[LETTERHEAD OF DILL DILL CARR STONBRAKER & HUTCHINGS]
CHRISTOPHER W. CARR
DANIEL J. CARR
JOHN J. COATES
KEVIN M. COATES
H. ALAN DILL
ROBERT A. DILL
455 SHERMAN STREET, SUITE 300 THOMAS M. DUNN
DENVER, COLORADO 80203 JOHN A. HUTCHINGS
PHONE: 303-777-3737 STEPHEN M. LEE
FAX: 303-777-3823 FAY M. MATSUKAGE*
ADAM P. STAPEN
JON STONBRAKER
CRAIG A. STONER
DILL DILL CARR STONBRAKER & HUTCHINGS, P.C. PATRICK D. TOOLEY
*Also licensed in Nevada
December 9, 2005
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0405
RE: TITANIUM GROUP LIMITED
REGISTRATION STATEMENT ON FORM S-1
FILED ON SEPTEMBER 14, 2005
FILE NO. 333-128302
Dear Ms. Jacobs:
On behalf of Titanium Group Limited (the "Company"), Amendment No. 1 to the
registration statement on Form S-1 is being filed.
The comments of the Staff in its letter dated October 11, 2005, have been
addressed in this filing pursuant to your request. The comments are set forth
below, together with the Company's responses, which refer to the EDGAR page,
which contains revised disclosure.
To assist the staff in its review of this Amendment, we are sending two hard
copies of this letter, together with two hard copies of the Amendment, marked to
show all of the changes. The circled numbers appearing in the right margin of
the marked copy correspond to the comment number.
GENERAL
1. WE NOTE THAT YOU ARE A BRITISH VIRGIN ISLANDS COMPANY WITH OPERATIONS
IN THE PEOPLE'S REPUBLIC OF CHINA. PLEASE TELL US WHETHER THE RECENT
PUBLICATION OF CIRCULARS 11 AND 29 BY THE STATE ADMINISTRATION OF
FOREIGN EXCHANGE, OR SAFE, APPLIES TO THE COMPANY AND WHAT EFFECTS, IF
ANY, SUCH REGULATIONS COULD HAVE ON YOUR BUSINESS OR THE HOLDINGS OF
INVESTORS.
RESPONSE: Circulars 11 and 29 focused on the tightening of approval
requirements and registration procedures for both foreign investments
made by domestic residents of China as well as for merger and
acquisitions of domestic enterprises by foreign companies controlled by
domestic residents of China. The Circulars were applicable to "domestic
residents," which has been interpreted to apply to citizens of the
People's Republic of China. Therefore, these Circulars do not affect
investors who are not citizens of China.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 2
Those Circulars, however, failed to provide specific criteria or
procedures concerning examination and registration. Accordingly, SAFE
is expected to issue a new notice soon to replace Circulars 11 and 29.
A draft of the new notice indicates that it will apply only to domestic
residents of China.
2. THROUGHOUT THE FILING YOU HAVE INCLUDED STATEMENTS REGARDING YOUR
COMPETITIVE POSITION, THE QUALITY OF YOUR PRODUCTS AND THE INNOVATION
OF YOUR TECHNOLOGY THAT DO NOT APPEAR TO BE SUPPORTED BY THE
INFORMATION IN THE FILING. THE LIST BELOW INCLUDES SEVERAL EXAMPLES OF
SUCH STATEMENTS BUT IS NOT COMPREHENSIVE. WITH YOUR NEXT AMENDMENT,
PLEASE PROVIDE SUPPLEMENTAL INFORMATION SUPPORTING EACH SUCH STATEMENT
AND REVISE YOUR FILING TO PROVIDE THE FACTUAL BASIS FOR THESE
STATEMENTS, OR REVISE AS NECESSARY:
o "TO DATE, TI-FACE SDK IS WIDELY-ADOPTED AS THE DEVELOPMENT
PLATFORM FOR GOVERNMENTS, UNIVERSITIES AND INSTITUTIONS," PAGE
11;
o "ALTHOUGH DIFFERENT BIOMETRICS . . . MAY BE WIDELY EMPLOYED IN
SIMILAR APPLICATIONS, FACE RECOGNITION IS THE BEST AMONG THE
EXISTING ALTERNATIVES," PAGE 13;
o ". . . USERS HAVE LESS CONCERN ON PRIVACY ISSUES WITH REGARD
TO FACIAL PICTURES AND THE MARKET ACCEPTANCE IS MUCH HIGHER,"
PAGE 13;
o "FROM COAST TO COAST AND AROUND THE WORLD, PRO ACCESS FACE
ATTEND IS EASING CONCERNS AND BOOSTING SECURITY BY ENSURING
THAT THE PEOPLE ON-SITE ACTUALLY BELONG THERE," PAGE 14;
o ". . . THE SOUTHERN PART OF CHINA HAS BECOME ARGUABLY THE
LARGEST NETWORK OF FACTORIES," PAGE 14;
o "EXISTING CLIENTS . . . ARE SATISFIED WITH THIS HIGHLY
ACCURATE, PROMPT RESPONSE, TIME COST EFFECTIVE SURVEILLANCE
SYSTEM," PAGE 16;
o "IT IS BELIEVED THAT POLICE FORCES WILL BE INTERESTED IN THIS
ADVANCED APPLICATION," PAGE 16;
o "WE ARE A CLOSE PARTNER WITH IBM OFFERING SECURITY TO ITS
CUSTOMERS," PAGE 16;
o "WE ARE RESPONSIBLE FOR BUSINESS SYSTEMS CRITICAL TO THE
RUNNING OF SOME OF THE WORLD'S LEADING COMMERCIAL AND PUBLIC
SECTOR ORGANIZATIONS, AS WELL AS LARGE-SCALE TECHNICAL SYSTEMS
DESIGNED TO OPERATE TO THE HIGHEST LEVELS OF RELIABILITY IN
DEMANDING CONDITIONS," PAGE 16;
o "MANY POTENTIAL BUYERS HAVE BEEN PUT OFF BY THE COMPROMISES
AND WORKAROUNDS DEMANDED BY WHAT IS AVAILABLE IN THE MARKET,
AND THEY ARE WAITING FOR A BETTER ALTERNATIVE TO ARRIVE," PAGE
18.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 3
RESPONSE: Complied. The foregoing statements have been revised to
provide the factual basis for the statements. In one case, the
statement was omitted, as it did not add to the disclosure. See pages
15 to 23.
3. AS A FOLLOW-UP TO THE COMMENT ABOVE, WHILE WE NOTE THAT YOU HAVE
INCLUDED SEVERAL OPINIONS OF THE COMPANY, SUCH AS THE ONES LISTED
BELOW, WE WOULD EXPECT TO SEE SUPPLEMENTAL SUPPORT FOR THESE
STATEMENTS, AS WELL.
o "BASED ON THESE BREAKTHROUGH ABILITIES, MANAGEMENT BELIEVES
THAT THE COMPANY IS NOW A LEADER IN THIS TECHNOLOGY,
WORLDWIDE," PAGE 9;
o ". . . ENABLE OUR CUSTOMERS TO COST-EFFECTIVELY ACHIEVE WHAT
WE BELIEVE TO BE INDUSTRY-LEADING ACCURACY
RATES AND PERFORMANCE," PAGE 11;
o ". . . WE BELIEVE WE ARE A LEADING PROVIDER OF AUTOMATIC FACE
RECOGNITION SYSTEMS, OR AFRS, AND OTHER BIOMETRIC AND SECURITY
SOLUTIONS TO GOVERNMENTS, LAW ENFORCEMENT AGENCIES, GAMING
COMPANIES, AND OTHER ORGANIZATIONS WORLDWIDE," PAGE 11;
o "WE BELIEVE WE ARE ONE OF THE LEADING DIGITAL SECURITY
SERVICES PROVIDERS. ..," PAGE 16;
o "WE PROJECT THAT BY THE END OF THIS YEAR, THE NUMBER OF MAJOR
CUSTOMERS WILL GROW TO CLOSE TO 20 FROM A VARIETY OF
INDUSTRIES," PAGE 17.
RESPONSE: Complied. Enclosed with the hard copy of this letter is the
following supplemental information to support the above statements:
o "Based on these breakthrough abilities..." - See the article
entitled, "Face Authentication Competition on the BANCA
Database."
o "...enable our customers to cost-effectively..." - See the
article entitled, "Face Authentication Competition on the
BANCA Database."
o "...we believe we are a leading provider..." - This statement
has been revised to one that the Company believes it can
support. See page 15. Reference is made to the discussion
under "Customers" in the "Business" portion of the
prospectus.
o "We believe we are one of the leading digital..." - This
statement has been revised to one that the Company believes
it can support. See page 21. Reference is made to the
discussion under "Customers" in the "Business" portion of the
prospectus.
o "We project that by the end of this year..." - This statement
has been revised to one that the Company believes it can
support. See page 22.
PROSPECTUS SUMMARY, PAGE 3
4. PLEASE INCLUDE THE TELEPHONE NUMBER OF THE COMPANY, AS REQUIRED BY ITEM
503(B) OF REGULATION S-K.
RESPONSE: Complied. See page 3.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 4
5. PLEASE EXPAND THIS SECTION TO PROVIDE MORE INFORMATION ABOUT THE
STRUCTURE OF YOUR COMPANY, INCLUDING WHEN IT WAS FORMED, WHEN YOUR
OPERATIONS BEGAN AND WHY YOUR COMPANY IS INCORPORATED IN THE BRITISH
VIRGIN ISLANDS WHILE YOUR OPERATIONS ARE CONDUCTED IN CHINA.
ADDITIONALLY, EXPAND THE DISCUSSION OF YOUR RELATIONSHIP WITH TSINGHUA
UNIVERSITY AND THE CHINESE ACADEMY OF SCIENCE TO BETTER EXPLAIN HOW
SUCH RELATIONSHIP AFFECTS YOUR BUSINESS.
RESPONSE: Complied. See page 3.
RISK FACTORS, PAGE 4
6. PLEASE ENSURE THAT ALL OF THE RISK FACTOR SUBHEADINGS CLEARLY INDICATE
THE RISK POSED TO INVESTORS. FOR EXAMPLE, THE SUBHEADING "WE FACE
COMPETITION FROM EXISTING AND POTENTIAL COMPETITORS" DOES NOT CLEARLY
DESCRIBE WHAT THE RISK OF COMPETITION IS TO YOUR BUSINESS OR INVESTORS.
IS THE RISK THAT YOU COULD LOSE POTENTIAL REVENUES OR CUSTOMERS? PLEASE
REVISE HERE AND THROUGHOUT THIS SECTION AS APPROPRIATE. ADDITIONALLY,
WHERE APPLICABLE, REVISE THROUGHOUT THIS SECTION TO CLARIFY HOW EACH
RISK RELATES TO THE COMPANY ITSELF, AS OPPOSED TO BEING A RISK TO ALL
COMPANIES GENERALLY. FOR EXAMPLE, WE NOTE THAT YOUR RISK FACTOR
ENTITLED, "UNLESS WE KEEP PACE WITH CHANGING TECHNOLOGIES, WE COULD
LOSE CUSTOMERS AND FAIL TO WIN NEW CUSTOMERS," DOES NOT APPEAR TO
DISCUSS ANY SPECIFIC RISK TO THE COMPANY BUT RATHER RELATES TO A RISK
FACED BY MOST COMPANIES. PLEASE REVISE TO PROVIDE MORE SPECIFIC
INFORMATION ABOUT THE RISK TO YOUR COMPANY HERE AND THROUGHOUT THIS
SECTION AS APPROPRIATE.
RESPONSE: Complied. See pages 4 to 8. The risk factor about keeping
pace with changing technologies has been deleted, as it is applicable
to all companies generally.
7. PLEASE REVISE TO INCLUDE A SEPARATE RISK FACTOR DESCRIBING ANY MATERIAL
FOREIGN CURRENCY OR EXCHANGE RATE RISKS ASSOCIATED WITH DOING BUSINESS
IN SEVERAL DIFFERENT COUNTRIES. ADDITIONALLY, IF YOU ARE SUBJECT TO ANY
MATERIAL FOREIGN EXCHANGE REGULATIONS AS A RESULT OF DOING BUSINESS IN
THE PRC, YOU SHOULD INCLUDE A SEPARATE RISK FACTOR DESCRIBING THOSE
RISKS AND THEIR AFFECTS ON YOUR COMPANY, AS WELL.
RESPONSE: Complied. See page 8.
8. WE NOTE FROM YOUR MD&A AND BUSINESS SECTIONS THAT YOU RELY ON A SOLE
DISTRIBUTOR IN JAPAN AND OTHER DISTRIBUTORS THROUGHOUT DIFFERENT
REGIONS OF THE WORLD. PLEASE REVISE THIS SECTION TO PROVIDE DISCLOSURE
REGARDING ANY MATERIAL RISKS ASSOCIATED WITH YOUR DEPENDENCE ON THESE
DISTRIBUTORS. FOR EXAMPLE IF YOU LOST YOUR JAPANESE DISTRIBUTOR WOULD
SUCH LOSS HAVE A MATERIAL IMPACT ON REVENUES? REVISE OR ADVISE AS
APPROPRIATE.
RESPONSE: The Company does not believe that material risks are
presented because of the Company's distributorship arrangements. The
Company believes that an exclusive arrangement provides motivation for
the distributors to expand the market. The Company believes that its
interests are adequately protected through its evaluation of the
distributor prior to granting the exclusive arrangement, its ongoing
review to monitor the progress of the distributor, and the fact that
the distributor agreement normally does not exceed one year.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 5
"OUR SUCCESS AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE . . ."
PAGE 4
9. YOUR DISCLOSURE UNDER "INTELLECTUAL PROPERTY-PATENTS," ON PAGE 17,
INDICATES THAT YOU HAVE ONLY ONE PATENT THAT APPEARS TO HAVE BEEN
ISSUED IN HONG KONG. PLEASE EXPAND BOTH THE TEXT OF THIS RISK FACTOR
AND THE DISCUSSION ON PAGE 17 TO ADDRESS WHETHER AND WHY TITANIUM'S
MANAGEMENT DEEMS A PATENT IN HONG KONG SUFFICIENT PROTECTION OF ITS
TECHNOLOGY. IN THIS REGARD, WE NOTE THAT WHILE TITANIUM'S OFFICES ARE
IN HONG KONG, IT INTENDS TO MARKET ITS PRODUCTS WORLD-WIDE. PLEASE
REVISE OR ADVISE.
RESPONSE: Complied. See pages 4 and 23.
"THE LOSS OF OUR OFFICERS AND DIRECTORS OR OUR FAILURE TO ATTRACT . . ." PAGE 4
10. WE NOTE THAT WHILE THE SUBHEADING OF THIS RISK FACTOR INDICATES THAT
THE LOSS OF OFFICERS AND DIRECTORS COULD ADVERSELY AFFECT YOUR
BUSINESS, THE TEXT OF THE RISK FACTOR INDICATES THAT THIS "WOULD HAVE A
MATERIAL ADVERSE AFFECT" ON YOU. PLEASE REVISE THE SUBHEADING TO
CONFORM TO THE TEXT OF THE RISK FACTOR AND INDICATE THAT SUCH LOSS
WOULD HAVE A MATERIAL AFFECT ON THE COMPANY. ADDITIONALLY, WE NOTE YOUR
STATEMENT THAT YOU STRONGLY BELIEVE THAT THE STABILITY OF THE CORE TEAM
WILL BE MAINTAINED FOR A LONG PERIOD OF TIME. PLEASE REVISE TO PROVIDE
A THOROUGH DISCUSSION REGARDING THE BASIS FOR THIS BELIEF.
RESPONSE: Complied. See page 5.
"WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM A FEW CUSTOMERS. . . ."
PAGE 5
11. PLEASE REVISE THE TEXT OF THIS RISK FACTOR TO IDENTIFY THE EIGHT
CUSTOMERS RESPONSIBLE FOR 75% OF LAST YEAR'S REVENUES AND REVISE THE
SUBHEADING TO QUANTIFY THE "SIGNIFICANT PORTION" OF REVENUES TO WHICH
YOU REFER. SIMILARLY, REVISE THE SUBHEADING OF YOUR RISK FACTOR
ENTITLED, "A LIMITED NUMBER OF STOCKHOLDERS WILL COLLECTIVELY CONTINUE
TO OWN A MAJORITY OF OUR COMMON STOCK . . ." TO QUANTIFY THE "MAJORITY"
OF COMMON STOCK THAT WILL CONTINUE TO BE HELD BY YOUR OFFICERS AND
DIRECTORS.
RESPONSE: While the subheadings were revised, the eight customers were
not identified. The Company did not consider the identities to be
critical, as the largest customers have changed from period to period.
Instead this fact has been disclosed in the revised text. See page 5.
"THERE IS A LACK OF A PUBLIC MARKET FOR OUR COMMON SHARES . . ." PAGE 6
12. REVISE TO DISCLOSE WHETHER YOU HAVE APPLIED FOR LISTING ON THE OTCBB OR
ANY OTHER MARKET, AND WHETHER YOU HAVE ANY PLANS TO DO SO.
ADDITIONALLY, PLEASE ADVISE OF THE NEED FOR ANY BLUE SKY REGISTRATION.
Response: Complied. See page 6.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 6
"OUTSTANDING COMMON STOCK PURCHASE WARRANTS MAY NEGATIVELY IMPACT . . ." PAGE 6
13. YOU INDICATE IN THE TEXT OF THIS RISK FACTOR THAT SO LONG AS THE
WARRANTS REMAIN OUTSTANDING, THE TERMS UNDER WHICH YOU MAY BE ABLE TO
OBTAIN ADDITIONAL CAPITAL FINANCING MAY BE ADVERSELY AFFECTED. PLEASE
REVISE TO EXPLAIN WHY SUCH TERMS MAY BE ADVERSELY AFFECTED.
RESPONSE: Complied. See pages 6 and 7.
"SINCE NEITHER NONE OF OUR OFFICERS AND DIRECTORS IS A UNITED STATES RESIDENT .
.. ." PAGE 6
14. PLEASE EXPAND THIS RISK FACTOR TO ADDRESS ALL OF THE RISKS ASSOCIATED
WITH YOUR OFFICERS AND DIRECTORS RESIDING IN HONG KONG AND, IF
NECESSARY, BREAK THIS RISK FACTOR UP INTO SEPARATE RISK FACTORS IN
ORDER TO ADEQUATELY DESCRIBE ALL OF THE RELATED RISKS. FOR EXAMPLE,
EXPAND YOUR DISCUSSION OF SERVICE OF PROCESS AND DESCRIBE OTHER ISSUES
SUCH AS ENFORCEABILITY OF U.S. JUDGMENTS AND THE DUTIES OF OFFICERS AND
DIRECTORS. IN THIS REGARD, WE NOTE FROM PAGE 28 THAT UNDER BVI LAW,
LIABILITY OF A CORPORATE DIRECTOR TO THE CORPORATION IS PRIMARILY
LIMITED TO CASES OF WILLFUL MALFEASANCE IN THE PERFORMANCE OF HIS
DUTIES OR TO CASES WHERE THE DIRECTOR HAS NOT ACTED HONESTLY AND IN
GOOD FAITH AND WITH A VIEW TO THE BEST INTERESTS OF THE COMPANY.
RESPONSE: Complied. This risk factor has been moved so that it is
located with the others discussed in comment 15 below. A specific risk
factor has been added about the duties of the officers and directors
under BVI law. See pages 7 and 8.
"WE ARE A BRITISH VIRGIN ISLANDS COMPANY . . ." PAGE 7
15. WE NOTE THAT THIS RISK FACTOR ADDRESSES SEVERAL DISTINCT RISKS POSED BY
BEING A BVI COMPANY, SUCH AS THE FACT THAT BVI COMMON LAW IS LIMITED AS
COMPARED WITH SIMILAR U.S. LAW, THE BVI HAS A LESS DEVELOPED BODY OF
SECURITIES LAWS AS COMPARED WITH THE U.S., BVI COMPANIES MAY NOT HAVE
STANDING TO INITIATE SHAREHOLDER DERIVATIVE ACTIONS IN THE U.S. COURTS
AGAINST THE COMPANY, AND THERE IS NO STATUTORY RECOGNITION IN THE BVI
OF JUDGMENTS OBTAINED IN THE U.S. PLEASE REVISE TO ADDRESS EACH OF
THESE RISKS AS SEPARATE RISK FACTORS AND ENSURE THAT YOU THOROUGHLY
DISCUSS EACH RISK AND ITS POTENTIAL AFFECTS ON INVESTORS.
RESPONSE: Complied. This risk factor has been broken down into
several risk factors. See pages 7 and 8.
DETERMINATION OF OFFERING PRICE
16. PLEASE REVISE YOUR FILING TO PROVIDE ALL OF THE INFORMATION REQUIRED BY
ITEM 504 OF REGULATION S-K REGARDING THE MANNER IN WHICH YOU DETERMINED
YOUR OFFERING PRICE. ENSURE THAT THIS DISCUSSION ADDRESSES THE FACT
THAT YOU HAVE OUTSTANDING WARRANTS WITH AN EXERCISE PRICE OF $.50/SHARE
AND EXPLAINS WHY YOU CHOSE A DIFFERENT PRICE FOR YOUR PUBLIC OFFERING.
RESPONSE: Complied. See page 9.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 7
SUPPLEMENTARY FINANCIAL INFORMATION
17. REVISE THE FILING TO INCLUDE QUARTERLY FINANCIAL DATA PURSUANT TO ITEM
302 OF REGULATION S-K.
RESPONSE: The Company does not believe that it is required to include
quarterly financial data, as Item 302 of Regulation S-K makes this
applicable to registrants that have securities registered pursuant to
Section 12(b) or 12(g) of the Securities Exchange Act of 1934.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, PAGE 8
18. PLEASE COMPREHENSIVELY REVISE THIS SECTION TO PROVIDE ALL INFORMATION
REQUIRED BY ITEM 303 OF REGULATION S-K, INCLUDING THE RELATED
INSTRUCTIONS. SEE ALSO SEC RELEASE 33-8350. IN THIS REGARD, WE WOULD
EXPECT TO SEE MORE INFORMATION REGARDING YOUR OPERATING HISTORY AND HOW
YOUR BUSINESS HAS CHANGED OVER THE PAST THREE YEARS. FOR EXAMPLE, IT IS
NOT CLEAR WHAT "PROJECTS REVENUES" ARE OR HOW THEY HAVE AFFECTED YOUR
COMPANY IN THE PAST OR WILL AFFECT IT IN THE FUTURE. ADDITIONALLY, YOUR
CURRENT DISCLOSURE DOES NOT CLEARLY DISCUSS HOW YOU GENERATE REVENUES.
IN THIS REGARD, WE NOTE FROM YOUR FINANCIAL STATEMENTS THAT YOU MAINLY
RECOGNIZE REVENUE THROUGH THE LICENSING OF YOUR SOFTWARE, BUT NOTE FROM
YOUR BUSINESS SECTION THAT YOU APPEAR TO ALSO PERFORM CONSULTING AND
DISTRIBUTION SERVICES. REVISE TO CLEARLY DISCLOSE THE LINES OF BUSINESS
IN WHICH YOU ARE INVOLVED AND HOW THEY AFFECT YOUR RESULTS OF
OPERATIONS. WE WOULD ALSO EXPECT TO SEE MORE COMPREHENSIVE LINE-ITEM
DISCUSSIONS REGARDING MATERIAL CHANGES BETWEEN PERIODS, INCLUDING
QUANTIFIED INFORMATION REGARDING THE REASONS FOR SUCH CHANGES.
FURTHERMORE, YOU SHOULD BETTER EXPLAIN YOUR RELATIONSHIP WITH THIRD
PARTIES, SUCH AS YOUR DISTRIBUTORS AND THE CHINESE ACADEMY OF SCIENCE
AND HOW SUCH RELATIONSHIPS HAVE OR WILL AFFECT YOUR RESULTS OF
OPERATIONS. FINALLY, ENSURE THAT YOUR REVISED DOCUMENT INCLUDES A
DISCUSSION OF ANY MATERIAL PRICING PRESSURES AND WHETHER CHANGES IN
REVENUES BETWEEN PERIODS HAVE BEEN THE RESULT OF A CHANGE IN PRICING OR
VOLUME. IN THIS REGARD, WE NOTE THE RISK FACTOR ON PAGE 5 THAT
INDICATES THAT YOU MAY BE FORCED TO OFFER LOWER PRICES TO COMPETE. ALL
OF THESE ISSUES SHOULD BE ADDRESSED IN YOUR NEXT AMENDMENT.
RESPONSE: Complied. See pages 10 to 14.
19. AS A FOLLOW-UP TO THE COMMENT ABOVE, WE NOTE YOUR DISCUSSIONS ON PAGES
FF-11 AND FF-12 REGARDING THE COMPANY'S GRANT AND SUBSIDY INCOME. YOUR
MD&A, INCLUDING YOUR LIQUIDITY DISCUSSION, SHOULD BE REVISED TO INCLUDE
SIMILAR DISCLOSURE, AS THE GRANT AND SUBSIDY INCOME YOU HAVE RECEIVED
APPEARS TO HAVE PROVIDED CASH FOR YOUR OPERATIONS THAT WILL NOT
CONTINUE INDEFINITELY, AND AS IT APPEARS THAT YOU WILL BE REQUIRED TO
PAY THE HONG KONG GOVERNMENT A 5% ROYALTY ON ALL GROSS REVENUE EARNED
FROM ANY ACTIVITIES IN CONNECTION WITH GRANT-FUNDED PROJECTS.
RESPONSE: Complied. See pages 11 and 12.
20. WE NOTE THE STATISTICS YOU CITE ON PAGE NINE AND THE CORRESPONDING
FOOTNOTE YOU HAVE PROVIDED. PLEASE REVISE TO REMOVE THE FOOTNOTE AND
PROVIDE THE SUPPORTING INFORMATION WITH
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 8
THE TEXT OF THE STATISTICS. ADDITIONALLY, PLEASE SUPPLEMENTALLY PROVIDE
THE ARTICLE TO WHICH YOU REFER AND TELL US WHETHER IT IS PUBLICLY
AVAILABLE FOR FREE OR FOR A NOMINAL AMOUNT.
RESPONSE: Complied. See page 10. The articles appears to be available
from CFO Magazine, but for a nominal amount.
21. WE NOTE THAT THE FILING DOES NOT CONTAIN A DISCUSSION OF THE COMPANY'S
CRITICAL ACCOUNTING POLICIES. REVISE THE FILING TO INCLUDE A DISCUSSION
OF YOUR CRITICAL ACCOUNTING POLICIES. SEE SEC RELEASE NO. 33-8040 AND
FR-60 FOR GUIDANCE.
RESPONSE: Complied. See pages 11 and 12.
22. CURRENTLY, YOUR DISCUSSION OF MD&A AND LIQUIDITY AND CAPITAL RESOURCES
ARE IN US$ WHILE YOUR AUDITED FINANCIAL STATEMENTS ARE IN HK$. REVISE
THE FILING TO PRESENT ALL DISCUSSIONS IN THE REPORTING CURRENCY OF THE
COMPANY'S AUDITED FINANCIAL STATEMENTS (I.E., HK$).
RESPONSE: As most of the selling shareholders are in the United States,
the Company expects that the prospectus will be used extensively in the
United States. Accordingly, the Company is presenting all discussions
in both US dollars and HK dollars.
23. REVISE THE FILING TO INCLUDE THE FIVE-YEAR HISTORY OF EXCHANGE RATES
SETTING FORTH RATES AT PERIOD END, AVERAGE, HIGHS AND LOWS IN
ACCORDANCE WITH RULE 3-20(B)) OF REGULATION S-X.
RESPONSE: Complied. See page 10.
RESULTS OF OPERATIONS, PAGE 9
24. WE NOTE YOUR DISCLOSURE REGARDING THE FACT THAT THE SALES OF PROACCESS
FACEOK IN 2004 "MARKED THE POINT WHERE THE COMPANY NO LONGER RELIED
SOLELY UPON PROJECT-BASED OR CONSULTANCY INCOME." AS A FOLLOW-UP TO THE
FIRST MD&A COMMENT ABOVE, PLEASE REVISE THIS SECTION AND MD&A GENERALLY
TO BETTER EXPLAIN WHAT YOUR PROJECT-BASED AND CONSULTANCY INCOME IS AND
HOW IT RELATES TO YOUR OPERATIONS AND THE PRODUCTION OF YOUR BIOMETRICS
SOFTWARE.
RESPONSE: This statement has been deleted. See pages 11 and 12.
25. WE NOTE FROM YOUR DISCLOSURE ON PAGE 10 THAT YOU COMMENCED "A FEW LARGE
PROJECTS OUTSIDE OF HONG KONG." AS A FOLLOW-UP TO THE FIRST MD&A
COMMENT ABOVE, PLEASE REVISE TO BETTER EXPLAIN WHAT THESE PROJECTS ARE
AND HOW THEY HAVE OR WILL AFFECT YOUR RESULTS OF OPERATIONS.
RESPONSE: Complied. See page 12.
26. AS A FOLLOW-UP TO THE FIRST MD&A COMMENT ABOVE, WE NOTE THAT YOU
ATTRIBUTE CHANGES IN CERTAIN CONSOLIDATED FINANCIAL STATEMENT LINE
ITEMS TO MORE THAN ONE FACTOR AND THAT CERTAIN LINE ITEMS ARE NOT
DISCUSSED. FOR INSTANCE, WE NOTE YOU DISCLOSE THE 10.3% DECREASE IN
GROSS MARGIN AT DECEMBER 31, 2004, WITHOUT DISCUSSING THE REASON FOR
THE DECREASE. REVISE YOUR MD&A TO
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 9
ALLOW INVESTORS TO SEE YOUR COMPANY THROUGH THE EYES OF MANAGEMENT. FOR
EXAMPLE, DISCUSS THE METRICS MANAGEMENT USES IN EVALUATING OPERATING
RESULTS, THE BUSINESS REASONS FOR PERIOD TO PERIOD CHANGES IN YOUR
FINANCIAL STATEMENT LINE ITEMS AND EACH FACTOR THAT RESULTED IN THOSE
CHANGES. WE REFER YOU TO SEC RELEASE NO. 33-6835 AND 33-8350.
RESPONSE: Complied. See pages 12 and 13.
LIQUIDITY AND CAPITAL RESOURCES, PAGE 10
27. WE NOTE FROM PAGE 24 THAT CERTAIN OF YOUR OFFICERS AND DIRECTORS HAVE
PROVIDED LOANS TO THE COMPANY SINCE 2001 AND THAT THE SAME OFFICERS
GUARANTEED A LOAN FROM A FINANCIAL INSTITUTION. PLEASE REVISE THIS
SECTION TO PROVIDE DISCLOSURE REGARDING ALL OF THESE LOANS, INCLUDING
THE NAME OF THE FINANCIAL INSTITUTION FROM WHICH YOU BORROWED FUNDS.
RESPONSE: Complied. See page 13.
28. WE NOTE YOUR DISCLOSURE OF MATERIAL CHANGES RELATING TO ACCOUNTS
RECEIVABLE, ACCOUNTS PAYABLE AND OTHER BALANCES IN YOUR DISCUSSION OF
LIQUIDITY AND CAPITAL RESOURCES. PLEASE REVISE YOUR DISCUSSION TO FOCUS
ON THE PRIMARY DRIVERS OF AND OTHER MATERIAL FACTORS NECESSARY TO
UNDERSTANDING YOUR COMPANY'S CASH FLOWS. IN ADDITION, DISCUSS ALL KNOWN
TRENDS, EVENTS OR UNCERTAINTIES, WHICH ARE REASONABLY LIKELY TO IMPACT
FUTURE LIQUIDITY, AS NECESSARY. WE REFER YOU TO SECTION IV OF SEC
RELEASE NO. 33-8350.
RESPONSE: Complied. See pages 13 and 14.
29. WE NOTE YOUR DISCLOSURE THAT YOU BELIEVE EXISTING CASH FLOWS, BASED
UPON YOUR SIGNED CONTRACTS FOR ORDERS, WILL BE ADEQUATE TO FUND
EXPENDITURES FOR DEVELOPMENT OF BIOMETRICS PRODUCTS. TELL US THE AMOUNT
OF BACKLOG ORDERS BELIEVED TO BE FIRM AS OF JUNE 30, 2005 AND REVISED
TO DISCLOSE THIS INFORMATION IN THE BUSINESS SECTION OF YOUR FILING
PURSUANT TO ITEM 101(C)(VIII) OF REGULATION S-K.
RESPONSE: Complied. See pages 14 and 22.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
30. PLEASE REVISE YOUR FILING TO PROVIDE ALL OF THE INFORMATION REQUIRED BY
ITEM 304 OF REGULATION S-K.
RESPONSE: Complied. See page 15.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
31. PLEASE REVISE YOUR FILING TO PROVIDE ALL OF THE INFORMATION REQUIRED BY
ITEM 305 OF REGULATION S-K.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 10
RESPONSE: The Company does not believe that disclosure of market risk
is warranted because it is not subject to interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant
market rate or price risks. The Company does not have any long-term
debt, except for shareholders' loans that are interest-free. As noted
in the new section entitled "Historical Exchange Rates," the Hong Kong
dollar has been pegged to the U.S. dollar at HK$7.80 to US$1.00 since
1983. Further, the Company `s business does not involve commodities or
other items sensitive to market rate or price risks.
BUSINESS, PAGE 11
32. THROUGHOUT THIS SECTION AND IN OTHER PLACES IN THE FILING, YOU REFER TO
CERTAIN AWARDS THAT YOUR PRODUCTS HAVE RECEIVED. FOR EXAMPLE, WE NOT
YOUR STATEMENT THAT PROACCESS FACEOK WAS AWARDED THE "BEST OF COMDEX
FINALIST 2003" IN LAS VEGAS. EACH PLACE YOU REFER TO AN AWARD, YOU
SHOULD ALSO INCLUDE A DESCRIPTION OF THE AWARD, THE ENTITY THAT GIVES
THE AWARD AND ITS MEANING IN YOUR INDUSTRY IN ORDER TO PUT THE
SIGNIFICANCE OF THE AWARD IN CONTEXT FOR INVESTORS. REVISE THROUGHOUT
AS APPROPRIATE. ADDITIONALLY, WHERE YOU REFER TO CONTRACT AWARDS, YOU
SHOULD PROVIDE SIMILAR INFORMATION. FOR EXAMPLE, WE NOTE YOUR STATEMENT
ON PAGE 12 THAT TITANIUM TECHNOLOGY WAS SELECTED BY THE HKSAR
GOVERNMENT AS ONE OF THE SUPPLIERS OF PC/LAN BULK TENDER IN CATEGORY C.
REVISE TO EXPLAIN WHAT THIS MEANS AND WHAT COMPETITION FOR THE CONTRACT
EXISTED AT THE TIME.
RESPONSE: Complied. See pages 16 and 22.
33. WE NOTE THAT YOU HAVE SEVERAL GOVERNMENT CUSTOMERS. ACCORDINGLY, PLEASE
ENSURE THAT YOUR NEXT AMENDMENT INCLUDES ALL OF THE INFORMATION
REQUIRED BY PARAGRAPH (C)(1)(IX) OF ITEM 101 OF REGULATION S-K,
REGARDING ANY MATERIAL PORTION OF YOUR BUSINESS THAT MAY BE SUBJECT TO
RENEGOTIATION OF PROFITS OR TERMINATION OF CONTRACTS AT THE ELECTION OF
THE GOVERNMENT.
RESPONSE: See page 22. The Company has added disclosure that its
contracts are not subject to termination at the election of the
government.
34. PLEASE REVISE TO PROVIDE ALL OF THE INFORMATION REGARDING THE
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS REQUIRED BY
ITEM 101(G) OF REGULATION S-K.
RESPONSE: Complied. See page 24.
BUSINESS DEVELOPMENT, PAGE 11
35. PLEASE REVISE HERE AND THROUGHOUT THE DOCUMENT AS APPROPRIATE TO BETTER
EXPLAIN THE ORGANIZATION AND HISTORY OF THE COMPANY. FOR EXAMPLE, WE
NOTE FROM PAGE F-4 THAT TITANIUM TECHNOLOGY (SHENZHEN) COMPANY LIMITED
IS A SUBSIDIARY OF TITANIUM TECHNOLOGY LIMITED, BUT SUCH RELATIONSHIP
IS NOT CLEARLY DISCLOSED HERE, IN YOUR PROSPECTUS SUMMARY OR IN MD&A.
ADDITIONALLY, IT IS NOT CLEAR WHO EAE PRODUCTIONS (HK) LIMITED IS OR
HOW SUCH ENTITY IS RELATED TO THE COMPANY. FINALLY, IT IS NOT CLEAR
WHETHER BOTH TITANIUM TECHNOLOGY AND TITANIUM
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 11
TECHNOLOGY (SHENZHEN) ARE OPERATING COMPANIES. PLEASE REVISE TO BETTER
EXPLAIN THE RELATIONSHIP BOTH COMPANIES HAVE WITH EACH OTHER AND WITH
THE COMPANY AS A WHOLE.
RESPONSE: Complied. See page 15.
PRODUCTS, PAGE 12
36. PLEASE REVISE THIS SECTION AND MD&A, IF APPROPRIATE, TO MORE CLEARLY
DESCRIBE THE PRODUCTS THE COMPANY CURRENTLY OFFERS AND THE PRODUCTS
THAT ARE IN THE DEVELOPMENT PHASE. IN THIS REGARD, WE NOTE THAT YOUR
DESCRIPTIONS OF PRODUCTS SUCH AS THE PROFACER IDVR AND PROFACER
IDCONTROL SEEM TO INDICATE THAT YOU ARE CURRENTLY OFFERING THE
PRODUCTS, BUT WE NOTE NO SIMILAR DISCLOSURE IN MD&A. ADDITIONALLY, WE
NOTE YOUR STATEMENT ON PAGE 15 REGARDING THE PROFACER IDVR WHICH
INDICATES THAT "[A] PILOT PROJECT HAS BEEN LAUNCHED IN GUANGXI PEOPLE'S
BANK OF CHINA." PLEASE REVISE TO EXPLAIN THIS STATEMENT. FOR EXAMPLE,
ARE YOU DERIVING REVENUES FROM THE BANK OR IS THIS PRODUCT STILL BEING
TESTED? REVISE AS APPROPRIATE.
RESPONSE: Complied. See the tables appearing on pages 17 and 20.
DISTRIBUTION AND MARKETS, PAGE 17
37. PLEASE REVISE THIS SECTION AND MD&A TO BETTER EXPLAIN YOUR DISTRIBUTOR
BUSINESS. FOR EXAMPLE, WHAT TYPES OF SOFTWARE DO YOU DISTRIBUTE TO YOUR
CUSTOMERS? WHAT PORTION OF YOUR REVENUES DOES YOUR DISTRIBUTOR BUSINESS
ACCOUNT FOR? ADDITIONALLY, REVISE TO BETTER EXPLAIN YOUR RELATIONSHIPS
WITH THE LARGER VENDORS, SUCH AS MICROSOFT AND NOVELL. DO YOU BUY
SOFTWARE FROM THESE VENDORS TO DISTRIBUTE IN HONG KONG OR DO YOU
DISTRIBUTE SOFTWARE TO THESE VENDORS?
RESPONSE: Complied. See page 22.
CUSTOMERS, PAGE 17
38. WE NOTE THAT EIGHT CUSTOMERS ACCOUNTED FOR APPROXIMATELY 75% OF YOUR
FISCAL 2004 REVENUES AND THAT SALES TO BEACON BASE SOFTWARE AND
INFORMATION SECURITY ONE WERE 13.32% AND 21.02%, RESPECTIVELY. IF ANY
OTHER CUSTOMER ACCOUNTED FOR 10% OR MORE OF TITANIUM'S REVENUES, PLEASE
REVISE TO IDENTIFY SUCH CUSTOMER AND TO INDICATE THE PERCENTAGE OF
REVENUES FOR WHICH IT WAS RESPONSIBLE.
RESPONSE: No customer accounted for 10% or more of the Company's
revenues, other than Information x Security One (HK) Ltd. and Beacon
Base Software Ltd.
MANAGEMENT
OFFICERS, DIRECTORS AND KEY EMPLOYEES, PAGE 19
39. PLEASE REVISE THIS DISCLOSURE TO INCLUDE THE SPECIFIC FIVE-YEAR
EMPLOYMENT HISTORY FOR EACH NAMED PERSON, AS REQUIRED BY ITEM 401(E)(1)
OF REGULATION S-K. IN THIS REGARD, WE WOULD
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 12
EXPECT TO SEE THE NAMES OF THE COMPANIES AT WHICH THE OFFICERS AND
DIRECTORS WORKED PRIOR TO THEIR EMPLOYMENT WITH THE COMPANY, AS WELL AS
ALL OTHER INFORMATION REQUIRED BY 401(E)(1).
RESPONSE: Complied. See pages 25 to 26.
40. AS A FOLLOW-UP TO COMMENT 2 ABOVE, PLEASE REVISE THE DESCRIPTION OF DR.
NG'S EXPERIENCE TO PROVIDE THE FACTUAL BASIS FOR THE STATEMENTS YOU
MAKE REGARDING HIS STANDING WITHIN THE BIOMETRICS COMMUNITY. FOR
EXAMPLE, WE NOTE STATEMENTS SUCH AS, "DR. NG IS ONE OF THE REPUTABLE
ENTREPRENEURS IN CHINA," "DR. NG HAS RECEIVED A GREAT DEAL OF
RECOGNITION FOR HIS EXTRAORDINARY ACCOMPLISHMENTS" AND "[H]E IS A
HIGHLY SOUGHT AFTER SPEAKER AT HIGH LEVEL INDUSTRY CONFERENCES AND A
FREQUENT COMMENTATOR IN THE MEDIA." ADDITIONALLY, YOU SHOULD REVISE TO
PUT THE SIGNIFICANCE OF THE AWARDS HE HAS RECEIVED IN CONTEXT FOR
INVESTORS.
RESPONSE: Complied. See page 25.
CONFLICTS OF INTEREST, PAGE 20
41. WE NOTE THAT THE LAST SENTENCE OF THE FIRST PARAGRAPH OF THIS SECTION
INDICATES THAT YOU ANTICIPATE THAT THE OTHER BUSINESS ACTIVITIES OF
YOUR OFFICERS AND DIRECTORS WILL NOT INTERFERE IN ANY SIGNIFICANT
FASHION WITH THE AFFAIRS OF THE BUSINESS. REVISE TO EXPLAIN THE BASIS
FOR THIS BELIEF. ADDITIONALLY, REVISE YOUR RISK FACTORS SECTION TO
PROVIDE A SEPARATE DISCUSSION REGARDING THE RISKS ASSOCIATED WITH YOUR
OFFICERS AND DIRECTORS BEING ALLOWED TO ENGAGE IN COMPETING BUSINESSES,
AND THE FACT THAT YOU HAVE NO RIGHT OF FIRST REFUSAL PERTAINING TO
OPPORTUNITIES THAT COME TO THEIR ATTENTION AND RELATED TO THE
OPERATIONS OF THE COMPANY.
RESPONSE: Complied. See pages 8 and 26.
EXECUTIVE COMPENSATION, PAGE 21
42. PLEASE REVISE YOUR EXECUTIVE COMPENSATION TABLE TO PROVIDE THE
INFORMATION REQUIRED BY ITEM 402(B)(2) OF REGULATION S-K FOR ALL NAMED
EXECUTIVE OFFICERS.
RESPONSE: Complied. See page 27.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, PAGE 22
43. NOTES 3 AND 4 TO THE OWNERSHIP TABLE INCLUDE WHAT APPEARS TO BE
CONFLICTING DISCLOSURE REGARDING THE BENEFICIAL OWNERSHIP OF GOLDEN
MASS TECHNOLOGIES LTD. PLEASE REVISE OR ADVISE, AS NECESSARY.
RESPONSE: Complied. Note 3 has been revised and note 4 has been
eliminated. See page 29.
44. IT APPEARS FROM YOUR DISCLOSURE THAT THE BENEFICIAL OWNERSHIP OF THE
PARTIES LISTED IN THIS TABLE MAY NOT HAVE BEEN CALCULATED IN ACCORDANCE
WITH RULE 13D-3 OF THE SECURITIES EXCHANGE ACT OF
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 13
1934. IN THIS REGARD, WE NOTE THAT THE WARRANTS APPEAR EXERCISABLE
WITHIN 60 DAYS, BUT THAT FOOTNOTE 2 INDICATES THAT THE CALCULATION WAS
DONE ASSUMING NO EXERCISE OF THE WARRANTS. ADDITIONALLY, FOOTNOTES FIVE
THROUGH SEVEN SEEM TO INDICATE THAT YOU CALCULATED THE BENEFICIAL
OWNERSHIP OF CERTAIN INDIVIDUALS BASED ON THEIR PERCENTAGE OWNERSHIP OF
LARGER SHAREHOLDERS. INSTEAD, IN ACCORDANCE WITH RULE 13D-3, BENEFICIAL
OWNERSHIP OF SECURITIES SHOULD BE BASED ON WHETHER A PERSON HAS VOTING
OR INVESTMENT CONTROL OVER SUCH SECURITIES. PLEASE REVISE AS NECESSARY
OR ADVISE. ADDITIONALLY, IN RESPONSE TO THIS COMMENT, PLEASE EXPLAIN
HOW YOU CALCULATED THE BENEFICIAL OWNERSHIP PERCENTAGES THAT WILL BE
LISTED IN YOUR AMENDED FILING.
RESPONSE: Complied. The table has been revised to disclose beneficial
ownership in accordance with Rule 13d-3. None of the shareholders
listed in this table own warrants, but note 2 has been clarified to
indicate that this would affect only the number of shares outstanding
for the purpose of calculating percentage ownership. See page 29.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, PAGE 24
45. WE NOTE THAT YOU SOLD GOODS TO AN ENTITY OWNED BY A 10% SHAREHOLDER OF
YOUR COMPANY. PLEASE REVISE TO DESCRIBE THE NATURE OF THE GOODS SOLD
AND TO DISCUSS HOW THE TERMS OF YOUR SALES TO THIS ENTITY COMPARED WITH
THE TERMS OF SIMILAR TRANSACTIONS WITH THIRD PARTIES.
RESPONSE: Complied. See page 30.
46. WE NOTE YOUR DISCLOSURE THAT YOU HAVE PAID THE "NON-BUSINESS RELATED
EXPENSES" OF GOLDEN MASS SINCE 2002. PLEASE REVISE TO PROVIDE MORE
INFORMATION REGARDING THE NATURE OF THESE EXPENSES. ADDITIONALLY, TELL
US WHETHER THE PAYMENT OF SUCH EXPENSES IS ONGOING.
RESPONSE: Complied. See page 30.
47. AS A FOLLOW-UP TO THE COMMENT ABOVE, YOUR DISCLOSURE REGARDING THE
AMOUNTS OWED TO THE COMPANY BY GOLDEN MASS AND OWED BY THE COMPANY TO
CERTAIN OF ITS OFFICERS AND DIRECTORS SHOULD BE REVISED TO MORE CLEARLY
EXPLAIN THE CURRENT STATUS OF THE TRANSACTIONS. FOR EXAMPLE, BASED ON
YOUR CURRENT DISCLOSURE, IT APPEARS THAT TITANIUM GROUP AND/OR ITS
SUBSIDIARIES HAVE ADVANCED MORE TO THE OFFICERS AND DIRECTORS THAT
THESE OFFICERS AND DIRECTORS HAVE ADVANCED TO TITANIUM GROUP.
THEREFORE, THE OFFSET DISCLOSED IN THE FOURTH PARAGRAPH WOULD APPEAR TO
HAVE BEEN INCOMPLETE AND THE DISCLOSURE SHOULD REFLECT THE AMOUNT STILL
OUTSTANDING. IF THAT AMOUNT HAS BEEN FORGIVEN, IT SHOULD BE REFLECTED,
AS APPLICABLE, IN THE "ALL OTHER COMPENSATION" COLUMN OF THE EXECUTIVE
COMPENSATION TABLE ON PAGE 21. PLEASE SEE ITEM 402 OF REGULATION S-K.
RESPONSE: Complied. See pages 30 and 31 for the revised disclosure.
48. PLEASE DISCLOSE THE REMUNERATION, IF ANY, THAT MESSRS. TANG, NG, AND
CHEUNG RECEIVED FOR THEIR GUARANTEE OF TITANIUM'S INSTALLMENT LOAN, AS
DISCUSSED IN THE FINAL PARAGRAPH.
RESPONSE: Complied. See page 31.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 14
DESCRIPTION OF SECURITIES, PAGE 26
49. WE NOTE THAT THE SECOND PARAGRAPH OF THIS SECTION INDICATES THAT IT
INCLUDES A SUMMARY OF MATERIAL DIFFERENCES BETWEEN THE CORPORATE LAWS
OF THE UNITED STATES AND THOSE OF THE BRITISH VIRGIN ISLANDS AND THAT
YOU HAVE IDENTIFIED CERTAIN SITUATIONS IN WHICH SUCH LAWS VARY. PLEASE
EXPAND YOUR DISCUSSION OF THESE DIFFERENCES TO PROVIDE A MORE DIRECT
AND DETAILED COMPARISON OF SHAREHOLDERS' RIGHTS AND OTHER CORPORATE
GOVERNANCE MATTERS UNDER BVI LAW AND, FOR EXAMPLE, DELAWARE LAW.
CONSIDER PROVIDING THIS INFORMATION IN TABULAR FORM. FOR EXAMPLE, BUT
WITHOUT LIMITATION, EXPLAIN WHETHER BVI LAW ALLOWS SHAREHOLDERS TO
APPROVE CORPORATE MATTERS BY WRITTEN CONSENT OR ALLOWS FOR THE ISSUANCE
OF PREFERRED STOCK OR THE ADOPTION OF OTHER "POISON PILL" MEASURES THAT
COULD PREVENT A TAKEOVER ATTEMPT AND THEREBY PRECLUDE SHAREHOLDERS FROM
REALIZING A POTENTIAL PREMIUM OVER THE MARKET VALUE OF THEIR SHARES.
RESPONSE: Complied. See pages 33 to 37.
SELLING STOCKHOLDERS, PAGE 28
50. DESCRIBE THE TRANSACTIONS IN WHICH THE SELLING STOCKHOLDERS ACQUIRED
THE SHARES BEING OFFERED UNDER THE REGISTRATION STATEMENT. INCLUDE ALL
MATERIAL TERMS OF THE TRANSACTION SUCH AS PRICE, DATE AND THE
EXEMPTION(S) FROM REGISTRATION UPON WHICH TITANIUM RELIED. SEE ITEM 507
OF REGULATION S-K.
RESPONSE: Complied. See page 38.
51. DISCLOSE WHETHER ANY OF THE SELLING STOCKHOLDERS ARE REGISTERED
BROKER-DEALERS OR AFFILIATES OF A REGISTERED BROKER-DEALER. IF ANY
SELLING STOCKHOLDER IS A REGISTERED BROKER-DEALER, OTHER THAN THOSE WHO
RECEIVED THE SHARES BEING OFFERED AS COMPENSATION FOR INVESTMENT
BANKING SERVICES, SUCH SELLING STOCKHOLDER SHOULD BE NAMED AS AN
UNDERWRITER WITH RESPECT TO THE SHARES BEING OFFERED ON ITS BEHALF.
ADDITIONALLY, IF ANY SELLING STOCKHOLDER IS AFFILIATED WITH A
REGISTERED BROKER-DEALER, STATE WHETHER THE SELLING STOCKHOLDER
ACQUIRED THE SECURITIES TO BE RESOLD IN THE ORDINARY COURSE OF BUSINESS
AND WHETHER, AT THE TIME OF ACQUISITION, IT HAD ANY AGREEMENTS OR
UNDERSTANDINGS, DIRECTLY OR INDIRECTLY, WITH ANY PERSON TO DISTRIBUTE
THE SECURITIES AT THE TIME OF PURCHASE.
RESPONSE: Complied. See footnote 11 on page 41.
52. FOR EACH LEGAL ENTITY THAT IS A NON-REPORTING SELLING STOCKHOLDER, SUCH
AS DEVRIES PROPERTIES, PONDEROSA INVESTMENT PARTNERS, INC., THE
IRREVOCABLE SEVEN OAKS TRUST, AND DECH'IN STRATEGIC CONSULTING LLC,
IDENTIFY THE NATURAL PERSONS WHO EXERCISE VOTING AND/OR DISPOSITIVE
POWERS OVER THE SECURITIES. SEE INTERPRETATION I.60 OF THE JULY 1997
MANUAL OF PUBLICLY AVAILABLE CF TELEPHONE INTERPRETATIONS, AS WELL AS
INTERPRETATION 4S OF THE REGULATION S-K PORTION OF THE MARCH 1999
SUPPLEMENT TO THE CF TELEPHONE INTERPRETATION MANUAL.
RESPONSE: Complied. See pages 39 to 41.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 15
PLAN OF DISTRIBUTION, PAGE 31
53. WE NOTE THAT THE SELLING STOCKHOLDERS MAY ENGAGE IN SHORT SALES OF YOUR
COMMON STOCK. PLEASE CONFIRM THAT YOU ARE AWARE OF CORPORATION FINANCE
TELEPHONE INTERPRETATION A.65. ADDITIONALLY, IN THE RESPONSE LETTER
DESCRIBE THE STEPS THE ISSUER AND THE SELLING STOCKHOLDERS HAVE TAKEN
TO ENSURE COMPLIANCE WITH REGULATION M.
RESPONSE: The Company is aware of Corporation Finance Telephone
Interpretation A.65. The issuer has reminded selling stockholders of
the provisions of Regulation M. In addition, the restrictive legend
will be removed from the stock certificate of a selling stockholder
only after sale and after receiving a letter from the stockholder
confirming compliance with prospectus delivery requirements.
FINANCIAL STATEMENTS
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - SIX MONTHS ENDED JUNE 30,
2005 AND 2004
54. WE NOTE THAT YOU HAVE INCLUDED A CONVENIENCE TRANSLATION IN THE FILING
FOR THE MOST RECENT FISCAL YEAR AND MOST RECENT INTERIM FISCAL PERIOD,
HOWEVER, A TRANSLATION FOR THE JUNE 30, 2005 STATEMENT OF CASH FLOWS
HAS BEEN OMITTED. PLEASE REVISE THE FILING TO INCLUDE A CONVENIENCE
TRANSLATION FOR THE JUNE 30, 2005 STATEMENT OF CASH FLOWS.
RESPONSE: Complied. See page F-3. The interim financial statements for
the nine months ended September 30, 2005 include a convenience
translation for the 2005 Statement of Cash Flows.
NOTE 3. AMOUNT DUE FROM RELATED PARTIES, PAGE F-4
55. WE NOTE FROM YOUR DISCLOSURES THAT CASH ADVANCED TO A DIRECTOR WILL BE
TRANSFERRED TO THE GROUP'S SUBSIDIARY IN THE PRC. TELL US THE BUSINESS
REASONS FOR TRANSFERRING CASH TO YOUR SUBSIDIARY VIA A DIRECTOR AS
OPPOSED TO TRANSFERRING THE CASH DIRECTLY TO YOUR SUBSIDIARY IN THE
PRC. IN YOUR RESPONSE, TELL US THE AMOUNT OF CASH THAT YOU TRANSFERRED
TO THE DIRECTORS IN FISCAL 2005, 2004 AND 2003 AND THE JOURNAL ENTRIES
RECORDED TO ACCOUNT FOR THESE TRANSACTIONS.
RESPONSE: It takes a considerable time for the Company to transfer cash
to its subsidiary in the People's Republic of China ("PRC") through
normal banking channels within the PRC. The subsidiary runs a risk of
missing payment obligations due to the delay in the receipt of funds.
Therefore, management has opted to transfer the cash through a director
instead, who hand carries the checks to the subsidiary. By doing so,
the Company insures that the subsidiary will have the cash as and when
required. Approximately five business days are saved by transferring
funds using this method.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 16
The amounts transferred to the director during the three years were as
follows:
Fiscal 2005 HK$Nil (US$Nil)
Fiscal 2004 HK$673,464 (US$86,342)
Fiscal 2003 HK$440,537 (US$56,479)
Fiscal 2002 HK$Nil (US$Nil)
The journal entries recorded to account for these transactions were a
debit to "Advance to the director" and a credit to "Bank".
56. YOU DISCLOSE THE MOVEMENTS IN AMOUNTS DUE FROM RELATED COMPANIES AS OF
JUNE 30, 2005 AND 2004. TELL US HOW YOU ARE RELATED TO THESE COMPANIES
AND WHETHER ANY OF THESE COMPANIES ARE YOUR SUBSIDIARIES. IF THEY ARE
SUBSIDIARIES, TELL US WHY THEY $1,043,714 DUE FROM RELATED COMPANIES AT
JUNE 30, 2004 WAS NOT ELIMINATED IN CONSOLIDATION.
RESPONSE: The amounts represent cash advanced to the director as
mentioned in comment 55 above and to a shareholder of the Company. As
these related parties were not subsidiaries of the Company, they were
not eliminated in consolidation.
FINANCIAL STATEMENTS - YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, PAGE FF-1
57. THE AUDIT FIRM ZHONG YI IS NOT RECOGNIZED BY THE STAFF OF THE SEC.
FOREIGN AUDITORS THAT WISH TO PRACTICE BEFORE THE SEC ARE EXPECTED TO
DEMONSTRATE THEIR KNOWLEDGE AND EXPERIENCE IN APPLYING U.S. GAAP, PCAOB
STANDARDS, SEC FINANCIAL REPORTING RULES AND SEC REQUIREMENTS PRIOR TO
INCLUSION OF THEIR AUDIT REPORTS IN SEC FILINGS. THE DEMONSTRATION OF
AN AUDITOR'S KNOWLEDGE AND EXPERIENCE IN ADVANCE OF FILING GENERALLY
APPLIES TO ALL FINANCIAL STATEMENTS PRESENTED IN SEC FILINGS, INCLUDING
FINANCIAL STATEMENTS PROVIDED PURSUANT TO RULE 3-09 OF REGULATION S-X.
PLEASE NOTE THAT REGISTRATION WITH THE PCAOB DOES NOT SUPERSEDE
EXISTING MEANS BY WHICH A FIRM DEMONSTRATES ITS KNOWLEDGE AND
EXPERIENCE IN APPLYING US GAAP, PCAOB STANDARDS, SEC FINANCIAL
REPORTING RULES AND SEC INDEPENDENCE REQUIREMENTS. YOU MAY REFER TO THE
INTERNATIONAL REPORTING AND DISCLOSURE ISSUES OUTLINE AVAILABLE ON OR
WEBSITE AT THE FOLLOWING LOCATION FOR ADDITIONAL INFORMATION:
HTTP://WWW.SEC.GOV/DIVISIONS/CORPFIN/INTERNATL/CFIRDISSUES1104.HTM#P313
_42976. WE MAY BE UNABLE TO COMPLETE OUR REVIEW AND ACCEPT THE REPORT
OF ZHONG YI UNTIL THE FIRM HAS DEMONSTRATED THIS KNOWLEDGE AND
EXPERIENCE TO THE OFFICE OF THE CHIEF ACCOUNTANT. IN ORDER TO BEGIN
THIS PROCESS, ZHONG YI SHOULD INQUIRE WITH THE OFFICE OF THE CHIEF
ACCOUNTANT (202-551-5300) AND REQUEST THE INFORMATION TO BEGIN THIS
PROCESS. UPON RECEIPT OF THIS REQUEST, THE OFFICE OF THE CHIEF
ACCOUNTANT WILL PROVIDE A LETTER OUTLINING THE STEPS AND INFORMATION
NECESSARY TO COMPLETE THE REVIEW. PLEASE ADVISE US OF ZHONG YI'S PLANS
TO COMPLETE THIS PROCESS.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 17
RESPONSE: The Company has been advised that Zhong Yi has initiated
contact with the Officer of the Chief Accountant and responded to
requests for information to complete the credentialing process.
58. TELL US IF YOU HAVE HAD YOUR FILINGS REVIEWED BY A DESIGNATED "FILING
REVIEWER" FROM A US FIRM OR INTERNATIONAL ORGANIZATION KNOWLEDGEABLE
ABOUT US GAAP, US GAAS, US AUDITOR INDEPENDENCE AND SEC REPORTING
REQUIREMENTS. IF YOU HAVE, PLEASE PROVIDE US WITH WRITTEN CONFIRMATION
THAT THE FILING REVIEWER'S PROCEDURES WERE APPLIED TO YOUR SUBMISSION.
YOUR RESPONSE SHOULD INCLUDE THE NAME OF THE DESIGNATED FILING
REVIEWER. REFER TO RULE 3400T IN PCAOB RELEASE NO. 2003-006 FOR
GUIDANCE.
RESPONSE: The filings have been reviewed by James Scheifley, P.C., a
designated "filing reviewer" from a US firm knowledgeable about US
GAAP, US GAAS, US auditor independence and SEC reporting requirements.
The Company hereby confirms that the filing reviewer's procedures were
applied to the submission.
CONSOLIDATED STATEMENTS OF INCOME, PAGES F-2 AND FF-4
59. REVISE THE FILING TO SEPARATELY DISCLOSE SALES FROM PRODUCTS AND
SERVICES OR EXPLAIN WHY A REVISION IS NOT NECESSARY. IN ADDITION, STATE
SEPARATELY THE COSTS AND EXPENSES APPLICABLE TO EACH CATEGORY OF SALES
AND REVENUES. REFER TO RULE 5-03 OF REGULATION S-X FOR GUIDANCE.
RESPONSE: Complied. The audited consolidated statements of income have
been revised to separately disclose sales from projects, which is
products, and maintenance, which is services. Also, the costs and
expenses related to each category of sales and revenues are set forth
separately. See page FF-4. The sales from projects were not separately
stated in the unaudited consolidated statement of income, as the sales
from maintenance were not material.
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION, PAGE FF-8
60. WE NOTE THAT THE COMPANY IS INCORPORATED IN THE BRITISH VIRGIN ISLANDS.
WE ALSO NOTE FROM DISCLOSURES IN YOUR FILING THAT YOU HAVE ASSETS AND
OPERATIONS IN A JURISDICTION THAT RESTRICTS THE TRANSFER OF ASSETS OR
DIVIDENDS OUTSIDE THE COUNTRY (I.E., THE PRC). TELL US HOW YOU
CONSIDERED INCLUDING A SCHEDULE OF CONDENSED FINANCIAL INFORMATION
PURSUANT TO RULE 5-04 OF REGULATION S-X.
RESPONSE: Rule 5-04 of Regulation S-X states that a schedule of
condensed financial information shall be filed when the restricted net
assets of consolidated subsidiaries exceed 25 percent of consolidated
net assets as of the end of the most recently completed fiscal year. In
this case, the Company has a consolidated subsidiary registered in a
jurisdiction that restricts the transfer of assets or dividends outside
the country, but the assets of that consolidated subsidiary represent
approximately 3% of the consolidated net assets as of December 31,
2004. Accordingly, it is not necessary to include this schedule.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 18
61. YOU DISCLOSE THAT YOUR INTEREST IN THE OPERATING ENTERPRISES WAS
ACQUIRED IN DECEMBER 31, 2004 AND THAT THIS TRANSACTION IS CONSIDERED
TO BE TRANSFERS BETWEEN ENTITIES UNDER COMMON CONTROL. TELL US THE
NATURE OF THE CONTROL RELATIONSHIP BETWEEN YOU AND THE OPERATING
ENTITIES AND THE AUTHORITATIVE ACCOUNTING LITERATURE THAT SUPPORTS YOUR
ACCOUNTING.
RESPONSE: The BVI parent company acquired all of the outstanding shares
of Titanium Technology Limited in exchange for its shares. The
shareholding structure of the BVI parent is exactly the same as that of
Titanium Technology prior to the shares exchange. Therefore, it is
considered a reverse acquisition and is allowed in accordance with SFAS
141, Business Combinations (paragraph 17).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PAGE FF-10
62. REVISE TO DISCLOSE YOUR ACCOUNTING POLICY FOR OPERATING SEGMENTS. IF
YOU HAVE ONE OPERATING SEGMENT TELL US HOW YOU MADE THAT DETERMINATION.
IN ADDITION, DISCLOSE ENTERPRISE-WIDE INFORMATION PURSUANT TO
PARAGRAPHS 26 THROUGH 29 OF SFAS 131.
RESPONSE: Complied. See page FF-10. This note has been revised to
disclose the basis for determining that there is only one operating
segment, as well as net assets and revenues by geographic region.
ACCOUNTS RECEIVABLE, PAGE FF-10
63. YOU DISCLOSE THAT NO GENERAL PROVISION OF BAD AND DOUBTFUL DEBTS HAS
BEEN MADE AND THAT MANAGEMENT EXPECTS THAT ACCOUNTS RECEIVABLES
BALANCES WILL BE COLLECTED IN FULL. TELL US THE ACCOUNTS RECEIVABLE
BALANCES, IF ANY, THAT WERE WRITTEN OFF IN FISCAL 2005, 2004 AND 2003.
IF YOU HAVE WRITTEN OFF ACCOUNTS RECEIVABLE IN THESE PRIOR PERIODS TELL
US WHY AN ALLOWANCE IS UNNECESSARY.
RESPONSE: There were no accounts receivable written off in fiscal 2005,
2004 and 2003. As the trade debtors have fully settled their respective
outstanding amounts in the subsequent year, the Company believes that
no provision for bad and doubtful debts is required.
CASH AND CASH EQUIVALENTS, PAGE FF-10
64. REVISE THE FILING TO DISCLOSE YOUR ACCOUNTING POLICY FOR DETERMINING
WHAT ITEMS ARE TREATED AS CASH EQUIVALENTS PURSUANT TO PARAGRAPH 10 OF
SFAS 95.
RESPONSE: Complied. See page FF-11. This note has been revised to
disclose the accounting policy for determining what items are treated
as cash equivalents.
INTANGIBLE ASSETS, PAGE FF-10
65. WE NOTE THAT PATENTS ARE AMORTIZED OVER A TWENTY YEAR PERIOD. IN
ADDITION, WE NOTE FROM DISCLOSURES ON PAGE 17 OF YOUR FILING THAT
CERTAIN PATENTS ARE DUE TO EXPIRE IN 2010. EXPLAIN
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 19
YOUR BASIS FOR AMORTIZING PATENTS OVER TWENTY YEARS AND HOW YOU
CONSIDERED THE EXPIRATION DATE OF PATENTS IN DETERMINING THE
AMORTIZATION PERIOD.
RESPONSE: Management considered that the patent rights application fees
have an infinite life. Although certain patents are due to expire in
2010, they can be renewed. Management is committed to renew these
patent rights upon expiration of the initial term as they consider that
these patent rights are vital for the Company's product development.
Management expects that they can renew the patent rights without
objection. Based on the above rationale, the Company elected to
amortize the patent rights over a period of twenty years.
REVENUE RECOGNITION, PAGE FF-11
66. CLARIFY FOR US EACH OF THE COMPANY'S REVENUE STREAMS, THE NATURE AND
TERMS OF YOUR ARRANGEMENTS WITH CUSTOMERS AND THE RELATED REVENUE
RECOGNITION POLICY FOR EACH REVENUE SOURCE (I.E., LICENSE FEES,
MAINTENANCE AGREEMENTS, MULTI-ELEMENT ARRANGEMENTS, HARDWARE SALES,
INSTALLATION, TRAINING, SOFTWARE INTEGRATION SERVICES, DISTRIBUTOR
SALES, ETC.). CITE THE ACCOUNTING LITERATURE THAT SUPPORTS YOUR
ACCOUNTING. FOR MULTIPLE ELEMENT ARRANGEMENTS TELL US HOW YOU ESTABLISH
FAIR VALUE FOR EACH ELEMENT AND HOW YOU ALLOCATE THE ARRANGEMENT FEE TO
EACH ELEMENT. REVISE YOUR NOTES, AS NECESSARY, TO DISCLOSE YOUR REVENUE
RECOGNITION POLICY FOR DIFFERENT REVENUE STREAMS AND MULTIPLE ELEMENT
ARRANGEMENTS.
RESPONSE: The Company earns revenue from two major sources - either
from projects or from the provision of maintenance services. For income
from projects, the Company recognizes the revenue at the time when the
projects have been completed, delivered, and accepted by the customers.
Actually, the project itself is the sale of a system utilizing
biometrics technology, which includes software and hardware. In most
cases, the customer may require the Company to carry out some minor
modification or customization of the software. When the software is
modified, the Company takes a few days to test-run in-house to ensure
that the product runs per the customer's requirement. The system, both
software and hardware, is delivered to the customer after the test-run.
Upon delivery, the Company installs the system at the customer's
premises.
In accordance with the standard sales contracts used by the Company,
the customer is deemed to have accepted the system upon the earlier of:
(1) The date the Company demonstrates to the customer, by the
successful completion of acceptance tests or otherwise, that
the deliverables substantially conform to the acceptance
criteria specified in the Request for Proposal; or
(2) The date that the customer uses the system for any purpose
other than performing acceptance tests.
Once the system has been delivered to the customer and the customer has
signified its acceptance of the system, the Company issues an invoice
to the customer in accordance with the amount as specified in the sales
contract. The customer is requested to settle the outstanding amount
within the credit terms as granted in the contract.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 20
For income from the provision of maintenance services, the Company
recognizes the revenue at the time when the maintenance services have
been rendered to the customer. If the maintenance service has a
duration of more than a year, the revenue will be prorated over that
period.
The Company believes that its revenue recognition policy is in
accordance with the Statement of Position 97-2.
In accordance with paragraph 8 of Statement of Position 97-2, the basic
revenue recognition criteria are:
(1) Persuasive evidence of an arrangement exists.
(2) Delivery has occurred.
(3) The vendor's fee is fixed or determinable
(4) Collectibility is probable.
The Company has followed the above criteria for its policy on revenue
recognition.
(1) PERSUASIVE EVIDENCE OF AN ARRANGEMENT EXISTS. All sales
transactions have to be initialized by a purchase order from
customers. The purchase orders give specifications of the
system to be purchased.
(2) DELIVERY HAS OCCURRED. Upon the time when the system is
delivered to the customer, the customer is required to sign on
the delivery note, confirming that it has received and
accepted the system.
(3) THE VENDOR'S FEE IS FIXED OR DETERMINABLE. The price is fixed
at the time when the purchase order is accepted by both the
customer and the Company.
(4) COLLECTIBILITY IS PROBABLE. Once the product is accepted by
the customer, it is obligated to settle the amount outstanding
within the credit term as granted.
The Company believes that the revenue from projects should not be
accounted as Long-term construction-type contracts. In accordance with
paragraph 7 of Statement of Position 97-2, "Software arrangements range
from those that provide a license for a single software product to
those that, in addition to the delivery of software or a software
system, require significant production, modification, or customization
of software. If an arrangement to delivery software or a software
system, either alone or together with other products or services,
requires significant production, modification, or customization of
software, the entire arrangement should be accounted for in conformity
with Accounting Research Bulletin (ARB) No. 45, Long-Term
Construction-Type Contracts, using the relevant guidance herein, and in
SOP 81-1 Accounting for Performance of Construction-Type and Certain
Production-Type Contracts."
Although customers might require the Company to slightly modify the
systems to meet their own specifications, it is considered that the
modifications are not a major overhaul to the
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 21
system. The majority of the systems' design and specifications remain
unchanged. Therefore, the condition under paragraph 7 of SOP 97-2
should not be applied.
67. WE NOTE FROM DISCLOSURES WITHIN THE FILING THAT YOUR CUSTOMERS INCLUDE
"GOVERNMENT CLIENTS" AND THAT SALES TO THESE CLIENTS ARE SIGNIFICANT.
TELL US HOW YOU CONSIDERED PARAGRAPHS 32 - 33 OF SOP 97-2 IN ACCOUNTING
FOR FISCAL FUNDING CLAUSES, IF ANY, INCLUDED IN YOUR SOFTWARE
ARRANGEMENTS. ALSO TELL US HOW FISCAL FUNDING CLAUSES OR OTHER
GOVERNMENT CONTRACT CONTINGENCIES IMPACT YOUR REVENUE RECOGNITION FOR
OTHER SERVICES AND PRODUCTS YOU PROVIDE.
RESPONSE: The Company does not believe that paragraph 32-33 of SOP 97-2
should be considered for recognizing the income for sales to the
government clients. The sales contracts to these government clients do
not include a condition similar to fiscal funding clauses. The
government clients are obligated to pay once delivery has been
accepted. Therefore, paragraph 32-33 of SOP 97-2 should not be applied
to the Company.
68. WE NOTE FROM DISCLOSURES WITHIN YOUR FILING THAT YOU UTILIZE
DISTRIBUTORS TO SELL YOUR PRODUCTS. TELL US HOW YOU RECOGNIZE REVENUE
ON SALES TO DISTRIBUTORS AND WHETHER YOU OFFER THESE DISTRIBUTORS ANY
RIGHTS-OF-RETURN OR OTHER INCENTIVES (I.E. DISCOUNTS, PRICE
CONCESSIONS, ETC.). FOR ANY DISTRIBUTOR INCENTIVE OFFERED, TELL US HOW
YOU DETERMINE THAT YOUR FEE IS FIXED AND DETERMINABLE UPON THE
PRODUCT'S SHIPMENT TO THE DISTRIBUTOR. IN ADDITION, DESCRIBE YOUR
ABILITY TO REASONABLY ESTIMATE THE EFFECTS OF THE VARIOUS PROGRAMS
OFFERED TO RESELLERS. WE REFER YOU TO SAB TOPIC 13A(4)(B), SFAS 48 AND
EITF 01-9.
RESPONSE: The Company recognizes sales to distributors at the time when
the products are delivered to the distributors, as this is when the
risk and reward have substantially passed to the distributors. The
selling prices to the distributors have been predetermined in
accordance with the distribution agreements, and are approximately 30%
to 40% off the recommended retail prices. Once the products are shipped
and the distributor has accepted the products, the Company bills the
distributor and the distributor is obligated to settle the bill
accordingly within the credit period granted. In all cases, there is no
right-of-return or other incentives given to the distributors.
Based on the above circumstances, the Company believes that is has
properly recognized its revenue in accordance with paragraph 6 of SFAS
48.
RESEARCH AND DEVELOPMENT COSTS, PAGE FF-11
69. YOU DISCLOSE THAT HK$1,185,678 AND HK$2,022,379 OF RESEARCH AND
DEVELOPMENT COSTS ASSOCIATED WITH "PROACCESS" AND "PROFACER" WERE
CAPITALIZED IN 2004 AND 2003. TELL US WHEN THESE PRODUCTS WERE
AVAILABLE FOR GENERAL RELEASE AND WHETHER YOU CEASED CAPITALIZATION OF
RESEARCH AND DEVELOPMENT AT THAT TIME. IN ADDITION, TELL US WHETHER YOU
INCURRED COSTS FOR DEVELOPMENT OF OTHER PRODUCTS IN FISCAL 2005, 2004
AND 2003. IF SO, EXPLAIN WHY YOU HAVE NOT REPORTED ANY RESEARCH AND
DEVELOPMENT COSTS IN YOUR FISCAL 2005 AND 2004 FINANCIAL STATEMENTS.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 22
RESPONSE: Generally speaking, ProAccess and ProFacer were launched in
late 2003 and 2004, respectively. However, the Company has further
developed two separate modules making use of the ProAccess technology.
These two products, ProAccess FaceOK and ProAccess FaceGuard, were
launched during mid-2004. In addition, the Company has also developed
two other products making use of the ProFacer technology. These two
products, ProFacer iDVR and ProFacer iWatchGuard, were launched during
2005.
The Company ceased to capitalize the research and development costs as
soon as these products were ready for general release.
Once the products are launched, the Company incurs ongoing expenses for
maintaining these products. Except for those amounts disclosed in the
statement of income for the years ended December 31, 2002, 2003, and
2004, the Company has not incurred costs for development of other
products.
70. EXPLAIN YOUR BASIS FOR AMORTIZING CAPITALIZED RESEARCH AND DEVELOPMENT
COSTS OVER FIVE YEARS. IN ADDITION, TELL US WHERE AMORTIZATION EXPENSE
IS RECORDED. IF IT IS NOT CLASSIFIED IN COST OF SALES, PLEASE REVISE
THE FILING ACCORDINGLY, OR ADVISE AS TO WHY COST OF SALES IS NOT THE
APPROPRIATE CLASSIFICATION. WE REFER YOU TO PARAGRAPH 8 OF SFAS 86 AND
QUESTION 17, SFAX 86 FASB STAFF IMPLEMENTATION GUIDE FOR GUIDANCE.
RESPONSE: Management of the Company believes that the product life
cycle for these products is approximately 5 years. The technology
adopted in developing these products should become obsolete by then.
Therefore, management opted to amortize the research and development
costs over 5 years. The amortization expenses have now been
reclassified as cost of sales and the filing has been revised to effect
these changes. See page FF-4.
GRANT AND SUBSIDY INCOME, PAGE FF-11
71. WE NOTE THAT YOU HAVE RECEIVED GOVERNMENT GRANTS FOR RESEARCH AND
DEVELOPMENT. EXPLAIN YOUR BASIS FOR AMORTIZING THESE FUNDS INTO INCOME.
EXPLAIN WHY YOU HAVE AMORTIZED HK$2,502,139 (PER CONSOLIDATED STATEMENT
OF INCOME) CONSIDERING YOUR DISCLOSURE THAT THE GRANT WAS FOR
HK$2,000,000. TELL US WHY YOU HAVE CLASSIFIED THIS AS OTHER INCOME AS
OPPOSED TO A REDUCTION IN RESEARCH AND DEVELOPMENT EXPENSE AND WHETHER
ANY GRANT AND SUBSIDY AMOUNTS RECEIVED WERE OFFSET AGAINST RESEARCH AND
DEVELOPMENT EXPENSES CAPITALIZED. TO THE EXTENT AMOUNTS HAVE BEEN
MATERIAL TO OPERATIONS, REVISE THE FILING TO INCLUDE THE IMPACT OF
THESE FUNDS ON OPERATIONS IN YOUR MD&A SECTION. AS A FOLLOW-UP TO
COMMENT 19 ABOVE, YOU SHOULD ALSO INCLUDE IN YOUR LIQUIDITY SECTION ANY
CONTRACTUAL OBLIGATIONS YOU MAY HAVE WITH REGARDS TO ROYALTY PAYMENTS
OR REIMBURSEMENTS OF ANY OF THESE FUNDS.
RESPONSE: HK$2 million is the maximum amount that the government will
give the Company on each project for which it has applied for the
subsidy. During the three years ended December 31, 2004, the Company
has submitted several grant applications to assist it in conducting
research and development. The amount of HK$2,502,139 was actually the
sum that the Company has received over the three years on several grant
applications.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 23
In accordance with the agreements entered into between the Company and
the government, the Company would have to tender to the government its
pro rata share of the residual funds remaining in the project account.
In rare circumstances, the Company would have to pay the government in
full if the Company could not reach an agreement with the government on
the progress of the projects.
In light of these facts, the Company believes that the amounts received
as government grants are not of the same nature as research and
development costs. Therefore, the amount was not offset against
research and development costs.
72. REVISE THE FILING TO INCLUDE A DISCUSSION RELATING TO THE IMPACT THAT
ADOPTION OF EACH RECENTLY ISSUED ACCOUNTING STANDARD IS EXPECTED TO
HAVE ON THE FINANCIAL STATEMENTS IN ACCORDANCE WITH SAB TOPIC 11M.
RESPONSE: Complied. The filing has been revised to include a discussion
relating to the impact of adoption of each recently issued accounting
standard. See pages FF-15 to FF-16.
NOTE 6 - LONG TERM BORROWINGS, PAGE FF-16
73. YOU DISCLOSE THAT LOANS FROM SHAREHOLDERS ARE UNSECURED, INTEREST FREE
AND ARE NOT REPAYABLE WITHIN THE NEXT TWELVE MONTHS. TELL US WHEN THE
SHAREHOLDERS' LOANS ARE DUE AND DISCLOSE THIS INFORMATION IN YOUR
FINANCIAL STATEMENT NOTES.
RESPONSE: There was no written agreement in existence for the loan from
shareholders. However, it was verbally confirmed by the shareholders
that they would not call for the Company to repay the loan for at least
two years.
74. CONSIDERING YOUR DISCLOSURE THAT LOANS FROM SHAREHOLDERS ARE INTEREST
FREE TELL US WHY INTEREST WAS NOT IMPUTED. EXPLAIN WHY, AS DISCLOSED IN
NOTE 5, THE CARRYING AMOUNT OF THE SHAREHOLDERS' LOANS APPROXIMATES
FAIR VALUE CONSIDERING THESE LOANS ARE INTEREST FREE. WE REFER YOU TO
APB 21 AND SFAS 107.
RESPONSE: The Company believes that no imputation of interest is
required, since the shareholder loans were made in cash and have no
fixed repayment dates. Since the loans are to be repaid in cash and no
discount is deemed appropriate, the Company believes that the fair
value is equivalent to the face amount of the notes. The filing has
been revised to explain why the carrying value of the shareholders'
loans approximates fair value. See Note 5 on page FF-17.
NOTE 7, COMMON STOCK, PAGE FF-17
75. EXPLAIN HOW YOU HAVE CONSIDERED EITF 00-19 IN DETERMINING THAT WARRANTS
ISSUED IN CONNECTION WITH THE PRIVATE PLACEMENT SUBSEQUENT TO THE
BALANCE SHEET DATE SHOULD BE CLASSIFIED IN EQUITY.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 24
RESPONSE: The Company does not believe that the warrants are an
instrument covered by EITF 00-19, as the exercise price in not variable
in nature.
NOTE 8. INCOME TAXES, PAGE FF-17
76. REVISE YOUR FILING TO INCLUDE A RECONCILIATION OF THE DIFFERENCES
BETWEEN THE STATUTORY TAX RATE AND THE EFFECTIVE INCOME TAX RATE. WE
REFER YOU TO PARAGRAPH 47 OF SFAS 109.
RESPONSE: Complied. See pages FF-18 and F-19. The filing has been
revised to include a reconciliation of the differences between the
statutory tax rate and the effective income tax rate.
77. WE NOTE YOUR DISCLOSURE THAT THE COMPANY HAS DETERMINED THAT THE AMOUNT
OF DEFERRED TAX ASSETS AND LIABILITIES THAT ARISE AS A RESULT OF
TEMPORARY DIFFERENCES IS IMMATERIAL TO THE GROUP. SUPPLEMENTALLY
PROVIDE US WITH YOUR ANALYSIS THAT QUANTIFIES THESE DIFFERENCES AS OF
EACH BALANCE SHEET DATE.
RESPONSE: The temporary differences arise mainly from the difference
between the tax-based carrying amounts of plant and equipment and their
reported amounts in the financial statements. An analysis that
quantifies these differences as of each balance sheet date is set forth
below:
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
------------------------------------------------------------------------------------------------------------
Tax-based carrying amount of plant and equipment 53,809 33,657 27,626
Carrying amount of plant and equipment as reported in
consolidated financial statements 174,999 121,551 84,982
------------------------------------------------------------------------------------------------------------
Temporary differences 121,190 87,894 57,356
============================================================================================================
Tax effect on temporary differences at respective
statutory tax rates 21,208 15,381 9,176
Percentage to income before provision for income taxes
and minority interest 1.00% 28.99% 1.50%
As it is noted, except for the year ended December 31, 2003, the impact
of the temporary difference is not significant in comparison to income
before provision for income taxes and minority interest. As of December
31, 2004, the cumulative effect of the temporary differences is
approximately 1% of income before provision for income taxes and
minority interest. Therefore, it is considered that no provision for
deferred tax liability is required.
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission
December 9, 2005
Page 25
NOTE 9. OPERATING LEASE COMMITMENTS, PAGE FF-18
78. WE NOTE YOUR DISCLOSURE FOR OPERATING LEASE COMMITMENTS AND THAT IT IS
LIMITED TO 2005 AND THEREAFTER. REVISE TO DISCLOSE YOUR OPERATING LEASE
COMMITMENTS FOR EACH OF THE FIVE YEARS SUBSEQUENT TO DECEMBER 31, 2004.
WE REFER YOU TO PARAGRAPH 16 OF SFAS 13.
RESPONSE: Complied. See page FF-19. The filing has been revised to
disclose the operating lease commitments for each of the five years
subsequent to December 31, 2004.
EXHIBITS
79. WE NOTE THAT THROUGHOUT THE FILING YOU HAVE REFERRED TO WHAT APPEAR
TO BE SEVERAL MATERIAL AGREEMENTS, INCLUDING YOUR COLLABORATION
AGREEMENTS WITH TSINGHUA UNIVERSITY AND THE CHINESE ACADEMY OF SCIENCE,
YOUR SOLE DISTRIBUTOR AGREEMENT REGARDING JAPAN, YOUR PARTNERSHIP WITH
IBM, YOUR RELATIONSHIPS WITH LARGE VENDORS SUCH AS MICROSOFT AND
NOVELL, YOUR RELATIONSHIP WITH EAE PRODUCTIONS AND THE LOAN DOCUMENTS
BETWEEN THE COMPANY AND ITS OFFICERS AND DIRECTORS. PLEASE FILE THESE
AGREEMENTS AS EXHIBITS TO YOUR NEXT AMENDMENT OR ADVISE. SEE ITEM
601(B)(10) OF REGULATION S-K. ADDITIONALLY, YOU SHOULD FILE ALL
AGREEMENTS GOVERNING THE TERMS OF THE SECURITIES HELD BY THE SELLING
STOCKHOLDERS, INCLUDING ANY PURCHASE AGREEMENTS, REGISTRATION RIGHTS
AGREEMENTS, UNITS OR WARRANTS. SEE ITEM 601(B)(4) OF REGULATION S-K.
RESPONSE: Complied. See Item 16 on page II-2. The only agreements that
govern the terms of the securities held by the selling shareholders are
the warrants and form of subscription agreement, which are being filed
as exhibits.
Please contact the undersigned with any additional questions or comments you may
have.
Sincerely,
/s/ FAY M. MATSUKAGE
Fay M. Matsukage
Enclosures
Cc: Titanium Group Limited
Zhong Yi (Hong Kong) C.P.A. Company Limited