As filed September 14, 2005 File No. 333-_________
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TITANIUM GROUP LIMITED
(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 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. [ ]_____________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
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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
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Common stock, $0.01 par 9,956,000 shares $0.20 $1,991,200 $234.36
value per share
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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 September 14, 2005
TITANIUM GROUP LIMITED
UP TO 9,956,000 SHARES OF COMMON STOCK
Unless the context otherwise requires, the terms "we", "our" and "us"
refers to Titanium Group Limited
The selling shareholders named in this prospectus are offering
9,956,000 shares of common stock of Titanium Group Limited. We will not receive
any of the proceeds from the sale of these shares. The shares were acquired by
the selling shareholders directly from us in a private offering of our common
stock that was exempt from registration under the securities laws. The selling
shareholders have set an offering price of $0.20 until our shares are quoted on
the OTC Bulletin Board and thereafter at prevailing market prices or privately
negotiated prices. See "Selling Stockholders" on page 28 for more information
about the selling shareholders.
Our common stock is presently not traded on any market or securities
exchange. The offering price may not reflect the market price of our shares
after the offering.
INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. A
DETAILED EXPLANATION OF THESE RISKS IS INCLUDED IN THE SECTION ENTITLED "RISK
FACTORS" OF THIS PROSPECTUS, BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
____________, 2005
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................3
RISK FACTORS...................................................................4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..............................7
DILUTION.......................................................................7
DIVIDEND POLICY................................................................7
USE OF PROCEEDS................................................................8
SELECTED FINANCIAL DATA........................................................8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL..............................8
CONDITION AND RESULTS OF OPERATIONS............................................8
BUSINESS......................................................................11
MANAGEMENT....................................................................19
EXECUTIVE COMPENSATION........................................................21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................22
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................24
TAXATION......................................................................24
DESCRIPTION OF SECURITIES.....................................................26
SELLING STOCKHOLDERS..........................................................28
PLAN OF DISTRIBUTION..........................................................31
LEGAL MATTERS.................................................................32
EXPERTS.......................................................................32
ADDITIONAL INFORMATION........................................................32
REPORTS TO STOCKHOLDERS.......................................................33
INDEX TO FINANCIAL STATEMENTS.................................................33
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
Through our wholly-owned subsidiary, Titanium Technology Limited
("Titanium Technology"), we develop and market biometrics technologies. Based in
Hong Kong, with a research and development center in ShenZhen, China, and a
sales representative office in the United States, we have built a strong network
of expertise, comprising over 30 IT practitioners and researchers, enabling us
to provide what we believe are top-quality biometrics products and professional
services. In order to ensure the sustainability of cutting edge technologies, we
have joined forces with Tsinghua University and the Chinese Academy of Science,
Institute of Automation in the development of foundation technology and new
products.
Our offices are located at 4/F, BOCG Insurance Tower, 134-136 Des Voeux
Road Central, Hong Kong. Our website is located at WWW.TITANIUM-TECH.COM.
Information contained in our website is not part of this prospectus.
THE OFFERING
Securities offered..................9,956,000 shares of common stock.
Use of proceeds.....................We will not receive any of the proceeds from
the selling stockholders of shares of our
common stock.
Securities outstanding..............50,000,000 shares of common stock.
Plan of distribution................The offering is made by the selling
stockholders named in this prospectus, to
the extent they sell shares. Sales may be
made in the open market or in private
negotiated transactions, at fixed or
negotiated prices. See "Plan of
Distribution."
RISK FACTORS
Investing in our securities involves a high degree of risk. You should
consider carefully the information under the caption "Risk Factors" in deciding
whether to purchase the Units.
SUMMARY FINANCIAL INFORMATION
The following summary financial data (expressed in United States
Dollars) is derived from the unaudited financial statements for the six-month
period ended June 30, 2005 and the fiscal years ended December 31, 2004, 2003
and 2002 for Titanium Technology, included elsewhere in this offering
memorandum. In June 2005, we acquired 100% ownership of Titanium Technology, but
did not have any operations prior to the acquisition. Accordingly, for
accounting purposes, the historical financial statements of Titanium Technology
will be the historical financial statements of the company.
We have prepared the financial statements in accordance with generally
accepted accounting principles. Our results of operations for any interim period
do not necessarily indicate our results of operations for the full year. You
should read this summary financial data in conjunction with "Management's
Discussion and Analysis or Plan of Operation," "Business," and our financial
statements.
3
INCOME STATEMENT DATA: SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, -----------------------------------------------------
2005 2004 2003 2002
----------------------------------------------------------------------
Revenues $ 841,860 $ 814,006 $ 558,679 $ 547,095
Net income $ 141,119 $ 258,204 $ 10,373 $ 66,801
Net income per common share (proforma)(1) $ .00 $ .01 $ .00 $ .00
BALANCE SHEET DATA: JUNE 30, 2005 DECEMBER 31,
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2004 2003 2002
----------------------------------------------------------------------
Working capital $ 188,116 $ 236,560 $ 112,106 $ 104,727
Total assets $ 1,106,979 $ 738,252 $ 503,562 $ 331,051
Long-term debt $ - $ 182,051 $ 120,086 $ -
Stockholders' equity $ 579,812 $ 388,948 $ 131,055 $ 120,809
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(1) Based on 47,000,000 shares outstanding as a result of the recapitalization
with Titanium Group Limited for the years ended December 31, 2004, 2003, and
2002.
RISK FACTORS
Before deciding to invest in us or to maintain or increase your
investment, you should carefully consider the risk factors described below,
together with all other information in this prospectus and in our other filings
with the SEC, before making an investment decision. If any of the following
risks actually occurs, our business, financial conditions or operating results
could be materially adversely affected. In such case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
WE HAVE ONLY A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE
YOUR INVESTMENT IN OUR STOCK.
Your evaluation of our business will be difficult because we have a
limited operating history. Titanium Technology has been in business since
February 2001. We face a number of risks encountered by early-stage companies,
including our need to develop infrastructure to support growth and expansion;
our need to obtain long-term sources of financing; our need to establish our
marketing, sales and support organizations, as well as our distribution
channels; our need to manage expanding operations; and our dependence on
technology which could become incompatible or out of date. Our business strategy
may not be successful, and we may not successfully address these risks.
OUR SUCCESS AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE AND
PROTECT OUR PROPRIETARY TECHNOLOGY.
Our success depends on our ability to protect our proprietary
technology. In the event that a third party misappropriates or infringes on our
intellectual property, our business would be seriously harmed. Third parties may
independently discover or invent competing technologies or reverse engineer our
technology. We expect that if we should successfully licenses to use our
technology, competitors may attempt to duplicate our technology. Even 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. Such enforcement efforts are likely to be expensive and
time-consuming.
THE LOSS OF OUR OFFICERS AND DIRECTORS OR OUR FAILURE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
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 we strongly believe
that the stability of the core team will be maintained for a long period of
4
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 A SIGNIFICANT PORTION OF OUR REVENUES FROM A FEW CUSTOMERS, THE LOSS
OF WHICH COULD HAVE AN ADVERSE EFFECT ON OUR REVENUES.
For the year ended December 31, 2004, 8 customers accounted for
approximately 75% of our revenue. Since a small number of customers account for
a substantial portion of our revenues, the loss of any of our significant
customers would cause revenue to decline and could have a material adverse
effect on our business.
WE FACE COMPETITION FROM EXISTING AND POTENTIAL COMPETITORS.
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.
UNLESS WE KEEP PACE WITH CHANGING TECHNOLOGIES, WE COULD LOSE CUSTOMERS AND FAIL
TO WIN NEW CUSTOMERS.
Our future success will depend upon our ability to develop and
introduce a variety of new products and services and enhancements to these new
products and services in order to address the changing needs of the marketplace.
We may not be able to accurately predict which technologies customers will
support. If we do not introduce new products, services and enhancements in a
timely manner, if we fail to choose correctly among technical alternatives, or
if we fail to offer innovative products and services at competitive prices,
customers may forego purchases of our products and services and purchase those
of our competitors.
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
5
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 A MAJORITY 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. Consequently, investors may
not be able to use their shares for collateral or loans and may not be able to
liquidate at a suitable price in the event of an emergency. In addition,
investors may not be able to resell their shares at or above the price they paid
for them or may not be able to sell their shares at all.
REGULATIONS RELATING TO "PENNY STOCKS" MAY LIMIT THE ABILITY OF OUR SHAREHOLDERS
TO SELL THEIR SHARES AND, AS A RESULT, OUR SHAREHOLDERS MAY HAVE TO HOLD THEIR
SHARES INDEFINITELY.
If a market develops for our common stock, our common stock would, most
likely, be subject to rules promulgated by the SEC relating to "penny stocks,"
which apply to non-NASDAQ companies whose stock trades at less than $5.00 per
share or whose tangible net worth is less than $2,000,000. These rules require
brokers who sell "penny stocks" to persons other than established customers and
"accredited investors" to complete certain documentation, make suitability
inquiries of investors, and provide investors with certain information
concerning the risks of trading in the security. These rules may discourage or
restrict the ability of brokers to sell our common stock and may affect the
secondary market for the common stock.
SINCE NEITHER 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.
OUTSTANDING COMMON STOCK PURCHASE WARRANTS MAY NEGATIVELY IMPACT OUR ABILITY TO
OBTAIN FUTURE FINANCING.
As of the date of this prospectus, there are outstanding 3,000,000
common stock purchase warrants, each of which entitles the holder to purchase
one share of common stock at an exercise price of $0.50 per share through June
30, 2008. The warrants are redeemable at $0.001 per warrant if the common stock
is then listed on a recognized stock exchange or trading at $1.00 per share for
20 consecutive trading days. 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 MAY 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
6
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
DIFFICULTY PROTECTING YOUR SHAREHOLDER RIGHTS.
Our corporate affairs are governed by our memorandum and articles of
association, the International Business Companies Act of the British Virgin
Islands and the common law of the British Virgin Islands. The rights of
shareholders to take action against the directors, actions by minority
shareholders and the fiduciary responsibilities of our directors to us under
British Virgin Islands law are to a large extent governed by the common law of
the British Virgin Islands. The common law of the British Virgin Islands is
derived in part from comparatively limited judicial precedent in the British
Virgin Islands as well as from English common law, which has persuasive, but not
binding, authority on a court in the British Virgin Islands. The rights of our
shareholders and the fiduciary responsibilities of our directors under British
Virgin Islands law are not as clearly established as they would be under
statutes or judicial precedent in some jurisdictions in the United States. In
particular, the British Virgin Islands has a less developed body of securities
laws as compared to the United States, and some states, such as Delaware, have
more fully developed and judicially interpreted bodies of corporate law. In
addition, British Virgin Islands companies may not have standing to initiate a
shareholder derivative action in a federal court of the United States.
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.
As a result of all of the 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 in the United States.
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.
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
7
growth of our business. Any future determination to pay dividends will be at the
discretion of our board of directors and will depend on our results of
operations, financial condition, contractual and legal restrictions and other
factors the board of directors deems relevant.
USE OF PROCEEDS
We will not receive any of the proceeds from the selling stockholders
of shares of our common stock. However, we may receive the sale price of any
common stock we sell to the selling stockholders upon exercise of the warrants.
We expect to use the proceeds received from the exercise of warrants, if any,
for general working capital purposes.
SELECTED FINANCIAL DATA
The following summary financial data (expressed in United States
Dollars) is derived from the unaudited financial statements for the six-month
period ended June 30, 2005 and the fiscal years ended December 31, 2004, 2003
and 2002 for Titanium Technology, included elsewhere in this offering
memorandum. In June 2005, we acquired 100% ownership of Titanium Technology, but
did not have any operations prior to the acquisition. Accordingly, for
accounting purposes, the historical financial statements of Titanium Technology
will be the historical financial statements of the company.
We have prepared the financial statements in accordance with generally
accepted accounting principles. Our results of operations for any interim period
do not necessarily indicate our results of operations for the full year. You
should read this summary financial data in conjunction with "Management's
Discussion and Analysis or Plan of Operation," "Business," and our financial
statements.
INCOME STATEMENT DATA: SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, -----------------------------------------------------
2005 2004 2003 2002
----------------------------------------------------------------------
Revenues $ 841,860 $ 814,006 $ 558,679 $ 547,095
Net income $ 141,119 $ 258,204 $ 10,373 $ 66,801
Net income per common share (proforma)(1) $ .00 $ .01 $ .00 $ .00
BALANCE SHEET DATA: JUNE 30, 2005 DECEMBER 31,
-----------------------------------------------------
2004 2003 2002
----------------------------------------------------------------------
Working capital $ 188,116 $ 236,560 $ 112,106 $ 104,727
Total assets $ 1,106,979 $ 738,252 $ 503,562 $ 331,051
Long-term debt $ - $ 182,051 $ 120,086 $ -
Stockholders' equity $ 579,812 $ 388,948 $ 131,055 $ 120,809
- ------------------------
(1) Based on 47,000,000 shares outstanding as a result of the recapitalization
with Titanium Group Limited for the years ended December 31, 2004, 2003, and
2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In June 2005, we acquired 100% ownership of Titanium Technology, but
did not have any operations prior to the acquisition. Accordingly, for
accounting purposes, the historical financial statements of Titanium Technology
will be the historical financial statements of the company.
As Titanium Technology is a software development company, it earns
revenues through license sales of its products, all of which utilize the
proprietary technology it develops. Development of the technology requires a
significant outlay of cash before a viable product is developed that utilizes
the technology. After development of a product, even more cash is required to
market the product before any revenues are realized. Accordingly, the challenge
that faces many software development companies is being able to obtain enough
cash to fund research and
8
development and marketing expenses and sustain the company until revenues are
generated. Such funds are needed fairly quickly after products are developed, as
the environment in which the products are used is constantly changing. Companies
face the risk of discovering that their products do not meet the needs of the
potential customers or are technologically outdated after a marketing campaign
is launched.
We believe that Titanium Technology has fared better than other
technology companies, as it has been able to generate revenues rather early in
the company's development, which have funded research and development expenses,
as well as selling, general and administrative expenses. In the past few years,
Titanium Technology has been able to develop proprietary products mainly based
on proceeds from projects revenues. Some of the examples are ProAccess FaceOK,
which the company launched in the fall of 2003 and was then quickly awarded the
"Best of Comdex 2003 Finalist" in November the same year. The same product
FaceOK was thereafter further awarded several local (the IT Excellence Award in
Hong Kong) and regional (the Asia Pacific ICT award) recognitions. The company
then launched ProFacer iDVR in the summer of 2004 and was then quickly granted
an official endorsement from the People's Bank of China, which secured a unique
advantage for the company to market its technology and products in the banking
and finance section in the People's Republic of China. The above illustrates
management's ability to internally fund the growth of the company with limited
resources.
Nevertheless, we believe that external funding from investors can
stimulate and accelerate product development for a number of reasons. First, the
company has now achieved a certain amount of recognition in the industry,
especially in its region. It has also established several important marketing
channels, most notably a sole distributor in Japan who brought along
opportunities and major customers such as the NTT Group. Second, there is a
clear sign of increased awareness in the personal security area in which
biometric technologies are some of the most commonly used applications. The
current global market size is approximately $1 billion, but is expected to grow
to around $7 billion by year 2008(1). Third, the company has achieved a major
breakthrough in its technology recently. In April 2005, we developed the newest
facial recognition engine that achieves a false acceptance rate of less than
0.001% and a verification rate of over 99.9%. The most notable strength of this
technology is perhaps its ability to be utilized in a one-to-many application as
well as its ability to be deployed in all indoor lighting conditions. Based on
these breakthrough abilities, management believes that the company is now a
leader in this technology, worldwide.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2002. Sales revenues slightly increased by $11,584 to $558,679 in
2003 from $547,095 in 2002. We launched new products in 2003. Because we devoted
a substantial amount of our resources to the development of new products and
fulfilling our operational needs, our marketing efforts suffered. As a result,
sales did not increase significantly in spite of the product launch. The profit
margins decreased from 54.0% in 2002 to 43.7% in 2003. Selling, general and
administrative expenses increased from $143,299 in 2002 to $299,002 in 2003, due
to a substantial increase in the number of employees and operating expenses at
the early development stage. Also in 2003, we established our research center in
Shenzhen, China. Research and development costs increased from $84,936 in 2002
to $89,092 in 2003. Accordingly, our net income decreased from $66,801 in 2002
to $10,373 in 2003.
FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2003. Sales revenues increased by $255,327 (45.7%) comparing the
2004 fiscal year to the 2003 fiscal year, due to the beginning of significant
sales of some of the products we had developed, such as ProAccess FaceOK. This
marked the point where the company no longer relied solely upon project-based or
consultancy income. The gross margin also improved as a percentage of sales,
from 43.7% to 53.9%, and in terms of dollars, from $244,035 to $438,431.
Selling, general and administrative expenses increased from $299,002 in 2003 to
$323,899 in 2004 due to an increase in the number of employees and operating
costs. However, in 2003, Titanium Technology incurred $89,092 of research and
development costs, primarily for the research expenses on the ProFacer project,
as compared to $nil in 2004. 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, Titanium Technology generated net income of $258,204 for 2004, as
compared to net income of $10,373 for 2003.
- -----------------------
(1) Alster, "A Touchy Subject," CFO MAGAZINE - IT SPECIAL EDITION, p. 29
(Spring 2005, Vol. 21 No. 5).
9
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30,
2004. Sales revenues increased by $502,581 (148%) comparing the 2005 period to
the 2004 period, due to sales of ProAccess FaceGuard and the commencement of a
few large projects outside of Hong Kong. Selling, general and administrative
expenses increased from $146,737 in 2004 to $259,081 in 2005, but decreased as a
percentage of revenues from 43.2% in 2004 to 30.8% in 2005. The gross margin as
a percentage of sales increased in 2005 to 47.1% from 25.4% in 2004, and also
increased in terms of dollars due to the increase in sales revenues. As a
result, we generated net income of $141,119 for the six months ended June 30,
2005, as compared to net income of $40,328 for the comparable 2004 period.
LIQUIDITY AND CAPITAL RESOURCES
AS OF DECEMBER 31, 2003 AND 2004. At December 31, 2004, we had working
capital of 236,560, as compared to $112,106 at December 31, 2003. The increase
was due primarily to the increase in net income for the 2004 fiscal year.
For the 2004 fiscal year, operating activities provided cash of
$280,834, while investing activities and financing activities used cash of
$283,428 and $25,641, respectively. Of the$283,428 used for investing
activities, $267,804 was used for product development costs. In comparison, 2003
operating activities and financing activities provided cash of $168,132 and
$27,778, respectively, while investing activities, primarily product development
costs, used cash of $164,327. Product development costs are required to be
capitalized when a product's technological feasibility has been established by
completion of a working model of the product and ending when a product is
available for general release to customers. We capitalized $152,010 and $259,279
of product development costs associated with ProAccess and ProFacer as
intangible assets for the 2003 and 2004 fiscal years, respectively.
AS OF JUNE 30, 2005. Titanium Technology had working capital of
$188,116 at June 30, 2005, as compared to $236,560 at December 31, 2004. While
our increased sales for the six months ended June 30, 2005 resulted in a
$486,327 increase in accounts receivable, accounts payable also increased by
$312,236. We expect that the majority of accounts receivable will be collected
in the third quarter of 2005 and do not anticipate any harmful effect on our
liquidity in the long-run.
For the six months ended June 30, 2005, operating activities provided
$184,411, but $100,410 and $134,529 were used in investing and financing
activities, respectively. We used $81,487 to renovate our newly leased offices
and $18,923 for product development costs. We also used $182,051 to repay
shareholders' loans.
In comparison, for the six months ended June 30, 2004, $140,431 was
provided by operating activities, but $172,380 was used for investing
activities, of which $162,438 was used for product development costs.
At June 30, 2005, we had contractual obligations as set forth below:
- ----------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
------------------------------------------------------------------
LESS THAN MORE THAN 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
- ----------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations Nil Nil Nil Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Capital (Finance) Lease Obligations Nil Nil Nil Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations $104,805 $31,670 $91,135 Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Purchase Obligations Nil Nil Nil Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities Reflected on the Nil Nil Nil Nil Nil
Company's Balance Sheet
- ----------------------------------------------------------------------------------------------------------------------
Total $104,805 $31,670 $91,135 Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
We anticipate that we will spend approximately $250,000 before the end
of the current fiscal year as a result of a collaboration agreement with the
Chinese Academy of Science, Institute of Automation, in Beijing,
10
China, in which we have agreed to jointly develop biometrics products. We
believe we will be able to fund this expenditure with our existing cash flow,
based upon the signed contracts for orders that we have.
Subsequent to June 30, 2005, we completed a private placement of our
securities, through which we obtained net proceeds of approximately $535,000.
Proceeds will be 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 will be 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.
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
specializes in the development of face recognition 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.
Titanium Technology is engaged in developing products utilizing
biometrics technologies, licensing of technologies, professional services, and
project contracting. Based in Hong Kong with a research and development center
in ShenZhen, China, and a sales representative office in the United States,
Titanium Technology has built a strong network of expertise, comprising over 30
IT practitioners and researchers, enabling us to provide what we believe are
top-quality biometrics products and professional services. In particular, we
believe we are a leading provider of Automatic Face Recognition Systems, or
AFRS, and other biometric and security solutions to governments, law enforcement
agencies, gaming companies, and other organizations worldwide. Our AFRS products
enable customers to capture human face images electronically, encode facial
image into searchable files (faceprint), and precisely compare a set of faces to
a database containing potentially thousands of faces in seconds.
For over five years, we have researched, developed, and marketed face
biometrics technologies that incorporate advanced concepts in neural networks,
artificial intelligence, image processing, pattern recognition, data mining, and
massively parallel computing. Our researchers are keen to work on innovative
recognition algorithms and, using advanced methods of software engineering, turn
core mathematical modules into practical applications. Our proprietary
mathematical algorithms, together with optimized hardware peripherals, enable
our customers to cost-effectively achieve what we believe to be industry-leading
accuracy rates and performance. Titanium Technology supports the latest
standards in face biometrics and we are focused on enabling our customers to
expand the capabilities of their systems as their biometric needs evolve.
In the beginning of 2002, the award-winning core component for face
recognition, called "Ti-Face", was successfully developed. To date, Ti-Face
Software Development Kit ("SDK") is widely adopted as the development platform
for governments, universities, and institutions. 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 the same year. In 2004, our intelligent surveillance product,
ProFacer, was launched and promoted into casino and financial institution
markets. We also set up distribution networks in mainland China, Australia, and
Japan. Titanium Technology has proven capabilities in delivering biometrics
security products, consulting, and systems integration serving the government,
major financial institutions, universities, telecommunication companies, and
prestigious international corporations.
11
TI-FACE
Ti-Face is the core face recognition engine developed and implemented
by Titanium Technology. A proprietary algorithm, named Dynamic Local Feature
Analysis (DLFA), was invented to utilize the specific features for
identification instead of the entire representation of the face. This technology
is capable of selecting intelligently specific areas of the face, such as the
eyes or mouth, which in turn are used as distinguishable features for
recognition. Embedded with the Ti-Face module, a system can dynamically select
sets of blocks, or features, in each face that differ from other faces in the
data repository with an outstanding processing speed.
Based on this innovative face recognition technology, our research and
development group successfully modularized and realized this concept into the
Ti-Face Software Development Kit (SDK) in 2002. This SDK is not only our core
technology but serves as the blueprint for further extending our security access
control applications for all walks of life.
TI-FACE SDK 3.0 FOR WINDOWS. Features included in Ti-Face SDK 3.0 are
face detection, high speed face tracking, matching and authentication, detecting
motion or changes in a scene, extracting imagery from a video or live-stream,
comparing and matching non-facial images, performing both "one-to-one"
verification and "one-to-many" identification. Independent developers can use
Ti-Face SDK as a tool to easily build custom applications based on our
proprietary face detection and recognition technology. Furthermore, by
integrating our face recognition engine into third-party solutions and
applications, end users can obtain a solution that is customized to fulfill
their specific requirements. At present, we are eager to develop additional
modules on face recognition, such as lip movement identifier. By combining
several modules, greater security and more accurate identification methods can
be obtained. Furthermore, a multimodal biometric system can be easily integrated
into an application to greatly enhance security, privacy and user convenience.
PRODUCTS
Powered by our innovative face recognition technology, our core
products can be grouped into two categories: PROACCESS and PROFACER. The
ProAccess series fulfills the fundamental security and trust needs of the
information world by logical and physical access control. The ProFacer series
provides an ultimate solution for intelligent surveillance. Both of them have
won both local and international prizes, which have shown that these are highly
competitive face recognition products in the worldwide market. Moreover,
Titanium Technology has proven its potential among its competitors and was
selected by the HKSAR Government as one of suppliers PC/LAN Bulk Tender in
Category C.
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 door, personal computer, and mobile phones by
advanced face recognition technology.
PROACCESS FACEOK (PROFESSIONAL & ENTERPRISE). Powered by cutting-edge
Face Recognition Technologies, ProAccess FaceOK fulfils the fundamental security
and trust needs of the information world. Users can sign-on to their computers
through face recognition, which ensures the highest degree of security against
unauthorized access, especially when compared to authentication methods such as
unsecured simple text input and unreliable memories. In addition, ProAccess
FaceOK offers features such as audit trail, face learning, active user
monitoring, and web-based single sign-on services and integrated with directory
services.
Audit Trail is enabled to capture all unauthorized login attempts (with
images of trespassers and hackers) and store that information in a log file. The
Face Learning function allows the user to learn the latest face whenever a login
occurs. Natural facial progression does not compromise system accuracy. Active
Monitoring monitors the environment actively to ensure continuous access
control. The system proactively locks itself out when the authorized user is not
detected. Hidden Encryption encrypts a file and masks it with an image file type
so that only authorized users can retrieve its true content, while it appears as
a normal file to others. Furthermore, users can logon to different Directory
Services with the use of FaceOK. Those directories can be Novell eDirectory,
Microsoft Active Directory, NT Domain, NDS, iPlanet and other LDAP compliant
directories. Additionally, our
12
new module focusing on web Single-sign on technology is integrated in FaceOK,
which in turn, enforces our competitive competency in the market.
Considering our variety of clients, our FaceOK is released into two
editions, Professional edition and Enterprise edition. Enterprise edition is
suited for the corporate buyers (such as MTRC, Mass Transit Railway Corp) and
government agencies (Department of Health), whereas Professional edition is
designed for SOHO or SME. Titanium Technology cooperates with distributors in
Australia and Japan to market globally. Currently, we are dealing with potential
distributors to enlarge our markets in different countries including United
States, Europe and China.
PROACCESS FACEGUARD. Conventional access control systems relying on
cards, keys or codes are vulnerable to those wishing to gain unauthorized entry
to a facility. The card, key or code may be lost, stolen or illegally copied.
Once an intruder has gained access to a building using a stolen entry device,
there is often little evidence to help in apprehending or prosecuting the
culprit.
Personal property, office equipment and intellectual property are all
at risk. "FaceGuard" offers users a radically different approach to facilities
security that not only provides secure access to buildings, but also detects and
identifies anyone attempting to gain access without authorization.
ProAccess FaceGuard is a biometric physical access control system,
which identifies an individual's identity from their facial characteristics by
comparison with recorded data, and enables keyless entry based not on what the
entrant has or knows, but based on the identity of the entrant. In contrast to
conventional automatic systems, which only check for possession of a valid card,
pass or PIN number, this digital image analysis system recognizes individual
people and turns away those who try to enter using borrowed or stolen IDs. Its
clever software is not fooled by life-size photos, and will only admit living,
breathing humans with faces it "recognizes". Therefore, the technology allows
access that is convenient, personal, private, and extremely secure.
ProAccess FaceGuard is empowered by Ti-Face. It can be operated in both
online and offline mode. The templates of the authorized user list can be stored
in a server or in the internal memory of the device. Features such as all-in-one
device and best technology are used to protect and secure physical assets.
All-In-One Device - Although ProAccess FaceGuard may be networked in an
enterprise environment, it is a stand-alone device that can be operated
independently. The installation is simple and, except for the electric lock,
there is no hidden cost in the installation.
Best Technology - Although different biometrics, e.g. finger scan, may
be widely employed in similar application, face recognition is the best among
the existing alternatives. First, according to our internal research, the false
acceptance rate is less than 0.001% regardless of the lighting condition, which
is 50 times better than traditional fingerprint authentication. Second, there is
no direct contact between the device and users, and hence the problems of
cleanliness and wear on the equipment are greatly reduced. Third, the core
component is a CCD/CMOS camera, which is relatively low in production cost. Last
but not least, users have less concern on privacy issues with regard to facial
pictures and the market acceptance is much higher.
PROACCESS FACEATTEND. ProAccess FaceAttend is a feature-rich,
stand-alone, robust, cost effective, face recognition based time attendance
recorder. It is suitable for medium and large offices, branches, factories, or
other sites. ProAccess FaceAttend provides the most accurate data collection
solution available by ensuring that employees must be present in order to record
a punch. It brings the flexibility of a full-function time and attendance
terminal together with the sophistication of the most accurate identification
technology available. Using field-proven face biometric technology, FaceAttend
terminals scan employees' faces to identify their identities from a huge
database each time they punch. No fingerprints or palm prints are utilized.
ProAccess FaceAttend can be installed at convenient locations
throughout a facility to make it easy for employees to clock in. Punching is
performed using biometric face scans, and the resulting transactions are
periodically uploaded to a host PC running the automated timekeeping system. It
greatly improves payroll accuracy by eliminating "buddy-punching," the practice
of employees punching in or out for other employees who are not present at work.
Not only does this reduce labor costs and the time required to prepare payroll,
but it also gives
13
supervisors more time to focus on their jobs instead of watching clocks, thereby
increasing efficiency and profitability.
From coast-to-coast and around the world, ProAccess FaceAttend is
easing concerns and boosting security by ensuring that the people on-site
actually belong there. Attendance of each employee is printed on the attendance
report. The attendance report is particularly useful for payroll purposes. Wages
and salaries can be paid according to the employee's worked hours, overtime etc.
Given the continual growth of China as a worldwide manufacturing base, the
Southern part of China has become arguably the largest network of factories.
This region is also where we clearly have a distinct advantage of physical and
cultural proximity.
PROACCESS FACEMOBILE. ProAccess FaceMobile is the security solution
using biometric technology for the mobile computing market. As the mobile
ownership becomes more universal and third generation mobiles become more
popular, we are keen to introduce advanced biometric security solution to this
market.
This technology uses the camera equipped in the mobile phone to perform
the logon process. As a result, no additional hardware cost is incurred on the
capturing device. Utilizing our face recognition technology, mobile users do not
require special knowledge to use it. Users simply look at the camera embedded in
their phone, automatically triggering and processing authentication for the
logon process. The FaceMobile supports two different system architectures. The
difference between the two architectures (user authenticated on the device and
on the operator) is the location where authentication is processed.
USER AUTHENTICATED ON THE DEVICE. In this architecture, the device
captures and authenticates the user by the same device. This architecture is
optimal for the following situations:
o The device may be operated offline;
o The device stores sensitive information locally; or
o The device has high processing power.
In general, this architecture is applicable in the PDA market.
USER AUTHENTICATED ON THE OPERATOR. This architecture supports the user
picture being captured by the device, and then the servers in the operator site
authenticate the user. This approach is designed for the following cases:
o Authentication is required only when the user access service
from operator; or
o The device need not have very powerful processing power.
This approach can be a turn-key solution for current generation mobile
phones.
In summary, features found in FaceMobile are described below:
o ENHANCED ACCESS CONTROL - As cameras are standard components in
third generation mobile phones, this application of face
recognition helps to greatly improve the access control of the
phone with limited increased in production cost. The improved
access control prevents unauthorized persons from making calls,
receiving calls and reading stored data within the phone.
o M-COMMERCE SUPPORT - The continual improvement of computing
power of mobile devices, communication bandwidth, market
acceptance, etc., will allow the real-life application of
M-commerce in the near future. We believe that the use of
FaceMobile could provide the foundation for secure transaction
in the virtual credit card payment platform for major carriers
such as NTT Docomo and Credit Card companies.
PROFACER. ProFacer is a biometrically integrated surveillance system.
Titanium Technology employs a full range of technology to enhance and automate
existing surveillance techniques. In order to make the digital video recording
technology more secure and smart, we provide the most advance biometrics systems
that enable automated real time face recognition. The technology rapidly and
accurately detects and recognizes faces.
Characteristic processes enabling ProFacer to function effectively are
detection, alignment, normalization, representation and matching:
14
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.
PROFACER IDVR. Currently, Digital Video Recorders (DVRs) are popular in
public areas, offices and homes, with the belief that the cameras deter criminal
activity. However, with the public need for security rising, the sheer numbers
of DVRs pose problems. On top of traditional DVR systems, Titanium Technology
offers a proprietary real-time algorithm of face image detection and capture,
named PROFACER IDVR. It does not require special cameras or a specific
environment. Multiple faces in a stream of people may be detected, captured,
recorded and delivered with further analysis, reporting and notification
capabilities. The Face Capture is an application software for video
surveillance, monitoring, law enforcement and other applications.
Individual facial patterns are recorded and stored in a digital photo
database that can be viewed and used for different applications on-site or
remotely. Titanium Technology developed several algorithms, supporting the real
time processing of video data and image localization, determination of position
of head and motion tracing for subsequent recognition.
PROFACER IDVR can be used at airports, banks, casinos, public
buildings, subways, factories, schools or in any other location where it makes
sense to record the faces of visitors, with facilities for integration into
existing DVR systems. The PROFACER IDVR GUI is very simple such that any
operator can use all of its functions with just a minimal amount of training.
The system is highly flexible, allowing images to be digitalized and recorded in
either color or monochrome with a storage capacity typically exceeding 36 months
of facial data recording. PROFACER IDVR screen simultaneously shows the live
camera shot and the latest sequence of captured images. A pilot project has been
launched in GuangXi Peoples' Bank of China.
PROFACER IWATCHGUARD. PROFACER IWATCHGUARD adds automatic full time
face recognition, matching and active warning alerts to any new or existing
surveillance system. It allows each camera to serve as a diligent observation
point even when the video is not observed. Face recognition surveillance
incorporates computer intelligence to monitor faces and match those faces
against a "watch list" face database. As a modern new tool to identify potential
threats to public safety, PROFACER IWATCHGUARD can scan facial images of
individuals and match them with a database of images containing known suspects.
In seconds, a scanned face can be searched against thousands, or even millions
of database images to determine if the scanned image matches a previously stored
suspect image.
This creative concept has been applied to protect high security areas
such as casinos, banks, computer centers, research institutes and prison and
jails, for fully automatic operation 24 hours a day. For example, a casino group
in Macau has started a pilot project using PROFACER IWATCHGUARD to identify
unwanted guests or VIPs. Using a list of unwanted guests stored in the database,
casino staff can focus on trailing specific individuals from thousands of guests
everyday. With the installation of PROFACER IWATCHGUARD, closed circuit
televisions are connected and in real time send the scenes to a detection
manager. Inside the detection engine, a number of clear and distinct faces will
be identified. Each face will attempt to match the existing black-listed faces.
As soon as a face known to the database appears in the scene, the system
triggers a configurable alarm. Security guards can locate the unwanted
15
person easily and take them away. As a result, staffs are no longer burdened by
monotonous work, but can be employed more flexibly and effectively while still
increasing security.
PROFACER IMUGSHOT. PROFACER IMUGSHOT is another product derived from
ProFacer surveillance solution. In law enforcement units such as police and
immigration departments, this system can greatly help reducing fraud and crime.
Through identifying duplicate images in large databases, such as licensed
drivers and missing children and immigration, suspicious targets can be provided
as a list. As a result, the scope in finding the target subjects can be greatly
narrowed which, in turn, provides a cost effective, reliable and time saving
surveillance application.
Existing clients, like the Government Laboratory of HKSAR, are
satisfied with this highly accurate, promptly response, time cost effective
surveillance system. It is believed that police forces will be interested in
this advanced application.
PROFACER IDCONTROL. PROFACER IDCONTROL utilizes face recognition
technology in the airline and national security. Every traveler, who is ready to
make boarding registration, will be captured an image. Our PROFACER IDCONTROL
can start scanning if the given facial image has a high similarity scale with
the suspects contained in a database storing images of terrorists' faces
provided by government agencies. Once a list of suspects is generated, airline
staff can refine the verification process by one-to-one scanning. For further
enhancement, facial images can be saved in the travel document during the
check-in process. When travelers are ready to board the airline, our system can
achieve a high degree of security by further matching live face with the face ID
marked in the travel document. We believe these two levels of security measures
are practical, helpful, safe and convenient in the airport.
PROFACER IDCONTROL can be used for banking application. Face identity
can be embedded in the credit card, every time holders withdraw money from ATM
machines. For greater security, faces can be verified in addition to inputting
passwords, to confirm ownership of credit or debit cards. Using these two levels
of security control, personal property is strongly protected.
CONSULTING
Our consulting team works with the client from the earliest stages of
the project and takes accountability for the success of the project. We provide
services in the areas of security service and system integration/development
projects.
SECURITY SERVICES. We believe we are one of the leading digital
security services providers, offering strategic solutions for technology-enabled
enterprises. As a security advisor, we help clients to meet their requirements
for continuous IT innovation and development while controlling the risks
inherent in today's complex networked environments. Our security specialists
help customers identify system/network security weaknesses and provide
professional advice on how to best protect vital information and assets both
virtually on the Internet and physically without compromising productivity or
endangering the bottom line. Our services include security consulting, risk
assessment and penetration testing. Security training is also provided for the
staffs to increase the security awareness and knowledge. Our clients include the
Labour Department of Hong Kong SAR, Tokyo Bank of Mitsubishi, Citic Ka Wah Bank,
Hong Kong Productivity Council, Mandatory Provident Fund Schemes Authority, and
Mass Transit Railway Corp (MTRC). We are also a close partner with IBM offering
the aforementioned service to its customers.
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 are responsible for
business systems critical to the running of some of the world's leading
commercial and public sector organizations, as well as large-scale technical
systems designed to operate to the highest levels of reliability in demanding
conditions. 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.
16
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.
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 prepares marketing materials such as brochures, product white
papers and pricing references for the distributors and provide complete sales
support and technical consulting services to them.
Our markets include the following:
o Hong Kong, including the Hong Kong government and commercial
sectors;
o China, mainly the government;
o Macau, mainly casinos; and
o For Japan and the US markets, we form a distribution
partnership with the local agents to sell our products. Clients
in Japan came from both retail and commercial sectors.
Through these marketing activities, we have been able to acquire an
increasing number of customers and distributors. As of the date of this
Memorandum, we have 12 major customers, which represents a 50% increase over the
end of our last fiscal year (December 31, 2004). Further, we project that by the
end of this year, the number of major customers will grow to close to 20 from a
variety of industries. This will ensure us a more balanced customer portfolio.
Titanium Technology not only focuses on two core activities,
biometrics-based technology development and professional services, but also
operates a distribution business. In March 2003, it was awarded a bulk tender to
supply PC/LAN software to all departments in HKSAR government for three years.
This guarantees that Titanium Technology is one of the few vendors from whom the
Hong Kong government purchases software. To strengthen our distributor network,
we believe we have built a good relationship with many large vendors such as
Microsoft, Novell, SiS International Ltd, JOS, and others. In addition, with our
expertise in security technologies, eEye Digital Security has appointed Titanium
Technology to be a regional distributor for eEye products.
CUSTOMERS
Titanium Technology's major customers include:
o In Hong Kong: the Hong Kong government
o In China: People's Bank of China
o In Macau: Elixir Group, a supplier to an entertainment
corporation - Sociedade de Jogos de Macau
o In Japan: NTT Group
During the fiscal year ended December 31, 2004, 8 customers accounted
for approximately 75% of revenues. Sales to Beacon Base Software Ltd. and
Information Security One (Hong Kong) Ltd. were 13.32% and 21.02% of revenues,
respectively.
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.
17
TRADEMARK AND TRADE NAME. Titanium Technology has the following
registered trademarks for "ProAccess FaceOK":
o United States - Serial No. 78/414377
o Hong Kong - Trade Mark No. 300053478
o China - Serial No. ZC3732931SL
COMPETITION
The biometrics industry is fragmented and undeveloped, with a plethora
of methods for gathering biometric information, processing the data, and
interconnecting with applications. All the major prevailing biometrics systems
have limitations. As a general rule, systems with a high degree of accuracy have
typically been expensive to install and maintain. Systems that are inexpensive
have performed poorly relative to accuracy. This compromise between accuracy and
cost has led to many buyers deploying "layered" systems that combine two or more
biometric methods, or require supplemental passwords and/or smart cards. Many
potential buyers have been put off by the compromises and workarounds demanded
by what is available in the market, and they are waiting for a better
alternative to arrive.
The biometric industry is global in scope, with many competitors and
customers located in US and Europe. While Asia has some companies in the
biometrics arena, many of the biggest projects have been in nations installing
national identification systems. Strategic focus is quite diverse, as well, with
some firms specializing in the proprietary technology associated with capturing
biometric information, others in providing enterprise-level integration
services, and still others in offering managed or hosted services for outsourced
systems. Large players in intermediate or end-use markets for biometrics (e.g.
banking/financial services, security, PCs/peripherals, software/enterprise
systems, and wireless equipment and services) have been active in investing in
or sponsoring biometric technologies.
We intend to compete by utilizing the following strategies:
o put more funding into research and development to strengthen
the quality of our products;
o gain more share in the Asian market before the big competitors
step in;
o seek potential partnerships and strategic alliances; and
o organize more exhibitions of our products.
We believe that we have two major competitors: Identix Incorporated and
Viisage Technology, Inc., from the United States.
Identix is a multi-biometrics security technology company in both
fingerprint identification and facial recognition solutions has set to the
growing demand for biometrics products and solutions access multiple security
markets.
Viisage delivers advance technology identity solutions for governments,
law enforcement agencies and business concerned with enhancing security,
reducing identity theft, and protecting personal privacy. It has been renowned
for its facial recognition technologies.
RESEARCH AND DEVELOPMENT
During the fiscal years ended December 31, 2004, 2003 and 2002, we
spent $nil, $89,092 and $84,936, respectively, on research and development
activities.
EMPLOYEES
As of August 31, 2005, we employed a total of 33 persons, of which 28
were full-time. None of our employees is covered by a collective bargaining
agreement.
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FACILITIES
Our principal offices are located at 4/F, BOCG Insurance Tower, 134-136
Des Voeux Road, Central, Hong Kong. We have entered into a lease contract with
this new property that runs through June 2008, with an option to renew for an
additional term of two years. The lease requires monthly rent of HK$23,695
(approximately $3,050) and a monthly management fee and air conditioning charge
of HK$12,863 (approximately $1,656).
Our research and development center is located at 15/F, Wen Jin Plaza
23, Tian Bei Road 1, Luo Hu Qu, Shenzhen, China, while the sales representative
office in the United States is located at 3723 Haven Avenue, Menlo Park,
California.
LEGAL PROCEEDINGS
There are no legal proceedings pending and, to the best of our
knowledge, there are no legal proceedings contemplated or threatened.
MANAGEMENT
OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors, and key employees are:
NAME AGE POSITION
Dr. Johnny Ng 30 Chairman of the Board of Directors
Jason Ma 33 Chief Executive Officer
Prof. Stan Li 47 Chief Scientific Advisor
Humphrey Cheung 34 Chief Technology Officer and Director
Billy Tang 32 Chief Operation Officer and Director
Our shareholders elect our directors annually and our board of
directors appoints our officers annually. Vacancies in our board are filled by
the board itself. Set forth below are brief descriptions of the recent
employment and business experience of our executive officers and directors.
DR. JOHNNY NG, CHAIRMAN. Dr. Ng is one of the reputable young
entrepreneurs in China. Being a post-doctor in Tsinghua University, he received
his BEng and Ph.D. in Industrial & Systems Engineering from The Hong Kong
Polytechnic University. Dr. Ng first organized his own technology start-up, 303
Co. Ltd in 1998, which was sold to a listed company in 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
extraordinary achievements. In particular, he was awarded the "Ten Outstanding
Young Digi Persons 2000," "Innovative Entrepreneur of Year 2003," and "Top 100
Cosmopolitan Chinese Confucian Businessman in 2004". Dr. Ng is the youngest
recipient in this event. He is a highly sought after speaker at high level
industry conferences and a frequent commentator in the media. Currently, Dr.
Ng's duties include his functioning as our principal financial and accounting
officer.
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 BSc degree in Engineering and
computer science from the University of California at Berkeley, and an MBA
degree from the University of Southern California's Marshall School of Business.
During his stays in the United States he
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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 has worked as a consultant for the implementation of an ERP system for a
multi-national manufacturing firm, and an analyst for a local venture capitalist
on evaluation of IT-related investment opportunities.
PROF. STAN LI, CHIEF SCIENTIFIC ADVISOR. Prof. Li has been a Researcher
at National Lab of Pattern Recognition (NLPR), Institute of Automation, Chinese
Academy of Sciences (CASIA), and the Director of the Center for Biometrics
Research and Testing (CBRT) since August 2004. He worked at Microsoft Research
Asia (MSRA) as a Researcher from May 2000 to Aug 2004. Prior to that, he was an
Associate Professor of Nanyang Technological University, Singapore. His current
research interest is in face recognition technologies, biometrics, intelligent
surveillance, pattern recognition, and machine learning. Prof. Li has been the
Chief Scientific Advisor to Titanium Technology since June 2005. He has
published several books, including "Handbook of Face Recognition"
(Springer-Verlag, 2004) and "Markov Random Field Modeling in Image Analysis"
(Springer-Verlag, 2nd edition in 2001), and over 180 reference papers and book
chapters in these areas. He obtained a B.Eng from Hunan University, an M.Eng
from National University of Defense Technology, and a PhD. from Surrey
University where he also worked as a research fellow. All the degrees are in
Electrical and Electronic Engineering. He is a senior member of IEEE and
currently serves as editorial board of Pattern Recognition, and program
committees of various international conferences.
MR. HUMPHREY CHEUNG, CHIEF TECHNOLOGY OFFICER AND DIRECTOR. Mr. Cheung
has been the Chief Technology Officer of Titanium Technology since July 2001. He
has BEng in Electronic Engineering from The Chinese University of Hong Kong and
M.Phil in Manufacturing Engineering from The Hong Kong Polytechnic University.
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. He has published several papers in the fields of computer
graphics, solid modeling, biometrics, and pattern recognition.
MR. BILLY TANG, CHIEF OPERATION OFFICER AND DIRECTOR. Mr. Tang has been
the Chief Operation Officer of Titanium Technology since July 2001 and is
responsible for its management and overall operation. He holds Bachelor's degree
in Mathematics from the Hong Kong University of Science and Technology. Under
his leadership, Titanium Technology has experienced tremendous growth and has
increased its employee base to over 30 employees worldwide in just over a year.
Prior to co-founding Titanium Technology, he was also a co-founder of 303
Company Limited with Dr. Johnny Ng and Mr. Humphrey Cheung. 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, where he
focused on the research of virtual reality technology. He also held senior
position in one of the largest Internet Service Provider in Hong Kong.
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.
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
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that they are affiliated with on an equal basis. A breach of this requirement
will be a breach of the fiduciary duties of the officer or director. If we or
the companies with which the officers and directors are affiliated both desire
to take advantage of an opportunity, then said officers and directors would
abstain from negotiating and voting upon the opportunity. However, all directors
may still individually take advantage of opportunities if we should decline to
do so. Except as set forth above, we have not adopted any other conflict of
interest policy with respect to such transactions.
EXECUTIVE COMPENSATION
The following table sets forth information about the remuneration of
our chief executive officers for the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
ANNUAL COMPENSATION --------------------------------------
AWARDS PAYOUTS
----------------------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION($) ($) SARS (#) ($) TION ($)
- -----------------------------------------------------------------------------------------------------------------------
Johnny Ng (1)<F1> 2002 $17,820 $-0- $-0- $-0- -0- $-0- $-0-
2003 $41,538 $-0- $-0- $-0- -0- $-0- $-0-
2004 $30,512 $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
- --------------------------
<FN>
(1)<F1> Mr. Johnny Ng functioned as the Chief Executive Officer from September
2001 to April 2004.
</FN>
During the last fiscal year, there were no grants of stock options,
stock appreciation rights, benefits under long-term incentive plans or other
forms of compensation involving our officers. We reimburse our officers and
directors for reasonable expenses incurred during the course of their
performance.
EMPLOYMENT CONTRACTS
We entered into agreements with our executive officers, Jason Ma,
Humphrey Cheung, and Billy Tang as of January 1, 2005. While each of the
agreements provides for permanent employment, each agreement may be terminated
by either party at any time without cause upon two weeks' notice. In the event
of termination, the employee is subject to a 12-month non-competition provision
during which he cannot engage in any business that competes with us or deal with
any of our existing customers. The agreements provide for monthly salaries of
$2,564 for Mr. Ma, $3,846 for Mr. Cheung, and $3,846 for Mr. Tang, with annual
salary reviews on January 1 of each year.
During 2005, there were unpaid salaries to Jason Ma, Humphrey Cheung,
and Billy Tang in the amount of $7,692 to each person. On June 30, 2005, these
three officers agreed to forgive the unpaid salaries due from us through that
date in the total amount of $23,076.
STOCK OPTION PLAN
We propose to adopt 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 not 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
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service is terminated for any reason, other than by reason of cause, voluntary
termination of employment or service by the optionee, or the optionee's death.
Options would terminate immediately upon the termination of an optionee's
employment for cause or 30 days after the voluntary termination of employment or
service by the optionee. If an optionee's employment or consulting relationship
terminates as a result of his or her death, then all options he or she could
have exercised at the date of death, or would have been able to exercise within
the following year if the employment or consulting relationship had continued,
would be exercisable within the one year period following the optionee's death
by his or her estate or by the person who acquired the exercise right by bequest
or inheritance.
Options granted under the plan would not transferable other than by
will or the laws of descent and distribution and may be exercised during the
optionee's lifetime only by the optionee, except that a non-statutory stock
option would be transferable to a family member or trust for the benefit of a
family member if the committee's prior written consent is obtained.
We anticipate that we will have the right to redeem any shares issued
to any optionee upon exercise of the option granted under the plan immediately
upon the termination of optionee's employment or service arising from
disability, the death of the optionee, the voluntary termination of employment
or services of the optionee, or the termination of employment or services of the
optionee for cause. The redemption price would be the fair market value of the
shares on the date of the event of redemption.
In the event that our stock changes by reason of any stock split,
dividend, combination, reclassification or other similar change in our capital
structure effected without the receipt of consideration, appropriate adjustments
shall be made in the number and class of shares of stock subject to the plan,
the number and class of shares of stock subject to any option outstanding under
the plan, and the exercise price for shares subject to any such outstanding
option.
In the event of a merger in which our shareholders immediately before
the merger own 50% or more of the issued and outstanding shares of stock of the
resulting entity after the merger, then existing options shall automatically
convert into options to receive stock of the resulting entity. Unless otherwise
expressly provided in any option, the committee in its sole discretion may
cancel, effective upon the date of the consummation of any change of control,
any option that remains unexercised on such date.
We anticipate that the plan will authorize the board to amend, alter,
suspend, or terminate the plan, or any part thereof, at any time and for any
reason. However, the plan would require shareholder approval for any amendment
to the plan to the extent necessary and desirable to comply with applicable
laws. No such action by the board or shareholders would alter or impair any
option previously granted under the plan without the written consent of the
optionee. The plan would remain in effect until terminated by action of the
board or operation of law.
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)<F1> NUMBER OF SHARES OWNED PERCENT OF CLASS
- -----------------------------------------------------------------------------------------------------------------------
Johnny Ng 37,835,000 (3)<F3> 75.7%
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
Golden Mass Technologies Ltd. 37,835,000 (4)<F4> 75.7%
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
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NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1> NUMBER OF SHARES OWNED PERCENT OF CLASS
- -----------------------------------------------------------------------------------------------------------------------
Humphrey Cheung 7,188,650 (5)<F5> 14.4%
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
Billy Tang 7,188,650 (6)<F6> 14.4%
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
Hong Tai Holdings, Co. Ltd. 5,005,500 (7)<F7> 10.0%
A2, 2/F, Tonic Industrial Centre
No. 26, Kai Cheung Road
Kowloon Bay, Hong Kong
Eric Wong 5,005,500 (7)<F7> 10.0%
A2, 2/F, Tonic Industrial Centre
No. 26, Kai Cheung Road
Kowloon Bay, Hong Kong
Christine Lau 3,783,500 (8)<F8> 7.6%
2/F, Blk 10, Rosary Villas
Lok Lam Road, Shatin, Hong Kong
All Directors and Executive Officers As a Group (3 37,835,000 (9)<F9> 75.7%
persons)
- -------------------
<FN>
(1)<F1> 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)<F2> Does not give effect to the possible exercise of the Warrants or
warrants that may be issued as selling compensation.
(3)<F3> Includes 37,835,000 shares owned by Golden Mass Technologies Ltd., a
British Virgin Islands company ("Golden Mass"). Golden Mass is 51%
owned by Golden Emperor Investments Ltd., a BVI company ("Golden
Emperor"). Golden Emperor is 80% owned by Goldford Business Inc., a BVI
company ("Goldford") and 20% owned by Ms. Christine Lau. Goldford is
100% owned by Mr. Ng.
(4)<F4> Golden Mass is beneficially owned by Mr. Johnny Ng (41%); Ms. Christine
Lau (10%); Mr. Humphrey Cheung (19%); Mr. Billy Tang (19%); Mr. Eric
Wong and his wife (through Hong Tai Holdings Co. Ltd., a Hong Kong
company) (10%); and Mr. Patrick Lo (1%)
(5)<F5> Mr. Cheung is the beneficial owner of 19% of the shares owned by Golden
Mass.
(6)<F6> Mr. Tang is the beneficial owner of 19% of the shares owned by Golden
Mass.
(7)<F7> Hong Tai Holdings, Co. Ltd. beneficially owns 3,783,500 shares through
its 10% ownership of Golden Mass and 1,222,000 shares through its 2.6%
direct ownership in the Company. Hong Tai Holdings is 100% owned by
Eric Wong and his wife.
(8)<F8> Ms. Christine Lau is the mother of Mr. Jason Ma.
(9)<F9> Includes all shares of common stock described in notes (3) through (5)
above.
</FN>
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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.
During the years ended December 31, 2004, 2003 and 2002, we had sold
goods to Ericorps Creation (HK) Limited in the amounts of $34,204, $105,874, and
$64,102, respectively. Ericorps Creation (HK) Limited is owned by Eric Wong and
his wife, who own beneficially 10.0% of the our outstanding shares.
We paid for the non-business related expenses of Golden Mass
Technologies Limited ("Golden Mass"), a shareholder that is beneficially owned
by, among others, Johnny Ng, Humphrey Cheung, and Billy Tang, who are our
officers and directors, since 2002. In addition, we have paid Humphrey Cheung, a
director, who then transferred the cash to our subsidiary in the PRC. Both
transactions have been reflected on our balance sheets as amounts due from
related parties. At December 31, 2002, $49,427 was owed to us by Golden Mass and
Mr. Cheung. We received payments of $6,210 and advanced $60,415 during 2003,
resulting in $103,632 being owed at December 31, 2003. We received payments of
$56,329 and advanced $87,144 during 2004, resulting in $180,601 being owed at
December 31, 2004. All these balances were settled on June 30, 2005 by
offsetting the outstanding balances against the loans from directors.
Since 2001, Billy Tang, Humphrey Cheung and Johnny Ng, officers and
directors, have loaned funds to us on an interest-free, unsecured basis. During
2001 and 2002, the three directors loaned us $52,964 and we repaid $28,058,
leaving a balance owed of $24,906. During 2003, the three directors and Goldford
Consultancy Limited ("Goldford"), a shareholder that is beneficially owned
primarily by Johnny Ng, loaned us $81,149 and we repaid $68,865 to Humphrey
Cheung and Johnny Ng, leaving a balance owed to the three directors and Goldford
of $37,190 at December 31, 2003. During 2004, Billy Tang and Johnny Ng loaned us
$56,604 and we repaid $66,769 to Humphrey Cheung, Johnny Ng, and Goldford,
leaving a balance owed to Humphrey Cheung and Johnny Ng of $27,025 at December
31, 2004. During 2005, Billy Tang and Johnny Ng loaned $65,767 and we repaid
$4,679 to both directors. On June 30, 2005, Billy Tang and Johnny Ng agreed to
forgive loans made to us through that date in the amount of $88,113.
In 2003 and 2004, Johnny Ng, Billy Tang, and Humphrey Cheung, through
Golden Mass, loaned us $117,949 and $64,102, respectively. These loans are
unsecured, interest-free, and not repayable within the next twelve months.
Billy Tang, Johnny Ng, and Humphrey Cheung personally guaranteed our
installment loan from a financial institution in the amount of $38,462. This
loan was repaid in 18 monthly installments of $2,313 in 2005.
TAXATION
The following is a summary of anticipated material U.S. federal income
and British Virgin Islands tax consequences of an investment in our common
shares. The summary does not deal with all possible tax consequences relating to
an investment in our common shares and does not purport to deal with the tax
consequences applicable to all categories of investors, some of which, such as
dealers in securities, insurance companies and tax-exempt entities, may be
subject to special rules. In particular, the discussion does not address the tax
consequences under state, local and other non-U.S. and non-British Virgin
Islands tax laws. Accordingly, each prospective investor should consult its own
tax advisor regarding the particular tax consequences to it of an investment in
the common shares. The discussion below is based upon laws and relevant
interpretations in effect as of the date of this prospectus, all of which are
subject to change.
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UNITED STATES FEDERAL INCOME TAXATION
The following discussion addresses only the material U.S. federal
income tax consequences to a U.S. person, defined as a U.S. citizen or resident,
a U.S. corporation, or an estate or trust subject to U.S. federal income tax on
all of its income regardless of source, making an investment in the common
shares.
In addition, the following discussion does not address the tax
consequences to a person who holds or will hold, directly or indirectly, 10% or
more of our common shares, which we refer to as a "10% Shareholder". Non-U.S.
persons and 10% Shareholders are advised to consult their own tax advisors
regarding the tax considerations incident to an investment in our common shares.
A U.S. investor receiving a distribution of our common shares will be
required to include such distribution in gross income as a taxable dividend, to
the extent of our current or accumulated earnings and profits as determined
under U.S. federal income tax law. Any distributions in excess of our earnings
and profits will first be treated, for U.S. federal income tax purposes, as a
nontaxable return of capital, to the extent of the U.S. investor's adjusted tax
basis in our common shares, and then as gain from the sale or exchange of a
capital asset, provided that our common shares constitutes a capital asset in
the hands of the U.S. investor. U.S. corporate shareholders will not be entitled
to any deduction for distributions received as dividends on our common shares.
Gain or loss on the sale or exchange of our common shares will be
treated as capital gain or loss if our common shares are held as a capital asset
by the U.S. investor. Such capital gain or loss will be long-term capital gain
or loss if the U.S. investor has held our common shares for more than one year
at the time of the sale or exchange.
A holder of common shares may be subject to "backup withholding" at the
rate of 28% with respect to dividends paid on our common shares if the dividends
are paid by a paying agent, broker or other intermediary in the 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.
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There are no capital gains, gift or inheritance taxes levied by the
British Virgin Islands on companies incorporated under the International
Business Companies Act. In addition, the common shares are not subject to
transfer taxes, stamp duties or similar charges.
There is no income tax treaty or convention currently in effect between
the United States and the British Virgin Islands.
DESCRIPTION OF SECURITIES
We were registered in the British Virgin Islands on May 17, 2004 as a
British Virgin Islands International Business Company, number 597079.
Our charter documents consist of our Memorandum of Association and our
Articles of Association. The Memorandum of Association loosely resembles the
Articles of Incorporation of a United States corporation and the Articles of
Association loosely resembles the bylaws of a United States corporation. A brief
description of our Memorandum of Association and Articles of Association
follows, including a summary of material differences between the corporate laws
of the United States 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 laws. 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.
Our Memorandum of Association provides that we any engage in any act or
activity which is not prohibited by any laws of the British Virgin Islands.
We are authorized to issue 100,000,000 shares of common stock, with a
par value of $0.01 per share. As of the date of this prospectus, we had
50,000,000 outstanding shares of common stock. All of our outstanding shares are
fully paid and non-assessable.
All shareholders have the same voting rights. Holders of common stock
are each entitled to cast one vote for each share held of record on all matters
presented to shareholders. Our shareholders are entitled to vote together as a
single class on all matters submitted to a vote of the shareholders. Cumulative
voting is not allowed; hence, the holders of a majority of the outstanding
common stock can elect all directors.
Holders of common stock are entitled to receive such dividends as may
be declared by the Board of Directors out of funds legally available for
dividends. All outstanding common shares have the same rights with regard to
dividends and distributions upon our liquidation, which is to share pro rata in
any distribution of our assets after payment of liabilities. Our Board of
Directors is not obligated to declare a dividend and it is not anticipated that
dividends will ever be paid. All dividends unclaimed for three years after
having been declared may be forfeited by resolution of the directors for our
benefit.
Although there are no conversion, redemption, sinking fund or similar
provisions applicable to our outstanding shares of common stock, we may redeem
any of our own shares for fair value. However, no purchase, redemption or other
acquisition of shares can be made unless out of surplus (as defined by the
International Business Companies Act) and unless the directors determine that
immediately after the 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.
If our shares are divided into different classes of shares, the rights
attached to any class (unless otherwise provided by the terms of the shares of
that class) may be changed only with the consent in writing of the holders of
not less than 75% of the issued shares of that class and the holders of not less
than 75% of the issued shares of any other class of shares which may be affected
by such variation.
26
There are no limitations on the right of any person to own or vote our
securities. However, holders of common stock do not have preemptive rights to
subscribe to any additional shares we may issue. Our Memorandum and Articles of
Association do not contain any provision discriminating against any existing or
prospective holder of our common stock as a result of ownership of any
particular number of shares. Our Memorandum and Articles of Association do not
contain any provisions relating to changes in our capital which are more
stringent than those required by law.
Our Articles of Association provide that our board of directors will
consist of not less than one nor more than 20 directors. Each director holds
office until his successor has been elected or the director is removed or
resigned.
The directors may by resolution fix the compensation of directors for
services provided in any capacity to us. There is no age requirement or limit
for a director and a director is not required to own any shares of our capital
stock.
Directors may be natural persons or companies, in which event the
company may designate a person as its representative as a director. Directors or
shareholders may remove a director for any reason. A director may appoint an
alternate to attend meetings and vote in the place of the director. No agreement
or transaction between us and one or more of our directors or any person in
which any of our directors has a financial interest is void or voidable by
reason of the presence, vote or consent by the interested director at the
meeting at which the agreement or transaction is approved if the material facts
of the interest of each director are disclosed in good faith or known to the
other directors.
The directors may convene meetings of our shareholders at such times
and in such manner and places as the directors consider necessary or desirable.
The directors are required to convene such a meeting upon the written request of
shareholders holding 50% or more of our outstanding voting shares. At least
seven days' notice of the meeting must be given to the shareholders whose names
appear on the share register. One-third of our outstanding shares entitled to
vote must be present at a meeting of shareholders in order to constitute a
quorum and the affirmative vote of a majority of those present and entitled to
vote is required in order to approve action by shareholders. Our Memorandum and
Articles of Association do not contain any conditions relating to admission to
any meeting of our shareholders.
Our directors have the power to take certain actions without
shareholder approval, including an amendment of our Memorandum of Association or
Articles of Association or an increase or reduction in our authorized capital,
which would require shareholder approval under the laws of most US
jurisdictions. In addition, the directors of a British Virgin Islands company,
subject in certain cases to court approval but without shareholder approval,
may, among other things, implement a reorganization, certain mergers or
consolidations with a subsidiary, the sale, transfer, exchange or disposition of
any assets, property, part of the business, or securities of the company, or any
combination (provided the assets do not represent more than 50% of the total
assets of the company and the sale is not outside of the usual or ordinary
course of the company's business), if they determine it is in the best interests
of the company. The directors may, by a resolution of directors, exercise all
powers we may have to borrow money. The directors' ability to amend our
Memorandum of Association and Articles of Association without shareholder
approval could have the effect of delaying, deterring or preventing a change in
our control without any further action by the shareholders, including a tender
offer to purchase our common shares at a premium over then current market
prices.
Our directors may also, by resolution:
o change the shares of all or part of a class into a different
number of shares of the same class.
o sub-divide all or any of our outstanding shares into a smaller
number of shares, and determine that, as between the holders
of the shares resulting from the sub-division, one or more of
the shares may have special rights, or may have qualified or
deferred rights over other outstanding shares or be subject
to any restrictions imposed by the directors.
27
British Virgin Islands law protecting the interests of minority
shareholders may not be as protective in all circumstances as the law protecting
minority shareholders in US jurisdictions.
While British Virgin Islands law does permit a shareholder of a British
Virgin Islands company to sue its directors derivatively, that is, in the name
of, and for the benefit of, our company and to sue a company and its directors
for his benefit and for the benefit of others similarly situated, the
circumstances in which any such action may be brought, and the procedures and
defenses that may be available in respect of any such action, may result in the
rights of shareholders of a British Virgin Islands company being more limited
than those of shareholders of a company organized in the US.
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. However,
under our Memorandum of Association, we are authorized to indemnify any director
or officer who is made or threatened to be made a party to a legal or
administrative proceeding by virtue of being one of our directors or officers,
provided such person acted honestly and in good faith. Our Memorandum of
Association also enables us to indemnify any director or officer who was
successful in such a proceeding against expense and judgments, fines and amounts
paid in settlement and reasonably incurred in connection with the proceeding.
WARRANTS
In connection with our private placement of Units, we issued common
stock purchase warrants. The warrants give the holders the right to purchase
from us, until June 30, 2008, an aggregate of 3,000,000 shares of our common
stock for $0.50 per share. Both the number of warrants and the exercise price of
the warrants are subject to anti-dilution adjustments in the event of stock
dividends, stock splits, stock combinations and any other similar transactions.
The warrants also give the holders the right to any additional rights, including
those obtained through the consolidation, merger or sale of assets of the
company or a similar transaction, that are granted, issued or sold to our
shareholders as if the holders had held the number of shares of common stock
acquirable upon the complete exercise of the warrants at the time such rights
become available to the shareholders.
Each warrant is redeemable at $0.001 per warrant if the common stock is
then listed on a recognized stock exchange or trading at $1.00 per share for 20
consecutive trading days.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Trust Company, Inc. Its address is 350 Indiana Street, Suite 800, Golden,
Colorado 80401, and its telephone number is (303) 262-0600.
SELLING STOCKHOLDERS
This prospectus relates to the resale of 9,956,000 shares of common
stock held by existing shareholders. We are registering the shares in order to
permit the selling shareholders to offer the shares of common stock for resale
from time to time. The selling shareholders have not had any material
relationship with us within the past three years.
28
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.
OWNERSHIP AFTER OFFERING
--------------------------
NUMBER OF
SHARES SHARES
BENEFICIALLY REGISTERED FOR NUMBER OF
NAME OF SELLING SHAREHOLDER OWNED (1)<F1> FOR RESALE (3)<F3> SHARES (2)<F2> PERCENT
- --------------------------- --------- -------------- ---------- -------
George Lucas Adamson 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Lori Kay Allred 20,000 (2)<F2> 10,000 10,000 (4)<F4>
William Ambrose 150,000 (2)<F2> 75,000 75,000 (4)<F4>
Lloyd Banks and Vera Banks 100,000(2)<F2> 50,000 50,000 (4)<F4>
Richard Bush-Luna and Cyndi Bush-Luna 25,000 (2)<F2> 12,500 12,500 (4)<F4>
Howard S. Carney 100,000 (2)<F2> 50,000 50,000 (4)<F4>
Chan Ho Wah Terence 100,000 (2)<F2> 50,000 50,000 (4)<F4>
Linda A Chandler and Bradley Scott Chandler 10,000 (2)<F2> 5,000 5,000 (4)<F4>
Cheng Chui Yee Bonnie 20,000 (2)<F2> 10,000 10,000 (4)<F4>
Chin Cheung 100,000 (2)<F2> 50,000 50,000 (4)<F4>
Devries Properties 30,000 (2)<F2> 15,000 15,000 (4)<F4>
Laura Dichter 25,000 (2)<F2> 12,500 12,500 (4)<F4>
John Diepersloot Trust 37,000 (2)<F2> 18,500 18,500 (4)<F4>
Heather Evans 108,000 (2)<F2> 54,000 54,000 (4)<F4>
Brent Alan Fedrizzi 10,000 (2)<F2> 5,000 5,000 (4)<F4>
Jeffrey W. Felton 100,000 (2)<F2> 50,000 50,000 (4)<F4>
Lilian Fong 300,000 (2)<F2> 150,000 150,000 (4)<F4>
Michael D. Forti and Thomas A. Forti 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Thomas A. Forti 200,000 (2)<F2> 100,000 100,000 (4)<F4>
Dirk Blair Freeman II 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Clifford E. Godfrey 20,000 (2)<F2> 10,000 10,000 (4)<F4>
Goh Choo Hwee 10,000 (2)<F2> 5,000 5,000 (4)<F4>
Arnold Goldblatt 20,000 (2)<F2> 10,000 10,000 (4)<F4>
Martin Gross 10,000 (2)<F2> 5,000 5,000 (4)<F4>
Jacquie Hallenbeck 100,000 (2)<F2> 50,000 50,000 (4)<F4>
Sarah S. Haney 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Robert Hardaway 10,000 (2)<F2> 5,000 5,000 (4)<F4>
Randy and Carol Heller 30,000 (2)<F2> 15,000 15,000 (4)<F4>
Ryan B. Heller and Marlana Heller 15,000 (2)<F2> 7,500 7,500 (4)<F4>
Adrian Hernandez and Tracy Hernandez 250,000 (2)<F2> 125,000 125,000 (4)<F4>
Annie S. Hinson and Bob Hinson 250,000 (2)<F2> 125,000 125,000 (4)<F4>
Paul E. Hinson 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Robert S. and Michele B. Hinson 50,000 (2)<F2> 25,000 25,000 (4)<F4>
J Paul Consulting 500,000 (2)<F2> 250,000 250,000 (4)<F4>
Mike G. Jackson 250,000 (2)<F2> 125,000 125,000 (4)<F4>
Kevin Jenkins 130,000 (2)<F2> 65,000 65,000 (4)<F4>
Richard H. Kelly 50,000 (2)<F2> 25,000 25,000 (4)<F4>
John D. Kucera 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Lai To Yue Linden 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Lam Kwan 10,000 (2)<F2> 5,000 5,000 (4)<F4>
Lam Sheung Ching Larry 20,000 (2)<F2> 10,000 10,000 (4)<F4>
29
OWNERSHIP AFTER OFFERING
--------------------------
NUMBER OF
SHARES SHARES
BENEFICIALLY REGISTERED FOR NUMBER OF
NAME OF SELLING SHAREHOLDER OWNED (1)<F1> FOR RESALE (3)<F3> SHARES (2)<F2> PERCENT
- --------------------------- --------- -------------- ---------- -------
Lee Wing Hong Bruce 200,000 (2)<F2> 100,000 100,000 (4)<F4>
Lee Yau Chuen Jacko 200,000 (2)<F2> 100,000 100,000 (4)<F4>
Myron Leon Trust 125,000 (2)<F2> 62,500 62,500 (4)<F4>
Catherine Leung 100,000 (2)<F2> 50,000 50,000 (4)<F4>
Stella S.F. Liu Trust 125,000 (2)<F2> 62,500 62,500 (4)<F4>
Jay Lutsky 10,000 (2)<F2> 5,000 5,000 (4)<F4>
Thomas E. Manoogian 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Chris J. Martinez 20,000 (2)<F2> 10,000 10,000 (4)<F4>
Deborah A. Melnick 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Jeffrey C. Melnick 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Robert A. Melnick 50,000 (2)<F2> 25,000 25,000 (4)<F4>
John J. Murphy and Paula B. Murphy 10,000 (2)<F2> 5,000 5,000 (4)<F4>
Steven F. Neira 10,000 (2)<F2> 5,000 5,000 (4)<F4>
Robert M. Nieder 200,000 (2)<F2> 100,000 100,000 (4)<F4>
Ponderosa Investment Partners Inc. 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Edward H. Price, Inc. PS Plan 100,000 (2)<F2> 50,000 50,000 (4)<F4>
Seth D. Rankin 30,000 (2)<F2> 15,000 15,000 (4)<F4>
David J. Schanin 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Mike M. Schizas and Linda K. Schizas 20,000 (2)<F2> 10,000 10,000 (4)<F4>
Andrew J. Schlauch and Kimberly L. Schlauch 20,000 (2)<F2> 10,000 10,000 (4)<F4>
John Schoenauer 50,000 (2)<F2> 25,000 25,000 (4)<F4>
William Secor 100,000 (2)<F2> 50,000 50,000 (4)<F4>
The Irrevocable Seven Oaks Trust 150,000 (2)<F2> 75,000 75,000 (4)<F4>
H. Howland Silleck 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Silleck Investments, LLC 100,000 (2)<F2> 50,000 50,000 (4)<F4>
David Simas and Jeanne Simas 100,000 (2)<F2> 50,000 50,000 (4)<F4>
David Simas FBO Kasey Simas 20,000 (2)<F2> 10,000 10,000 (4)<F4>
Kyle P. Simas and David L. Simas 20,000 (2)<F2> 10,000 10,000 (4)<F4>
Donald Strasburg 10,000 (2)<F2> 5,000 5,000 (4)<F4>
Scott R Takeda 20,000 (2)<F2> 10,000 10,000 (4)<F4>
Billy B Kay Tam 20,000 (2)<F2> 10,000 10,000 (4)<F4>
Roger Wasserman 100,000 (2)<F2> 50,000 50,000 (4)<F4>
Jeremy Watada 10,000 (2)<F2> 5,000 5,000 (4)<F4>
Charles Wong 70,000 (2)<F2> 35,000 35,000 (4)<F4>
Yau Kam Wing Anthony 200,000 (2)<F2> 100,000 100,000 (4)<F4>
DeCh'in Strategic Consulting LLC 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- --
- ------------------------
<FN>
(1)<F1> 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)<F2> Includes shares underlying warrants which entitle the holder to
purchase common shares through June 30, 2008.
30
(3)<F3> Does not include shares underlying warrants.
(4)<F4> Less than 1%.
</FN>
PLAN OF DISTRIBUTION
The selling shareholders may sell some or all of their shares of common
stock in one or more transactions, including block transactions:
o on such public markets or exchanges as the common stock may from time
to time be trading;
o in privately negotiated transactions;
o through the writing of options on the common stock;
o in short sales; or
o in any combination of these methods of distribution.
The selling shareholders have set an offering price of $0.20 until our
shares are quoted on the OTC Bulletin Board and thereafter at prevailing market
prices or privately negotiated prices.
The shares may also be sold in compliance with the Securities and
Exchange Commission's Rule 144.
In the event of the transfer by the selling shareholders of their
shares to any pledgee, donee, or other transferee, we will amend this prospectus
and the registration statement of which this prospectus forms a part by the
filing of a post-effective registration statement in order to name the pledgee,
donee, or other transferee in place of the selling shareholder who has
transferred his shares.
The selling shareholders may also sell their shares directly to market
makers acting as principals or brokers or dealers, who may act as agent or
acquire the common stock as a principal. Any broker or dealer participating in
such transactions as agent may receive a commission from the selling shareholder
or, if they act as agent for the purchaser of such common stock, from such
purchaser. The selling shareholder will likely pay the usual and customary
brokerage fees for such services. Brokers or dealers may agree with the selling
shareholder to sell a specified number of shares at a stipulated price per share
and, to the extent such broker or dealer is unable to do so acting as agent for
the selling shareholder, to purchase, as principal, any unsold shares at the
price required to fulfill the respective broker's or dealer's commitment to the
selling shareholder. Brokers or dealers who acquire shares as principals may
thereafter resell such shares from time to time in transactions in a market or
on an exchange, in negotiated transactions or otherwise, at market prices
prevailing at the time of sale or at negotiated prices, and in connection with
such resales may pay or receive commissions to or from the purchasers of such
shares. These transactions may involve cross and block transactions that may
involve sales to and through other brokers or dealers. We can provide no
assurance that all or any of the common stock offered will be sold by the
selling shareholders.
If, after the date of this prospectus, a selling shareholder enters
into an agreement to sell his shares to a broker-dealer as principal and the
broker-dealer is acting as an underwriter, we will need to file a post-effective
amendment to the registration statement of which this prospectus is a part. We
will need to identify the broker-dealer, provide required information on the
plan of distribution, and revise the disclosures in that amendment, and file the
agreement as an exhibit to the registration statement. Also, the broker-dealer
would have to seek and obtain clearance of the underwriting compensation and
arrangements from the NASD Corporate Finance Department.
We are bearing all costs relating to the registration of the common
stock, which are estimated at $25,000. The selling shareholders, however, will
pay any commissions or other fees payable to brokers or dealers in connection
with any sale of the common stock.
We are paying the expenses of the offering because we seek to: (i)
become a reporting company with the Commission under the Securities Exchange Act
of 1934 (the "1934 Act"); and (ii) enable our common stock to be traded on the
NASD OTC Bulletin Board. We believe that the registration of the resale of
shares on behalf of existing shareholders may facilitate the development of a
public market in our common stock if our common stock is approved for trading on
the NASD OTC Bulletin Board.
31
We consider that the development of a public market for our common
stock will make an investment in our common stock more attractive to future
investors. In order for us to continue with our business plan, we will at some
point in the near future need to raise additional capital through private
placement offerings. We believe that obtaining reporting company status under
the 1934 Act and trading on the OTC Bulletin Board should increase our ability
to raise these additional funds from investors.
The selling shareholders must comply with the requirements of the
Securities Act and the Securities Exchange Act in the offer and sale of the
common stock. In particular, during such times as the selling shareholders may
be deemed to be engaged in a distribution of the common stock, and therefore be
considered to be underwriters, they must comply with applicable law and may,
among other things:
o Not engage in any stabilization activities in connection with our
common stock;
o Furnish each broker or dealer through which common stock may be
offered, such copies of this prospectus, as amended from time to time,
as may be required by such broker or dealer; and
o Not bid for or purchase any of our securities or attempt to induce any
person to purchase any of our securities other than as permitted under
the Securities Exchange Act.
LEGAL MATTERS
Stevenson, Wong & Co., has given an opinion on the validity of the
securities.
EXPERTS
We have included the financial statements of the company as of December
31, 2004 and 2003, and for the years ended December 31, 2004, 2003 and 2002, in
reliance upon the report of Zhong Yi (Hong Kong) C.P.A. Company Limited, an
independent registered public accounting firm, to the extent and for the periods
indicated in their report also incorporated by reference, and are included in
reliance upon such report and upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have not previously been subject to the reporting requirements of
the Securities and Exchange Commission. We have filed with the Commission a
registration statement on Form S-1 under the Securities Act with respect to the
shares offered hereby. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules thereto.
For further information with respect to our securities 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.
32
REPORTS TO STOCKHOLDERS
As a result of filing the registration statement, we are subject to the
reporting requirements of the federal securities laws, and are required to file
periodic reports and other information with the SEC. We will furnish our
shareholders with annual reports containing audited financial statements
certified by independent public accountants following the end of each fiscal
year and quarterly reports containing unaudited financial information for the
first three quarters of each fiscal year following the end of such fiscal
quarter.
INDEX TO FINANCIAL STATEMENTS
Unaudited Interim Consolidated Financial Statements - Six Months Ended June 20,
2005 and 2004
Consolidated Balance Sheet
June 30, 2005 (Unaudited).............................................F-1
Consolidated Statements of Income (Unaudited)
Six Months Ended June 30, 2005 and 2004...............................F-2
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2005 and 2004...............................F-3
Notes to Consolidated Financial Statements (Unaudited)..................F-4
Financial Statements - Years Ended December 31, 2004, 2003 and 2002
Report of Independent Registered Public Accounting Firm ................FF-1
Consolidated Balance Sheets
December 31, 2004, 2003 and 2002......................................FF-2
Consolidated Statement of Income
Years Ended December 31, 2004, 2003 and 2002..........................FF-4
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 2004, 2003 and 2002..........................FF-5
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002..........................FF-6
Notes to Consolidated Financial Statements..............................FF-8
33
Titanium Group Limited and its Subsidiaries
Consolidated Balance Sheets
As of June 30, 2005
(Original currency expressed in Hong Kong Dollars ("HK$"))
(Unaudited)
2005 2005
-------------- --------------
US$ HK$
ASSETS
Current assets:
Cash and cash equivalents $ 16,592 $ 129,417
Accounts receivable, trade 670,673 5,231,246
Amount due from related parties - -
Inventories 3,141 24,497
Deposits 28,890 225,342
-------------- --------------
Total current assets 719,296 5,610,502
-------------- --------------
Property and equipment, at cost, net of accumulated depreciation
Cost 122,161 952,852
Accumulated depreciation (22,912) (178,710)
-------------- --------------
99,249 774,142
-------------- --------------
Other assets 288,434 2,249,788
-------------- --------------
Total assets $ 1,106,979 $ 8,634,432
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 51,843 $ 404,375
Current portion of long term debt
Accounts payable, trade 423,865 3,306,147
Taxes payable 55,472 432,683
Amount due to related parties - -
-------------- --------------
Total current liabilities 531,180 4,143,205
-------------- --------------
Long-term debt
Shareholders' loans - -
-------------- --------------
- -
-------------- --------------
Minority interest (4,013) (31,304)
-------------- --------------
Stockholders' equity:
Common stock, US$0.01 (HK$0.078) par value,
100,000,000 shares authorized, 47,000,000 shares
issued and outstanding 99,659 777,338
Retained earnings 480,153 3,745,193
-------------- --------------
579,812 4,522,531
-------------- --------------
$ 1,106,979 $ 8,634,432
============== ==============
See accompanying notes to unaudited consolidated financial statements.
F-1
Titanium Group Limited and its Subsidiaries
Consolidated Statements of Income
Six Months Ended June 30, 2005 and 2004
(Original currency expressed in Hong Kong Dollars ("HK$"))
(Unaudited)
2005 2005 2004
--------------- ---------------- ----------------
US$ HK$ HK$
Revenue $ 841,860 $ 6,566,505 $ 2,646,377
Cost of sales 444,984 3,470,875 1,974,936
---------------- ---------------- ----------------
Gross profit 396,876 3,095,630 671,441
---------------- ---------------- ----------------
Selling, general and administrative expenses 259,081 2,020,831 1,144,551
---------------- ---------------- ----------------
259,081 2,020,831 1,144,551
--------------- ---------------- ----------------
Income (loss) from operations 137,795 1,074,799 (473,110)
---------------- ---------------- ----------------
Other income (expense):
Other income 37,042 288,924 781,609
Interest expense (191) (1,486) (8,054)
---------------- ---------------- ----------------
36,851 287,438 773,555
---------------- ---------------- ----------------
Income before provision for income taxes
and minority interest 174,646 1,362,237 300,445
Income tax 38,462 300,000 -
---------------- --------------- ----------------
Income before minority interest 136,184 1,062,237 300,445
Minority interest (4,935) (38,493) (14,115)
---------------- ---------------- ----------------
Net income $ 141,119 $ 1,100,730 $ 314,560
================ ================ ================
Per share information:
Basic and diluted income (loss)
per common share $ - $ 0.02 $ 0.01
================ ================ ================
Weighted average shares outstanding
basic and fully diluted 47,000,000 47,000,000 47,000,000
================ =============== ================
Net income $ 141,119 $ 1,100,730 $ 314,560
Other comprehensive income (loss)
Effect of foreign currency transactions 86 671 (3,009)
---------------- ---------------- ----------------
Comprehensive income $ 141,205 $ 1,101,401 $ 311,551
================ ================ ================
See accompanying notes to unaudited consolidated financial statements.
F-2
Titanium Group Limited and its Subsidiaries
Consolidated Statement of Cash Flows
Six Months Ended June 30, 2005 and 2004
(Original currency expressed in Hong Kong Dollars ("HK$"))
(Unaudited)
2005 2004
---------------- ---------------
HK$ HK$
Net cash provided by operating activities $ 1,438,403 $ 1,095,363
Cash flows from investing activities:
Acquisition of intangible assets (147,600) (1,267,019)
Acquisition of plant and equipment (635,600) (77,545)
---------------- ----------------
Net cash used in investing activities (783,200) (1,344,564)
---------------- ----------------
Cash flows from financing activities:
Repayment of long term bank loan (16,667) (100,000)
Repayment of shareholders' loan (1,420,000) -
Proceeds from additional paid in capital 387,338 -
---------------- ---------------
Net cash used in financing activities (1,049,329) (100,000)
---------------- ---------------
Increase (decrease) in cash (394,126) (349,201)
Cash and cash equivalents, beginning of period 523,543 746,205
---------------- ---------------
Cash and cash equivalents, end of period $ 129,417 $ 397,004
================ ===============
See accompanying notes to unaudited consolidated financial statements.
F-3
Titanium Group Limited and its Subsidiaries.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - GENERAL
The Company is incorporated in the British Virgin Islands as a private limited
company using the name Titanium Group Limited. The Company is incorporated on
May 17, 2004 and has been dormant since incorporation. The Company's functional
currency is the Hong Kong dollar.
On June 22 2005, the Company acquired the entire share capital of Titanium
Technology Limited from Golden Mass Technologies Limited. Titanium Technology
Limited is a company incorporated in Hong Kong and is engaged in developing
products utilizing biometrics technologies, licensing of technologies,
professional services and project contracting. Through the acquisition of
Titanium Technology Limited, the Company had also acquired Titanium Technology
(Shenzhen) Company Limited., a subsidiary of Titanium Technology Limited.
The accompanying financial statements present the financial position and results
of operations of the Company and its subsidiary companies, Titanium Technology
Limited and Titanium Technology (Shenzhen) Company Limited (collectively known
as "the Group"). The Group's functional currency is the Hong Kong dollar.
NOTE 2 - BASIS OF PRESENTATION OF INTERIM PERIOD
The accompanying unaudited consolidated financial statements as of June 30, 2005
and 2004 and for the six-month period then ended have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") for interim financial information and the requirements of
Regulation S-X. They do not include all of the information and footnotes for
complete consolidated financial statements as required by GAAP. In management's
opinion, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results of
operations for the period ended June 30, 2005 and 2004 presented are not
necessarily indicative of the results to be expected for the full year. These
financial statements should be read in conjunction with the annual fiancial
statements presented elsewhere in this registration statement.
Note 3 - AMOUNT DUE FROM RELATED PARTIES
The outstanding amounts represent cash advanced to a director and shareholder of
the Group.
The cash advanced to a shareholder was for the payment of the shareholder's
non-business related expenses over the years. The cash advanced to a director
relates to the temporary cash payment to the directors who will then transfer
the cash to the Group's subsidiary in PRC. It form part of the remittance
procedures from the Group's subsidiary in Hong Kong to its subsidiary in PRC.
These amounts due from related parties are unsecured, interest free and are
repayable on demand.
F-4
Set out below is the movement of the amount due from related companies during
each of the six months ended June 30, 2005 and 2004:
2005 2004
HK$ HK$
Balance brought forward 1,048,685 808,330
Advances during the year 623,673 235,384
Repayment during the year - -
Amount capitalized (1,672,358) -
-------------- --------------
Balance carried forward - 1,043,714
============== ==============
Maximum balance during the year 1,672,358 1,043,714
============== ==============
NOTE 4 - OPERATING LEASE
During the period ended June 30, 2005, the Group subsidiary signed a new
operating lease effective from July 1, 2005. The future minimum lease payments
for the next three years under the lease are HK$106,627 for 2005, HK$284,340 for
2006, HK$284,340 for 2007 and HK$142,170 for 2008.
NOTE 5 - STOCKHOLDERS' EQUITY
On June 30, 2005, certain shareholders agreed to forgive loans made to the Group
though that date. The amount of the forgiveness (net of loans made to the
shareholders) was contributed to the capital of the Company and aggregated
approximately HK$387,000.
F-5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Titanium Group Limited and its subsidiaries
We have audited the accompanying consolidated balance sheets of Titanium Group
Limited and its subsidiaries as of December 31, 2002, 2003 and 2004, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Titanium Group
Limited and its subsidiaries as of December 31, 2002, 2003 and 2004, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, 2003 and 2004 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Zhong Yi (Hong Kong) C.P.A. Company Limited
Zhong Yi (Hong Kong) C.P.A. Company Limited.
Certified Public Accountants
Hong Kong, China
August 31, 2005
9TH FLOOR, CHINACHEM HOLLYWOOD CENTRE, 1-13 HOLLYWOOD ROAD, CENTRAL, HONG KONG
TEL. : (852) 2573 2296 FAX.: (852) 2384 2022
FF-1
FF-4
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002
---- ----- ---- ----
US$ HK$ HK$ HK$
ASSETS
Current assets:
Cash and cash equivalents $ 67,121 $ 523,543 $ 746,205 $ 500,852
Accounts receivable, trade 184,346 1,437,898 1,203,161 1,552,623
Amount due from related parties 134,447 1,048,685 808,330 385,534
Inventories 2,686 20,953 - -
Deposits 14,291 111,469 47,860 20,210
-------------- ------------- ------------- -------------
Total current assets 402,891 3,142,548 2,805,556 2,459,219
-------------- ------------- ------------- -------------
Plant and equipment
Computer system 28,012 218,495 133,720 73,232
Decoration 4,671 36,430 - -
Furniture and fixtures 2,521 19,660 19,000 19,000
Office equipment 5,470 42,667 42,667 23,012
-------------- ------------- ------------- -------------
40,674 317,252 195,387 115,244
Less: accumulated depreciation (18,238) (142,253) (72,836) (30,262)
-------------- ------------- ------------- -------------
Plant and equipment, net 22,436 174,999 122,551 84,982
-------------- ------------- ------------- -------------
Intangible assets 312,925 2,440,815 999,677 38,000
-------------- ------------- ------------- -------------
Total assets $ 738,252 $ 5,758,362 $ 3,927,784 $ 2,582,201
============== ============= ============= =============
See accompanying notes to consolidated financial statements.
FF-2
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002
---- ---- ---- ----
US$ HK$ HK$ HK$
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 8,058 $ 62,850 $ 211,264 $ 1,215
Current portion of bank borrowings 2,137 16,667 200,000 -
Amount due to related parties 27,025 210,797 290,085 194,265
Accounts payable 111,629 870,706 1,215,076 1,350,983
Taxes payable 17,482 136,360 14,706 95,884
------------- ------------- ------------- -------------
Total current liabilities 166,331 1,297,380 1,931,131 1,642,347
------------- ------------- ------------- -------------
Long-term debt
Long term portion of bank
Borrowings - - 16,667 -
Shareholders' loans 182,051 1,420,000 920,000 -
------------- ------------- ------------- -------------
182,051 1,420,000 936,667 -
------------- ------------- ------------- -------------
Minority interest 922 7,190 37,760 (2,455)
------------- ------------- ------------- -------------
Stockholders' equity:
Common stock, US$0.01 (HK$0.078) par
value, Authorized - 100,000,000
shares, issued and outstanding -
47,000,000 shares 50,000 390,000 390,000 390,000
Retained earnings 339,374 2,647,120 633,127 552,219
Accumulated other comprehensive
Income (426) (3,328) (901) 90
388,948 3,033,792 1,022,226 942,309
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity $ 738,252 $ 5,758,362 $ 3,927,784 $ 2,582,201
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
FF-3
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002
---- ---- ---- ----
US$ HK$ HK$ HK$
Revenue $ 814,006 $ 6,349,252 $ 4,357,694 $ 4,267,341
Cost of sales (375,575) (2,929,488) (2,454,220) (1,964,860)
------------- -------------- -------------- ---------------
Gross profit 438,431 3,419,764 1,903,474 2,302,481
------------- -------------- -------------- ---------------
Expenses
Selling, general and
administrative expenses (323,899) (2,526,414) (2,332,213) (1,117,729)
Research and development costs - - (694,918) (662,500)
------------- -------------- -------------- ---------------
(323,899) (2,526,414) (3,027,131) (1,780,229)
------------- -------------- -------------- ---------------
Income (loss) from operations 114,532 893,350 (1,123,657) 522,252
------------- -------------- -------------- ---------------
Other income (expenses)
Interest expenses (2,119) (16,532) (6,877) -
Grant and subsidy income 157,634 1,229,545 1,182,435 90,159
Other income 3,134 24,449 1,153 2,064
------------- -------------- -------------- ---------------
Total other income 158,649 1,237,462 1,176,711 92,223
------------- -------------- -------------- ---------------
Income before provision for
income taxes and minority
interest 273,181 2,130,812 53,054 614,475
Income tax (18,896) (147,389) (11,931) (95,884)
------------- -------------- -------------- ---------------
Income before minority interest 254,285 1,983,423 41,123 518,591
Minority interest 3,919 30,570 39,785 2,455
------------- -------------- -------------- ---------------
Net income $ 258,204 $ 2,013,993 $ 80,908 $ 521,046
============= ============== ============== ===============
Net income per share $ 0.01 $ 0.04 $ 0.00 $ 0.01
============= ============== ============== ===============
Weighted average shares
Outstanding
Basic 47,000,000 47,000,000 47,000,000 47,000,000
============= ============== ============== ===============
Diluted 47,000,000 47,000,000 47,000,000 47,000,000
============= ============== ============== ===============
Net income $ 258,204 $ 2,013,993 $ 80,908 $ 521,046
Other comprehensive income (loss)
Effect of foreign transactions (311) (2,427) (991) 90
------------- -------------- -------------- ---------------
Comprehensive income $ 257,893 $ 2,011,566 $ 79,917 $ 521,136
============= ============== ============== ===============
See accompanying notes to consolidated financial statements.
FF-4
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Common stock Accumulated
comprehensive Retained
SHARES AMOUNT INCOME PROFITS TOTAL
At January 1, 2002 47,000,000 $ 390,000 $ - $ 31,173 $ 421,173
Cumulative foreign
currency translation - - 90 - 90
Profit for the year - - - 521,046 521,046
------------- ------------- -------------- ------------- -------------
At December 31, 2002 47,000,000 390,000 90 552,219 942,309
Cumulative foreign - - (991) - (991)
currency translation
Profit for the year - - - 80,908 80,908
------------- ------------- -------------- ------------- -------------
At December 31, 2003 47,000,000 390,000 (901) 633,127 1,022,226
Cumulative foreign
currency translation - - (2,427) - (2,427)
Profit for the year - - - 2,013,993 2,013,993
------------- ------------- -------------- ------------- -------------
At December 31, 2004 47,000,000 $ 390,000 $ (3,328) $ 2,647,120 $ 3,033,792
============= ============= ============== ============= =============
See accompanying notes to consolidated financial statements.
FF-5
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002
---- ---- ---- ----
US$ HK$ HK$ HK$
Cash flow from operating activities:
Net income $ 258,204 $ 2,013,993 $ 80,908 $ 521,046
Adjustments:
Depreciation and amortization 91,942 717,148 282,505 20,520
Minority interest in earnings of
subsidiaries (3,919) (30,570) 40,215 (2,455)
Loss on disposals of long term assets - - - 18,868
Decrease/ (increase) in:
Inventories (2,686) (20,953) - -
Trade and other receivables (30,094) (234,737) 349,462 (1,470,128)
Deposits (8,155) (63,609) (27,650) 12,270
Amount due from related parties (30,815) (240,355) (422,796) (385,534)
Increase/ (decrease) in:
Trade and other payables (63,177) (492,784) 74,142 1,327,900
Amount due to related parties (10,166) (79,288) 95,820 107,053
Tax payable 15,597 121,654 (81,178) 95,884
Shareholders loan 64,103 500,000 920,000 -
--------------- -------------- -------------- -------------
Net cash provided by operating activities 280,834 2,190,499 1,311,428 245,424
--------------- -------------- -------------- -------------
Cash flows from investing activities:
Purchases of investment securities - - - (187,727)
Disposal of investment securities - - - 170,381
Investment in subsidiary - - - (30,000)
Purchases of fixed assets (15,624) (121,865) (80,143) (56,534)
Increase of intangible assets (267,804) (2,088,869) (1,201,608) (40,000)
--------------- -------------- -------------- -------------
Net cash used in investing activities (283,428) (2,210,734) (1,281,751) (143,880)
--------------- -------------- -------------- -------------
Cash flows from financing activities :
Increase in share capital - - - 390,000
Proceeds from long term debt - - 300,000 -
Repayments of long term debt (25,641) (200,000) (83,333) -
--------------- -------------- -------------- -------------
Net cash provided by (used in) financing
activities (25,641) (200,000) 216,667 390,000
--------------- -------------- -------------- -------------
Effect of exchange gain / (loss) on cash and
cash equivalents (311) (2,427) (991) 90
--------------- -------------- -------------- -------------
Net increase/(decrease) in cash and cash
equivalents (28,546) (222,662) 245,353 491,634
Cash and cash equivalents at the beginning of
the year 95,667 746,205 500,852 9,218
--------------- -------------- -------------- -------------
Cash and cash equivalents at the end of the
year $ 67,121 $ 523,543 $ 746,205 $ 500,852
=============== ============== ============== =============
See accompanying notes to consolidated financial statements.
FF-6
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002
---- ---- ---- ----
US$ HK$ HK$ HK$
Other information
Interest paid on bank overdraft and
bank borrowing $ 2,119 $ 16,532 $ 6,877 $ -
============== ============ ============ ============
Income tax paid $ 423 $ 25,735 $ 93,109 $ -
============== ============ ============ ============
Non-cash disclosure
Comprehensive income / (loss) $ (311) $ (2,427) $ (991) $ 90
============== ============ ============ ============
See accompanying notes to consolidated financial statements.
FF-7
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
1. ORGANIZATION AND BASIS OF PRESENTATION
Titanium Group Limited ("the Company") was incorporated as an
International Business Company with limited liability in the British
Virgin Island under the International Business Companies Act, Cap 291
of the British Virgin Islands on May17, 2004.
The Company was established to be the holding company for Titanium
Technology Limited ("TTL") and Titanium Technology (Shenzhen) Co.,
Ltd., a subsidiary in which TTL has a 92% equity interest,
(collectively known as "the Operating Enterprises"). The Operating
Enterprises are distinct legal entities with limited liability.
The following are the particulars of the Operating Enterprises included
in the consolidated financial statements:
Titanium Technology Limited ("TTL")
TTL was incorporated in Hong Kong on February 14, 2001 by certain
individuals. The issued ordinary share capital of TTL was HK$30,000.
TTL is engaged in developing products utilizing biometrics technology,
licensing of technologies, professional services and project
contracting.
Listed below are the technology and products which TTL has developed
and sold during the year ended December 31, 2004:
Technology
Ti-Face
Ti-Face is the core face recognition engine developed and implemented
by TTL. The technology is capable of selecting intelligently specific
areas of the face, such as the eyes or mouth, which in turn are used as
distinguishable features for recognition.
Products
ProAccess
Applying TTL's Ti-Face technology, the ProAccess suite is a
high-performance, secure, user-friendly solution to enhance the
authentication method of physical door, personal computer, and mobile
phones by advance recognition technology.
FF-8
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
ProFacer
ProFacer is a biometrically integrated surveillance system. TTL employs
a full range of technology to enhance and automate existing
surveillance techniques. The characteristic processes enabling ProFacer
to function effectively are detection, alignment, normalization,
representation and matching.
Besides, TTL also provides consulting services to its customers. TTL's
consulting team works with the client from the earliest stages of the
project and takes accountability for the success of the project. In
generally, TTL provides consulting services in the areas of security
service and system integration/development projects.
TTL's principal markets/customer base as well as the geographic area
served can be summarized as below:
- Hong Kong, including Hong Kong government and commercial sectors;
- China, mainly the government;
- Macau, mainly casinos; and
- For Japan and the US markets, TTL has formed distribution
partnership with the local agents to sell its products. Customers
in Japan came from both retail and commercial sectors.
Titanium Technology (Shenzhen) Limited ("TTLSZ")
TTLSZ was registered in Shenzhen, the People's Republic of China
("PRC") on September, 20 2002. The registered and contributed capital
of TTLSZ was HK$1,000,000. TTLSZ was established by TTL and EAE
Production HK Limited ("EAE"). TTL owns 92% of the registered capital
of TTLSZ while EAE owns the remaining 8%.
TTLSZ is responsible for the product development activities for TTL.
The Company believes that it operates in a single business segment.
The accompanying consolidated financial statements present the
consolidated assets, liabilities, results of operations and cash flows
of the Company and its subsidiaries (collectively known as "the Group")
as if the Company had been in existence throughout the three years
ended December 31, 2004.
The interest of the Company in the Operating Enterprises was acquired
in exchange for shares in the Company subsequent to December 31, 2004.
These transactions are considered to be transfers between entities
under common control, within the meaning of generally accepted
accounting principles in the United States of America ("US GAAP").
Accordingly, the assets and liabilities transferred have been accounted
for at historical cost or at their "fair value" at the date of their
original acquisition and have been included in the foregoing financial
statements as of the beginning of the periods presented.
FF-9
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the financial statements
of Titanium Group Limited and its subsidiaries and have been prepared
in accordance in accordance with US GAAP. All significant inter-company
balances and transactions have been eliminated on consolidation.
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the weighted average method for all inventories.
Inventories consist of computer accessories purchased from various
suppliers.
Accounts receivable
Trade accounts receivable are recorded at the invoiced amount and do
not bear interest. The allowance for doubtful accounts is the Group's
best estimate of the amount of probable credit losses in the Group's
existing accounts receivable. The Group determines the allowance based
on historical write-off experience of the Group. The Group reviews its
allowance for doubtful accounts on a regular basis. Past due balances
over 90 days and over a specified amount are reviewed individually for
collectibility. All other balances are reviewed on a pooled basis by
industry. Account balances are charged off against the allowance after
all means of collection have been exhausted and the potential for
recovery is considered remote. The Group does not have any
off-balance-sheet credit exposure related to its customers.
No general provision of bad and doubtful debts has been made in these
consolidated financial statements. The management considers that the
accounts receivables are from reputable customers and expects to
collect their outstanding balances in full.
Cash and cash equivalents
For purposes of reporting cash flows, cash includes amounts on hand and
amounts on deposits at financial institutions.
Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation on plant and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. The estimated
useful life of machinery and equipment is 5 years. Total depreciation
for each of the three years ended December 31, 2002, 2003 and 2004 was
HK$18,520, HK$42,574 and HK$69,417 respectively.
Intangible assets
Costs incurred in connection with the registration of patent rights
have been capitalized and are being amortized using the straight-line
method over a period of 20 years.
FF-10
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Revenue recognition
The principal activities of the Group are software development and
software sales. It generates revenues through license sales of its
products, all of which utilize the proprietary technology that it has
developed as well as consulting services that the Group provides to its
customers in connection with its products. Revenue from software
license sales is recognized as revenue when the Group has fulfilled all
conditions and obligation under the agreements. Revenue from the
provision services is recognized at the time when the consulting
services have been rendered to the customers.
Interest income is recognized on a time apportionment basis, taking
into account the principal amounts outstanding and the interest rates
applicable.
Research and development costs
Research costs are expensed as incurred. Product development expenses,
consist primarily of labor cost. The products are developed by in-house
technicians who perform research and development, enhance and maintain
existing products and provide quality assurance. Product development
costs are required to be capitalized when a product's technological
feasibility has been established by completion of a working model of
the product and ending when a product is available for general release
to customers. To date, management considers that the products,
"ProAccess" and "ProFacer" have reached this stage of development,
therefore, they have capitalized HK$1,185,678 and HK$2,022,379 of
product development costs associated with ProAccess ProFacer as
intangible assets for the years ended December 2003 and 2004
respectively.
These intangible assets are being amortized using the straight-line
method over a period of 5 years. Amortization amounted to HK$237,135
and HK$641,610 and was charged to operations for the years ended
December 31, 2003 and 2004 respectively.
Grant and subsidy income
Grant and subsidy income represents subsidy from the Government of Hong
Kong Special Administrative Region ("HKSAR") for assisting the Group in
development of products of innovative nature. The products developed
under this subsidy plan include ProAccess and ProFacer.
Pursuant to the agreements made between the Group and the Government of
Hong Kong Special Administrative Region ("HKSAR"), the Government of
HKSAR will provide funding to the Group for product development. The
funding will be made available to the specific project in accordance
with the milestones as established by the Group and is subject to a
ceiling of HK$2,000,000.
The Group is not required to repay the Government grant. However, the
Group is required to contribute approximately 50% of the overall
project cost in accordance with the grant agreement. The Group has
contributed HK$2,309,313 for the ProAccess and ProFacer projects.
Upon completion of the project, the Group will have to tender to the
Government its pro rata share of the residual funds remaining in the
project account. Beside that, the Group will have to pay the Government
a royalty fee of 5% on the gross revenue earned from any activities in
connection with
FF-11
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
the project. The royalty fee paid by the Group for each of the years
ended December 31, 2003 and 2004 amounted to HK$32,647 and HK$34,532
respectively.
The Group is entitled to retain ownership of the intellectual property
resulting from the project.
Advertising costs
The Group expenses advertising costs as incurred in accordance with the
American Institute of Certified Public Accountants ("AICPA") Statement
of Position 93-7, "Reporting for Advertising Costs". Advertising
expenses amounted to HK$129,573, HK$80,303 and HK$45,643 for the year
ended December 31, 2002, 2003 and 2004 respectively.
Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Comprehensive income
Comprehensive income as defined includes all changes in equity during a
period from non-owner sources. Accumulated comprehensive income, as
presented in the accompanying consolidated statement of stockholder's
equity consists of changes in unrealized gains and losses on foreign
currency translation. This comprehensive income is not included in the
computation of income tax expense or benefit.
Foreign currency translation methodology
The Group's functional currency is the Hong Kong dollar because the
majority of the Group's revenues, capital expenditure and operating and
borrowing costs are either denominated in Hong Kong dollars or linked
to the Hong Kong dollar exchange rate. Accordingly, transactions and
balances not already measured in Hong Kong dollars (primarily
transactions involving the United States dollar and the PRC Yuan) have
been re-measured into Honk Kong dollars in accordance with the relevant
provisions of Statement of Financial Accounting Standards (`SFAS") No.
52, "Foreign Currency Translation". The objective of this
re-measurement process is to produce largely the same results that
would have been reported if the accounting records had been kept in
Hong Kong dollars. The exchange rate adopted throughout the
consolidated financial statement where US dollars are presented was
US$1 / HK$7.8.
Cash, receivables, payables, and loans are considered monetary assets
and liabilities and have been translated using the exchange rate as of
the balance sheet dates. Non-monetary assets and liabilities, including
non-current assets and shareholders' equity, are stated at their actual
dollars costs or are restated from their historic cost, by applying the
historical exchange rate as monthly average exchange rates to
underlying transactions.
FF-12
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Equity-based compensation
The Company adopted Statement of Financial Accounting Standard ("FAS")
No. 123 ("FAS 123"), Accounting for Stock-Based Compensation beginning
at its inception. Upon adoption of FAS 123, the Company continued to
measure compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by Accounting
Principals Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"). The Company did not pay any stock based
compensation during any period presented.
Use of estimates
The preparation of the consolidated financial statements requires
management to make a number of estimates and assumptions relating to
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the period. Significant items subject to such estimates and
assumptions include the carrying amount of property, plant and
equipment, intangibles and goodwill; valuation allowances for
receivables, inventories and deferred income tax assets; environmental
liabilities; valuation of derivative instruments; and assets and
obligations related to employee benefits. Actual results could differ
from those estimates.
Paid vacation leave and long service leave obligation
No accrual for paid vacation leave and long service leave obligation
has been provided in the financial statements of the Group. Pursuant to
Hong Kong law, Hong Kong employees are generally only entitled to
severance pay upon their retirement or upon the termination of their
employment without cause provided that they have been employed by the
Group for a period of more than five years. As the Group had been in
existence for less than five years, the management believes that the
provision for long service leave obligation is not required. For paid
leave obligation, the Group has adopted a policy that employees would
be entitled to take paid holiday leave in each year in accordance with
their employment contracts. Any unused vacation leave is forfeited at
the end of each calendar year.
With the approval from the management, an employee of the PRC
subsidiary is entitled to carry forward the unused annual vacation
leave to the subsequent year once. Furthermore, it is also obligated to
pay long service leave to employee upon termination of employment. In
accordance with the PRC's rules and regulations on employment, the
subsidiary is required to pay the employee a payment equals to a month
salary for every full year of employment. However, the payment should
not be more than twelve month of salary normally earned by that
employee. Since all the employee have taken their entitlement of paid
vacation leave and the management considers that the provision for long
service leave obligation would be insignificant, therefore, no
provision for unused annual paid vacation leave and long service leave
obligation has been provided in the financial statements for the year
ended December 31, 2004.
FF-13
Provision for products warranties
The Group's standard warranty for its software products generally
covers a twelve-month period and warrants against substantial
non-conformance to the published documentation at time of delivery. The
Group has not experienced any material returns where it was under
obligation to honor this standard warranty provision. Warranty claims
on hardware deficiencies are covered by the particular hardware
suppliers. As such, no warranty provision has been provided in the
accompanying consolidated balance sheet or reflected in the result of
operations for the three years ended December 31, 2004.
Impairment of long-lived assets
In accordance with Statement 144, long-lived assets, such as plant, and
equipment and intangible assets subject to amortization are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be
disposed of would be separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less costs
to sell, and are no longer depreciated. The assets and liabilities of a
disposal group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the
balance sheet.
Intangible assets are tested annually for impairment and are tested for
impairment more frequently if events and circumstances indicate that
the asset might be impaired. An impairment loss is recognized to the
extent that the carrying amount exceeds the asset's fair value. This
determination is made at the reporting unit.
Recently issued accounting standards
In December 2004, the FASB issued FASB Statement No. 123 (revised
2004), SHARE-BASED PAYMENT, which addresses the accounting for
transactions in which an entity exchanges its equity instruments for
goods or services, with a primary focus on transactions in which an
entity obtains employee services in share-based payment transactions.
This Statement is a revision to Statement 123 and supersedes APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its
related implementation guidance. For nonpublic companies, this
Statement will require measurement of the cost of employee services
received in exchange for stock compensation based on the grant-date
fair value of the employee stock options. Incremental compensation
costs arising from subsequent modifications of awards after the grant
date must be recognized. This Statement will be effective for the
Company as of January 1, 2006.
In December 2004, the FASB issued FASB Statement No.151, INVENTORY
COSTS, which clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material
(spoilage). Under this Statement, such items will be recognized as
current-period charges. In addition, the Statement requires that
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. This
Statement will be effective for the Company for inventory costs
incurred on or after January 1, 2006.
FF-14
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
In December 2004, the FASB issued FASB Statement No. 153, EXCHANGES OF
NON-MONETARY ASSETS, which eliminates an exception in APB 29 for
non-monetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of non-monetary assets that do
not have commercial substance. This Statement will be effective for the
Company for non-monetary asset exchanges occurring on or after January
1, 2006.
3. AMOUNT DUE FROM RELATED PARTIES
The outstanding amounts represent cash advanced to a director and
shareholder of the Group.
The cash advanced to a shareholder was for the payment of the
shareholder's non-business related expenses over the years. The cash
advanced to a director relates to the temporary cash payment to the
directors who will then transfer the cash to the Group's subsidiary in
PRC. It form part of the remittance procedures from the Group's
subsidiary in Hong Kong to its subsidiary in PRC.
These amounts due from related parties are unsecured, interest free and
are repayable on demand.
Set out below are the movement of the amount due from related companies
during each of the three years ended December 31, 2002, 2003 and 2004:
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Balance brought forward $ 808,330 $ 385,534 $ -
Advances during the year 679,725 471,237 385,534
Repayment during the year (439,370) (48,441) -
-------------- -------------- -------------
Balance carried forward $ 1,048,685 $ 808,330 $ 385,534
============== ============== =============
Maximum balance during the year $ 1,408,685 $ 808,330 $ 385,534
============== ============== =============
4. INTANGIBLE ASSETS
AS OF DECEMBER 31, 2004
--------------------------------------------------------
WEIGHTED
GROSS AVERAGE
CARRYING AMORTIZATION ACCUMULATED
AMOUNT PERIOD AMORTIZATION
------ ------ ------------
HK$ HK$
Intangible assets:
Products development costs $ 3,208,057 5 years $ 878,745
Patent and license right registration fee 122,420 20 years 10,917
--------------- -------------
$ 3,330,477 $ 889,662
=============== =============
Aggregate amortization expense for intangible assets was HK$2,000,
HK$239,931 and HK$647,731 for the years ended December 31, 2002, 2003
and 2004 respectively.
FF-15
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
5. FAIR VALUE OF INANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The board of directors considers that the estimated fair value
of the Group's financial instruments at December 31, 2002, 2003 and
2004 are their respective carrying amount.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents, trade accounts receivable, amounts due from
related parties, bank borrowings, trade accounts payable and
shareholders' loan. The carrying amount approximates fair value because
of short maturity of these instruments.
6. LONG TERM BORROWINGS
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Bank borrowings $ - $ 216,667 $ -
Current portion of bank borrowings - (200,000) -
-------------- --------------- -------------
Long term portion of bank borrowings - 16,667 -
-------------- --------------- -------------
Loan from shareholders 1,420,000 920,000 -
-------------- --------------- -------------
$ 1,420,000 $936,667 $ -
============== =============== =============
In 2003, TTL entered into a financing agreement with a financial
institution in which the financial institution would lend the Group
HK$300,000 (US$38,462). The bank borrowings were unsecured and bearing
interest at 5.5% per annum. The loan was to be repaid by 18 monthly
installments of HK$18,042 (US$2,313). The financing agreement was
secured by personal guarantees given by TTL's directors.
The loans from shareholders are unsecured, interest free and are not
repayable within the next twelve months.
FF-16
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
7. COMMON STOCK
The description of the Company's shares is as follows:
Each outstanding share of common stock is entitled to one vote. The
common stockholders do not have cumulative voting rights in the
election of directors, and accordingly, holders of a majority of shares
voting are able to elect all of the directors.
Holders of common stock are entitled to receive ratably such dividends
as may be declared by the board of directors out of funds legally
available therefore as well as distributions to the stockholders.
At the time of incorporation, the Company's authorized capital was
1,000,000 shares of common stock, par value US$0.05. On June 20, 2005,
the authorized capital was changed to 100,000,000 shares of common
stock, par value US$0.01.
Pursuant to a share an exchange agreement dated June 22, 2005, the
Company issued 47,000,000 shares in exchange for the then outstanding
shares of TTL and TTL then became a wholly owned subsidiary of the
Company.
Subsequent to the balance sheet date, the Company sold 3,000,000 shares
of common stock through a private placement and received aggregate
gross proceeds of HK$4,680,000 (US$600,000). Expenses of the offering
were approximately HK$507,000 (US$65,000). In addition, the Company
issued 3,000,000 common stock purchase warrants to the investors. Each
common stock purchase warrant entitles the investor to purchase one
share of common stock at an exercise price of US$0.50 per share through
June 30, 2008.
8. INCOME TAXES
Income tax consists of:
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Hong Kong Profit Tax:
- current year $ 147,389 $ 11,931 $ 95,884
============== =============== =============
Income tax is calculated at 17.5% based on the estimated assessable
profit for each year. No income tax has been provided for the Group's
subsidiary registered in the PRC as the subsidiary has no profit earned
which is subject to tax in accordance with the relevant law and
regulation in the PRC.
As the tax effect of temporary differences that give rise to deferred
tax assets and deferred tax liabilities at December 31, 2004, 2003 and
2002 is immaterial to the Group; therefore, no provision for deferred
tax has been made in these consolidated financial statements.
FF-17
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
9. OPERATING LEASE COMMITMENTS
At December 31, 2004 the Group had total future minimum lease payments
under non-cancelable operating leases falling due as follows:
Due in 2005 $ 235,656
Thereafter $ 589,140
The Group expenses rental payments as incurred and is included in
administrative expenses in the consolidated statement of income. Rental
payments amounted to HK$45,587, HK$99,052 and HK$207,088 for the years
ended December 31, 2002, 2003 and 2004 respectively.
10. RELATED PARTY TRANSACTIONS
For each of the years in the three-year period ended December 31, 2002,
2003 and 2004, TTL had sold goods to Ericorps Creation (HK) Limited
amounting to HK$500,000, HK$825,820 and HK$266,791 respectively.
Ericorps Creation (HK) Limited is owned by certain beneficial
shareholders of the Group who control an aggregate of 10% of the
outstanding shares.
11. OPERATING RISK
Concentration of credit risk
The carrying amount of cash and cash equivalents, trade receivables and
due from related parties represented the Group's maximum exposure to
credit risk in relation to financial assets.
The majority of the Group's trade receivables relate to sales of
goods/provision of services to third party customers. The Group does
not have fixed credit period for its trade receivables. The Group
performs ongoing credit evaluations of its customer's financial
condition and generally does not require collateral on trade
receivables.
No other financial assets carry a significant exposure to credit risk.
Exchange risk
The Group cannot guarantee that the current exchange rate will remain
steady, therefore there is a possibility that the Group could post the
same amount of profit for two comparable periods and because of the
fluctuating exchange rate actually post higher or lower profit
depending on exchange rate of HK$ converted to US$ on that date. The
exchange rate could fluctuate depending on changes in political and
economic environments without notices.
FF-18
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
12. SUBSEQUENT EVENTS
On May 13, 2005, the Group subsidiary signed a new operating lease
effective from July 1, 2005. The future minimum lease payments for the
next three years under the lease are HK$106,627 for 2005, HK$284,340
for 2006, HK$284,340 for 2007 and HK$142,170 for 2008.
On June 30, 2005, certain shareholders agreed to forgive loans made to
the Group though that date. The amount of the forgiveness (net of loans
made to the shareholders) was contributed to the capital of the Company
and aggregated approximately HK$387,000.
FF-19
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the registrant in connection with the
securities being registered are as follows:
Securities and Exchange Commission filing fee........$ 234.36
Accounting fees and expenses......................... 70,000.00
Blue sky fees and expenses........................... 1,000.00
Legal fees and expenses.............................. 25,000.00
Transfer agent fees and expenses..................... 5,550.00
Printing expenses.................................... 2,000.00
Miscellaneous expenses............................... 1,215.64
--------------
Total................................................$ 105,000.00
==============
All amounts are estimates except the SEC filing fee. The Selling
Stockholders will be bearing the cost of its own brokerage fees and commissions
and its own legal and accounting fees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the International Business Companies Act of the British Virgin
Islands, the registrant has broad powers to indemnify its directors and officers
against liabilities they may incur in such capacities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). Section 74
of the registrant's Articles of Association (Exhibit 3.2 hereto) states that
every officer and director shall be entitled to be indemnified out of the assets
of the registrant against all losses or liabilities which he may sustain or
incur in or about the execution of the duties of his office or otherwise in
relation thereto, and no director or other officer shall be liable for any loss,
damage, or misfortune which may happen to, or be incurred by the registrant in
the execution of the duties of his office, or in relation thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the registrant has issued and sold the
unregistered securities set forth in the tables below.
- ----------------------------------------------------------------------------------------------------------------------
PERSONS OR
CLASS OF
DATE PERSONS SECURITIES CONSIDERATION EXEMPTION CLAIMED
- ----------------------------------------------------------------------------------------------------------------------
May 2004 5 persons 5,000,000 shares of common $50,000 Section 4(2)
stock
- ----------------------------------------------------------------------------------------------------------------------
June 2005 Golden Mass 42,000,000 shares of common Shares of capital stock of Section 4(2)
Technolo-gies stock Titanium Technology Limited
Ltd.
- ----------------------------------------------------------------------------------------------------------------------
July 2005 - 64 2,460,000 Units, each Unit $492,000 aggregate offering Rule 506
August 2005 accredited consisting of one share of price; selling commissions of
investors common stock and one common $49,200
stock purchase warrant
- ----------------------------------------------------------------------------------------------------------------------
II-1
- ----------------------------------------------------------------------------------------------------------------------
PERSONS OR
CLASS OF
DATE PERSONS SECURITIES CONSIDERATION EXEMPTION CLAIMED
- ----------------------------------------------------------------------------------------------------------------------
July 2005 - 13 non-U.S. 540,000 Units, each Unit $108,000 aggregate offering Regulation S
August 2005 Persons consisting of one share of price; selling commissions of
common stock and one common $10,800
stock purchase warrant
- ----------------------------------------------------------------------------------------------------------------------
No underwriters were used in the recapitalization and reorganization of
the registrant. Underwriters were used in connection with the sale of the Units
made from July 2005 to August 2005. The registrant relied upon the exemption
from registration contained in Section 4(2) as to all of the transactions except
for the sales of Units to accredited investors. The registrant relied upon Rule
506 and Regulation S for the sales of Units from July 2005 to August 2005, as
all of the purchasers were either accredited investors or non-US persons. With
regard to the transactions made in reliance on the exemption contained in
Section 4(2), the purchasers were deemed to be sophisticated with respect to the
investment in the securities due to their financial condition and involvement in
the registrant's business. Restrictive legends were placed on the stock
certificates evidencing the securities issued in all of the above transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- --------------------------------------------------------------------------------
REGULATION S-K
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
3.1 Memorandum of Association, as amended
- --------------------------------------------------------------------------------
3.2 Articles of Association, as amended
- --------------------------------------------------------------------------------
5.1 Opinion of Stevenson, Wong & Co.
- --------------------------------------------------------------------------------
10.1 Employment agreement with Jason Ma dated January 1, 2005
- --------------------------------------------------------------------------------
10.2 Employment agreement with Humphrey Cheung dated January 1, 2005
- --------------------------------------------------------------------------------
10.3 Employment agreement with Billy Tang dated January 1, 2005
- --------------------------------------------------------------------------------
10.4 Office lease dated June 22, 2005
- --------------------------------------------------------------------------------
21 Subsidiaries of the registrant
- --------------------------------------------------------------------------------
23.1 Consent of Stevenson, Wong & Co.
- --------------------------------------------------------------------------------
23.2 Consent of Zhong Yi (Hong Kong) C.P.A. Company Limited
- --------------------------------------------------------------------------------
II-2
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the issuer pursuant to the foregoing provisions, or
otherwise, the issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the issuer in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Hong Kong,
on September 12, 2005.
TITANIUM GROUP LIMITED
By: /s/ JASON MA
-----------------------------------
Jason Ma, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated:
SIGNATURE TITLE DATE
Chief Executive Officer (Principal
/s/ JASON MA Executive Officer) September 12, 2005
- --------------------------------------------
Jason Ma
Chairman of the Board of Directors
(Principal Financial and Accounting Officer)
/s/ DR. JOHNNY NG September 12, 2005
- --------------------------------------------
Dr. Johnny Ng
/s/ HUMPHREY CHEUNG Director September 12, 2005
- --------------------------------------------
Humphrey Cheung
/s/ BILLY TANG Director September 12, 2005
- --------------------------------------------
Billy Tang
II-4