES FOR THE MOST RECENT PERIOD COMPARE TO THE REVENUES OF THE LARGER COMPANIES THAT ARE YOUR COMPETITORS. CLARIFY WHY YOU BELIEVE THAT SUPPLYING SYSTEMS TO GOVERNMENTS, LAW ENFORCEMENT ORGANIZATIONS, GAMING COMPANIES AND OTHER ORGANIZATIONS SUPPORTS YOUR CONCLUSION THAT YOU ARE A "LEADING PROVIDER". RESPONSE: The Company cannot obtain revenue figures from its competitors. Accordingly, the sentence has been revised to state only that the Company has sold systems to governments, law enforcement organizations, gaming companies and other organizations. See pages 19 and 20. EXECUTIVE COMPENSATION, PAGE 31 9. PLEASE UPDATE THE EXECUTIVE COMPENSATION DISCLOSURE TO PROVIDE INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2005, THE MOST "RECENT FISCAL YEAR" AS THAT TERM IS USED IN ITEM 402 OF REGULATION S-K. IF BONUS AMOUNTS FOR THE PRIOR YEAR HAVE NOT YET BEEN DETERMINED, THIS SHOULD Mark P. Shuman Branch Chief Securities and Exchange Commission March 8, 2006 Page 4 BE NOTED IN A FOOTNOTE TOGETHER WITH DISCLOSURE REGARDING THE DATE THE BONUS WILL BE DETERMINED, ANY FORMULA OR CRITERIA THAT WILL BE USED AND ANY OTHER PERTINENT INFORMATION. REFER TO INTERP. 8B OF TELEPHONE INTERP. MANUAL (JULY 1997). RESPONSE: The table appearing on page 31 and 32 has been updated to include information for the year ended December 31, 2005. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, PAGE 33 10. WE NOTE THAT YOU ONLY LIST GOLDEN MASS AND ITS CONTROL PERSONS, MESSRS. CHEUNG AND TANG. WE WOULD NOT OBJECT TO OMISSION OF TABULAR INFORMATION ON ANY OTHER EXECUTIVE OFFICERS NAMED IN THE SUMMARY COMPENSATION TABLE, AS WELL AS ANY DIRECTORS, SO LONG AS YOU INCLUDE A STATEMENT THAT, EXCEPT AS SET FORTH IN THE TABLE, NONE OF THE PERSONS WITHIN THOSE CATEGORIES BENEFICIALLY OWNED ANY SHARES OF THE COMPANY'S COMMON STOCK. RESPONSE: The Company has determined to leave the table as is. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, PAGE 34 11. PLEASE EXPAND THE TEXT CONCERNING THE SALES TO ERICORPS TO DISCUSS MORE CLEARLY AND SPECIFICALLY HOW THE PRICES AND OTHER TERMS OF THE RELATED PARTY TRANSACTION COMPARE TO THE PRICES AND TERMS OF CORRESPONDING TRANSACTIONS DURING EACH PERIOD WITH NON-AFFILIATED ENTITIES. ALTHOUGH WE NOTE THAT YOU STATE THAT THE TERMS ARE "SIMILAR", YOU SHOULD INDICATE WHETHER THE TERMS OF THE RELATED PARTY TRANSACTION ARE NO LESS FAVORABLE THAN THE TERMS OF TRANSACTIONS WITH NON-AFFILIATES. TO THE EXTENT THERE ARE VARIANCES IN THE TERMS OR SOME OF THE TERMS OF THE RELATED PARTY TRANSACTION MAY BE VIEWED AS LESS FAVORABLE TO THE COMPANY, DESCRIBE THE NATURE OF THESE VARIANCES. RESPONSE: This disclosure has been revised to state that the terms to Ericorps are the same as those provided to non-affiliated distributors. See page 34. 12. WITH RESPECT TO THE LOANS FROM RELATED PARTIES, PLEASE DISCLOSE THE AMOUNTS RECEIVED FROM AND REPAID TO EACH RELATED PARTY. IN THIS RESPECT, IT APPEARS THAT YOU DISCUSS THE LOANS FROM JOHNNY NG AND BILLY TANG IN THE AGGREGATE, RATHER THAN ON AN INDIVIDUAL BASIS. PROVIDE SIMILAR DETAILS WITH RESPECT TO THE "SHAREHOLDER LOANS" THAT ALSO APPEAR TO BE DISCUSSED IN AN AGGREGATED FASHION. DID THE COMPANY ENTER INTO PROMISSORY NOTES OR OTHER WRITTEN DOCUMENTATION WITH RESPECT TO THESE AND OTHER RELATED PARTY TRANSACTIONS REQUIRED TO BE DISCLOSED IN THIS SECTION? IF SO, THE WRITTEN AGREEMENTS SHOULD BE FILED AS EXHIBITS. RESPONSE: Prior to the Company's private placement in 2005, it was a closely-held business, with Golden Mass Technologies Ltd. as the controlling shareholder. Through other entities, Johnny Ng has 51% ownership of Golden Mass and Humphrey Cheung and Billy Tang each own 19%. As disclosed in "Management - Officers, Directors and Key Employees," Messrs. Ng, Cheung and Tang have founded and operated other businesses with each other and are close business partners. Due to this relationship, they have had a Mark P. Shuman Branch Chief Securities and Exchange Commission March 8, 2006 Page 5 practice of settling their collective outstanding amounts due to and from the Company as one group. Also, because the Company was a closely-held business until the quarter ended September 30, 2005, there were no promissory notes to document these related party transactions. Once the Company obtained outside investors, net amounts due from related parties were offset against amounts due to related parties and the surplus, together with the outstanding amount owed under shareholders' loans, were contributed to the capital of the Company. Further, the Company has adopted a policy of prohibiting advances to related parties. 13. WE NOTE THE PAYMENTS TO MR. HUMPHREY CHEUNG. AS REQUIRED BY ITEM 404 OF REGULATION S-K, ALL RELATED PARTY TRANSACTIONS INVOLVING IN EXCESS OF $60 THOUSAND MUST BE DESCRIBED IN REASONABLE DETAIL. PLEASE DISCLOSE HOW MR. CHEUNG INTENDS TO PAY THE AMOUNTS DUE AND WHETHER THE PAYMENTS ARE SUBJECT TO INTEREST. RESPONSE: As disclosed in the prospectus, the amounts advanced to Humphrey Cheung were offset against amounts owed to the other related parties pursuant to their agreement. As of December 31, 2005, there were no amounts due from Humphrey Cheung or any other related party. Further, the Company has adopted a policy to prohibit this practice. The Company did not charge interest on the advances made to Mr. Cheung, as they had been made to facilitate the operation of the Company's PRC subsidiary. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 PRIOR COMMENT NO. 41 - NOTE 3. AMOUNT DUE FROM RELATED PARTIES, PAGE F-4 14. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 41. YOUR RESPONSE APPEARS TO BE INCONSISTENT WITH YOUR RESPONSE TO COMMENT NO. 55 IN OUR LETTER DATED DECEMBER 9, 2005, IN WHICH YOU INDICATE THAT IT TAKES A CONSIDERABLE AMOUNT OF TIME TO TRANSFER CASH THROUGH NORMAL BANKING CHANNELS AND THAT YOU SAVE APPROXIMATELY FIVE BUSINESS DAYS BY TRANSFERRING CASH TO A DIRECTOR. RECONCILE THESE TWO RESPONSES CONSIDERING IT DOES NOT APPEAR FROM YOUR RESPONSE TO PRIOR COMMENT 41 THAT THE DIRECTOR IMMEDIATELY DEPOSITS FUNDS HE RECEIVES IN HIS NAME DIRECTLY INTO THE BANK ACCOUNT OF YOUR SUBSIDIARY. FURTHER TELL US HOW FUNDS ARE TRANSFERRED TO THE DIRECTOR, PRESUMABLY LOCATED IN CHINA, AND IF DONE THROUGH A BANK TRANSFER, CLARIFY WHY THIS TAKES LESS TIME THEN A TRANSFER DIRECTLY TO THE BANK ACCOUNT OF YOUR SUBSIDIARY. ALSO TELL US WHETHER THERE IS A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE DIRECTOR RELATING TO THESE TRANSFERS, AND IF SO, PROVIDE US THE TERMS OF THE AGREEMENT. RESPONSE: See the responses to comments 12 and 13 above. FINANCIAL STATEMENTS - YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 Mark P. Shuman Branch Chief Securities and Exchange Commission March 8, 2006 Page 6 PRIOR COMMENT NO. 42 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, PAGE FF-1 15. WE UNDERSTAND FROM YOUR RESPONSE THAT ZHONG YI IS INVOLVED IN THE CREDENTIALING PROCESS WITH THE OFFICE OF THE CHIEF ACCOUNTANT. PLEASE ADVISE US WHEN ZHONG YI HAS COMPLETED THIS PROCESS. AS NOTED IN OUR PRIOR COMMENT NO. 42 WE MAY BE UNABLE TO COMPLETE OUR REVIEW AND ACCEPT THE REPORT OF ZHONG YI UNTIL THE FIRM HAS COMPLETED THE CREDENTIALING PROCESS. RESPONSE: We understand the Zhong Yi has recently received a letter from the Office of the Chief Accountant and that the credentialing process is ongoing. We have noted your prior comment. PRIOR COMMENT NO 43 - CONSOLIDATED STATEMENTS OF INCOME, PAGE F-2 AND FF-4 16. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 43 AND REVISED PRESENTATION OF REVENUES AND COST OF SALES IN YOUR CONSOLIDATED STATEMENTS OF INCOME. TELL US WHY NO, OR NOMINAL AMOUNTS, ARE ASSOCIATED WITH COST OF MAINTENANCE REVENUES. RESPONSE: The cost of maintenance revenues is now reflected separately from Selling, general and administrative expenses. See page F-4 and Note 4 of the Notes to the financial statements on page F-20. PRIOR COMMENT NO 44 - NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PAGE FF-11 17. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 44 AND REVISED DISCLOSURES IN NOTE 1 AND 12 OF YOUR AUDITED FINANCIAL STATEMENTS. CONSIDER CROSS REFERENCING YOUR DISCLOSURES IN NOTE 12 ("OPERATING RISK") TO NOTE 1, IN WHICH YOU DISCLOSE SIGNIFICANT CUSTOMERS AND SIGNIFICANT REVENUES GENERATED IN ONE COUNTRY. RESPONSE: The notes to the financial statements have been revised to disclose "Concentrations and Risks" together in one note, Note 17, which appears on pages F-27 and F-28. PRIOR COMMENT NO. 45 - REVENUE RECOGNITION, PAGE FF-12 18. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT NO. 45 AND REFERENCE TO REVISED DISCLOSURES IN NOTE 2, WHICH INCLUDE A DESCRIPTION OF PRODUCTS AND SERVICES THAT RECOGNIZE REVENUE PURSUANT TO SFAS 13 AND SOP 97-2. PROVIDE THE INFORMATION ABOUT YOUR ACCOUNTING FOR THESE PRODUCTS AND SERVICES: PROVIDE THE INFORMATION AND ANALYSIS REQUESTED ABOVE IN YOUR RESPONSE LETTER AS OPPOSED TO REFERRING TO YOUR REVISED DISCLOSURES AND ALSO REVISE YOUR DISCLOSURES AS NECESSARY. PLEASE BE AS DETAILED AS NECESSARY TO PROVIDE A THOROUGH UNDERSTANDING OF YOUR REVENUE RECOGNITION FOR PRODUCTS AND SERVICES. Mark P. Shuman Branch Chief Securities and Exchange Commission March 8, 2006 Page 7 RESPONSE: To facilitate your review of the Company's response, the response to the specific item is set forth immediately after that item: o YOUR ANALYSIS OF DETERMINING UNITS OF ACCOUNT PURSUANT TO EITF 00-21 FOR MULTIPLE ELEMENT ARRANGEMENTS, THE ACCOUNTING LITERATURE THAT APPLIES TO RECOGNIZING REVENUES FOR THOSE UNITS OF ACCOUNT AND THE TIMING OF DELIVERY FOR EACH UNIT OF ACCOUNT; Product arrangements comprising multiple deliverables including software, hardware, professional services, and maintenance are generally classified into one of the following categories: FACIAL BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS THAT DO NOT REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION OF THE COMPANY'S SOFTWARE Revenue associated with these arrangements, exclusive of amounts allocated to maintenance, for which the Company has vendor-specific objective evidence of fair value ("VSOE"), is recognized upon installation and receipt of written acceptance of the project by the customer when required by the provisions of the contract, provided that all other criteria for revenue recognition have been met. Revenue resulting from arrangements for which VSOE of the maintenance element does not exist is recognized ratably over the maintenance period. FACIAL BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS THAT REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION OF THE COMPANY'S SOFTWARE: Revenue associated with these arrangements is recognized using the percentage of completion method as described by SOP 81-1. The percentage of completion method reflects the portion of the anticipated contract revenue, excluding maintenance that has VSOE, which has been earned, equal to the ratio of labor effort expended to date to the anticipated final labor effort, based on current estimates of total labor effort necessary to complete the project. Revenue resulting from arrangements for which VSOE of the maintenance element does not exist is recognized ratably over the contractual maintenance period. SELF-DEVELOPED SOFTWARE PRODUCTS SALES AND RE-SALE OF PURCHASED THIRD PARTIES PRODUCTS: Revenue associated with the sale of these products, excluding maintenance when applicable, is recognized upon shipment to the customer. The amount of these revenues has historically not been significant. o THE TERMS OF YOUR ARRANGEMENTS AND RELATED REVENUE RECOGNITION FOR PRODUCTS SUBJECT TO SFAS 13 AS NOTED IN YOUR DISCLOSURE, INCLUDING THE CLASSIFICATION OF THE LEASES, HOW YOU DETERMINE INTEREST RATES, RESIDUAL VALUES AND OTHER SIGNIFICANT ASSUMPTIONS AND FACTORS RELATING TO YOUR LEASE ACCOUNTING; o WHY SYSTEM DESIGN, IMPLEMENTATION AND TRAINING WOULD BE SUBJECT TO SFAS 13 CONSIDERING THE SCOPE OF THIS LITERATURE INCLUDES PROPERTY AND EQUIPMENT. WE REFER YOU TO EITF 01-8 AND PARAGRAPH 1 OF SFAS 13; Mark P. Shuman Branch Chief Securities and Exchange Commission March 8, 2006 Page 8 o WHY YOU HAVE NOT PROVIDED ANY OF THE DISCLOSURES PURSUANT TO SFAS 13; Reference to accounting pronouncement SFAS 13 "Accounting for Leases" was made incorrectly. SFAS 13 is not applicable to the Company and such reference has been deleted from the notes to the financial statements. o WHETHER ALL REVENUE RELATING TO UNITS OF ACCOUNT SUBJECT TO SOP 97-2 ARE DEFERRED UNTIL THE LAST DELIVERABLE IS ACCEPTED BY THE CUSTOMER; See the explanation set forth above with respect to the question about multiple element arrangements. Revenue is recognized or deferred according to the interpretation in each of the three products revenue categories. o TELL US THE STANDARD TERMS OF YOUR SOFTWARE LICENSE ARRANGEMENTS; Sales of the Company's products include a license to use the software in perpetuity so long as the software is installed on the hardware for which it was originally intended. o CONSIDERING YOUR DISCLOSURE THAT REVENUE IS DEFERRED UNTIL A USER ACCEPTANCE CERTIFICATE IS OBTAINED (I.E., AFTER SYSTEM DESIGN AND IMPLEMENTATION), TELL US WHY NO DETERRED REVENUE IS REPORTED IN YOUR BALANCE SHEETS; The Company had some deferred revenue at December 31, 2003 that was included in Accounts payable. The deferred revenue is now in a separate line item on the balance sheet. o EXPLAIN THE DIFFERENCE BETWEEN SERVICES/UPGRADES/PRODUCTS UNDER POST CONTRACT CUSTOMER SUPPORT ARRANGEMENTS THAT ARE PROVIDED FREE OF CHARGE FOR THE FIRST TWELVE MONTHS AND THOSE PROVIDED UNDER "DEFINITE MAINTENANCE CONTRACTS"; The major difference between the "free" post-contract customer support ("PCS") arrangement and "definite maintenance contract" is that the free PCS is for all customers for the first twelve-month period, while the definite maintenance contract is not free and the terms and scope of services are as agreed upon between the Company and its particular customer. o TELL US HOW YOU HAVE CONSIDERED PARAGRAPH 56 OF SOP 97-2 IN EVALUATING WHETHER YOU ARE PROVIDING IMPLIED PCS UNDER THE TERMS OF YOUR CONTRACTS. IN THIS REGARD CONFIRM THAT IF AN UNSPECIFIED UPGRADE OR OTHER PRODUCTS AND SERVICES WERE PROVIDED TO CUSTOMERS IN THE SECOND YEAR OF THEIR CONTRACT THAT YOU WOULD NOT PROVIDE THOSE SAME UPGRADES AND SERVICES TO CUSTOMERS THAT WERE IN THE FIRST TWELVE MONTHS OF THEIR CONTRACT; Generally the Company will provide both product warranty and PCS to its customers for a period of twelve months, free of charge, and thereafter enter into a definite Mark P. Shuman Branch Chief Securities and Exchange Commission March 8, 2006 Page 9 maintenance contract at the discretion of the customer. The Company confirms that it does not provide any unspecified upgrade or other products and services to its customers in the second year, unless the customer has a definite maintenance contract with the Company. o TELL US WHETHER YOU EVER SELL SOFTWARE WITHOUT PROVIDING CUSTOMIZATION, DESIGN AND IMPLEMENTATION SERVICES, AND IF SO, HOW YOU DETERMINE VSOE WHEN SOFTWARE IS SOLD WITH PCS. Occasionally, the Company sells software without providing customization, design and implementation services. In those cases, revenue, exclusive of amounts allocated to maintenance, for which the Company has vendor-specific object evidence of fair value ("VSOE"), is recognized upon installation and receipt of written acceptance of the project by the customer when required by the provisions of the contract, provided that all other criteria for revenue recognition have been met. Revenue resulting from arrangements for which VSOE of the maintenance element does not exist is recognized ratably over the maintenance period. PRIOR COMMENT NO. 48 19. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 48. AS REQUESTED IN OUR PRIOR COMMENT, 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: As discussed in Note 18 of the Notes to the financial statements, the Company provides both product warranties and post-contract customer support ("PCS") to its customers and resellers for a period of twelve months, free of charge. Thereafter, at the discretion of the customers, the Company will enter into definite maintenance contracts. PCS consists of the provision of a technical support telephone hotline for the customers. As customers seldom use this hotline, the Company does not assign any specific personnel to staff the 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. PRIOR COMMENT NO. 50 - RESEARCH AND DEVELOPMENT COSTS, PAGE FF-14 20. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 50. IT APPEARS FROM YOUR RESPONSE THAT ALL RESEARCH AND DEVELOPMENT COSTS RELATING TO PRODUCTS LAUNCHED IN 2004 AND 2005 WERE CAPITALIZED. CONSIDERING THIS, CONFIRM THAT PROACCESS FACEOK, PROACCESS FACEGUARD, PROFACER IDVR, PROFACER WATCHGUARD AND PROACCESS FACEATTEND REACHED TECHNOLOGICAL FEASIBILITY, AS DEFINED IN SFAS 86, PRIOR TO 2004. RESPONSE: The Company confirms that ProAccess FaceOK, ProAccess FaceGuard, ProFacer iDVR, ProFacer Watchguard and ProAccess FaceAttend reached technological feasibility, as defined in SFAS 86, prior to 2004. Mark P. Shuman Branch Chief Securities and Exchange Commission March 8, 2006 Page 10 PRIOR COMMENT NO. 51 - RESEARCH AND DEVELOPMENT COSTS, PAGE FF-14 21. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 51. TELL US WHY THE AUDITOR'S OPINION IS NOT DATED AFTER AUGUST 31, 2005 OR DUAL DATED, CONSIDERING YOUR FINANCIALS STATEMENTS WERE RESTATED AFTER THAT DATE. HAVE YOUR AUDITOR'S REVISE THE DATE OF THEIR OPINION DATE, AS NECESSARY. RESPONSE: The Company believes that the auditor's opinion was dual dated and presented as: "August 31, 2005 (except for Note 13, as to which the date is January 25, 2006)". This issue is now moot, as a new audit report, bearing a date of March 1, 2006 is included in Amendment No. 3. PRIOR COMMENT NO. 52 - GRANT AND SUBSIDY INCOME, PAGE FF-11 22. WE NOTE YOUR RESPONSE TO PRIOR COMMENT 52 AND THAT THE COMPANY APPLIED SFAS 68 IN ACCOUNTING FOR GOVERNMENT GRANTS RECEIVED. TELL US WHY SFAS 68 APPLIES TO THE GOVERNMENT GRANTS YOU RECEIVED CONSIDERING PARAGRAPH 3 OF THAT STANDARD INDICATES "THIS STATEMENT DOES NOT ADDRESS REPORTING OF GOVERNMENT-SPONSORED RESEARCH AND DEVELOPMENT." FURTHER TELL US WHY YOU HAVE NOT APPLIED THE GUIDANCE IN PARAGRAPH 73 OF SOP 97-2, AS IT RELATES TO ACCOUNTING FOR INCOME RECEIVED FROM A FUNDING PARTY. IN ADDITION TELL US HOW YOU PROPOSE TO ACCOUNT FOR YOUR ARRANGEMENTS WITH TSING HUA UNIVERSITY AND THE INSTITUTE. RESPONSE: Note 2 of the Notes to the financial statements with respect to "Intangible assets/Software development costs" has been revised to comply with paragraph 73 of SOP 97-2. The 2003 and 2004 financial statements were restated to reflect the crediting of grant income to the software development costs prior to capitalization. Amounts expended by the Company as its share of expenses under the agreements with Tsing Hua University and the Institute will be reflected as research and development expenses. PRIOR COMMENT NO. 55 - NOTE 8. INCOME TAXES, PAGE FF-17 23. WE NOTE YOUR RESPONSE TO PRIOR COMMENT 55 AND YOUR ANALYSIS OF THE IMPACT OF NOT RECORDING DEFERRED TAXES. IN YOUR ANALYSIS THE IMPACT ON 2003 INCOME OF NOT RECORDING DEFERRED TAXES IS 30% WHICH APPEARS TO BE MATERIAL. ALTHOUGH SAB TOPIC 1 M INDICATES THAT QUALITATIVE FACTORS SHOULD BE CONSIDERED WHEN MISSTATEMENTS ARE QUANTITATIVELY SMALL IT DOES NOT SUGGEST THAT THE QUALITATIVE FACTORS SHOULD BE CONSIDERED WHEN ITEMS ARE QUANTITATIVELY MATERIAL. TELL US WHY THIS AMOUNT IS NOT QUANTITATIVELY MATERIAL TO YOUR FINANCIAL STATEMENTS. RESPONSE: As disclosed in Note 3 to the Notes to the financial statements, the 2003 and 2004 statements have been restated to record deferred taxation. Mark P. Shuman Branch Chief Securities and Exchange Commission March 8, 2006 Page 11 PRIOR COMMENT NO. 56 24. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 56. IT IS NOT EVIDENT FROM YOUR RESPONSE WHICH ITEMS INCLUDED IN YOUR ANALYSIS ARE TEMPORARY TIMING DIFFERENCES AND PERMANENT TIMING DIFFERENCES AND HOW YOUR DISCLOSURES COMPLY WITH ITEM 4-08(H) OF REGULATION S-X. TELL US WHICH ITEMS IN YOUR ANALYSIS ARE TEMPORARY TIMING DIFFERENCES AND DESCRIBE WHAT IS INCLUDED IN "OTHERS." PROVIDE US WITH THE ACCOUNTING ENTRIES TO RECORD DEFERRED TAX ASSETS AND LIABILITIES AND REVISE YOUR ANALYSIS PRESENTED IN RESPONSE TO OUR PRIOR COMMENT NO. 55 TO INCLUDE ALL TEMPORARY TIMING DIFFERENCES IN ADDITION TO THE AMOUNT PROVIDED FOR DEPRECIATION. ALSO, TELL US WHY THE AMOUNT OF THE VALUATION ALLOWANCE, WHICH YOU REFER TO IN YOUR RESPONSE, IS NOT DISCLOSED ALONG WITH THE RELATED NET OPERATING LOSS CARRY FORWARDS. WE MAY HAVE FURTHER COMMENTS BASED ON YOUR RESPONSE. RESPONSE: "Income not subject to tax," "Expenses not subject to tax," "Expenses not deductible for tax purposes," "Utilization of previous unrecognized tax losses," "Tax losses for which no deferred tax asset was recognized," and "others" in the reconciliation table related to the permanent difference items, while "Tax allowances" relates to the temporary difference. The accounting entry for the deferred tax liability is a debit to statement of operations and a credit to the balance sheet, while the entry for deferred tax assets is a debit to the balance sheet and credit to the statement of operations. As there no deferred tax assets have arisen, no valuation allowance is considered necessary. The Company has amended the disclosure in Note 13 of the Notes to financial statements in an effort to present a clearer explanation to the reader. PRIOR COMMENT NO. 57 - NOTE 10. RELATED PARTY TRANSACTIONS, PAGE FF-19 25. WE NOTE YOU RESPONSE TO OUR PRIOR COMMENT 57. AS NOTED IN YOUR RESPONSE THE AMOUNT OF REVENUE FROM SALES TO ERICORPS ARE SIGNIFICANT. CONSIDERING THIS, REVISE YOUR BALANCE SHEET, INCOME SHEET, INCOME STATEMENT, OR STATEMENT OF CASH FLOWS PURSUANT TO RULE 4-08 OF REGULATION S-X TO DISCLOSE RELATED PARTY TRANSACTIONS. FURTHER REVISE YOUR MD&A TO DISCUSS THE IMPACT OF RELATED PARTY TRANSACTIONS ON YOUR RESULTS OF OPERATIONS AND LIQUIDITY. RESPONSE: Complied. The disclosure of related party transactions pursuant to Regulation S-X is included in the audited financial statements. Reference to related party transactions has also been made in MD&A. See pages 15 to 17. PART II - INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 26. IN RESPONSE TO PRIOR COMMENT 27, YOU PROVIDE "FORM OF" AGREEMENTS AS EXHIBITS 10.9 AND 10.10. IF AN AGREEMENT WITH A DISTRIBUTOR IS MATERIAL, THEN THE AGREEMENT WITH THAT DISTRIBUTOR SHOULD BE FILED IN THE FORM IT WAS EXECUTED. IF YOU SEEK TO REDUCE THE BURDENS ASSOCIATED WITH FILING TWO OR MORE COPIES OF SUBSTANTIALLY IDENTICAL AGREEMENTS, YOU MAY RELY ON INSTRUCTION 2 Mark P. Shuman Branch Chief Securities and Exchange Commission March 8, 2006 Page 12 YET THIS APPROACH REQUIRES THAT YOU IDENTIFY THE PLACES IN THE AGREEMENT WHERE INFORMATION VARIES FROM ONE AGREEMENT TO THE NEXT AND THEN PROVIDES THE INFORMATION THAT VARIES IN A SCHEDULE TO THE AGREEMENT. OTHERWISE, PROVIDE THE APPROPRIATE DOCUMENTS OR PROVIDE US WITH A REASONABLE BASIS FOR EXCLUDING THE EXECUTED DOCUMENTS. RESPONSE: Complied. Two material distributor agreements are being filed as Exhibits 10.11 and 10.12. UNDERTAKINGS 27. PLEASE PROVIDE THE UNDERTAKINGS SET FORTH IN ITEM 512(A)(5) AND (A)(6) OF REGULATION S-K, AS APPLICABLE. RESPONSE: Complied. The undertaking set forth in Item 512(a)(5)(ii) has been included. The undertakings in Item 512(a)(5)(i) were not applicable, as the Company is not relying on Rule 430B. Also, the undertakings of Item 512(a)(6) do not apply as this registration statement does not involve an initial distribution of the Company's securities. See pages II-3 and II-4. 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-----