As filed January 26, 2006 File No. 333-128302
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TITANIUM GROUP LIMITED
(Exact name of registrant as specified in its charter)
BRITISH VIRGIN ISLANDS 7373 NOT APPLICABLE
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization Classification Code Number)
4/F, BOCG INSURANCE TOWER
134-136 DES VOEUX ROAD CENTRAL, HONG KONG
(852) 3427 3177
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
JASON MA, CHIEF EXECUTIVE OFFICER
4/F, BOCG INSURANCE TOWER
134-136 DES VOEUX ROAD CENTRAL, HONG KONG
(852) 3427 3177
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications to:
FAY M. MATSUKAGE, ESQ.
DILL DILL CARR STONBRAKER & HUTCHINGS, P.C.
455 SHERMAN STREET, SUITE 300
DENVER, COLORADO 80203
(303) 777-3737; (303) 777-3823 FAX
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the Registration Statement.
If any of the securities registered on this Form are being offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
----------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-----------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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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 January 26, 2006
TITANIUM GROUP LIMITED
UP TO 9,956,000 SHARES OF COMMON STOCK
Unless the context otherwise requires, the terms "we", "our" and "us"
refers to Titanium Group Limited
The selling shareholders named in this prospectus are offering
9,956,000 shares of common stock of Titanium Group Limited. We will not receive
any of the proceeds from the sale of these shares. The shares were acquired by
the selling shareholders directly from us in a private offering of our common
stock that was exempt from registration under the securities laws. The selling
shareholders have set an offering price of $0.20 until our shares are quoted on
the OTC Bulletin Board and thereafter at prevailing market prices or privately
negotiated prices. See "Selling Stockholders" on page 43 for more information
about the selling shareholders.
Our common stock is presently not traded on any market or securities
exchange. The offering price may not reflect the market price of our shares
after the offering.
INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. A
DETAILED EXPLANATION OF THESE RISKS IS INCLUDED IN THE SECTION ENTITLED "RISK
FACTORS" OF THIS PROSPECTUS, BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal OFFENSE.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
____________, 2006
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................3
RISK FACTORS...................................................................4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..............................9
DILUTION.......................................................................9
DETERMINATION OF OFFERING PRICE................................................9
DIVIDEND POLICY...............................................................10
USE OF PROCEEDS...............................................................10
SELECTED FINANCIAL DATA.......................................................10
HISTORICAL EXCHANGE RATES.....................................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL.............................11
CONDITION AND RESULTS OF OPERATIONS...........................................11
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.................................18
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................18
BUSINESS......................................................................18
MANAGEMENT....................................................................28
EXECUTIVE COMPENSATION........................................................31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................34
TAXATION......................................................................36
DESCRIPTION OF SECURITIES.....................................................37
SELLING STOCKHOLDERS..........................................................43
PLAN OF DISTRIBUTION..........................................................46
LEGAL MATTERS.................................................................47
EXPERTS.......................................................................48
ADDITIONAL INFORMATION........................................................48
REPORTS TO STOCKHOLDERS.......................................................48
INDEX TO FINANCIAL STATEMENTS.................................................49
2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should carefully read this entire prospectus and the financial
statements contained in this prospectus before purchasing our securities.
TITANIUM GROUP LIMITED
Titanium Group Limited was incorporated on May 17, 2004 as an
international business company pursuant to the International Business Companies
Act of the British Virgin Islands ("BVI"). On June 22, 2005, we acquired all of
the entire issued share capital of Titanium Technology Limited, a company
incorporated in Hong Kong on February 14, 2001 with limited liability ("Titanium
Technology"). On September 20, 2002, Titanium Technology and EAE Productions
(HK) Limited, a company incorporated in Hong Kong on October 8, 1997,
established Titanium Technology (Shenzhen) Co., Ltd., a wholly foreign owned
enterprise in China.
We established a BVI company to hold Titanium Technology, as we
believed that it would be easier to attract investment capital into a BVI
company rather than a Hong Kong company. While the BVI entity is the parent
company, our accounting history is that of Titanium Technology and therefore our
operations go back to 2001 when Titanium Technology began operations.
Through our wholly-owned subsidiary, Titanium Technology, we develop
and market biometrics technologies. Based in Hong Kong, with a research and
development center in ShenZhen, People's Republic of China ("PRC"), and a sales
representative office in the United States, we have built a network of
expertise, comprising over 30 IT practitioners and researchers, enabling us to
provide what we believe are quality biometrics products and professional
services. In order to ensure the sustainability of technological development, we
have engaged both Tsinghua University and the Chinese Academy of Science,
Institute of Automation to perform certain research and development work on our
behalf.
Our offices are located at 4/F, BOCG Insurance Tower, 134-136 Des Voeux
Road Central, Hong Kong, where our telephone number is 852 3427 3177. Our
website is located at WWW.TITANIUM-TECH.COM. Information contained in our
website is not part of this prospectus.
THE OFFERING
Securities offered..................9,956,000 shares of common stock.
Use of proceeds.....................We will not receive any of the proceeds from
the selling stockholders of shares of our
common stock.
Securities outstanding..............50,000,000 shares of common stock.
Plan of distribution................The offering is made by the selling
stockholders named in this prospectus, to
the extent they sell shares. Sales may be
made in the open market or in private
negotiated transactions, at fixed or
negotiated prices. See "Plan of
Distribution."
RISK FACTORS
Investing in our securities involves a high degree of risk. You should
consider carefully the information under the caption "Risk Factors" in deciding
whether to purchase the Units.
SUMMARY FINANCIAL INFORMATION
The following summary financial data (expressed in both United States
Dollars (US$) and Hong Kong Dollars (HK$)) is derived from the unaudited
financial statements for the nine-month period ended September 30, 2005 and the
fiscal years ended December 31, 2004, 2003 and 2002 for Titanium Technology,
included elsewhere in this offering memorandum. In June 2005, we acquired 100%
ownership of Titanium Technology, but did not have
3
any operations prior to the acquisition. Accordingly, for accounting purposes,
the historical financial statements of Titanium Technology will be the
historical financial statements of the company.
We have prepared the financial statements in accordance with generally
accepted accounting principles. Our results of operations for any interim period
do not necessarily indicate our results of operations for the full year. You
should read this summary financial data in conjunction with "Management's
Discussion and Analysis or Plan of Operation," "Business," and our financial
statements.
As stated in United States dollars:
INCOME STATEMENT DATA: NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED -----------------------------------------------------
SEPTEMBER 30,
2005 2004 2003 2002
(US$) (US$) (US$) (US$)
----------------------------------------------------------------------
Revenues $ 1,271,009 $ 814,006 $ 558,679 $ 547,095
Net income $ 76,737 $ 258,204 $ 10,373 $ 66,801
Net income per common share (proforma)(1) $ .00 $ .01 $ .00 $ .00
BALANCE SHEET DATA: SEPTEMBER 30, DECEMBER 31,
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2005 2004 2003 2002
(US$) (US$) (US$) (US$)
----------------------------------------------------------------------
Working capital $ 675,522 $ 236,560 $ 112,106 $ 104,727
Total assets $ 1,528,459 $ 738,252 $ 503,562 $ 331,051
Long-term debt $ - $ 182,051 $ 120,086 $ -
Stockholders' equity $ 1,044,974 $ 388,948 $ 131,055 $ 120,809
As stated in Hong Kong dollars:
INCOME STATEMENT DATA: NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED -----------------------------------------------------
SEPTEMBER 30,
2005 2004 2003 2002
(HK$) (HK$) (HK$) (HK$)
----------------------------------------------------------------------
Revenues $ 9,913,869 $ 6,349,252 $ 4,357,694 $ 4,267,341
Net income $ 598,548 $ 2,013,993 $ 80,908 $ 521,046
Net income per common share (proforma)(1) $ .01 $ .04 $ .00 $ .01
BALANCE SHEET DATA: SEPTEMBER 30, DECEMBER 31,
-----------------------------------------------------
2005 2004 2003 2002
(HK$) (HK$) (HK$) (HK$)
----------------------------------------------------------------------
Working capital $ 5,269,066 $ 1,845,168 $ 874,425 $ 816,872
Total assets $ 11,921,982 $ 5,758,362 $ 3,927,784 $ 2,582,201
Long-term debt $ - $ 1,420,000 $ 936,667 $ -
Stockholders' equity $ 8,150,798 $ 3,033,792 $ 1,022,226 $ 942,309
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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 that
discuss the material risks related to an investment in us, together with all
other information in this prospectus and in our other filings with the SEC,
before making an investment decision. If any of the following risks actually
occurs, our business, financial conditions or operating results could be
materially adversely affected. In such case, the trading price of our common
stock could decline, and you may lose all or part of your investment.
4
WE HAVE ONLY A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE
YOUR INVESTMENT IN OUR STOCK.
Your evaluation of our business will be difficult because we have a
limited operating history. Titanium Technology has been in business since
February 2001. We face a number of risks encountered by early-stage companies,
including our need to develop infrastructure to support growth and expansion;
our need to obtain long-term sources of financing; our need to establish our
marketing, sales and support organizations, as well as our distribution
channels; our need to manage expanding operations; and our dependence on
technology which could become incompatible or out of date. Our business strategy
may not be successful, and we may not successfully address these risks.
OUR SUCCESS AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE AND
PROTECT OUR PROPRIETARY TECHNOLOGY.
Our success depends on our ability to protect our proprietary
technology. In the event that a third party misappropriates or infringes on our
intellectual property, our business would be seriously harmed. Third parties may
independently discover or invent competing technologies or reverse engineer our
technology. We expect that if we should successfully licenses to use our
technology, competitors may attempt to duplicate our technology. Even though we
have been issued a patent from Hong Kong and even if we were to obtain copyright
protection on the software, we would still have to enforce our rights against
those who might attempt to infringe on our intellectual property, as patent
protection does not necessarily deter infringement. Such enforcement efforts are
likely to be expensive and time-consuming and we may lack the ability to engage
in any significant enforcement efforts.
THE LOSS OF OUR OFFICERS AND DIRECTORS OR OUR FAILURE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL COULD IMPAIR OUR ABILITY TO MAINTAIN OUR BUSINESS
OPERATIONS.
Our success depends largely upon the efforts, abilities, and
decision-making of our executive officers and directors. Although we believe
that we maintain a core group sufficient for us to effectively conduct our
operations, the loss of any of our key personnel could, to varying degrees, have
an adverse effect on our operations and system development. We do not currently
maintain "key-man" life insurance on any of our executives or directors, but we
intend to have such policies in place in the near future. On the other hand, all
of the key officers have employment contracts in place and significant stock
ownership and we strongly believe that the stability of the core team will be
maintained for a long period of time. Nevertheless, the loss of any one of them
would have a material adverse affect on us and technically, there can be no
assurance that the services of any member of our management will remain
available to us for any period of time.
The knowledge and expertise of our officers and directors are critical
to our operations. There is no guarantee that we will be able to retain our
current officers and directors, or be able to hire suitable replacements in the
event that some or all of our current management leave our company. In the event
that we should lose key members of our staff, or if we are unable to find
suitable replacements, we may not be able to maintain our business and might
have to cease operations, in which case you might lose all of your investment.
WE DERIVE OVER HALF OF OUR REVENUES FROM A FEW CUSTOMERS, THE LOSS OF WHICH
COULD HAVE AN ADVERSE EFFECT ON OUR REVENUES.
For the year ended December 31, 2004 and the nine months ended
September 30, 2005, four customers accounted for over 50% of our revenue. The
following two customers were each over 10%: Information Security One (HK) Ltd.
and Beacon Base Software Ltd. accounted for 20.0% and 12.7% of our revenues,
respectively. Since a small number of customers account for a substantial
portion of our revenues, the loss of any of our significant customers would
cause revenue to decline and could have a material adverse effect on our
business. While the four customers for the 2004 fiscal year are not the same as
the four customers for the 2005 period, this indicates that we need to expand
our client base so that we will no longer be subject to this risk.
5
WE FACE COMPETITION FROM EXISTING AND POTENTIAL COMPETITORS IN THE BIOMETRICS
INDUSTRY, WHICH COULD FORCE US TO OFFER LOWER PRICES AND/OR NARROW OUR FOCUS,
RESULTING IN REDUCED REVENUES.
The current global political climate has heightened interest in the use
of security solutions, and we expect competition in this field, which is already
substantial, to intensify. Competitors in biometrics are developing and bringing
to market products that use face recognition as well as eye, fingerprint, and
other forms of biometric verification. Our products also will compete with other
non-biometric technologies, such as certificate authorities and traditional
keys, cards, surveillance systems, and passwords. Widespread adoption of one or
more of these technologies or approaches in the markets we intend to target
could significantly reduce the potential market for our systems and products.
Due to our small size, it can be assumed that most if not all of our competitors
have significantly greater financial, technical, marketing and other competitive
resources. Many of our competitors and potential competitors have greater name
recognition and more extensive customer bases that could be leveraged, for
example, to position themselves as being more experienced, having better
products, and being more knowledgeable than us. To compete, we may be forced to
offer lower prices and narrow our marketing focus, resulting in reduced
revenues.
SECURITY BREACHES IN SYSTEMS THAT WE SELL OR MAINTAIN COULD RESULT IN THE
DISCLOSURE OF SENSITIVE GOVERNMENT INFORMATION OR PRIVATE PERSONAL INFORMATION
THAT COULD RESULT IN THE LOSS OF CLIENTS AND NEGATIVE PUBLICITY.
Many of the systems we sell manage private personal information and
protect information involved in sensitive government functions. A security
breach in one of these systems could cause serious harm to our business as a
result of negative publicity and could prevent us from having further access to
such systems or other similarly sensitive areas for other governmental clients.
Our systems may also be affected by outages, delays and other difficulties. We
do not have insurance coverage that would cover losses and liabilities that may
result from such events.
THE MARKET FOR OUR SOLUTIONS IS STILL DEVELOPING AND IF THE INDUSTRY ADOPTS
STANDARDS OR A PLATFORM DIFFERENT FROM OUR PLATFORM, THEN OUR COMPETITIVE
POSITION WOULD BE NEGATIVELY AFFECTED.
The market for identity solutions is still emerging. The evolution of
this market is in a constant state of flux that may result in the development of
different technologies and industry standards that are not compatible with our
current products or technologies. In particular, the face recognition market
lacks widely recognized industry standards for commercial use.
A LIMITED NUMBER OF STOCKHOLDERS WILL COLLECTIVELY CONTINUE TO OWN OVER 75% OF
OUR COMMON STOCK AFTER THIS OFFERING AND MAY ACT, OR PREVENT CERTAIN TYPES OF
CORPORATE ACTIONS, TO THE DETRIMENT OF OTHER STOCKHOLDERS.
Immediately after this offering, our directors and officers will
continue to own more than 75% of our outstanding common stock. Accordingly,
these stockholders may, if they act together, exercise significant influence
over all matters requiring stockholder approval, including the election of a
majority of the directors and the determination of significant corporate actions
after this offering. This concentration could also have the effect of delaying
or preventing a change in control that could otherwise be beneficial to our
stockholders.
THERE IS A LACK OF A PUBLIC MARKET FOR OUR COMMON SHARES, WHICH LIMITS OUR
SHAREHOLDERS ABILITY TO RESELL THEIR SHARES OR PLEDGE THEM AS COLLATERAL.
There is currently no public market for our shares, and we cannot
assure you that a market for our stock will develop. It is our understanding
that a broker-dealer plans to submit a Form 211 to commence quotation of our
stock on the OTC Bulletin Board. However, we cannot assure you that our common
stock will be listed for quotation on the OTC Bulletin Board. If this effort
should be unsuccessful, we intend to pursue listing on the OTC Bulletin Board
through another broker-dealer. Consequently, investors may not be able to use
their shares for collateral or loans and may not be able to liquidate at a
suitable price in the event of an emergency. In addition, investors may not be
able to resell their shares at or above the price they paid for them or may not
be able to sell their shares at all.
6
Due to the registration of the shares, we will be subject to the
reporting requirements of the Securities Exchange Act of 1934. As a company that
files reports under this Act, our common stock will be considered a "covered
security" under the National Securities Market Improvement Act of 1996 for
secondary trading transactions in most states. We also intend to obtain coverage
in Standard & Poor's Corporation Records, which we believe will facilitate
secondary trading of our shares.
REGULATIONS RELATING TO "PENNY STOCKS" MAY LIMIT THE ABILITY OF OUR SHAREHOLDERS
TO SELL THEIR SHARES AND, AS A RESULT, OUR SHAREHOLDERS MAY HAVE TO HOLD THEIR
SHARES INDEFINITELY.
If a market develops for our common stock, our common stock would, most
likely, be subject to rules promulgated by the SEC relating to "penny stocks,"
which apply to non-NASDAQ companies whose stock trades at less than US$5.00 per
share or whose tangible net worth is less than US$2,000,000 (HK$15,600,000).
These rules require brokers who sell "penny stocks" to persons other than
established customers and "accredited investors" to complete certain
documentation, make suitability inquiries of investors, and provide investors
with certain information concerning the risks of trading in the security. These
rules may discourage or restrict the ability of brokers to sell our common stock
and may affect the secondary market for the common stock.
OUTSTANDING COMMON STOCK PURCHASE WARRANTS MAY NEGATIVELY IMPACT OUR ABILITY TO
OBTAIN FUTURE EQUITY FINANCING ON FAVORABLE TERMS.
As of the date of this prospectus, there are outstanding 3,000,000
common stock purchase warrants, each of which entitles the holder to purchase
one share of common stock at an exercise price of US$0.50 per share through June
30, 2008. The warrants are redeemable at US$0.001 per warrant if the common
stock is then listed on a recognized stock exchange or trading at US$1.00 per
share for 20 consecutive trading days. These outstanding warrants could have the
effect of keeping our stock from trading at prices substantially higher than
US$0.50 per share. As the market price of the stock exceeds US$0.50 per share,
holders of the warrants would be likely to exercise their warrants, thereby
increasing the number of shares and potentially depressing the market price.
This means that we would be able to obtain financing through the sale of our
stock, but only at prices below US$0.50 per share. The lower the price of the
stock, the more shares we would have to sell to raise a given amount of
financing. Accordingly, as long as the warrants remain unexercised and
outstanding, the terms under which we may be able to obtain additional capital
financing may be adversely affected.
POTENTIAL FUTURE SALES UNDER RULE 144 WOULD INCREASE THE NUMBER OF SHARES IN THE
MARKET AND MAY THEREBY DEPRESS THE MARKET PRICE FOR THE COMMON STOCK.
In general, under Rule 144, a person who has satisfied a one-year
holding period may sell within any three-month period a number of shares which
does not exceed the greater of one percent of the then outstanding shares of
common stock. Rule 144 also permits the sale of shares without any quantity
limitation by a person who is not an affiliate of us and who has beneficially
owned the shares for a minimum period of two years. Therefore, the possible sale
of our shares may, in the future, have a depressive effect on the price of our
common stock in the market, should one develop.
WE ARE A BRITISH VIRGIN ISLANDS COMPANY AND, BECAUSE THE RIGHTS OF SHAREHOLDERS
UNDER BRITISH VIRGIN ISLANDS LAW DIFFER FROM THOSE UNDER U.S. LAW, YOU MAY HAVE
FEWER PROTECTIONS AS A SHAREHOLDER.
Our corporate affairs are governed by our memorandum and articles of
association, the International Business Companies Act of the British Virgin
Islands and the common law of the British Virgin Islands. The rights of
shareholders to take action against the directors, actions by minority
shareholders and the fiduciary responsibilities of our directors to us under
British Virgin Islands law are to a large extent governed by the common law of
the British Virgin Islands. The common law of the British Virgin Islands is
derived in part from comparatively limited judicial precedent in the British
Virgin Islands as well as from English common law, which has persuasive, but not
binding, authority on a court in the British Virgin Islands. The rights of our
shareholders and the fiduciary responsibilities of our directors under British
Virgin Islands law are not as clearly established as they would be under
statutes or judicial precedent in some jurisdictions in the United States. In
particular, the British Virgin Islands has a less developed body of securities
laws as compared to the United States, and some states, such as Delaware, have
more fully developed and judicially interpreted bodies of corporate law.
7
BRITISH VIRGIN ISLANDS COMPANIES MAY NOT BE ABLE TO INITIATE SHAREHOLDER
DERIVATIVE ACTIONS, THEREBY DEPRIVING SHAREHOLDERS OF THE ABILITY TO PROTECT
THEIR INTERESTS.
British Virgin Islands companies may not have standing to initiate a
shareholder derivative action in a federal court of the United States. The
circumstances in which any such action may be brought, and the procedures and
defenses that may be available in respect of any such action, may result in the
rights of shareholders of a British Virgin Islands company being more limited
than those of shareholders of a company organized in the US. Accordingly,
shareholders may have fewer alternatives available to them if they believe that
corporate wrongdoing has occurred.
AS A BRITISH VIRGIN ISLANDS CORPORATION, SHAREHOLDERS MAY HAVE DIFFICULTY IN
ENFORCING JUDGMENTS AGAINST US, THEREBY RENDERING ANY JUDGMENTS USELESS.
The British Virgin Islands courts are also unlikely to recognize or
enforce against us judgments of courts of the United States based on certain
civil liability provisions of U.S. securities laws; and to impose liabilities
against us, in original actions brought in the British Virgin Islands, based on
certain civil liability provisions of U.S. securities laws that are penal in
nature. There is no statutory recognition in the British Virgin Islands of
judgments obtained in the United States, although the courts of the British
Virgin Islands will generally recognize and enforce a non-penal judgment of a
foreign court of competent jurisdiction without retrial on the merits. This
means that even if shareholders were to sue us successfully, they may not be
able to recover anything to make up for losses suffered.
SINCE NONE OF OUR OFFICERS AND DIRECTORS IS A UNITED STATES RESIDENT, IT MAY BE
DIFFICULT TO ENFORCE ANY LIABILITIES AGAINST THEM.
All of our officers and directors reside in Hong Kong. Accordingly, if
events should occur that give rise to any liability on the part of these
persons, shareholders would likely have difficulty in enforcing such
liabilities. If a shareholder desired to sue these persons, the shareholder
would have to serve such persons with legal process. Even if personal service is
accomplished and a judgment is entered against that person, the shareholder
would then have to locate assets of that person, and register the judgment in
the foreign jurisdiction where assets are located.
OUR OFFICERS AND DIRECTORS MAY BE SUBJECT TO A LOWER STANDARD OF CARE OWED TO
THE SHAREHOLDERS, WHICH MAY RESULT IN DECREASED CORPORATE PERFORMANCE.
In most jurisdictions in the United States, directors owe a fiduciary
duty to the corporation and its shareholders, including a duty of care, under
which directors must properly apprise themselves of all reasonably available
information, and a duty of loyalty, under which they must protect the interests
of the corporation and refrain from conduct that injures the corporation or its
shareholders or that deprives the corporation or its shareholders of any profit
or advantage. Under British Virgin Islands law, liability of a corporate
director to the corporation is primarily limited to cases of willful malfeasance
in the performance of his duties or to cases where the director has not acted
honestly and in good faith and with a view to the best interests of the company.
As a result of this risk and other discussed above, public shareholders
may have more difficulty in protecting their interests in the face of actions
taken by management, members of the board of directors or controlling
shareholders than they would if we were incorporated and operating in the United
States.
CURRENCY CONVERSION CONTROL POLICY IN THE PRC AND EXCHANGE RATE RISK MAY
ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The PRC Government has strict restrictions on free conversion of RMB
into foreign currencies and vice versa. On January 1, 1994, the PRC implemented
a unified controlled exchange rate system based on market supply and demand.
Based on such system, the People' Bank of China ("PBOC") quoted a daily exchange
rate of RMB against US dollars based on the market rate for foreign exchange
transaction conducted by the designated banks in the PRC foreign exchange market
during the preceding day. The PBOC also quoted the exchange rates of RMB against
other foreign currencies based on the international market rate.
8
On July 21, 2005, PBOC announced that the PRC government reformed the
exchange rate regime by moving into a managed floating exchange rate regime
based on market supply and demand with reference to a basket of foreign
currencies. As a result, RMB appreciated against U.S. dollars and Hong Kong
dollars by approximately 2% on July 21, 2005. The value of RMB may continue to
appreciate or depreciate in the future, subject to many factors, including
future changes in the currency value of the basket of currencies with reference
to which the RMB exchange rate is floated, changes in the PRC government's
policy, domestic and international economic and political developments, as well
as market supply and demand. Moreover, foreign exchange transactions under
capital account (including principal payments in respect of foreign
currency-denominated obligations) continue to be subject to foreign exchange
controls and the approval of State Administration of Foreign Exchange of the
PRC.
The existing restrictions on the conversion of RMB into foreign
currencies (and thus restrictions on the subsequent repatriation of those
funds), and any tightening of such restrictions may have an adverse effect on
our ability to obtain sufficient foreign currencies to meet our needs.
Alternatively, in the event that RMB continues to appreciate in the future
currencies (U.S. dollars, Hong Kong dollars or otherwise) and if RMB continues
to appreciate in the future, we may incur exchange losses thereby affecting our
profitability.
INVESTORS IN THE COMPANY COULD BE HARMED IF MANAGEMENT SHOULD ENGAGE IN
COMPETING BUSINESSES.
Our officers and directors are not prohibited from engaging in
competing businesses. We do not have a right of first refusal pertaining to
opportunities that come to their attention and related to the operations of the
company. While we believe that the ownership of stock in the company is
sufficient to motivate management to focus primarily on the business of the
company, we cannot assure you that this will not occur. The BVI corporate
statute applicable to the company requires officers and directors, in performing
their functions, to act honestly and in good faith with a view to the best
interests of the company and exercise the care, diligence and skill that a
reasonably prudent person would exercise in comparable circumstances, but this
may be difficult to enforce.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements." All statements
other than statements of historical facts included or incorporated by reference
in this report, including, without limitation, statements regarding our future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "intend,"
"project," "estimate," "anticipate," "believe," or "continue" or the negative
thereof or variations thereon or similar terminology. Although we believe that
the expectations reflected in such forward-looking statements are reasonable, we
cannot give any assurance that such expectations will prove to have been
correct.
DILUTION
The common stock to be sold by the selling shareholders is common stock
that is currently issued and outstanding. Accordingly, there will be no dilution
to our existing shareholders.
DETERMINATION OF OFFERING PRICE
Only the resale of the shares purchased in the private placement and
certain shares owned by existing shareholders is being registered. The selling
shareholders have set an offering price of US$0.20 until our shares are quoted
on the OTC Bulletin Board and thereafter at prevailing market prices or
privately negotiated prices. We believe that this price was based on the fact
that most of the selling shareholders recently purchased their shares at that
price and that this may be the best indicator or market price. They may not have
perceived an increase in value of their shares since the date of purchase.
9
The shares issuable upon exercise of the warrants sold in the private
placement are not being registered. Most of the selling shareholders have
warrants to purchase common stock exercisable at US$0.50 per share, but the
warrants are exercisable until June 30, 2008. As the warrants are exercisable
for some period of time, they may not have an urgency to exercise the warrants
in the near future.
DIVIDEND POLICY
To date, we have not declared or paid any dividends on our common
stock. We do not intend to declare or pay any dividends on our common stock in
the foreseeable future, but rather to retain any earnings to finance the growth
of our business. Any future determination to pay dividends will be at the
discretion of our board of directors and will depend on our results of
operations, financial condition, contractual and legal restrictions and other
factors the board of directors deems relevant.
USE OF PROCEEDS
We will not receive any of the proceeds from the selling stockholders
of shares of our common stock. However, we may receive the sale price of any
common stock we sell to the selling stockholders upon exercise of the warrants.
We expect to use the proceeds received from the exercise of warrants, if any,
for general working capital purposes.
SELECTED FINANCIAL DATA
The following summary financial data (expressed in both United States
Dollars (US$) and Hong Kong Dollars (HK$)) is derived from the unaudited
financial statements for the nine-month period ended September 30, 2005 and the
fiscal years ended December 31, 2004, 2003 and 2002 for Titanium Technology,
included elsewhere in this offering memorandum. In June 2005, we acquired 100%
ownership of Titanium Technology, but did not have any operations prior to the
acquisition. Accordingly, for accounting purposes, the historical financial
statements of Titanium Technology will be the historical financial statements of
the company.
We have prepared the financial statements in accordance with generally
accepted accounting principles. Our results of operations for any interim period
do not necessarily indicate our results of operations for the full year. You
should read this summary financial data in conjunction with "Management's
Discussion and Analysis or Plan of Operation," "Business," and our financial
statements.
As stated in United States dollars:
INCOME STATEMENT DATA: NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED -----------------------------------------------------
SEPTEMBER 30,
2005 2004 2003 2002
(US$) (US$) (US$) (US$)
----------------------------------------------------------------------
Revenues $ 1,271,009 $ 814,006 $ 558,679 $ 547,095
Net income $ 76,737 $ 258,204 $ 10,373 $ 66,801
Net income per common share (proforma)(1)<F1> $ .00 $ .01 $ .00 $ .00
BALANCE SHEET DATA: SEPTEMBER 30, DECEMBER 31,
------------------------------------------------------
2005 2004 2003 2002
(US$) (US$) (US$) (US$)
-----------------------------------------------------------------------
Working capital $ 675,522 $ 236,560 $ 112,106 $ 104,727
Total assets $ 1,528,459 $ 738,252 $ 503,562 $ 331,051
Long-term debt $ - $ 182,051 $ 120,086 $ -
Stockholders' equity $ 1,044,974 $ 388,948 $ 131,055 $ 120,809
10
As stated in Hong Kong dollars:
INCOME STATEMENT DATA: NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------------------------------------
SEPTEMBER 30,
2005 2004 2003 2002
(HK$) (HK$) (HK$) (HK$)
-----------------------------------------------------------------------
Revenues $ 9,913,869 $ 6,349,252 $ 4,357,694 $ 4,267,341
Net income $ 598,548 $ 2,013,993 $ 80,908 $ 521,046
Net income per common share (proforma)(1) $ $ $ $
.01 .04 .00 .01
BALANCE SHEET DATA: SEPTEMBER 30, DECEMBER 31,
------------------------------------------------------
2005 2004 2003 2002
(HK$) (HK$) (HK$) (HK$)
-----------------------------------------------------------------------
Working capital $ 5,269,066 $ 1,845,168 $ 874,425 $ 816,872
Total assets $ 11,921,982 $ 5,758,362 $ 3,927,784 $ 2,582,201
Long-term debt $ - $ 1,420,000 $ 936,667 $ -
Stockholders' equity $ 8,150,798 $ 3,033,792 $ 1,022,226 $ 942,309
- ---------------------------
<FN>
(1) <F1>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.
</FN>
HISTORICAL EXCHANGE RATES
Since October 17, 1983, the Hong Kong dollar has been pegged to the
U.S. dollar at HK$7.80 to US$1.00.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In June 2005, we acquired 100% ownership of Titanium Technology, but
did not have any operations prior to the acquisition. Accordingly, for
accounting purposes, the historical financial statements of Titanium Technology
are the historical financial statements of the company.
As Titanium Technology is a software development company, it earns
revenues through license sales of its products, all of which utilize the
proprietary technology it develops. Development of the technology requires a
significant outlay of cash before a viable product is developed that utilizes
the technology. After development of a product, even more cash is required to
market the product before any revenues are realized. Accordingly, the challenge
that faces many software development companies is being able to obtain enough
cash to fund research and development and marketing expenses and sustain the
company until revenues are generated. Such funds are needed fairly quickly after
products are developed, as the environment in which the products are used is
constantly changing. Companies face the risk of discovering that their products
do not meet the needs of the potential customers or are technologically outdated
after a marketing campaign is launched. If that happens, the research and
development costs are never recouped.
Titanium Technology has been able to generate revenues rather early in
the company's development, which have funded research and development expenses,
as well as selling, general and administrative expenses. For example, during the
year ended December 31, 2002, revenues were US$547,095 (HK$4,267,341) and the
gross profit was US$295,190 (HK$2,302,481). This amount was sufficient to
sustain our selling, general and administrative expenses of US$143,299
(HK$1,117,729), as well as our research and development costs of US$84,936
(HK$662,500).
As compared to companies located in the United States, we believe that
we have lower personnel costs, which are our primarily costs of doing business.
We believe that this has been the main reason for our having generated net
income for the last three fiscal years.
11
While we have been able to develop proprietary products mainly based on
proceeds from sales revenues and from subsidy income received from the Hong Kong
government, we believe that external funding from investors can stimulate and
accelerate product development and marketing for a number of reasons. First, the
company has now achieved a certain amount of recognition in the industry,
especially in its region. It has also established several important marketing
channels, most notably a sole distributor in Japan who brought along
opportunities and major customers such as the NTT Group. Second, there is a
clear sign of increased awareness in the personal security area in which
biometric technologies are some of the most commonly used applications. The
current global market size is approximately US$1 billion, but is expected to
grow due to concerns about identity theft and security. Third, the company has
achieved what it believes to be a major breakthrough in its technology recently.
In April 2005, we developed a facial recognition engine that achieves a very low
false acceptance rate and a very high verification rate. Moreover, we believe
that this technology can be utilized in a one-to-many application as well be
deployed in all indoor lighting conditions. Based on this developed technology,
management believes that the company should try to market its products and
services in areas outside of Asia and compete in a larger market.
We raised net proceeds of US$535,000 (HK$4,173,000) through a private
placement of securities. These proceeds are being used to provide the funds
necessary to implement the next step in our business plan, which is becoming a
publicly-held company in the United States. Funds are being used for legal,
accounting, and corporate consulting services and working capital. We believe
that by becoming a publicly-held company, we will enhance the visibility of our
products and services and our ability to obtain additional financing in the
future.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. We deliver facial recognition software solutions
primarily to commercial and government customers. We recognize revenue when
persuasive evidence of a sale arrangement exists, delivery occurs or services
are rendered, the sales price is fixed or determinable and collectibility is
reasonably assured. Revenue is classified into project revenue and maintenance
revenue.
PROJECT REVENUE. Project revenue consists of revenue from sales of
products and services. Product revenue mainly consists of sales of digital video
recorders, face recognition equipment, our off-the-shelf ProAccess and ProFacer
software, ProAccess and ProFacer software keys, and other software products,
such as those we distribute for other vendors. Revenue on products is recognized
when the customers accept the products. We also provide consulting services
primarily to customers primarily in connection with their implementation and use
of our products. Revenue from services is recognized as the services are
rendered. Expenses on all services are recognized when the costs are incurred.
During the three years ended December 31, 2002, 2003 and 2004, we
adopted the provisions of Emerging Issues Task Force 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." EITF 00-21 governs how to
determine whether separate units of accounting exist in a revenue arrangement
with multiple deliverables and, if so, how the arrangement consideration should
be allocated among separate units of accounting. When elements such as products
and services are contained in a single arrangement, or in related arrangements
with the same customer, we allocate revenue to each element based on its
relative fair value, provided that such element meets the criteria for treatment
as a separate unit of accounting. The price charged when the element is sold
separately generally determines fair value.
We enter into contracts with customers who require the production of
tailor-made facial recognition solutions. Under these contracts, the first
element usually consists of hardware, system design, implementation and
training, which is accounted for as equipment and related executory services in
accordance with SFAS No. 13. The second element consists of customized software,
which is accounted for as a long-term contract in accordance with AICPA
Statement of Position 97-2, "Software Revenue Recognition," on a unit of
delivery method of measurement. Nonperformance of training, consumables
management and support services would prevent receipt of payment for the costs
incurred in the customization, design and installation of the system. EITF 00-21
limits the amount of revenue allocable to the customization, design and
installation of the system to the amount that is not contingent upon the
function of the products. Revenue on these contracts under EITF 00-21 is earned
based on, and is contingent upon, the full function of the products. Due to the
contingent performance of function of the products,
12
we defer revenue recognition for the system design and installation phase of
such contracts, including customized software and equipment, and recognize
revenue when we obtain an acceptance certificate from the user.
MAINTENANCE REVENUE. We also provide maintenance services primarily to
customers purchasing products. There are two types of maintenance contracts: the
fixed price maintenance contracts and the one-off maintenance contracts. Revenue
from the fixed price maintenance contracts is recorded ratably over the
maintenance contract term, while the revenue for the one-off maintenance
contracts are recorded when the services are rendered.
SALES TO AUTHORIZED DISTRIBUTORS. We also use authorized distributors
to resell certain of our products and only the authorized distributors are
allowed to resell those products. We require the authorized distributors to
purchase the products and then sell through the authorized distributors' own
distribution channels to end customers. From our prospective, the authorized
distributors are ordinary customers and so the same revenue recognition policy
as described above applies. The sales prices to distributors are predetermined
in accordance with the distribution agreements, and are approximately 30% to 40%
off the recommended retail prices. Once the products are delivered and the
distributor has accepted the products, we bill the distributor and the
distributor is obligated to settle the bill accordingly within the credit period
granted. There is no right of return or other incentives given to the
distributors.
POST-CONTRACT CUSTOMER SUPPORT. Under the terms of the contracts, we
will provide post-contract customer support ("PCS") to the customers for a
period of three months free of charge and then enter into maintenance contracts
as the discretion of the customers. The nature of the PCS is the provision of a
technical support telephone hotline to the customers. As the usage of this
hotline is infrequent, we did not maintain any specific personnel to operate
this hotline. As a result, the cost of the PCS during the free support period is
insignificant and no reserve for the cost of PCS is required.
RESEARCH AND DEVELOPMENT COSTS. Research costs are expensed as
incurred. Product development expenses consist primarily of labor cost. The
products are developed by in-house technicians who perform research and
development, enhance and maintain existing products, and provide quality
assurance. Product development costs are required to be capitalized when a
product's technological feasibility has been established by completion of a
working model of the product and ending when a product is available for general
release to customers. To date, management considers that the products,
"ProAccess" and "ProFacer," have reached this stage of development and have
capitalized US$152,010 (HK$1,185,678) and US$259,279 (HK$2,022,379) of product
development costs associated with ProAccess and ProFacer as intangible assets
for the years ended December 31, 2003 and 2004, respectively.
These intangible assets are being amortized using the straight-line
method over a period of five years, as management believes that the product life
cycle for these products is approximately five years. Amortization amounted to
US$30,402 (HK$237,135) and US$82,258 (HK$641,610) and was included as cost of
sales for the years ended December 31, 2003 and 2004, respectively.
GRANT AND SUBSIDY INCOME. Grant and subsidy income represents a subsidy
from the government of Hong Kong for assisting us in development of products of
innovative nature. The products developed under this subsidy plan include
ProAccess and ProFacer. The HKSAR government has set up an Innovation and
Technology Fund in the Hong Kong Special Administration Regions to support
projects that contribute to innovation and technology advancements in industry.
The Small Entrepreneur Research Assistance Programme (SERAP) under the
Innovation and Technology Fund provides funding support on a matching basis to
small companies with promising research ideas to assist them in developing their
technology through to successful commercialization.
When applying for funding, the applicant must submit a completed
proposal that details the specifications of the project's technology, a
marketing plan, the expected budget of the project and the personnel involved in
the project. The funding is subject to a ceiling of US$256,410 (HK$2,000,000)
per project. In addition to the government funding, the applicant must
contribute capital to the project on a dollar-for-dollar matching basis. The
matching funds from the applicant can be in the form of money or in any other
resources which are essential to the project. Under most circumstances, the
application will be processed within two months after receiving all the
13
required information in connection to the project. Upon approval, the government
will then release the funding to the applicant according to a fixed payment
schedule as stipulated in the Phase Fund Agreement.
The SERAP program involves two phases. Phase 1 will last for around six
months and upon successful completion of Phase 1, Phase 2 will take the project
forward for not more than 18 additional months. The applicant will be required
to refund the HKSAR government's contribution to the government if revenue shall
be derived from the services or products attributable to the deliverables or the
applicant shall fail to enter into an agreement for the Phase 2 project. In our
case, all of our projects have entered into a Phase 2 Fund Agreement.
On successful commercialization of the project, the intellectual
property rights belong to the applicant while the government is entitled to
share 5% of the gross revenue earned from any activities in connection with the
project as a royalty fee until the government has been repaid the amount that it
funded for the project. There is no time limit to repay this amount.
During the three years ended December 31, 2004, we have submitted
several grant applications and have received a total of US$320,787
(HK$2,502,139). We have contributed US$296,066 (HK$2,309,313) on the
dollar-for-dollar matching part of the program for the ProAccess and ProFacer
projects.
Upon completion of the project, we are required to tender to the
government, its pro rata share of the residual funds remaining in the project
account in addition to the 5% royalty fee on the gross revenue earned from any
activities in connection with the project. We paid royalty fees of US$4,186
(HK$32,647) and US$4,427 (HK$34,532) for the 2003 and 2004 fiscal years,
respectively.
FOREIGN CURRENCY TRANSLATION METHODOLOGY. Our functional currency is
the Hong Kong dollar because the majority of our revenues, capital expenditures,
and operating and borrowing costs are either denominated in Hong Kong dollars or
linked to the Hong Kong dollar exchange rate. Accordingly, transactions and
balances not already measured in Hong Kong dollars, which are primarily
transactions involving the United States dollar and the PRC Yuan, have been
re-measured into Hong Kong dollars in accordance with the relevant provisions of
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation." The object of this re-measurement process is to produce largely
the same results that would have been reported if the accounting records had
been kept in Hong Kong dollars. The exchange rate adopted throughout the
consolidated financial statements where United States dollars are presented was
US$1 for HK$7.8.
Cash, receivables, payable, and loans are considered monetary assets
and liabilities and have been translated using the exchange rate as of the
balance sheet dates. Non-monetary assets and liabilities, including non-current
assets and shareholders' equity, are stated at their actual dollars cost or are
restated from their historic cost, by applying the historical exchange rate as
monthly average exchange rates to underlying transactions.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2002. As discussed above, we were able to generate sufficient
revenues during 2002 to sustain company operations and research and development
efforts. Three customers accounted for approximately 69.25% of our sales. The
receipt of grant and subsidy income in the amount of US$11,559 (HK$90,159) did
not materially impact the results of operations.
We launched the ProAccess FaceOK in the third quarter of 2003. Project
revenues decreased slightly US$13,985 (HK$109,080) to US$490,524 (HK$3,826,091)
in 2003 from US$504,509 (HK$3,935,171) in 2002 because we devoted a substantial
amount of our resources to the development of this new product and fulfilling
our operational needs. As a result, our marketing efforts suffered sales did not
increase significantly because the product launch occurred late in the year.
Gross margin related to projects decreased from 50.3% in 2002 to 29.7% in 2003
due to our decision to seek aggressively more market share. We bid competitively
on several projects to insure that we would be awarded the work, which caused
the gross margin to drop in 2003.
14
Maintenance revenue increased by 60.0% from US$42,586 (HK$332,170) in
2002 to US$68,154 (HK$531,603) in 2003, due to the increased amount of completed
installations. As a percentage of all revenues, maintenance revenue was 7.8% in
2002 and 12.12% in 2003.
This resulted in an overall slight increase in revenue in 2003, as
compared to 2002.
Selling, general and administrative expenses increased from US$143,299
(HK$1,117,729) in 2002 to US$299,002 (HK$2,095,078) in 2003, due to a
substantial increase in the number of employees and operating expenses at the
early development stage. Also in 2003, we established our research center in
Shenzhen, China. Research and development costs increased from US$84,936
(HK$662,500) in 2002 to US$89,092 (HK$694,918) in 2003. The receipt of grant and
subsidy income of US$151,594 (HK$1,182,435) in 2003, as compared to US$11,559
(HK$90,159) did not offset these increased expenditures in 2003. Accordingly,
our net income decreased from US$66,801 (HK$521,046) in 2002 to US$10,373
(HK$80,908) in 2003.
FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2003. During the 2004 fiscal year, we had the entire year to market
our ProAccess FaceOK, which had obtained recognition at Comdex, an acronym for
Computer Dealer's Exhibition, which was a computer and information technology
exposition held in Las Vegas, Nevada. Accordingly, project revenues increased by
US$250,636 (HK$1,954,958) (51.1%) comparing the 2004 fiscal year to the 2003
fiscal year, due to the beginning of significant sales of ProAccess FaceOK and
other products we had developed.
The gross margin related to projects also improved as a percentage of
sales, from 29.7% to 38.2%, and in terms of dollars, from US$145,479
(HK$1,134,736) to US$283,327 (HK$2,209,951) due to the accumulation of
experience, which led to better project management in general, and due to the
fact that in 2004 we had greater name recognition and did not have to bid as
competitively to secure contracts for projects.
Maintenance revenue increased by 6.9% from US$68,154 (HK$531,603) in
2003 to US$72,847 (HK$568,203) in 2004, as with more completed installations,
there was greater demand for maintenance contracts. As a percentage of all
revenues, maintenance revenue was 12.2% in 2003 and 8.9% in 2004, primarily due
to the significantly greater project revenues in 2004.
Selling, general and administrative expenses decreased from US$299,002
(HK$2,095,078) in 2003 to US$241,642 (HK$1,884,804) in 2004, despite an increase
in the number of employees, due to the assignment of some technical related
tasks to inland China, where salary cost is significantly lower.
Also in 2004, no research and development costs were incurred, as
compared to US$89,092 (HK$694,918) in 2003, which was primarily for the research
expenses on the ProFacer project. As both projects, ProAccess and ProFacer,
reached the stage of development where they were available for general release
to the public, expenses incurred for product development were capitalized, and
therefore, no research and development expenses were incurred for 2004. Also, we
received US$6,040 (HK$47,110) more in grant and subsidy income in 2004 than in
2003. Accordingly, Titanium Technology generated net income of US$258,204
(HK$2,013,993) for 2004, as compared to net income of US$10,373 (HK$80,908) for
2003.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2004. Project revenues increased by US$753,580 (HK$5,877,924)
(178.7%) comparing the 2005 period to the 2004 period, due to sales of ProAccess
FaceGuard and the commencement of projects such as sales of a facial recognition
system and physical access control system to the Elixir Group of MACAU.
The gross margin as a percentage of project revenues increased slightly
in 2005 to 32.9% from 30.7% in 2004 because of the improving economic conditions
in the region that enabled us to charge a higher price to our customers. Gross
margin on project revenues in terms of dollars increased to US$386,632
(HK$3,015,732) from US$129,512 (HK$1,010,190) due to the increase in sales
revenues.
As a percentage of all revenues, maintenance revenue was 14.6% in 2004
and 7.5% in 2005, but increased overall in terms of dollars.
15
Selling, general and administrative expenses increased from US$264,228
(HK$2,060,975) in 2004 to US$454,272 (HK$3,543,321) in 2005 due to the expansion
of our operations, which included hiring more personnel. However, these expenses
as a percentage of revenues decreased from 53.5% in 2004 to 35.7% in 2005.
Other income in 2005 of US$70,982 (HK$553,660), which consisted
primarily of grant and subsidy income, decreased from US$138,296 (HK$1,078,706)
in 2004. As a result, while we generated significantly more revenues in 2005,
our increased operating costs, reduced other income, and provision for income
taxes resulted in net income comparable to what was generated for the nine
months of last year. We generated net income of US$76,737 (HK$598,548) for the
nine months ended September 30, 2005, as compared to US$77,070 (HK$601,149) for
the comparable 2004 period.
LIQUIDITY AND CAPITAL RESOURCES
AS OF DECEMBER 31, 2003 AND 2004. At December 31, 2004, we had working
capital of US$236,560 (HK$1,845,168), as compared to US$112,106 (HK$874,425) at
December 31, 2003. The increase was due primarily to the increase in net income
for the 2004 fiscal year.
For the 2004 fiscal year, operating activities provided cash of
US$280,834 (HK$2,190,499), while investing activities and financing activities
used cash of US$283,428 (HK$2,210,734) and US$25,641 (HK$200,000), respectively.
Included in the amount of cash provided by operating activities was a
shareholders' loan of US$64,103 (HK$500,000). As disclosed in "Certain
Relationships and Related Transactions," the shareholders' loan was unsecured
and did not accrue interest. Of the US$283,428 (HK$2,210,734) used for investing
activities, US$267,804 (HK$2,088,869) was used for product development costs.
In comparison, 2003 operating activities and financing activities
provided cash of US$168,132 (HK$1,311,428) and US$27,778 (HK$216,667),
respectively, while investing activities, primarily product development costs,
used cash of US$164,327 (HK$1,281,751). Product development costs are required
to be capitalized when a product's technological feasibility has been
established by completion of a working model of the product and ending when a
product is available for general release to customers. We capitalized US$152,010
(HK$1,185,678) and US$259,279 (HK$2,022,379) of product development costs
associated with ProAccess and ProFacer as intangible assets for the 2003 and
2004 fiscal years, respectively. Included in the amount of cash provided by
operating activities was a shareholders' loan of US$117,949 (HK$920,000). The
US$38,462 (HK$300,000) reflected as proceeds from long-term debt were proceeds
of a loan from HKCB Finance Limited, the repayment of which was personally
guaranteed by our officers and directors.
AS OF SEPTEMBER 30, 2005. Titanium Technology had working capital of
US$675,522 (HK$5,269,066) at September 30, 2005, as compared to US$236,560
(HK$1,845,168) at December 31, 2004. The increase was due primarily to the
completion of our private placement of securities, through which we received net
proceeds of US$535,000 (HK$4,173,000). These proceeds are being used to provide
the funds necessary to implement the next step in our business plan, which is
becoming a publicly-held company in the United States. We believe that by
becoming a publicly-held company, we will enhance the visibility of our products
and services and our ability to obtain additional financing in the future.
Accordingly, the net proceeds are being used as follows:
o approximately US$300,000 (HK$2,340,000) for legal, accounting,
and corporate consulting services necessitated by this plan of
becoming a public company, such as the legal fees for
preparing and filing the registration statement of which this
prospectus is a part, the cost of auditing our financial
statements, and guidance and advice about the stock markets in
the United States;
o approximately US$125,000 (HK$975,000) for setting up our
Beijing office for research and development and marketing
efforts in China; and
o approximately US$110,000 (HK$858,000) for the purchase of
tooling for the production of the ProAccess FaceGuard product.
For the nine months ended September 30, 2005, operating activities used
US$56,388 (HK$440,117), while US$119,056 (HK$928,641) was used in investing
activities, primarily for the acquisition of plant and equipment. We used
US$100,133 (HK$781,041) primarily to renovate our newly leased offices and
US$18,923 (HK$147,600)
16
for product development costs. Financing activities, primarily the private
placement discussed above, provided cash of US$532,863 (HK$4,156,333). In
addition, non-cash financing activities included debt forgiveness by
shareholders, who agreed to do so, so that a better cash position could be
maintained. The amount of the forgiveness (net of loans made to the
shareholders) was contributed to the capital of the Company and aggregated
approximately US$44,479 (HK$346,935).
In comparison, for the nine months ended September 30, 2004, US$151,034
(HK$1,178,065) was provided by operating activities, but US$177,490
(HK$1,384,420) was used for investing activities, of which US$162,438
(HK$1,267,019) was used for product development costs. We also used US$19,231
(HK$150,000) to repay a long-term bank loan.
At September 30, 2005, we had contractual obligations as set forth
below, as stated in United States dollars (US$):
- ----------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
------------------------------------------------------------------
LESS THAN MORE THAN 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
(US$) (US$) (US$) (US$) (US$)
- ----------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations Nil Nil Nil Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Capital (Finance) Lease Obligations Nil Nil Nil Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations $104,805 $31,670 $91,135 Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Purchase Obligations Nil Nil Nil Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities Reflected on the Nil Nil Nil Nil Nil
Company's Balance Sheet
- ----------------------------------------------------------------------------------------------------------------------
Total $104,805 $31,670 $91,135 Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
These amounts stated in Hong Kong dollars (HK$) are as follows:
- ----------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
------------------------------------------------------------------
LESS THAN MORE THAN 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
(HK$) (HK$) (HK$) (HK$) (HK$)
- ----------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations Nil Nil Nil Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Capital (Finance) Lease Obligations Nil Nil Nil Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations $817,477 $247,026 $710,853 Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Purchase Obligations Nil Nil Nil Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities Reflected on the Nil Nil Nil Nil Nil
Company's Balance Sheet
- ----------------------------------------------------------------------------------------------------------------------
Total $817,477 $247,026 $710,853 Nil Nil
- ----------------------------------------------------------------------------------------------------------------------
Under the terms of the Technology Partnership and Research and
Development Contract entered into in June 2005 with the Institute, we have
agreed to provide the capital and operational technicians, while the Institute
has agreed to provide the location and technical technicians to perform research
for the application of facial recognition operation technology. Any new facial
recognition technology that is developed shall become the property of the joint
venture. While the contract required us to have paid all of the costs by
September 30, 2005, certain payment installments have been delayed. Accordingly,
at September 30, 2005, we have paid approximately half of the roughly US$25,000
(HK$192,000) required under the contract, but expect that we will have paid the
remainder by the end of 2005.
We also entered into a similar contract with Tsing Hua University
(Shenzhen research campus) in November 2005, under which the University will
perform research of a multi-media home intelligence system, covering the receipt
of digital TV signals, OSD (Open Software Description) capability, PVR (Personal
Video Recorder) capability, and Blue tooth facial recognition capability. We
have agreed to bear all costs of the research, while the University provides the
necessary technical people. The total cost of the research, approximately
17
US$25,000 (HK$192,000) was paid by December 30, 2005. The University will own
the new intellectual property that is developed, but we will have the right to
use the property.
In light of our working capital of US$675,522 (HK$5,269,066) at
September 30, 2005, we believe that we have current and available capital
resources sufficient to fund planned operations for a period of not less than
twelve months. Our current "burn" rate is approximately $57,700 (HK$450,000) per
month, without giving any effect to any revenues that we generate. We believe we
will be able to fund the expenditures described above with our existing cash
flow, based upon the signed contracts for orders that we have. At September 30,
2005, our backlog of orders believed to be firm was approximately US$1,026,000
(HK$8,000,000), as compared to approximately US$256,000 (HK$2,000,000) at
December 31, 2004. We expect that approximately US$513,000 (HK$4,000,000) will
not be filled by December 31, 2005. We expect that the above "burn" rate will
increase by approximately 10% towards the end of 2006, as we plan to increase
research and development efforts.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
We engaged Zhong Yi (Hong Kong) C.P.A. to audit our financial
statements on May 17, 2005. We did not consult that firm prior to its
engagement.
BUSINESS
BUSINESS DEVELOPMENT
We were incorporated on May 17, 2004 as an international business
company pursuant to the International Business Companies Act of the British
Virgin Islands ("BVI"). On June 22, 2005, we acquired all of the entire issued
share capital of Titanium Technology Limited, a company incorporated in Hong
Kong on February 14, 2001 with limited liability ("Titanium Technology"). On
September 20, 2002, Titanium Technology and EAE Productions (HK) Limited, a
company incorporated in Hong Kong on October 8, 1997, established Titanium
Technology (Shenzhen) Co., Ltd., a wholly foreign owned enterprise in China, to
conduct research and development operations. Beginning in the third quarter of
2004, it began to conduct business operations in China. EAE Productions (HK)
Limited owns 8% of Titanium Technology (Shenzhen) Co., Ltd. and is owned by
persons who indirectly are shareholders.
We established a BVI company to hold Titanium Technology, as we
believed that it would be easier to attract investment capital into a BVI
company rather than a Hong Kong company. Most of our investors in our recently
completed private placement are United States citizens. We believe that a having
a corporate jurisdiction located in closer proximity to the United States made
the investors feel more at ease than one located in Asia. BVI was selected as a
compromise, as its laws, which are under the British system, are similar to
those of Hong Kong. While the BVI entity is the parent company, our accounting
history is that of Titanium Technology and therefore our operations go back to
2001 when Titanium Technology began operations.
Titanium Technology is engaged in developing products utilizing
biometrics technologies, licensing of technologies, professional services, and
project contracting. Based in Hong Kong with a research and development center
in Shenzhen, China, and a sales representative office in the United States,
Titanium Technology has built a strong network of expertise, comprising over 30
IT practitioners and researchers, enabling us to provide what we believe are
top-quality biometrics products and professional services. In particular, we
believe we are a leading provider of Automatic Face Recognition Systems, or
AFRS, and other biometric and security solutions as we have developed and sold
systems to governments, law enforcement agencies, gaming companies, and other
organizations in China and other parts of Asia. Our AFRS products enable
customers to capture human face images electronically, encode facial image into
searchable files (faceprint), and precisely compare a set of faces to a database
containing potentially thousands of faces in seconds.
Although different biometrics, e.g. finger scan, may be widely employed
in similar applications, we believe that face recognition is the best among the
existing alternatives. First, according to our internal research, the false
18
acceptance rate is very low regardless of the lighting condition, and lower than
traditional fingerprint authentication. Second, there is no direct contact
between the device and users, and hence the problems of cleanliness and wear on
the equipment are greatly reduced. Third, the core component is a digital
(Charge Coupled Device (CCD)/Complementary Metal-Oxide-Semiconductor (CMOS)
camera, which is relatively low in production cost. Last but not least, we
believe that users have less concern on privacy issues with regard to facial
pictures and the market acceptance is much higher, since photographs of facial
images for identification are commonly used, such as in passports, driver's
licenses, and other forms of identification cards.
For over five years, we have researched, developed, and marketed face
biometrics technologies that incorporate advanced concepts in neural networks,
artificial intelligence, image processing, pattern recognition, data mining, and
massively parallel computing. Our researchers have taken innovative recognition
algorithms and, using advanced methods of software engineering, turned core
mathematical modules into practical applications. We believe that our
proprietary mathematical algorithms, together with optimized hardware
peripherals, enable our customers to cost-effectively achieve solutions that fit
their requirements in terms of accuracy and performance. Titanium Technology
supports the latest standards in face biometrics and we are focused on enabling
our customers to expand the capabilities of their systems as their biometric
needs evolve.
In the beginning of 2002, the award-winning core component for face
recognition, called "Ti-Face", was successfully developed. To date, Ti-Face
Software Development Kit ("SDK") has been adopted to develop custom-made
applications for governments, universities, and institutions in the
greater-China region. Examples include the Hong Kong government, Hong Kong
Polytechnic University, Institution of Vocation Education (Hong Kong), Chinese
Academy of Science (PRC), and Tsing Hua University (PRC).
In 2003, we successfully registered a patent about "Apparatus and
Method for Recognizing Images" in Hong Kong Special Administrative Region
("HKSAR"). Also in 2003, our face recognition product, ProAccess FaceOK(TM),
computer logical access control software, was launched. This product was then
awarded the "Best of Comdex Finalist 2003" in Las Vegas in November of the same
year. Comdex, an acronym for Computer Dealer's Exhibition, was a computer and
information technology exposition held in Las Vegas, Nevada, each year from 1979
to 2003. It was one of the largest computer trade shows in the world. ProAccess
FaceOK was also awarded several local (the IT Excellence Award in Hong Kong) and
regional (the Asia Pacific ICT Award) recognitions. The IT Excellence Awards is
a professional initiative of the Hong Kong Computer Society. Established in
1998, the award scheme is an annual event that recognizes excellent IT
applications and innovative IT technologies. The Asia Pacific ICT Awards
(APICTA) is an international awards program initiated by the Multimedia
Development Corporation of Malaysia to increase ICT (Information and
Communication Technology) awareness in the community and assist in bridging the
Digital Divide. Participants of the Awards Program comprise members of the
APICTA Network, which include Australia, Brunei, Hong Kong, India, Indonesia,
Korea, Macau, Malaysia, Myanmar, Philippines, Singapore, Sri Lanka, Thailand,
Vietnam and China. Nominees to the different awards are presented to APICTA by
the respective economy coordinator and assessed by a panel of judges
representing every member-economy. Titanium was presented the Merit Award in
Security category with the ProAccess FaceOK product in 2004.
In 2004, our intelligent surveillance product, ProFacer, was launched
and promoted into casino and financial institution markets. We also set up
distribution networks in mainland China, Australia, and Japan. Titanium
Technology has delivered biometrics security products, consulting services, and
systems integration services to various government offices, major financial
institutions, universities, telecommunication companies, and prestigious
international corporations.
TI-FACE
Ti-Face is the core face recognition engine developed and implemented
by Titanium Technology. A proprietary algorithm, named Dynamic Local Feature
Analysis (DLFA), was invented to utilize the specific features for
identification instead of the entire representation of the face. This technology
is capable of selecting intelligently specific areas of the face, such as the
eyes or mouth, which in turn are used as distinguishable features for
recognition. Embedded with the Ti-Face module, a system can select sets of
blocks, or features, in each face that differ from other faces in a data
repository with an outstanding processing speed.
19
Based on this innovative face recognition technology, our research and
development group modularized and realized this concept into the Ti-Face
Software Development Kit (SDK) in 2002. This SDK is not only our core technology
but serves as the blueprint for further extending our security access control
applications for various situations.
TI-FACE SDK 3.0 FOR WINDOWS. Features included in Ti-Face SDK 3.0 are
face detection, high speed face tracking, matching and authentication, detecting
motion or changes in a scene, extracting imagery from a video or live-stream,
comparing and matching non-facial images, and performing both "one-to-one"
verification and "one-to-many" identification. Independent developers can use
Ti-Face SDK as a tool to build custom applications based on our proprietary face
detection and recognition technology. Examples of applications include physical
access control solutions that can integrate with reporting modules and alarm
systems, logical access control solutions that can integrate with existing
authentication systems and replace the use of passwords, and ticketing systems
that can insure that a single ticket is not being shared by multiple customers.
Furthermore, by integrating our face recognition engine into third-party
solutions and applications, end users can obtain a solution that is customized
to fulfill their specific requirements. We intend to develop additional modules
on face recognition. By combining several modules, greater security and more
accurate identification methods can be obtained. Furthermore, a multimodal
biometric system can be easily integrated into an application to greatly enhance
security, privacy and user convenience.
PRODUCTS
Powered by our innovative face recognition technology, our core
products can be grouped into two categories: PROACCESS and PROFACER. The
ProAccess series fulfills the fundamental security and trust needs of the
information world by logical and physical access control. The ProFacer series
provides an ultimate solution for intelligent surveillance.
PROACCESS. Applying our Ti-Face technology, the first series of
products, called ProAccess, were launched in the middle of 2003. The ProAccess
suite is a high-performance, secure, user-friendly solution to enhance the
authentication method of physical doors, personal computers, and mobile phones
by advanced face recognition technology.
- -------------------------------------------------------------------------------------------------------------------------
PRODUCT APPLICATION STATUS
- -------------------------------------------------------------------------------------------------------------------------
ProAccess FaceOK Access to computers Launched in third quarter of 2003;
over 10,000 licenses sold to
customers.
- -------------------------------------------------------------------------------------------------------------------------
ProAccess FaceGuard Facility entry First versions completed in third
quarter of 2005 and being marketed;
approximately 60 systems installed.
- -------------------------------------------------------------------------------------------------------------------------
ProAccess FaceAttend Time attendance recorder First versions completed third quarter
of 2005 and being marketed; approximately
30 systems installed.
- -------------------------------------------------------------------------------------------------------------------------
ProAccess FaceMobile Mobile computing such as PDA devices This product is under development.
and mobile phones
- -------------------------------------------------------------------------------------------------------------------------
PROACCESS FACEOK (PROFESSIONAL & ENTERPRISE). ProAccess FaceOK was
designed to fulfill the fundamental security and trust needs of the information
world. Users can sign-on to their computers through face recognition, which
ensures the highest degree of security against unauthorized access, especially
when compared to authentication methods such as unsecured simple text input and
unreliable memories. In addition, ProAccess FaceOK offers features such as audit
trail, face learning, active user monitoring, and web-based single sign-on
services and integrated with directory services.
Audit Trail is enabled to capture all unauthorized login attempts (with
images of trespassers and hackers) and store that information in a log file. The
Face Learning function allows the user to learn the latest face whenever a login
occurs. Natural facial progression does not compromise system accuracy. Active
Monitoring monitors the environment actively to ensure continuous access
control. The system proactively locks itself out when the authorized user is not
detected. Hidden Encryption encrypts a file and masks it with an image file type
so that only
20
authorized users can retrieve its true content, while it appears as a normal
file to others. Furthermore, users can logon to different Directory Services
with the use of FaceOK. Those directories can be Novell eDirectory, Microsoft
Active Directory, NT Domain, NDS, iPlanet and other LDAP compliant directories.
We also have a module that focuses on web Single-sign on technology, which is
integrated in FaceOK.
Considering our variety of clients, our FaceOK is released into two
editions, Professional edition and Enterprise edition. Enterprise edition is
suited for the corporate buyers (such as MTRC, Mass Transit Railway Corp) and
government agencies (Department of Health), whereas Professional edition is
designed for the small office and home office or small to medium-sized
enterprises. The product is currently available in four language versions:
English, traditional Chinese, simplified Chinese, and Japanese.
PROACCESS FACEGUARD. Conventional access control systems relying on
cards, keys or codes are vulnerable to those wishing to gain unauthorized entry
to a facility. The card, key or code may be lost, stolen or illegally copied.
Once an intruder has gained access to a building using a stolen entry device,
there is often little evidence to help in apprehending or prosecuting the
culprit. Personal property, office equipment and intellectual property are all
at risk. "FaceGuard" has been designed to not only provide secure access to
buildings, but to also detect and identify anyone attempting to gain access
without authorization.
ProAccess FaceGuard is a biometric physical access control system,
which identifies an individual's identity from their facial characteristics by
comparison with recorded data, and enables keyless entry based not on what the
entrant has or knows, but based on the identity of the entrant. In contrast to
conventional automatic systems, which only check for possession of a valid card,
pass or PIN number, this digital image analysis system recognizes individual
people and turns away those who try to enter using borrowed or stolen IDs. The
proprietary algorithm utilized in the software is designed in such a way that
the software is not fooled by life-size photos, and will only admit living,
breathing humans with faces it "recognizes". Therefore, the technology allows
access that we believe is convenient, personal, private, and extremely secure.
ProAccess FaceGuard is empowered by Ti-Face. It can be operated in both
online and offline mode. The templates of the authorized user list can be stored
in a server or in the internal memory of the device. Although ProAccess
FaceGuard may be networked in an enterprise environment, it is a stand-alone
device that can be operated independently. The installation is simple and,
except for the electric lock, there is no hidden cost in the installation.
ProAccess FaceGuard is primarily being used by commercial customers for
physical access controls to areas such as office premises, data centers, and
server rooms.
PROACCESS FACEATTEND. ProAccess FaceAttend is a stand-alone, face
recognition- based time attendance recorder. It is suitable for medium and large
offices, branches, factories, or other sites. ProAccess FaceAttend provides the
an accurate data collection solution by ensuring that employees must be present
in order to record a punch. It brings the flexibility of a full-function time
and attendance terminal together with the sophistication of identification
technology. Using face biometric technology, FaceAttend terminals scan
employees' faces to identify their identities from a huge database each time
they punch. No fingerprints or palm prints are utilized.
ProAccess FaceAttend can be installed at convenient locations
throughout a facility to make it easy for employees to clock in. Punching is
performed using biometric face scans, and the resulting transactions are
periodically uploaded to a host PC running the automated timekeeping system. It
eliminates "buddy-punching," the practice of employees punching in or out for
other employees who are not present at work.
We believe that use of ProAccess FaceAttend eases concerns and boosts
security by ensuring that the people on-site actually belong there. Attendance
of each employee is printed on the attendance report. The attendance report is
particularly useful for payroll purposes. Wages and salaries can be paid
according to the employee's worked hours, overtime etc. Given the continual
growth of China as a worldwide manufacturing base, and specifically the fact
that the Southern part of China houses the largest network of factories in Asia,
based on gross domestic product statistics, we believe that we have a
significant marketing opportunity in this region and perhaps a distinct
advantage of physical and cultural proximity. To date, purchasers have installed
this product primarily in factories for time attendance purposes.
21
PROACCESS FACEMOBILE. ProAccess FaceMobile is the security solution
using biometric technology for the mobile computing market. As the mobile
ownership becomes more universal and third generation mobiles become more
popular, we are keen to introduce advanced biometric security solution to this
market.
This technology uses the camera equipped in the mobile phone to perform
the logon process. As a result, no additional hardware cost is incurred on the
capturing device. Utilizing our face recognition technology, mobile users do not
require special knowledge to use it. Users simply look at the camera embedded in
their phone, automatically triggering and processing authentication for the
logon process. The FaceMobile supports two different system architectures. The
difference between the two architectures (user authenticated on the device and
on the operator) is the location where authentication is processed.
USER AUTHENTICATED ON THE DEVICE. In this architecture, the device
captures and authenticates the user by the same device. This architecture is
optimal for the following situations:
o The device may be operated offline;
o The device stores sensitive information locally; or
o The device has high processing power.
In general, this architecture is applicable in the PDA market.
USER AUTHENTICATED ON THE OPERATOR. This architecture supports the user
picture being captured by the device, and then the servers in the operator site
authenticate the user. This approach is designed for the following cases:
o Authentication is required only when the user access service from
operator; or
o The device need not have very powerful processing power.
This approach can be a turn-key solution for current generation mobile
phones.
In summary, features found in FaceMobile are described below:
o ENHANCED ACCESS CONTROL - As cameras are standard components
in third generation mobile phones, this application of face
recognition helps to greatly improve the access control of the
phone with limited increased in production cost. The improved
access control prevents unauthorized persons from making
calls, receiving calls and reading stored data within the
phone.
o M-COMMERCE SUPPORT - The continual improvement of computing
power of mobile devices, communication bandwidth, market
acceptance, etc., will allow the real-life application of
M-commerce in the near future. We believe that the use of
FaceMobile could provide the foundation for secure transaction
in the virtual credit card payment platform for major carriers
such as NTT Docomo and Credit Card companies.
PROFACER. ProFacer is a biometrically integrated surveillance system.
Titanium Technology employs a full range of technology to enhance and automate
existing surveillance techniques. Digital video recording technology, coupled
with our biometrics systems, enable automated real time face recognition.
Characteristic processes enabling ProFacer to function effectively are
detection, alignment, normalization, representation and matching:
o DETECTION - When the system is attached to a video
surveillance system, ProFacer recognition software searches
the field of view of a video camera for human faces. If there
is a face in the view, it is detected within a second.
o ALIGNMENT - Once a face is detected, the system determines the
head's position, size and pose. A face needs to be turned to
an appropriate angle toward the camera for the system to
register it.
o NORMALIZATION - The image of the head is scaled and rotated so
that it can be registered and mapped into an appropriate size
and pose. Normalization is performed regardless of the head's
location and distance from the camera. Light does not impact
the normalization process.
22
o REPRESENTATION - The system translates the facial data into a
binary string - "Faceprint". This coding process allows for
easier comparison of the newly acquired facial data to stored
facial data.
o MATCHING - The newly acquired facial data is compared to the
stored data and linked to at least one stored facial
representation. As comparisons are made, the system assigns a
value to the comparison. If a score is above a predetermined
threshold, a match is declared. The operator then views the
two photos that have been declared a match to be certain that
the computer is accurate.
- -----------------------------------------------------------------------------------------------------------------------
PRODUCT APPLICATION STATUS
- -----------------------------------------------------------------------------------------------------------------------
ProFacer iDVR DVR system with face capture Deployed in four branches of the
People's Bank of China
- -----------------------------------------------------------------------------------------------------------------------
ProFacer iWatchGuard Automatic full-time face recognition Deployed in four branches of the
People's Bank of China, a casino in
Macao, and NTT Group in Japan
- -----------------------------------------------------------------------------------------------------------------------
ProFacer iMugShot Image to image matching Deployed in an agency of the Hong
Kong government.
- -----------------------------------------------------------------------------------------------------------------------
ProFacer iDControl Live person to image matching Deployed in two government locations.
- -----------------------------------------------------------------------------------------------------------------------
PROFACER IDVR. Currently, Digital Video Recorders (DVRs) are popular in
public areas, offices and homes, with the belief that the cameras deter criminal
activity. However, with the public need for security rising, the sheer numbers
of DVRs pose problems. On top of traditional DVR systems, Titanium Technology
offers a proprietary real-time algorithm of face image detection and capture,
named PROFACER IDVR. It does not require special cameras or a specific
environment. Multiple faces in a stream of people may be detected, captured,
recorded and delivered with further analysis, reporting and notification
capabilities. The Face Capture is an application software for video
surveillance, monitoring, law enforcement and other applications.
Individual facial patterns are recorded and stored in a digital photo
database that can be viewed and used for different applications on-site or
remotely. Titanium Technology developed several algorithms, supporting the real
time processing of video data and image localization, determination of position
of head and motion tracing for subsequent recognition.
PROFACER IDVR can be used at airports, banks, casinos, public
buildings, subways, factories, schools or in any other location where it makes
sense to record the faces of visitors, with facilities for integration into
existing DVR systems. The PROFACER IDVR GUI is very simple such that any
operator can use all of its functions with just a minimal amount of training.
The system is highly flexible, allowing images to be digitalized and recorded in
either color or monochrome with a storage capacity typically exceeding 36 months
of facial data recording. PROFACER IDVR screen simultaneously shows the live
camera shot and the latest sequence of captured images. The ProFacer iDVR
product was installed in the Nanning branch of GuangXi Peoples' Bank of China in
March 2005 and in September 2005, we installed the product in three other
branches of GuangXi People's Bank of China in the cities of BaiSe, DaiXing, and
PinGuo. While this installation began as a pilot project in order to test and
further refine the product, the bank paid for the product and did not simply
allow the product to be installed and tested as an accommodation.
PROFACER IWATCHGUARD. PROFACER IWATCHGUARD adds automatic full time
face recognition, matching and active warning alerts to any new or existing
surveillance system. It allows each camera to serve as a diligent observation
point even when the video is not observed. Face recognition surveillance
incorporates computer intelligence to monitor faces and match those faces
against a "watch list" face database. As a modern new tool to identify potential
threats to public safety, PROFACER IWATCHGUARD can scan facial images of
individuals and match them with a database of images containing known suspects.
In seconds, a scanned face can be searched against thousands, or even millions
of database images to determine if the scanned image matches a previously stored
suspect image.
This product has been applied to protect high security areas such as
casinos, banks, computer centers, research institutes and prison and jails, for
fully automatic operation 24 hours a day. For example, a casino group in Macau
has started a pilot project using PROFACER IWATCHGUARD to identify unwanted
guests or VIPs. Using a list of
23
unwanted guests stored in the database, casino staff can focus on trailing
specific individuals from thousands of guests everyday. With the installation of
PROFACER IWATCHGUARD, closed circuit televisions are connected and in real time
send the scenes to a detection manager. Inside the detection engine, a number of
clear and distinct faces will be identified. Each face will attempt to match the
existing black-listed faces. As soon as a face known to the database appears in
the scene, the system triggers a configurable alarm. Security guards can locate
the unwanted person easily and take him/her away. As a result, staffs are no
longer burdened by monotonous work, but can be employed more flexibly and
effectively while still increasing security.
PROFACER IMUGSHOT. PROFACER IMUGSHOT is another product derived from
ProFacer surveillance solution. In law enforcement units such as police and
immigration departments, this system can greatly help reducing fraud and crime.
Through identifying duplicate images in large databases, such as licensed
drivers and missing children and immigration, suspicious targets can be provided
as a list. As a result, the scope in finding the target subjects can be greatly
narrowed which, in turn, provides a cost effective, reliable and time saving
surveillance application.
As existing clients, like the Government Laboratory of HKSAR, have
placed repeat purchase orders, we believe that our customers are satisfied with
this highly accurate, promptly response, time cost effective surveillance
system. It is believed that police forces would be a likely target market for
this advanced application.
PROFACER IDCONTROL. PROFACER IDCONTROL utilizes face recognition
technology in the airline and national security. Every traveler, who is ready to
make boarding registration, will be captured an image. Our PROFACER IDCONTROL
can start scanning if the given facial image has a high similarity scale with
the suspects contained in a database storing images of terrorists' faces
provided by government agencies. Once a list of suspects is generated, airline
staff can refine the verification process by one-to-one scanning. For further
enhancement, facial images can be saved in the travel document during the
check-in process. When travelers are ready to board the airline, our system can
achieve a high degree of security by further matching live face with the face ID
marked in the travel document. We believe these two levels of security measures
are practical, helpful, safe and convenient in the airport.
PROFACER IDCONTROL can be used for banking application. Face identity
can be embedded in the credit card, every time holders withdraw money from ATM
machines. For greater security, faces can be verified in addition to inputting
passwords, to confirm ownership of credit or debit cards. Using these two levels
of security control, personal property is strongly protected.
CONSULTING
Our consulting team works with the client from the earliest stages of
the project and takes accountability for the success of the project. We provide
services in the areas of security service and system integration/development
projects.
SECURITY SERVICES. As a digital security services provider, we offer
strategic solutions for technology-enabled enterprises. As a security advisor,
we help clients to meet their requirements for continuous IT innovation and
development while controlling the risks inherent in today's complex networked
environments. Our security specialists help customers identify system/network
security weaknesses and provide professional advice on how to best protect vital
information and assets both virtually on the Internet and physically without
compromising productivity or endangering the bottom line. Our services include
security consulting, risk assessment and penetration testing. Security training
is also provided for the staffs to increase the security awareness and
knowledge. Our clients include the Labour Department of Hong Kong SAR, Tokyo
Bank of Mitsubishi, Citic Ka Wah Bank, Hong Kong Productivity Council, Mandatory
Provident Fund Schemes Authority, and Mass Transit Railway Corp (MTRC). In
addition, we agreed to partner with IBM China/Hong Kong Limited to provide
professional services for the Hong Kong government, as part of our role as a
service supplier to IBM China/Hong Kong Limited under a Technical Service
Agreement dated October 5, 2004. That agreement outlines a general working
relationship, with specific deliverables, services, and pricing to be outlined
from time to time in statement of work documents.
SYSTEM DEVELOPMENT/INTEGRATION. Our solution team utilizes its
technical expertise to implement complex business systems, thereby reducing time
and risk for our customers' mission critical projects. We work with
24
business systems critical to the running large commercial and public sector
organizations, as well as large-scale technical systems designed to operate to
the highest levels of reliability in demanding conditions. To keep pace with the
competitive IT world, our staff have been equipped with newly and advanced
knowledge, such as Microsoft .net and J2EE, on system implementation work.
DISTRIBUTION AND MARKETS
We select distributors based on the potential impact of the
distribution relationship. We seek to cooperate with business partners that will
bring synergies, making it quicker to penetrate the target market and
localization. Distributors in the United States include Elite Technology
Solutions and eInfoDev Inc. Distributors in Asia include Smart Wireless (Japan),
Elixir Group (Macau), Maxfair Technology Limited (Hong Kong), and Regal Cyber
Group (Hong Kong and People's Republic of China). However, for major accounts
that are readily accessible, we tend to handle such accounts ourselves since
these corporate clients expect expert knowledge and demand flexibility.
Our distributors purchase products from us at prices specified on our
Distributor Price List in effect from time to time. The distributors sell to
resellers or end-users with a mark-up in price and the profit generated from the
mark-up is the compensation for the distributors. The sales prices to
distributors are approximately 30% to 40% off the recommended retail prices.
Once the products are shipped and the distributor has accepted the products, we
bill the distributor and the distributor is obligated to settle the bill
accordingly within the credit period granted. There is no right of return or
other incentives given to the distributors.
Our distributor agreement and reseller agreement dictate the terms and
conditions of the relationship with us, such as pricing, warranties, exclusivity
or non-exclusivity, and term.
We organize exhibitions and seminars periodically to create awareness
of the importance of biometrics applications. We participated in four
exhibitions and one seminar in Japan in 2004 and 2005. The main purpose of these
exhibitions and seminars is to introduce our products to the Japanese market,
especially in the retail sector.
We also prepare marketing materials such as brochures, product white
papers and pricing references for the distributors and provide complete sales
support and technical consulting services to them.
Our markets include the following:
o Hong Kong, including the Hong Kong government and commercial
sectors;
o China, mainly the government;
o Macau, mainly casinos; and
o For Japan and the US markets, we form a distribution
partnership with the local agents to sell our products.
Clients in Japan came from both retail and commercial sectors.
Through these marketing activities, we have been able to acquire an
increasing number of customers and distributors. As of the date of this
prospectus, we have 12 major customers, which represents a 50% increase over the
end of our last fiscal year (December 31, 2004).
Titanium Technology not only focuses on two core activities,
biometrics-based technology development and professional services, but also
operates a distribution business and distributes a number of commercially
available software, such as software from Microsoft, Novell, Symantec and IBM.
At times, our customers may require software that is not within Titanium's
product range, but is available from these large software manufacturers and
vendors. Most of the software consists of security-related products. We buy
software from these vendors to resell to our customers. In most cases, we
perform a certain amount of customization and system integration services with
respect to the purchased software.
In March 2003, Titanium Technology was selected by the HKSAR government
as a supplier of PC/LAN software in Category C to all departments in HKSAR
government for three years under a bulk tender. The bulk tender is an initiative
from the HKSAR government with the purpose of streamlining and insuring the
process and quality of the procurement of all information technology products by
the government. The government selected companies that it believed to be
qualified for specific categories of products. Category C is software
applications. This means that the government departments have to purchase from
the selected companies and that Titanium
25
Technology is one of the few vendors from whom the Hong Kong government
purchases software. At the time of the award, there was one other company that
received an award in the same category as us.
To strengthen our distributor network, we are authorized resellers for
software marketed by Microsoft, Novell, SiS International Ltd, JOS, and others.
We sell to end users and we can also purchase their products at discounted
prices from the suggested retail prices. In addition, with our expertise in
security technologies, eEye Digital Security has appointed Titanium Technology
to be a regional distributor for eEye products. We estimate that our
distribution business accounted for approximately 8% and 11% of our business in
fiscal 2004 and 2003, respectively.
CUSTOMERS
Titanium Technology's major customers include:
o In Hong Kong: the Hong Kong government
o In China: People's Bank of China
o In Macau: Elixir Group, a supplier to an entertainment
corporation - Sociedade de Jogos de Macau
o In Japan: NTT Group
During the fiscal year ended December 31, 2004, 8 customers accounted
for approximately 75% of revenues. Sales to Beacon Base Software Ltd. and
Information Security One (Hong Kong) Ltd. were 13.32% and 21.02% of revenues,
respectively.
There is no law in Hong Kong or any provisions in our contracts with
the Hong Kong government that specifies or triggers a termination at the
election of the government.
At September 30, 2005, our backlog of orders believed to be firm was
approximately US$1,026,000 (HK$8,000,000), as compared to approximately
US$256,000 (HK$2,000,000) at December 31, 2004. We expect that approximately
US$513,000 (HK$4,000,000) will not be filled by December 31, 2005.
INTELLECTUAL PROPERTY
PATENTS. Titanium Technology was issued patent number HK1053239 for
"Apparatus and Method for Recognizing Images" in September 2002. The patent
expires September 10, 2010. Even though we have been issued a patent from Hong
Kong and even if we were to obtain copyright protection on the software, we
would still have to enforce our rights against those who might attempt to
infringe on our intellectual property as patent protection does not necessarily
deter infringement. Such enforcement efforts are likely to be expensive and
time-consuming and we may lack the ability to engage in any significant
enforcement efforts. Instead, we have chosen to use our resources on product
development and the expansion of market share.
TRADEMARK AND TRADE NAME. Titanium Technology has the following
registered trademarks for "ProAccess FaceOK":
o United States - Serial No. 78/414377
o Hong Kong - Trade Mark No. 300053478
o China - Serial No. ZC3732931SL
COMPETITION
The biometrics industry is fragmented and undeveloped, with a plethora
of methods for gathering biometric information, processing the data, and
interconnecting with applications. All the major prevailing biometrics systems
have limitations.
The biometric industry is global in scope, with many competitors and
customers located in US and Europe. While Asia has some companies in the
biometrics arena, many of the biggest projects have been in nations installing
national identification systems. Strategic focus is quite diverse, as well, with
some firms specializing in the
26
proprietary technology associated with capturing biometric information, others
in providing enterprise-level integration services, and still others in offering
managed or hosted services for outsourced systems. Large players in intermediate
or end-use markets for biometrics (e.g. banking/financial services, security,
PCs/peripherals, software/enterprise systems, and wireless equipment and
services) have been active in investing in or sponsoring biometric technologies.
We intend to compete by utilizing the following strategies:
o put more funding into research and development to strengthen
the quality of our products;
o gain more share in the Asian market before the big competitors
step in;
o seek potential partnerships and strategic alliances; and
o organize more exhibitions of our products.
We believe that we have two major competitors: Identix Incorporated and
Viisage Technology, Inc., from the United States.
Identix is a multi-biometrics security technology company in both
fingerprint identification and facial recognition solutions has set to the
growing demand for biometrics products and solutions access multiple security
markets.
Viisage delivers advance technology identity solutions for governments,
law enforcement agencies and business concerned with enhancing security,
reducing identity theft, and protecting personal privacy. It has been renowned
for its facial recognition technologies.
RESEARCH AND DEVELOPMENT
During the fiscal years ended December 31, 2004, 2003 and 2002, we
spent $nil, US$89,092 (HK$694,918) and US$84,936 (HK$662,500), respectively, on
research and development activities.
We have engaged both Tsinghua University and the Chinese Academy of
Science, Institute of Automation to perform certain research and development
work on our behalf.
Under the terms of the Technology Partnership and Research and
Development Contract entered into in June 2005 with the Institute, we have
agreed to provide the capital and operational technicians, while the Institute
has agreed to provide the location and technical technicians to perform research
for the application of facial recognition operation technology. Any new facial
recognition technology that is developed shall become the property of the joint
venture. While the contract required us to have paid all of the costs by
September 30, 2005, certain payment installments have been delayed. Accordingly,
at September 30, 2005, we have paid approximately half of the roughly US$25,000
(HK$192,000) required under the contract, but expect that we will have paid the
remainder by the end of 2005.
We also entered into a similar contract with Tsing Hua University
(Shenzhen research campus) in November 2005, under which the University will
perform research of a multi-media home intelligence system, covering the receipt
of digital TV signals, OSD (Open Software Description) capability, PVR (Personal
Video Recorder) capability, and Blue tooth facial recognition capability. We
have agreed to bear all costs of the research, while the University provides the
necessary technical people. The total cost of the research, approximately
US$25,000 (HK$192,000) was paid by December 30, 2005. The University will own
the new intellectual property that is developed, but we will have the right to
use the property.
EMPLOYEES
As of November 30, 2005, we employed a total of 35 persons, of which 30
were full-time. None of our employees is covered by a collective bargaining
agreement.
27
FACILITIES
Our principal offices are located at 4/F, BOCG Insurance Tower, 134-136
Des Voeux Road, Central, Hong Kong. We have entered into a lease contract with
this new property that runs through June 2008, with an option to renew for an
additional term of two years. The lease requires monthly rent of HK$23,695
(approximately US$3,050) and a monthly management fee and air conditioning
charge of HK$12,863 (approximately US$1,656).
Our research and development center is located at 15/F, Wen Jin Plaza
23, Tian Bei Road 1, Luo Hu Qu, Shenzhen, China, while the sales representative
office in the United States is located at 3723 Haven Avenue, Menlo Park,
California.
LEGAL PROCEEDINGS
There are no legal proceedings pending and, to the best of our
knowledge, there are no legal proceedings contemplated or threatened.
ENFORCEABILITY OF CIVIL LIABILITIES
We are a British Virgin Islands company. You should note that the
British Virgin Islands courts are unlikely to recognize or enforce against us
judgments of courts of the United States based on certain civil liability
provisions of U.S. securities laws; and to impose liabilities against us, in
original actions brought in the British Virgin Islands, based on certain civil
liability provisions of U.S. securities laws that are penal in nature. There is
no statutory recognition in the British Virgin Islands of judgments obtained in
the United States, although the courts of the British Virgin Islands will
generally recognize and enforce a non-penal judgment of a foreign court of
competent jurisdiction without retrial on the merits. This means that even if
shareholders were to sue us successfully, they may not be able to recover
anything to make up for losses suffered.
All of our officers and directors reside in Hong Kong. Accordingly, if
events should occur that give rise to any liability on the part of these
persons, shareholders would likely have difficulty in enforcing such
liabilities. If a shareholder desired to sue these persons, the shareholder
would have to serve such persons with legal process. Shareholders would not be
able to effect service of process within the United States on us or any of our
officers or directors, unless a consent to service of process has been filed
with a government entity in the United States. To the best of knowledge we do
not believe that such a consent to service of process has been filed. Even if
personal service is accomplished and a judgment is entered against that person,
the shareholder would then have to locate assets of that person, and register
the judgment in the foreign jurisdiction where assets are located.
MANAGEMENT
OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors, and key employees are:
NAME AGE POSITION
Dr. Johnny Ng 31 Chairman of the Board of Directors
Jason Ma 33 Chief Executive Officer
Prof. Stan Li 47 Chief Scientific Advisor
Humphrey Cheung 34 Chief Technology Officer and Director
Billy Tang 32 Chief Operation Officer and Director
28
NAME AGE POSITION
Patrick Lo 34 Director of Business Development of Titanium
Technology
Eric Wong 51 Consultant
Our shareholders elect our directors annually and our board of
directors appoints our officers annually. Vacancies in our board are filled by
the board itself. Set forth below are brief descriptions of the recent
employment and business experience of our executive officers and directors.
DR. JOHNNY NG, CHAIRMAN. Dr. Ng is the Chairman of the Board of
Directors of the Company. Currently, Dr. Ng's duties include his functioning as
our principal financial and accounting officer. Dr. Ng received his bachelor's
degree in manufacturing engineering in 1996 and doctorate degree in industrial
and systems engineering in 2002 from The Hong Kong Polytechnic University, and
has been an Adjunct Associate Professor there, specializing in biometrics
technology. Dr. Ng first organized his own technology start-up, 303 Company
Limited, in 1998. This company, which was sold to a listed company in 2001, was
a solution provider of fingerprint authentication technology. He served as the
Chief Executive Officer of that company from August 1999 to August 2001. Shortly
after this transaction, he started Titanium Technology in September 2001 with
research and development as its primary activity, and gradually expanded his
business venture beyond Hong Kong.
Dr. Ng has received a great deal of recognition for his achievements,
which include the following:
o one of the "Ten Outstanding Young Digi Persons 2000" by the
Hong Kong Productivity Council and Hong Kong Junior Chamber;
o "Innovative Entrepreneur of the Year" for 2003 by the Hong Kong
Junior Chamber; and
o one of the "Top 100 Cosmopolitan Chinese Confucian Businessman
in 2004" by the Chinese Confucian Foundation and China
Economic Daily. Dr. Ng is the youngest recipient in this event.
The "Innovative Entrepreneur of the Year" award recognizes successful
and creative entrepreneurs in greater China. According to the selection
criteria, this award recognized Titanium as one of the best companies in terms
of products and services, originality of ideas, uniqueness in the market,
management and marketing strategies, revenues of the company, the future
prospect and potential of the company. He is a highly sought after speaker at
high level industry conferences and a frequent commentator in the media. He was
one of the speakers, representing Hong Kong, at one of the Asia-Pacific Economic
Cooperation ("APEC") business conferences held in Korea in 2005.
MR. JASON MA, CHIEF EXECUTIVE OFFICER. Mr. Ma became the Chief
Executive Officer of Titanium Technology in May 2005 and is responsible for
formulating business strategies, overseeing the entire business operation, and
establishing and executing global alliances and mergers and acquisitions for the
company. Mr. Ma was born and raised in Hong Kong and went to the United States
for his university education, where he received a bachelor's degree in
engineering and computer science from the University of California at Berkeley
in 1995, and an MBA degree from the University of Southern California's Marshall
School of Business in 1998. During his stays in the United States he had worked
for different companies in the fields of computer science and marketing. Mr. Ma
returned Hong Kong in 1998 and has since been involved in various IT related
endeavors. Before joining Titanium Technology in April 2004, he was the general
manager for Laurentia Technologies Ltd., a consumer electronics company
(February 2003 to March 2004), and he was the director of project management for
Ebiz Incubation Co., Ltd. from February 2000 to February 2003. Ebiz Incubation
was a Hong Kong private equity fund for incubation and investment in
technology-related ventures. From November 1998 to January 2000, he was the
assistant marketing manager for Ball Asia Pacific Ltd., a joint venture of Ball
Corporation, a publicly-held company based in Broomfield, Colorado. Ball Asia
Pacific Ltd. supplies metal beverage containers in the PRC and Hong Kong.
PROF. STAN LI, CHIEF SCIENTIFIC ADVISOR. Prof. Li has been a Researcher
at National Lab of Pattern Recognition (NLPR), Institute of Automation, Chinese
Academy of Sciences (CASIA), and the Director of the Center for Biometrics
Research and Testing (CBRT) since August 2004. He worked at Microsoft Research
Asia (MSRA) as a Researcher from May 2000 to Aug 2004. His role was to lead the
MSRA group to develop
29
facial recognition technologies. Prior to that, he was an Associate Professor of
Nanyang Technological University, Singapore. His current research interest is in
face recognition technologies, biometrics, intelligent surveillance, pattern
recognition, and machine learning. Prof. Li has been the Chief Scientific
Advisor to Titanium Technology since June 2005. He has published several books,
including "Handbook of Face Recognition" (Springer-Verlag, 2004) and "Markov
Random Field Modeling in Image Analysis" (Springer-Verlag, 2nd edition in 2001),
and over 180 reference papers and book chapters in these areas. He obtained a
B.Eng from Hunan University, an M.Eng from National University of Defense
Technology, and a PhD. from Surrey University where he also worked as a research
fellow. All the degrees are in Electrical and Electronic Engineering. He is a
senior member of IEEE and currently serves as editorial board of Pattern
Recognition, and program committees of various international conferences.
MR. HUMPHREY CHEUNG, CHIEF TECHNOLOGY OFFICER AND DIRECTOR. Mr. Cheung
has been the Chief Technology Officer of Titanium Technology since July 2001. He
received a bachelor's degree in Electronic Engineering from The Chinese
University of Hong Kong in 1994 and a master's degree in Manufacturing
Engineering from The Hong Kong Polytechnic University in 1998. Mr. Cheung is
responsible for overseeing the technical development of all product lines as
well as the integration of the technologies into product, systems and platforms
into deliverables that will best serve market demands. Prior to founding
Titanium Technology, Mr. Cheung worked at the Computer Graphics Laboratory for
the Hong Kong Polytechnic University as a research assistant. He was also a
co-founder of 303 Company Limited with Dr. Johnny Ng and Mr. Billy Tang, serving
as the Chief Technical Officer from April 1999 to March 2001. He has published
several papers in the fields of computer graphics, solid modeling, biometrics,
and pattern recognition.
MR. BILLY TANG, CHIEF OPERATION OFFICER AND DIRECTOR. Mr. Tang has been
the Chief Operation Officer of Titanium Technology since July 2001 and is
responsible for its management and overall operation. He holds Bachelor's degree
in Mathematics from the Hong Kong University of Science and Technology. Under
his leadership, Titanium Technology has experienced tremendous growth and has
increased its employee base to over 30 employees worldwide in just over a year.
Prior to co-founding Titanium Technology, he was also a co-founder of 303
Company Limited with Dr. Johnny Ng and Mr. Humphrey Cheung. He served as
Chairman of that company from April 1998 to January 2001. Mr. Tang previously
was an instrumental member of the research team in the department of Industrial
and Systems Engineering of the Hong Kong Polytechnic University from November
1996 to March 1997, where he focused on the research of virtual reality
technology. He was a system engineer for Internet Access Hong Kong Limited, one
of the largest Internet Service Providers in Hong Kong, from June 1997 to April
1998.
PATRICK LO, DIRECTOR OF BUSINESS DEVELOPMENT OF TITANIUM TECHNOLOGY.
Mr. Lo joined Titanium Technology in May 2003. From January 2001 to March 2003,
he worked for Information Security One, a Hong Kong company that distributes
security products in China, such as intrusion detection systems, firewalls, and
log analysis tools. As the director for enterprise security services, he was
responsible for sales operations in Hong Kong and China.
ERIC WONG, CONSULTANT. Mr. Wong has over 25 years of experience in the
areas of production development, sales and marketing in Southeast Asia and
Europe. Accordingly, we use Mr. Wong as a consultant. For the past five years,
he has been involved primarily as the chairman of BTC Consultant Co., Ltd., a
company incorporated in Hong Kong that provides professional consultancy and
business services with regard to foreign investment in China. It focuses on
assisting multinational companies in obtaining commercial opportunities offered
by China's consumer market.
CONFLICTS OF INTEREST
Members of our management are associated with other firms involved in a
range of business activities. Consequently, there are potential inherent
conflicts of interest in their acting as officers and directors of our company.
While the officers and directors are engaged in other business activities, we
anticipate that such activities will not interfere in any significant fashion
with the affairs of our business. Due to the ownership of stock in our company
by management, we believe that they are sufficiently motivated to focus
primarily on the business of the company. Additionally the employment agreements
with members of management state that any and all industrial property rights,
including patents, to which they are or may be entitled or which are created as
a result of their services under their employment agreements belong to and are
the exclusive property of Titanium Technology. The
30
employment agreements also contain a non-compete provision that prohibits them
from engaging or being interested in any capacity in any business whose
activities are substantially similar to or compete with any of the business
activities of Titanium Technology or any of its subsidiaries, being involved in
any projects or products handled or produced by Titanium Technology or its
subsidiaries, or dealing with any existing customers of Titanium Technology or
its subsidiaries.
Our officers and directors are now and may in the future become
shareholders, officers or directors of other companies, which may be formed for
the purpose of engaging in business activities similar to us. Accordingly,
additional direct conflicts of interest may arise in the future with respect to
such individuals acting on behalf of us or other entities. Moreover, additional
conflicts of interest may arise with respect to opportunities which come to the
attention of such individuals in the performance of their duties or otherwise.
Currently, we do not have a right of first refusal pertaining to opportunities
that come to their attention and may relate to our business operations.
Our officers and directors are, so long as they are our officers or
directors, subject to the restriction that all opportunities contemplated by our
plan of operation which come to their attention, either in the performance of
their duties or in any other manner, will be considered opportunities of, and be
made available to us and the companies that they are affiliated with on an equal
basis. A breach of this requirement will be a breach of the fiduciary duties of
the officer or director. If we or the companies with which the officers and
directors are affiliated both desire to take advantage of an opportunity, then
said officers and directors would abstain from negotiating and voting upon the
opportunity. However, all directors may still individually take advantage of
opportunities if we should decline to do so. Except as set forth above, we have
not adopted any other conflict of interest policy with respect to such
transactions.
EXECUTIVE COMPENSATION
The following table sets forth information about the remuneration of
our chief executive officers for the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
AS SHOWN IN UNITED STATES DOLLARS (US$)
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------------------------------
AWARDS PAYOUTS
----------------------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION ($) ($) SARS (#) ($) TION ($)
- -----------------------------------------------------------------------------------------------------------------------
Johnny Ng (1) 2002 $17,820 $-0- $-0- $-0- -0- $-0- $-0-
2003 $41,538 $-0- $-0- $-0- -0- $-0- $-0-
2004 $30,512 $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
Humphrey Cheung 2002 $17,820 $-0- $-0- $-0- -0- $-0- $-0-
2003 $58,974 $-0- $-0- $-0- -0- $-0- $-0-
2004 $51,282 $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
Billy Tang 2002 $17,820 $-0- $-0- $-0- -0- $-0- $-0-
2003 $58,974 $-0- $-0- $-0- -0- $-0- $-0-
2004 $51,282 $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
AS SHOWN IN HONG KONG DOLLARS (HK$)
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------------------------------
AWARDS PAYOUTS
----------------------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION ($) ($) SARS (#) ($) TION ($)
- -----------------------------------------------------------------------------------------------------------------------
Johnny Ng (1) 2002 $138,996 $-0- $-0- $-0- -0- $-0- $-0-
2003 $323,996 $-0- $-0- $-0- -0- $-0- $-0-
2004 $237,994 $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
Humphrey Cheung 2002 $138,996 $-0- $-0- $-0- -0- $-0- $-0-
2003 $459,997 $-0- $-0- $-0- -0- $-0- $-0-
2004 $400,000 $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
Billy Tang 2002 $138,996 $-0- $-0- $-0- -0- $-0- $-0-
2003 $459,997 $-0- $-0- $-0- -0- $-0- $-0-
2004 $400,000 $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
31
- -------------------
(1) Mr. Johnny Ng functioned as the Chief Executive Officer from September
2001 to April 2005.
During the last fiscal year, there were no grants of stock options,
stock appreciation rights, benefits under long-term incentive plans or other
forms of compensation involving our officers. We reimburse our officers and
directors for reasonable expenses incurred during the course of their
performance.
EMPLOYMENT CONTRACTS
We entered into agreements with our executive officers, Jason Ma,
Humphrey Cheung, and Billy Tang as of January 1, 2005. While each of the
agreements provides for permanent employment, each agreement may be terminated
by either party at any time without cause upon two weeks' notice. In the event
of termination, the employee is subject to a 12-month non-competition provision
during which he cannot engage in any business that competes with us or deal with
any of our existing customers. The agreements provide for monthly salaries of US
$2,564 (HK$20,000) for Mr. Ma, US$3,846 (HK$30,000) for Mr. Cheung, and US$3,846
(HK$30,000) for Mr. Tang, with annual salary reviews on January 1 of each year.
During 2005, there were unpaid salaries to Jason Ma, Humphrey Cheung,
and Billy Tang in the amount of $7,692 (HK$60,000) to each person. On June 30,
2005, these three officers agreed to forgive the unpaid salaries due from us
through that date in the total amount of $23,076 (HK$180,000).
STOCK OPTION PLAN
On November 22, 2005, our board of directors approved a stock option
plan under which options to purchase up to 5,000,000 shares of common stock may
be granted. We anticipate that the plan will provide for the granting of
incentive stock options to our employees and non-statutory options to our
employees, advisors and consultants.
The board of directors or the compensation committee of the board would
determine the exercise price for each option at the time the option is granted.
The exercise price for shares under an incentive stock option would not be less
than 100% of the fair market value of the common stock on the date such option
is granted. The fair market value price is the closing price per share on the
date the option is granted. The committee would also determine when options
become exercisable. The term of an option would be no more than ten (10) years
from the date of grant. No option would be exercised after the expiration of its
term.
Unless otherwise expressly provided in any option agreement, the
unexercised portion of any option granted to an optionee would automatically
terminate one year after the date on which the optionee's employment or service
is terminated for any reason, other than by reason of cause, voluntary
termination of employment or service by the optionee, or the optionee's death.
Options would terminate immediately upon the termination of an optionee's
employment for cause or 30 days after the voluntary termination of employment or
service by the optionee. If an optionee's employment or consulting relationship
terminates as a result of his or her death, then all options he or she could
have exercised at the date of death, or would have been able to exercise within
the following year if the employment or consulting relationship had continued,
would be exercisable within the one year period following the optionee's death
by his or her estate or by the person who acquired the exercise right by bequest
or inheritance.
Options granted under the plan would not transferable other than by
will or the laws of descent and distribution and may be exercised during the
optionee's lifetime only by the optionee, except that a non-statutory stock
option would be transferable to a family member or trust for the benefit of a
family member if the committee's prior written consent is obtained.
We anticipate that we will have the right to redeem any shares issued
to any optionee upon exercise of the option granted under the plan immediately
upon the termination of optionee's employment or service arising from
disability, the death of the optionee, the voluntary termination of employment
or services of the optionee, or the termination of employment or services of the
optionee for cause. The redemption price would be the fair market value of the
shares on the date of the event of redemption.
32
In the event that our stock changes by reason of any stock split,
dividend, combination, reclassification or other similar change in our capital
structure effected without the receipt of consideration, appropriate adjustments
shall be made in the number and class of shares of stock subject to the plan,
the number and class of shares of stock subject to any option outstanding under
the plan, and the exercise price for shares subject to any such outstanding
option.
In the event of a merger in which our shareholders immediately before
the merger own 50% or more of the issued and outstanding shares of stock of the
resulting entity after the merger, then existing options shall automatically
convert into options to receive stock of the resulting entity. Unless otherwise
expressly provided in any option, the committee in its sole discretion may
cancel, effective upon the date of the consummation of any change of control,
any option that remains unexercised on such date.
We anticipate that the plan will authorize the board to amend, alter,
suspend, or terminate the plan, or any part thereof, at any time and for any
reason. However, the plan would require shareholder approval for any amendment
to the plan to the extent necessary and desirable to comply with applicable
laws. No such action by the board or shareholders would alter or impair any
option previously granted under the plan without the written consent of the
optionee. The plan would remain in effect until terminated by action of the
board or operation of law.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides certain information as to the officers and
directors individually and as a group, and the holders of more than 5% of the
our common stock, as of the date of this prospectus:
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1> NUMBER OF SHARES OWNED PERCENT OF CLASS (2)<F2>
- -------------------------------------------------------------------------------------------------------------------------
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 (3)<F3> 75.7%
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
Humphrey Cheung 0 (3)<F3> --
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
Billy Tang 0 (3)<F3> --
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
Jason Ma 0 --
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
All Directors and Executive Officers As a Group (4 37,835,000 75.7%
persons)
- --------------------
33
<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> Based on 50,000,000 shares outstanding as of December 5, 2005. Does
not give effect to the possible exercise of the Warrants.
(3)<F3> Includes 37,835,000 shares owned by Golden Mass Technologies Ltd., a
British Virgin Islands company, as to which Johnny Ng has sole voting
and dispositive power through an indirect 51% ownership in Golden Mass.
Humphrey Chung and Billy Tang each own 19% of Golden Mass but do not
have voting or dispositive power over these shares.
</FN>
CHANGES IN CONTROL
There are no agreements known to management that may result in a change
of control of our company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as disclosed below, none of our present directors, officers
or principal shareholders, nor any family member of the foregoing, nor, to the
best of our information and belief, any of our former directors, senior officers
or principal shareholders, nor any family member of such former directors,
officers or principal shareholders, has or had any material interest, direct or
indirect, in any transaction, or in any proposed transaction which has
materially affected or will materially affect us.
ERICORPS CREATION (HK) LIMITED
Ericorps Creation (HK) Limited is owned by Eric Wong and his wife, who
own indirectly 10.0% of our outstanding shares through their ownership of Golden
Mass Technologies Ltd. Ericorps is also one of our distributors of ProAccess
FaceOK. The terms that we have with Ericorps are similar to those with other
third party distributors. During the years ended December 31, 2004, 2003 and
2002, we sold products and consulting services relating to system development
for customized accounting software to Ericorps Creation (HK) Limited in the
amounts of US$34,204 (HK$266,791) for products, US$105,874 (HK$825,552) for
products, and US$64,102 (HK$500,000) for system development services,
respectively.
AMOUNTS DUE FROM RELATED PARTIES
We have paid for the expenses related to the annual company secretary
fee of Golden Mass Technologies Limited ("Golden Mass"), a shareholder that is
controlled by, among others, Johnny Ng, Humphrey Cheung, and Billy Tang, who are
our officers and directors, since 2002. We paid for these expenses as an
accommodation, since Golden Mass does not maintain a bank account in Hong Kong.
The amounts paid were US$705 (HK$5,500), US$705 (HK$5,500) and US$782 (HK$6,100)
for the years ended December 31, 2004, 2003 and 2002, respectively. This
practice has ceased effective January 1, 2006.
In addition, we have paid Humphrey Cheung, who then transfers the cash
to our subsidiary in the PRC. It takes a considerable time for us to transfer
cash to our subsidiary in the PRC through normal banking channels within the
PRC. The subsidiary runs a risk of missing payment obligations due to the delay
in the receipt of funds. Therefore, management has opted to transfer the cash
through a director instead, who hand carries the checks to the subsidiary. By
doing so, we insure that the subsidiary will have the cash as and when required.
Approximately five business days are saved by transferring funds using this
method. The amounts paid to Humphrey Cheung for this purpose were US$110,356
(HK$860,778) and US$59,710 (HK$465,737) during the years ended December 31, 2004
and 2003, respectively.
34
The following table sets forth the advances and repayments, as stated
in Hong Kong dollars (HK$):
Humphrey Golden Mass Total
Cheung
Cash Non-cash HKD HKD HKD
- ------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 - -
Personal expenses paid on behalf x 19,434 6,100 25,534
Unpaid share capital x - 360,000 360,000
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 19,434 366,100 385,534
Loan to director for PRC subsidiary expenses x 465,737 - 465,737
Repayment x (48,441) - (48,441)
Personal expenses paid on behalf x - 5,500 5,500
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 436,730 371,600 808,330
Loan to director for PRC subsidiary expenses x 674,225 - 674,225
Repayment x (79,370) - (79,370)
Share capital paid up by set-off with - (360,000) (360,000)
shareholder's loan x
Personal expenses paid on behalf x - 5,500 5,500
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 1,031,585 17,100 1,048,685
Loan to director for PRC subsidiary expenses x 860,778 - 860,778
Other advances x 30,869 - 30,869
Personal expenses paid on behalf x - 6,000 6,000
Amount setting off against "Amount due to
related parties" x (1,649,441) - (1,649,441)
Amount setting off against "Shareholders'
Loan" x (273,791) (23,100) (296,891)
- ------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2005 - - -
========================================================================================================================
AMOUNTS DUE TO RELATED PARTIES
In 2003, Johnny Ng, Billy Tang, and Goldford Consultancy Limited
("Goldford") advanced US$37,190 (HK$290,082), to us. In 2004, we repaid the
advances from Goldford in full. Johnny Ng and Billy Tang also advanced funds to
us and at December 31, 2004, the aggregate amounts of these advances were
US$27,025 (HK$210,797). During the nine months ended September 30, 2005, Johnny
Ng and Billy Tang loaned us US$198,376 ($1,547,333) and we repaid them US$13,934
(HK$108,689), leaving a balance of US$211,467 (HK$1,649,441). This amount,
together with the shareholders' loans, was applied in full against amounts due
from related parties.
The following table sets forth the movement of the amounts due to
related parties in Hong Kong dollars (HK$):
Nine months
ended
September 30, December 31,
2005 2004 2003 2002
(HK$) (HK$) (HK$) (HK$)
-------------------------------------------------------------------
Balance brought forward $ 210,797 $ 290,085 $ 194,265 $ 4,716
Advances to us during the year 1,547,333 441,512 632,957 408,404
Repayment by us during the year (108,689) (520,800) (537,137) (218,855)
Amount offset against amounts due from
related parties (1,649,441) - - -
-------------------------------------------------------------------
Balance carried forward $ - $ 210,797 $ 290,085 $ 194,265
===================================================================
35
SHAREHOLDERS LOANS
In 2003 and 2004, Johnny Ng, Billy Tang, and Humphrey Cheung, through
Golden Mass, loaned us US$117,949 (HK$920,000) and US$64,102 (HK$500,000),
respectively, leaving a balance of US$182,051 (HK$1,420,000) owed to them at
December 31, 2004. During the nine months ended September 30, 2005, no
additional money was loaned. These loans were unsecured, interest-free, and not
repayable within the next twelve months. The amount of US$44,479 (HK$346,935),
which is US$182,051 (HK$1,420,000) less the US$38,063 (HK$296,891) due from
related parties and repayment of US$99,509 (HK$776,174), was contributed to the
capital to the company at September 30, 2005.
PERSONAL GUARANTEES
Billy Tang, Johnny Ng, and Humphrey Cheung personally guaranteed our
installment loan from a financial institution in the amount of US$38,462
(HK$300,000). None of these individuals received any remuneration for the
guarantee. This loan was repaid in 18 monthly installments of US$2,313
(HK$18,042) in 2005.
TAXATION
The following is a summary of anticipated material U.S. federal income
and British Virgin Islands tax consequences of an investment in our common
shares. The summary does not deal with all possible tax consequences relating to
an investment in our common shares and does not purport to deal with the tax
consequences applicable to all categories of investors, some of which, such as
dealers in securities, insurance companies and tax-exempt entities, may be
subject to special rules. In particular, the discussion does not address the tax
consequences under state, local and other non-U.S. and non-British Virgin
Islands tax laws. Accordingly, each prospective investor should consult its own
tax advisor regarding the particular tax consequences to it of an investment in
the common shares. The discussion below is based upon laws and relevant
interpretations in effect as of the date of this prospectus, all of which are
subject to change.
UNITED STATES FEDERAL INCOME TAXATION
The following discussion addresses only the material U.S. federal
income tax consequences to a U.S. person, defined as a U.S. citizen or resident,
a U.S. corporation, or an estate or trust subject to U.S. federal income tax on
all of its income regardless of source, making an investment in the common
shares.
In addition, the following discussion does not address the tax
consequences to a person who holds or will hold, directly or indirectly, 10% or
more of our common shares, which we refer to as a "10% Shareholder". Non-U.S.
persons and 10% Shareholders are advised to consult their own tax advisors
regarding the tax considerations incident to an investment in our common shares.
A U.S. investor receiving a distribution of our common shares will be
required to include such distribution in gross income as a taxable dividend, to
the extent of our current or accumulated earnings and profits as determined
under U.S. federal income tax law. Any distributions in excess of our earnings
and profits will first be treated, for U.S. federal income tax purposes, as a
nontaxable return of capital, to the extent of the U.S. investor's adjusted tax
basis in our common shares, and then as gain from the sale or exchange of a
capital asset, provided that our common shares constitutes a capital asset in
the hands of the U.S. investor. U.S. corporate shareholders will not be entitled
to any deduction for distributions received as dividends on our common shares.
Gain or loss on the sale or exchange of our common shares will be
treated as capital gain or loss if our common shares are held as a capital asset
by the U.S. investor. Such capital gain or loss will be long-term capital gain
or loss if the U.S. investor has held our common shares for more than one year
at the time of the sale or exchange.
A holder of common shares may be subject to "backup withholding" at the
rate of 28% with respect to dividends paid on our common shares if the dividends
are paid by a paying agent, broker or other intermediary in the
36
United States or by a U.S. broker or certain United States-related brokers to
the holder outside the United States. In addition, the proceeds of the sale,
exchange or redemption of common shares may be subject to backup withholding, if
such proceeds are paid by a paying agent, broker or other intermediary in the
United States.
Backup withholding may be avoided by the holder of Common Shares if
such holder:
o is a corporation or comes within other exempt categories; or
o provides a correct taxpayer identification number, certifies
that such holder is not subject to backup withholding and
otherwise complies with the backup withholding rules.
In addition, holders of common shares who are not U.S. persons are
generally exempt from backup withholding, although they may be required to
comply with certification and identification procedures in order to prove their
exemption.
Any amounts withheld under the backup withholding rules from a payment
to a holder will be refunded or credited against the holder's U.S. federal
income tax liability, if any, provided that amount withheld is claimed as
federal taxes withheld on the holder's U.S. federal income tax return relating
to the year in which the backup withholding occurred. A holder who is not
otherwise required to file a U.S. income tax return must generally file a claim
for refund or, in the case of non-U.S. holders, an income tax return in order to
claim refunds of withheld amounts.
BRITISH VIRGIN ISLANDS TAXATION
Under the International Business Companies Act of the British Virgin
Islands as currently in effect, a holder of common shares who is not a resident
of British Virgin Islands is exempt from British Virgin Islands income tax on
dividends paid with respect to the common shares and holders of common shares
are not liable for British Virgin Islands income tax on gains realized during
that year on any sale or disposal of the shares. The British Virgin Islands does
not currently impose a withholding tax on dividends paid by a company
incorporated under the International Business Companies Act.
There are no capital gains, gift or inheritance taxes levied by the
British Virgin Islands on companies incorporated under the International
Business Companies Act. In addition, the common shares are not subject to
transfer taxes, stamp duties or similar charges.
There is no income tax treaty or convention currently in effect between
the United States and the British Virgin Islands.
DESCRIPTION OF SECURITIES
We were registered in the British Virgin Islands on May 17, 2004 as a
British Virgin Islands International Business Company, number 597079. Our
charter documents consist of our Memorandum of Association and our Articles of
Association. The Memorandum of Association loosely resembles the Articles of
Incorporation of a United States corporation and the Articles of Association
loosely resembles the bylaws of a United States corporation. Our Memorandum of
Association provides that we any engage in any act or activity which is not
prohibited by any laws of the British Virgin Islands. We are authorized to issue
100,000,000 shares of common stock, with a par value of US$0.01 per share. As of
the date of this prospectus, we had 50,000,000 outstanding shares of common
stock. All of our outstanding shares are fully paid and non-assessable.
A brief description of our Memorandum of Association and Articles of
Association follows, including a summary of material differences between the
corporate statutes of the United States, using Delaware as an example, and those
of the British Virgin Islands. This description and summary does not purport to
be complete and does not address all differences between United States and
British Virgin Islands corporate statutes. Copies of our Memorandum of
Association and Articles of Association have been filed as exhibits to our
registration statement on Form S-1 and readers are urged to review these
exhibits in their entirety for a complete understanding of the provisions of our
charter documents.
37
BRITISH VIRGIN ISLANDS DELAWARE
========================================= =============================================
Voting rights The holders of ordinary shares are The holders of common stock are entitled
entitled to one vote for each share held to one vote for each share held of record
of record on all matters submitted to the on all matters submitted to a vote of
stockholders. Cumulative voting is not stockholders. Cumulative voting is
allowed; hence, the holders of a majority allowed if permitted in the certificate of
of the outstanding common stock can elect incorporation.
all directors.
Preemptive rights Holders of ordinary shares have no Holders of common stock have no preemptive
preemptive rights. rights.
Dividend rights Holders of common stock are entitled to The directors of a corporation, subject to
receive such dividends as may be declared any restrictions contained in its
by the Board of Directors out of funds certificate of incorporation, may declare
legally available for dividends. All and pay dividends upon shares of its
outstanding common shares have the same capital stock, either out of its surplus,
rights with regard to dividends and as defined in the Delaware General
distributions upon our liquidation, which Corporation Law, or out of its net profits
is to share pro rata in any distribution for the fiscal year in which the dividend
of our assets after payment of is declared and/or the preceding fiscal
liabilities. Our Board of Directors is year. If the capital of the corporation
not obligated to declare a dividend and shall be diminished by depreciation in the
it is not anticipated that dividends will value of its property or by losses or
ever be paid. All dividends unclaimed otherwise, to an amount less than the
for three years after having been aggregate amount of the capital
declared may be forfeited by resolution represented by the issued and outstanding
of the directors for our benefit. stock of all classes having a preference
upon the distribution of assets, the directors
shall not declare and pay out of net profits
any dividends upon any shares of any classes of
capital stock until the deficiency in the amount
of capital represented by the issued and
outstanding stock of all classes having a
preference upon the distribution of assets
shall have been repaired.
Redemption of shares We may redeem any of our own shares for A Delaware corporation may redeem its own
fair value. However, no purchase, shares, except that it may not redeem
redemption or other acquisition of shares shares for cash or other property when the
can be made unless out of surplus (as capital of the corporation is impaired or
defined by the International Business when such redemption would cause any
Companies Act) and unless the directors impairment of the capital of the
determine that immediately after the corporation.
purchase, redemption or other acquisition
we will be able to satisfy our
liabilities as they become due in the
ordinary course of business, and the
realizable value of our assets will not
be less than the sum of our total
liabilities and capital. In the absence
of fraud, the decision of the directors
as to the realizable value of our assets
is conclusive, unless a question of law
is involved.
38
BRITISH VIRGIN ISLANDS DELAWARE
========================================= =============================================
Annual meeting of British Virgin Islands law does not Delaware law requires annual meetings of
stockholders require an international business company stockholders.
to have an annual meeting.
Special meeting of Under British Virgin Islands law, unless Under Delaware law, a special meeting of
stockholders otherwise provided by a company's stockholders may be called by the board of
memorandum of association or articles of directors or any other person authorized
association, special meetings of to do so in the certificate of
stockholders may be called by the incorporation or bylaws.
directors at any time.
Under British Virgin Islands law,
directors are required to call meetings
upon a written request from the
stockholders holding more than 50% of
the outstanding voting shares, unless
the memorandum of association or articles
of association provide for a lesser
percentage.
Action by written consent Under British Virgin Islands law, unless Under Delaware law, unless otherwise
in lieu of a stockholders' otherwise provided by a company's provided in the certificate of
meeting memorandum of association or articles of incorporation, stockholders may take
association, stockholders may take action action by written consent in lieu of
by written consent in lieu of voting at a voting at a stockholders meeting.
stockholders' meeting.
Record date for determining Under British Virgin Islands law, the Under Delaware law, the record date for
stockholders and notice of directors of a company may fix the date determining stockholders of record at
a meeting notice is given of a meeting as the meeting is a date fixed by the directors
record date for determining those shares that is not more than 60 days nor less
that are entitled to vote at the than 10days before such meeting.
meeting.
Written notice of all meetings of
The company's articles of association stockholders, stating the time, place and
provide that written notice of all date thereof, shall be given no less than
meetings of stockholders, stating the 10 nor more than 60 days before the date
place, date, time and general nature of on which the meeting is to be held to each
the business to be conducted shall be stockholders entitled to vote at such
given at least 7 days before the date of meeting.
the proposed meeting to those persons
whose names appear as stockholders in the
share register of the company on the date
of the notice and are entitled to vote at
the meeting. However, in general a
meeting of stockholders may be called on
shorter notice if at least 60% of the
total number of shares entitled to vote
on all matters to be considered at the
meeting waive the right to notice.
The inadvertent failure of the directors
to give notice of a meeting to a stockholder
or the fact that a stockholder has not
received the notice does not invalidate the
meeting.
39
BRITISH VIRGIN ISLANDS DELAWARE
========================================= =============================================
Number of directors Our Articles of Association provide that The board of directors shall consist of
our board of directors will consist of one or more members, each of whom shall be
not less than one nor more than 20 a natural person. The number of directors
directors. Directors may be natural shall be fixed by, or in the manner
persons or companies, in which event the provided in, the bylaws.
company may designate a person as its
representative as a director.
Classified board of Under British Virgin Islands law, a Delaware law provides that a corporation's
directors company's board of directors may be board of directors may be divided into
divided into various classes with three classes with staggered terms of
staggered terms of office. office.
The company's articles of association Directors are to be elected at each annual
provide that directors may be elected by stockholders' meeting to hold office until
the stockholders or the existing the next annual meeting.
directors for such term as the members
of the directors may determine.
Removal of directors The company's articles of association Under Delaware law, any director or the
provide that a director shall vacate entire board of directors may be removed,
office if the director (a) is removed by with or without cause, by the holders of a
a resolution of the stockholders or majority of the shares then entitled to
directors; (b) becomes bankrupt or makes vote at an election of directors.
any arrangement or composition with his
creditors generally; (c) becomes of
unsound mind or of such infirm health as
to be incapable of managing his affairs;
or (d) resigns.
Board of director vacancies The company's articles of association Under Delaware law, vacancies and newly
provide that any vacancy on the board of created directorships may be filled by a
directors may be filled either by the majority of the directors then in office,
stockholders or by the remaining even though less than a quorum, unless
directors. otherwise provided in the certificate of
incorporation or bylaws.
40
BRITISH VIRGIN ISLANDS DELAWARE
========================================= =============================================
Limitation of liability of The company's articles of association The certificate of incorporation may
directors provide that no director shall be liable provide that, to the fullest extent
for any loss, damage or misfortune that permitted by Delaware law, no director
may happen to, or be incurred by the shall be personally liable to the
company in the execution of the duties of corporation or its stockholders for
his office or in relation thereto. monetary damages for any breach of
fiduciary duty by such director as a
British Virgin Islands law, however, sets director.
the standard of care expected from every
director in performing his functions, as Under Delaware law, a corporation may not
requiring that he act honestly and in eliminate monetary liability for (a)
good faith with a view to the best breaches of the director's duty of loyalty
interests of the company and exercise the to the corporation or its stockholders;
care, diligence and skill that a (b) acts or omissions not in good faith or
reasonably prudent person would exercise involving intentional misconduct or a
in comparable circumstances. No knowing violation of law; (c) unlawful
provision in the company's memorandum or dividends, stock repurchases or
articles of association or in any redemptions; or (d) transactions from
agreement entered into by the company which the director received an improper
relieves a director from the duty to act personal benefit. Such provisions for the
in accordance with the memorandum or limitation of liability may not limit a
articles of association or from any director's liability for violation of, or
personal liability arising from his otherwise relieve directors from, the
management of the business and affairs of necessity of complying with federal or
the company. state securities laws, or affect the
availability of nonmonetary remedies such
It should be noted, therefore, that in as injunctive relief or rescission.
addition to the statutory standard of
care imposed on directors, they are also
bound by the usual common law duty of
care in relation to the exercise of their
powers as directors.
Indemnification The articles of association provide that A corporation may indemnify present and
every director or officer of the company former directors or officers of a
shall be entitled to be indemnified corporation for any expenses, liability
against all losses or liabilities which and loss incurred in connection with any
he may sustain or incur in or about the action, suit, or proceeding, whether civil
execution of his duties of his office or or criminal, administrative or
otherwise in relation thereto. investigative that such person was or is
made a party to or is threatened to be
Such indemnity is subject to the made a party to by reason of the fact that
limitations that a BVI company may only such person was serving (during his or her
indemnify a person if the person acted tenure as director and/or officer of the
honestly and in good faith with a view to corporation) at the request of the
the best interests of the company and, in corporation as a director, officer,
the case of criminal proceedings, the employee or agent of another corporation
person had no reasonable cause to believe or entity. The director or officer is
that his conduct was unlawful. The indemnified and held harmless for all
decision of the directors as to whether expenses, liability and loss, including
the person acted appropriately is, in the attorneys' fees, judgments, fines, ERISA
absence of fraud, sufficient. excise taxes or penalties and amounts paid
or to be paid in settlement reasonably
incurred in connection with such proceeding.
Such officer or director is entitled to be paid
by the corporation for expenses incurred in
defending any such
41
BRITISH VIRGIN ISLANDS DELAWARE
========================================= =============================================
action in advance of its final disposition.
The director or officer must, as a condition
to such advancement, provide to the corporation
a written undertaking that if a court determines
that the director or officer is not entitled
to indemnification by the corporation, then
the director or officer shall repay to the
corporation all amounts so advanced. The
corporation may maintain directors' and
officers' liability insurance.
Amendment of corporate Amendments to the memorandum and articles Amendments to the certificate of
documents (including an of association may be made by resolution incorporation may be made by resolution of
increase in the authorized of stockholders OR directors. If the the board of directors followed by the
capital stock) amendment is to be approved at a meeting approval of the holders of a majority of
of stockholders or directors, the the shares of common stock then
affirmative vote of a simple majority is outstanding.
required - i.e., there must be more votes
in favor of the amendment than against The bylaws may be amended or repealed by
it. If the amendment to be approved by the board of directors or by the
consent in writing, the affirmative vote stockholders.
of the holders of a majority of the
shares entitled to vote or a majority of
the directors is required.
Designation and issuance of The company's Articles of Association If authorized to do so in the certificate
preferred stock provide that any share may be issued with of incorporation, the board of directors
such preferred, deferred, or other may adopt a resolution providing for such
special rights, or such restrictions, voting powers, designations, preferences
whether in regard to dividend, voting, and relative, participating, optional or
return of capital or otherwise, as the other special rights, and qualifications,
directors may from time to time determine. limitations or restrictions as it may
determine.
Stockholder votes on Under British Virgin Islands law, the Under Delaware law, the vote of a majority
certain transactions vote of a majority of the votes cast is of the outstanding shares of capital stock
generally required to approve each of the entitled to vote is generally required to
following transactions: (a) a merger or approve each of the following
other reorganization; (b) a sale of transactions: (a) a merger or other
substantially all of the assets of a reorganization; (b) a sale of
corporation; and (c) a voluntary substantially all of the assets of a
dissolution of the corporation. corporation; and (c) a voluntary
dissolution of the corporation.
British Virgin Islands law protecting the interests of minority
shareholders may not be as protective in all circumstances as the law protecting
minority shareholders in US jurisdictions.
While British Virgin Islands law does permit a shareholder of a British
Virgin Islands company to sue its directors derivatively, that is, in the name
of, and for the benefit of, our company and to sue a company and its directors
for his benefit and for the benefit of others similarly situated, the
circumstances in which any such action may be brought, and the procedures and
defenses that may be available in respect of any such action, may result in the
rights of shareholders of a British Virgin Islands company being more limited
than those of shareholders of a company organized in the US.
42
As in most US jurisdictions, the board of directors of a British Virgin
Islands company is charged with the management of the affairs of the company. In
most US jurisdictions, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care, under which directors must properly
apprise themselves of all reasonably available information, and a duty of
loyalty, under which they must protect the interests of the corporation and
refrain from conduct that injures the corporation or its shareholders or that
deprives the corporation or its shareholders of any profit or advantage. Many US
jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited.
Under British Virgin Islands law, liability of a corporate director to
the corporation is primarily limited to cases of willful malfeasance in the
performance of his duties or to cases where the director has not acted honestly
and in good faith and with a view to the best interests of the company.
WARRANTS
In connection with our private placement of Units, we issued common
stock purchase warrants. The warrants give the holders the right to purchase
from us, until June 30, 2008, an aggregate of 3,000,000 shares of our common
stock for US$0.50 per share. Both the number of warrants and the exercise price
of the warrants are subject to anti-dilution adjustments in the event of stock
dividends, stock splits, stock combinations and any other similar transactions.
The warrants also give the holders the right to any additional rights, including
those obtained through the consolidation, merger or sale of assets of the
company or a similar transaction, that are granted, issued or sold to our
shareholders as if the holders had held the number of shares of common stock
acquirable upon the complete exercise of the warrants at the time such rights
become available to the shareholders.
Each warrant is redeemable at US$0.001 per warrant if the common stock
is then listed on a recognized stock exchange or trading at US$1.00 per share
for 20 consecutive trading days.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Trust Company, Inc. Its address is 350 Indiana Street, Suite 800, Golden,
Colorado 80401, and its telephone number is (303) 262-0600.
SELLING STOCKHOLDERS
This prospectus relates to the resale of 9,956,000 shares of common
stock held by existing shareholders. We are registering the shares in order to
permit the selling shareholders to offer the shares of common stock for resale
from time to time. The selling shareholders have not had any material
relationship with us within the past three years.
The table below lists the selling shareholders and other information
regarding the beneficial ownership of the common stock by the selling
shareholders. The second column lists the number of shares of common stock held.
The third column lists the shares of common stock being offered by this
prospectus by the selling shareholders.
Except for the last four shareholders listed it the table, all of the
shareholders purchased units from the company, each unit consisting of one share
of common stock and one common stock purchase warrant, in a private placement
from July 2005 to August 2005, at a price of US$0.20 per unit. We relied upon
the exemption from registration contained in Rule 506 of Regulation D, as the
investors were accredited investors. We agreed to register the shares for
resale.
DeCh'in Strategic Consulting LLC received its from Golden Mass
Technologies Ltd. in consideration for services rendered in April 2005. Li Kai
Chi, Ma Kit Ying, Ada, and Lam Wai Keung had been shareholders of Golden Mass
Technologies Ltd. but opted to receive their ownership in the company directly,
as opposed to holding an indirect ownership interest through Golden Mass. They
received their shares in March 2005.
43
OWNERSHIP AFTER OFFERING
--------------------------
NUMBER OF
SHARES SHARES
BENEFICIALLY REGISTERED FOR NUMBER OF
NAME OF SELLING SHAREHOLDER OWNED (1)<F1> RESALE (2)<F2> SHARES (3)<F3> 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 (5)<F5> 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 (6)<F6> 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 (7)<F7> 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 (8)<F8> 30,000 (2)<F2> 15,000 15,000 (4)<F4>
Ryan B. Heller and Marlana Heller (8)<F8> 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 (9)<F9> 250,000 (2)<F2> 125,000 125,000 (4)<F4>
Paul E. Hinson (9)<F9> 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Robert S. and Michele B. Hinson (9)<F9> 50,000 (2)<F2> 25,000 25,000 (4)<F4>
J Paul Consulting (10)<F10> 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 Linda 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>
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 (11)<F11> 125,000 (2)<F2> 62,500 62,500 (4)<F4>
44
OWNERSHIP AFTER OFFERING
--------------------------
NUMBER OF
SHARES SHARES
BENEFICIALLY REGISTERED FOR NUMBER OF
NAME OF SELLING SHAREHOLDER OWNED (1)<F1> RESALE (2)<F2> SHARES (3)<F3> PERCENT
--------- ---------- ---------- --------
Catherine Leung 100,000 (2)<F2> 50,000 50,000 (4)<F4>
Stella S.F. Liu Trust (12)<F12> 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 (13)<F13> 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Jeffrey C. Melnick (13)<F13> 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Robert A. Melnick (13)<F13> 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. (14)<F14> 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Edward H. Price, Inc. PS Plan (15)<F15> 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 (16)<F16> 150,000 (2)<F2> 75,000 75,000 (4)<F4>
H. Howland Silleck (7)<F7> 50,000 (2)<F2> 25,000 25,000 (4)<F4>
Silleck Investments, LLC (7)<F7> 100,000 (2)<F3> 50,000 50,000 (4)<F4>
David Simas and Jeanne Simas (17)<F17> 100,000 (2)<F2> 50,000 50,000 (4)<F4>
David Simas FBO Kasey Simas (17)<F17> 20,000 (2)<F2> 10,000 10,000 (4)<F4>
Kyle P. Simas and David L. Simas (17)<F17> 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 Ray 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 (18)<F18> 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> Does not include shares underlying warrants.
(3)<F3> Includes shares underlying warrants which entitle the holder to
purchase common shares through June 30, 2008.
(4)<F4> Less than 1%.
45
(5)<F5> Dale D. DeVries exercises voting and/or dispositive powers over these
securities.
(6)<F6> John Diepersloot exercises voting and/or dispositive powers over these
securities.
(7)<F7> Sarah S. Haney and H. Howland Silleck are the adult children of R.
Haydn Silleck. R. Haydn Silleck exercises voting and/or dispositive
powers over the securities held in the name of Silleck Investments,
LLC.
(8)<F8> Ryan B. Heller is the adult child of Randy and Carol Heller.
(9)<F9> Paul E. Hinson and Robert S. Hinson are the adult children of Annie S.
Hinson and Bob Hinson.
(10)<F10>Jeff Ploen exercises voting and/or dispositive powers over these
securities.
(11)<F11>Myron Leon exercises voting and/or dispositive powers over these
securities.
(12)<F12>Stella S.F. Liu exercises voting and/or dispositive powers over these
securities.
(13)<F13>Jeffrey C. Melnick and Robert A. Melnick are the adult children of
Deborah A. Melnick.
(14)<F14>Cory Coppage exercises voting and/or dispositive powers over these
securities.
(15)<F15>Edward H. Price exercises voting and/or dispositive powers over these
securities. He is an affiliates of a registered broker-dealer and is an
underwriter with respect to the shares being offered on behalf of
Edward H. Price, Inc. PS Plan. This shareholder acquired the securities
in the ordinary course of business and did not have any agreements or
understandings with any person to distribute the securities at the time
of purchase.
(16)<F16>David H. Jackson exercises voting and/or dispositive powers over these
securities.
(17)<F17>Kyle P. Simas and David L. Simas are the adult children of David Simas
and Jeanne Simas. Kasey Simas is the minor child of David Simas and
Jeanne Simas.
(18)<F18>Randy J. Sasaki exercises voting and/or dispositive powers over these
securities.
</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 US$0.20 until
our shares are quoted on the OTC Bulletin Board and thereafter at prevailing
market prices or privately negotiated prices.
The shares may also be sold in compliance with the Securities and
Exchange Commission's Rule 144.
In the event of the transfer by the selling shareholders of their
shares to any pledgee, donee, or other transferee, we will amend this prospectus
and the registration statement of which this prospectus forms a part by the
filing of a post-effective registration statement in order to name the pledgee,
donee, or other transferee in place of the selling shareholder who has
transferred his shares.
The selling shareholders may also sell their shares directly to market
makers acting as principals or brokers or dealers, who may act as agent or
acquire the common stock as a principal. Any broker or dealer participating in
such transactions as agent may receive a commission from the selling shareholder
or, if they act as agent for the purchaser of such common stock, from such
purchaser. The selling shareholder will likely pay the usual and customary
brokerage fees for such services. Brokers or dealers may agree with the selling
shareholder to sell a
46
specified number of shares at a stipulated price per share and, to the extent
such broker or dealer is unable to do so acting as agent for the selling
shareholder, to purchase, as principal, any unsold shares at the price required
to fulfill the respective broker's or dealer's commitment to the selling
shareholder. Brokers or dealers who acquire shares as principals may thereafter
resell such shares from time to time in transactions in a market or on an
exchange, in negotiated transactions or otherwise, at market prices prevailing
at the time of sale or at negotiated prices, and in connection with such resales
may pay or receive commissions to or from the purchasers of such shares. These
transactions may involve cross and block transactions that may involve sales to
and through other brokers or dealers. We can provide no assurance that all or
any of the common stock offered will be sold by the selling shareholders.
If, after the date of this prospectus, a selling shareholder enters
into an agreement to sell his shares to a broker-dealer as principal and the
broker-dealer is acting as an underwriter, we will need to file a post-effective
amendment to the registration statement of which this prospectus is a part. We
will need to identify the broker-dealer, provide required information on the
plan of distribution, and revise the disclosures in that amendment, and file the
agreement as an exhibit to the registration statement. Also, the broker-dealer
would have to seek and obtain clearance of the underwriting compensation and
arrangements from the NASD Corporate Finance Department.
We are bearing all costs relating to the registration of the common
stock, which are estimated at US$105,000. The selling shareholders, however,
will pay any commissions or other fees payable to brokers or dealers in
connection with any sale of the common stock.
We are paying the expenses of the offering because we seek to: (i)
become a reporting company with the Commission under the Securities Exchange Act
of 1934 (the "1934 Act"); and (ii) enable our common stock to be traded on the
NASD OTC Bulletin Board. We believe that the registration of the resale of
shares on behalf of existing shareholders may facilitate the development of a
public market in our common stock if our common stock is approved for trading on
the NASD OTC Bulletin Board.
We consider that the development of a public market for our common
stock will make an investment in our common stock more attractive to future
investors. In order for us to continue with our business plan, we will at some
point in the near future need to raise additional capital through private
placement offerings. We believe that obtaining reporting company status under
the 1934 Act and trading on the OTC Bulletin Board should increase our ability
to raise these additional funds from investors.
The selling shareholders must comply with the requirements of the
Securities Act and the Securities Exchange Act in the offer and sale of the
common stock. In particular, during such times as the selling shareholders may
be deemed to be engaged in a distribution of the common stock, and therefore be
considered to be underwriters, they must comply with applicable law and may,
among other things:
o Not engage in any stabilization activities in connection with our
common stock;
o Furnish each broker or dealer through which common stock may be
offered, such copies of this prospectus, as amended from time to time,
as may be required by such broker or dealer; and
o Not bid for or purchase any of our securities or attempt to induce any
person to purchase any of our securities other than as permitted under
the Securities Exchange Act.
LEGAL MATTERS
Stevenson, Wong & Co., has given an opinion on the validity of the
securities.
47
EXPERTS
We have included the financial statements of the company as of December
31, 2004 and 2003, and for the years ended December 31, 2004, 2003 and 2002, in
reliance upon the report of Zhong Yi (Hong Kong) C.P.A. Company Limited, an
independent registered public accounting firm, to the extent and for the periods
indicated in their report also incorporated by reference, and are included in
reliance upon such report and upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have not previously been subject to the reporting requirements of
the Securities and Exchange Commission. We have filed with the Commission a
registration statement on Form S-1 under the Securities Act with respect to the
shares offered hereby. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules thereto.
For further information with respect to our securities and us you should review
the registration statement and the exhibits and schedules thereto. Statements
made in this prospectus regarding the contents of any contract or document filed
as an exhibit to the registration statement are not necessarily complete. You
should review the copy of such contract or document so filed.
You can inspect the registration statement and the exhibits and the
schedules thereto filed with the commission, without charge, at the office of
the Commission at 100 F Street, NE, Washington, D.C. 20549. You can also obtain
copies of these materials from the public reference section of the commission at
100 F Street, NE, Washington, D.C. 20549, at prescribed rates. You can obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The Commission maintains a web site on the Internet that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Commission at
HTTP://WWW.SEC.GOV.
REPORTS TO STOCKHOLDERS
As a result of filing the registration statement, we are subject to the
reporting requirements of the federal securities laws, and are required to file
periodic reports and other information with the SEC. We will furnish our
shareholders with annual reports containing audited financial statements
certified by independent public accountants following the end of each fiscal
year and quarterly reports containing unaudited financial information for the
first three quarters of each fiscal year following the end of such fiscal
quarter.
48
INDEX TO FINANCIAL STATEMENTS
Unaudited Interim Consolidated Financial Statements - Nine Months Ended
September 30, 2005 and 2004
Consolidated Balance Sheet
September 30, 2005 (Unaudited) ....................................F-1
Consolidated Statements of Income (Unaudited)
Nine Months Ended September 30, 2005 and 2004......................F-2
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2005 and 2004......................F-3
Notes to Consolidated Financial Statements (Unaudited).................F-4
Financial Statements - Years Ended December 31, 2004, 2003 and 2002
Report of Independent Registered Public Accounting Firm ...............FF-1
Consolidated Balance Sheets
December 31, 2004, 2003 and 2002...................................FF-2
Consolidated Statement of Income
Years Ended December 31, 2004, 2003 and 2002.......................FF-4
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 2004, 2003 and 2002.......................FF-6
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002.......................FF-7
Notes to Consolidated Financial Statements.............................FF-9
49
Titanium Group Limited and its Subsidiaries
Consolidated Balance Sheet
As of September 30, 2005
(Original currency expressed in Hong Kong Dollars ("HK$"))
(Unaudited)
2005 2005
----------------- -----------------
US$ HK$
ASSETS
Current assets:
Cash and cash equivalents $ 424,541 $ 3,311,418
Accounts receivable, trade 692,859 5,404,298
Deposits 41,607 324,534
----------------- -----------------
Total current assets 1,159,007 9,040,250
----------------- -----------------
Property and equipment, at cost, net of accumulated depreciation
Cost 140,806 1,098,293
Accumulated depreciation (38,082) (297,036)
----------------- -----------------
102,724 801,257
----------------- -----------------
Intangible assets 266,728 2,080,475
----------------- -----------------
Total assets $ 1,528,459 $ 11,921,982
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 98,976 $ 772,010
Accounts payable, trade 346,345 2,701,491
Taxes payable 38,164 297,683
----------------- -----------------
Total current liabilities 483,485 3,771,184
----------------- -----------------
Stockholders' equity:
Common stock, US$0.01 (HK$0.078) par value,
100,000,000 shares authorized, 50,000,000 shares
issued and outstanding 500,000 3,900,000
Additional paid-in capital 129,478 1,009,935
Retained earnings 415,496 3,240,863
----------------- -----------------
1,044,974 8,150,798
----------------- -----------------
$ 1,528,459 $ 11,921,982
================= =================
See accompanying notes to unaudited consolidated financial statements.
F-1
Titanium Group Limited and its Subsidiaries
Consolidated Statements of Income
Nine Months Ended September 30, 2005 and
2004 (Original currency expressed in Hong Kong Dollars ("HK$"))
(Unaudited)
2005 2005 2004
-------------- -------------- --------------
US$ HK$ HK$
Revenue - Projects
Products $ 728,197 $ 5,679,936 $ 2,310,324
Services 446,971 3,486,376 978,064
-------------- -------------- --------------
1,175,168 9,166,312 3,288,388
- Maintenance 95,841 747,557 563,980
-------------- -------------- --------------
1,271,009 9,913,869 3,852,368
-------------- -------------- --------------
Cost of sales - Projects
Products 168,301 1,312,749 1,607,009
Services 620,235 4,837,831 671,189
-------------- -------------- --------------
788,536 6,150,580 2,278,198
- Maintenance - - -
-------------- -------------- --------------
788,536 6,150,580 2,278,198
-------------- -------------- --------------
Gross profit 482,473 3,763,289 1,574,170
-------------- -------------- --------------
Selling, general and administrative expenses 454,272 3,543,321 2,060,975
-------------- -------------- --------------
454,272 3,543,321 2,060,975
-------------- -------------- --------------
Income (loss) from operations 28,201 219,968 (486,805)
-------------- -------------- --------------
Other income (expense):
Other income 70,982 553,660 1,078,706
Interest expense (1,269) (9,897) (12,405)
-------------- -------------- --------------
69,713 543,763 1,066,301
-------------- -------------- --------------
Income before provision for income taxes
and minority interest 97,914 763,731 579,496
Income tax 21,177 165,183 -
-------------- -------------- --------------
Income before minority interest 76,737 598,548 579,496
Minority interest - - (21,653)
-------------- -------------- --------------
Net income $ 76,737 $ 598,548 $ 601,149
============== ============== ==============
Per share information:
Basic and diluted income (loss)
per common share $ 0.0016 $ 0.0126 $ 0.0128
============== ============== ==============
Weighted average shares outstanding
basic and fully diluted 47,666,667 47,666,667 47,000,000
============== ============== ==============
Net income $ 76,737 $ 598,548 $ 601,149
Other comprehensive income (loss)
Effect of foreign currency transactions (189) (1,477) (1,727)
-------------- -------------- --------------
Comprehensive income $ 76,548 $ 597,071 $ 599,422
============== ============== ==============
See accompanying notes to unaudited consolidated financial statements.
F-2
Titanium Group Limited and its Subsidiaries
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2005 and 2004
(Original currency expressed in Hong Kong Dollars ("HK$"))
(Unaudited)
2005 2005 2004
------ ------ ------
USD HK$ HK$
Net cash (used in) provided by operating activities $ (56,388) $ (440,117) $ 1,178,065
Cash flows from investing activities:
Acquisition of intangible assets (18,923) (147,600) (1,267,019)
Acquisition of plant and equipment (100,133) (781,041) (117,401)
--------------- -------------- --------------
Net cash used in investing activities (119,056) (928,641) (1,384,420)
--------------- -------------- --------------
Cash flows from financing activities:
Repayment of long term bank loan (2,137) (16,667) (150,000)
Proceeds from sales of common stock 535,000 4,173,000 -
--------------- -------------- --------------
Net cash used in financing activities 532,863 4,156,333 (150,000)
--------------- -------------- --------------
Increase (decrease) in cash 357,419 2,787,575 (356,355)
Cash and cash equivalents, beginning of period 67,122 523,543 746,205
--------------- -------------- --------------
Cash and cash equivalents, end of period $ 424,541 $ 3,311,118 $ 389,850
=============== ============== ==============
Supplementary information of non-cash investing and financing activities:
During the nine months period ended September 30, 2005, the Group entered into
the following non-cash transactions:
Forgiveness of loan from shareholders $ 346,935
=============
See accompanying notes to unaudited consolidated financial statements.
F-3
Titanium Group Limited and its Subsidiaries.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - GENERAL
The Company is incorporated in the British Virgin Islands as a private limited
company using the name Titanium Group Limited. The Company is incorporated on
May 17, 2004 and has been dormant since incorporation. The Company's functional
currency is the Hong Kong dollar.
On June 22 2005, the Company acquired the entire share capital of Titanium
Technology Limited from Golden Mass Technologies Limited. Titanium Technology
Limited is a company incorporated in Hong Kong and is engaged in developing
products utilizing biometrics technologies, licensing of technologies,
professional services and project contracting. Through the acquisition of
Titanium Technology Limited, the Company had also acquired Titanium Technology
(Shenzhen) Company Limited., a subsidiary of Titanium Technology Limited.
The accompanying financial statements present the financial position and results
of operations of the Company and its subsidiary companies, Titanium Technology
Limited and Titanium Technology (Shenzhen) Company Limited (collectively known
as "the Group"). The Group's functional currency is the Hong Kong dollar.
NOTE 2 - BASIS OF PRESENTATION OF INTERIM PERIOD
The accompanying unaudited consolidated financial statements as of September 30,
2005 and 2004 and for the nine-month period then ended have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") for interim financial information and the requirements of
Regulation S-X. They do not include all of the information and footnotes for
complete consolidated financial statements as required by GAAP. In management's
opinion, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results of
operations for the period ended September 30, 2005 and 2004 presented are not
necessarily indicative of the results to be expected for the full year. These
financial statements should be read in conjunction with the annual financial
statements presented elsewhere in this registration statement.
Note 3 - AMOUNT DUE FROM RELATED PARTIES
The outstanding amounts represent cash advanced to a director and shareholder of
the Group.
The cash advanced to a shareholder was for the payment of the shareholder's
non-business related expenses over the years. The cash advanced to a director
relates to the temporary cash payment to the directors who will then transfer
the cash to the Group's subsidiary in PRC. It forms part of the remittance
procedures from the Group's subsidiary in Hong Kong to its subsidiary in PRC. As
it takes a considerable time for the Group's subsidiary in Hong Kong to transfer
the cash to the subsidiary in PRC through normal banking channels within the
PRC, by the time when the cash was transferred, the subsidiary could have missed
the payment obligations. Therefore, the
F-4
Titanium Group Limited and its Subsidiaries.
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
management has opted for passing the cash to the director instead who hand
carried the checks to the subsidiary. By doing so, the subsidiary could have
cash available as and when required. The Company estimates that five business
days were saved for each cash transfer.
These amounts due from related parties are unsecured, interest free and are
repayable on demand.
Set out below is the movement of the amount due from related parties during each
of the nine months ended September 30, 2005 and 2004:
2005 2004
HK$ HK$
Balance brought forward 1,048,685 808,330
Advances during the period 897,647 448,959
Repayment during the period - -
Amount offset against the shareholders' loans (296,891) -
Amount offset against the amount due to related parties (1,649,441) -
------------------ -----------------
Balance carried forward - 1,257,289
================== =================
Maximum balance during the period 1,946,334 1,257,289
================== =================
NOTE 4 - OPERATING LEASE
During the period ended September 30, 2005, the Group subsidiary signed a new
operating lease effective from July 1, 2005. The future minimum lease payments
for the next three years under the lease are HK$106,627 for 2005, HK$284,340 for
2006, HK$284,340 for 2007 and HK$142,170 for 2008.
NOTE 5 - STOCKHOLDERS' EQUITY
On September 30, 2005, certain shareholders agreed to forgive loans made to the
Group though that date. The amount of the forgiveness (net of loans made to the
shareholders) was contributed to the capital of the Company and aggregated
HK$346,935.
During the period, the Company sold 3,000,000 shares of common stock at US$0.20
per share through a private placement and received aggregate gross proceeds of
HK$4,680,000. Expenses of the offering were approximately HK$507,000. In
addition, the Company issued 3,000,000 common stock purchase warrants to the
investors. Each common stock purchase warrant entitles the investor to purchase
one share of common stock at an exercise price of US$0.50 per share through June
30, 2008.
F-5
Titanium Group Limited and its Subsidiaries.
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 6 - INCOME PER SHARE
Basic income per share is computed by dividing income attributable to holders of
common stock by the weighted average number of common stock outstanding during
the period. Diluted income per common stock reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
NOTE 7 - SUBSEQUENT EVENT
During November, 2005, the Company adopted a stock option plan under which
options to purchase up to 5,000,000 shares of common stock may be granted. The
board of directors will determine the exercise price for each option at the time
the options is granted. The exercise price for shares will be no less than 100%
of the fair value of the common stock at the date such options is granted. The
board will also determine when options become exercisable. The term of an option
would be no more than 10 years from the date of grant. No option would be
exercised after the expiration of its term.
F-6
9TH FLOOR, CHINACHEM HOLLYWOOD CENTRE, 1-13 HOLLYWOOD ROAD, CENTRAL, HONG KONG
TEL.: (852) 2573 2296 FAX.: (852) 2384 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Titanium Group Limited and its subsidiaries
We have audited the accompanying consolidated balance sheets of Titanium Group
Limited and its subsidiaries as of December 31, 2002, 2003 and 2004, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Titanium Group
Limited and its subsidiaries as of December 31, 2002, 2003 and 2004, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, 2003 and 2004 in conformity with
accounting principles generally accepted in the United States of America.
As described in Note 13 to the consolidated financial statements, the
accompanying 2002, 2003 and 2004 financial statements have been restated to
reflect certain reclassifications made to the consolidated statements of income
and cash flows.
/s/ ZHONG YI (HONG KONG) C.P.A. COMPANY LIMITED
Zhong Yi (Hong Kong) C.P.A. Company Limited.
Certified Public Accountants
Hong Kong, China
August 31, 2005
(except for Note 13, as to which
the date is January 25, 2006)
FF-1
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002
---- ----- ---- ----
US$ HK$ HK$ HK$
ASSETS
Current assets:
Cash and cash equivalents $ 67,121 $ 523,543 $ 746,205 $ 500,852
Accounts receivable, trade 184,346 1,437,898 1,203,161 1,552,623
Amount due from related parties 134,447 1,048,685 808,330 385,534
Inventories 2,686 20,953 - -
Deposits 14,291 111,469 47,860 20,210
-------------- -------------- -------------- --------------
Total current assets 402,891 3,142,548 2,805,556 2,459,219
-------------- -------------- -------------- --------------
Plant and equipment
Computer system 28,012 218,495 133,720 73,232
Decoration 4,671 36,430 - -
Furniture and fixtures 2,521 19,660 19,000 19,000
Office equipment 5,470 42,667 42,667 23,012
-------------- -------------- -------------- --------------
40,674 317,252 195,387 115,244
Less: accumulated depreciation (18,238) (142,253) (72,836) (30,262)
-------------- -------------- -------------- --------------
Plant and equipment, net 22,436 174,999 122,551 84,982
-------------- -------------- -------------- --------------
Intangible assets 312,925 2,440,815 999,677 38,000
-------------- -------------- -------------- --------------
Total assets $ 738,252 $ 5,758,362 $ 3,927,784 $ 2,582,201
============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
FF-2
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002
---- ---- ---- ----
US$ HK$ HK$ HK$
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 8,058 $ 62,850 $ 211,264 $ 1,215
Current portion of bank borrowings 2,137 16,667 200,000 -
Amount due to related parties 27,025 210,797 290,085 194,265
Accounts payable 111,629 870,706 1,215,076 1,350,983
Taxes payable 17,482 136,360 14,706 95,884
------------- -------------- -------------- --------------
Total current liabilities 166,331 1,297,380 1,931,131 1,642,347
------------- -------------- -------------- --------------
Long-term debt
Long term portion of bank
borrowings - - 16,667 -
Shareholders' loans 182,051 1,420,000 920,000 -
------------- -------------- -------------- --------------
182,051 1,420,000 936,667 -
------------- -------------- -------------- --------------
Minority interest 922 7,190 37,760 (2,455)
------------- -------------- -------------- --------------
Stockholders' equity:
Common stock, US$0,01 (HK$0.78)
par value, Authorized -
100,000,000 shares, issued and
outstanding - 47,000,000 shares 50,000 390,000 390,000 390,000
Retained earnings 339,374 2,647,120 633,127 552,219
Accumulated other comprehensive
income (426) (3,328) (901) 90
------------- -------------- -------------- --------------
388,948 3,033,792 1,022,226 942,309
------------- -------------- -------------- --------------
Total liabilities and stockholders'
equity $ 738,252 $ 5,758,362 $ 3,927,784 $ 2,582,201
============= ============== ============== ==============
See accompanying notes to consolidated financial statements.
FF-3
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002
---- ---- ---- ----
US$ HK$ HK$ HK$
(Restated) (Restated) (Restated) (Restated)
Revenue - Projects
Products $ 559,764 $ 4,366,162 $ 2,874,232 $ 2,905,458
Services 181,396 1,414,887 951,859 1,029,713
-------------- -------------- ------------- --------------
741,160 5,781,049 3,826,091 3,935,171
Maintenances 72,846 568,203 531,603 332,170
-------------- -------------- ------------- --------------
814,006 6,349,252 4,357,694 4,267,341
-------------- -------------- ------------- --------------
Cost of sales - Projects
Products (327,225) (2,552,379) (2,006,017) (1,223,467)
Services (130,608) (1,018,719) (685,338) (731,967)
-------------- -------------- ------------- --------------
(457,833) (3,571,098) (2,691,355) (1,955,434)
Maintenances - - (9,426)
-------------- -------------- ------------- --------------
(457,833) (3,571,098) (2,691,355) (1,964,860)
-------------- -------------- ------------- --------------
Gross profit 356,173 2,778,154 1,666,339 2,302,481
-------------- -------------- ------------- --------------
Expenses
Selling, general and
administrative expenses (241,641) (1,884,804) (2,095,078) (1,117,729)
Research and development costs - - (694,918) (662,500)
-------------- -------------- ------------- --------------
(241,641) (1,884,804) (2,789,996) (1,780,229)
-------------- -------------- ------------- --------------
Income (loss) from operations 114,532 893,350 (1,123,657) 522,252
-------------- -------------- ------------- --------------
Other income (expenses)
Interest expenses (2,119) (16,532) (6,877) -
Grant and subsidy income 157,634 1,229,545 1,182,435 90,159
Other income 3,134 24,449 1,153 2,064
-------------- -------------- ------------- --------------
Total other income 158,649 1,237,462 1,176,711 92,223
-------------- -------------- ------------- --------------
Income before provision for
income taxes and minority interest 273,181 2,130,812 53,054 614,475
Income tax (18,896) (147,389) (11,931) (95,884)
-------------- -------------- ------------- --------------
Income before minority interest 254,285 1,983,423 41,123 518,591
Minority interest 3,919 30,570 39,785 2,455
-------------- -------------- ------------- --------------
Net profit $ 258,204 $ 2,013,993 $ 80,908 $ 521,046
============== ============== ============= ==============
See accompanying notes to consolidated financial statements.
FF-4
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2004 2003 2002
US$ HK$ HK$ HK$
(Restated) (Restated) (Restated) (Restated)
Net income per share $ 0.01 $ 0.04 $ 0.00 $ 0.01
============== ============== ============= ==============
Weighted average shares
outstanding
Basic 47,000,000 47,000,000 47,000,000 47,000,000
============== ============== ============= ==============
Diluted 47,000,000 47,000,000 47,000,000 47,000,000
============== ============== ============= ==============
Net income $ 258,204 $ 2,013,993 $ 80,908 $ 521,046
Other comprehensive income (loss)
Effect of foreign transactions (311) (2,427) (991) 90
-------------- -------------- ------------- --------------
Comprehensive income $ 257,893 $ 2,011,566 $ 79,917 $ 521,136
============== ============== ============= ==============
See accompanying notes to consolidated financial statements.
FF-5
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Common stock Accumulated
comprehensive Retained
Shares Amount income Profits Total
------ ------ ------ ------- -----
At 1 January 2002 47,000,000 $ 390,000 $ - $ 31,173 $ 421,173
Cumulative foreign - - 90 - 90
currency translation
Profit for the year - - - 521,046 521,046
------------- ------------- -------------- ------------- -------------
At 31 December 2002 47,000,000 390,000 90 552,219 942,309
Cumulative foreign - - (991) - (991)
currency translation
Profit for the year - - - 80,908 80,908
------------- ------------- -------------- ------------- -------------
At 31 December 2003 47,000,000 390,000 (901) 633,127 1,022,226
Cumulative foreign - - (2,427) - (2,427)
currency translation
Profit for the year - - - 2,013,993 2,013,993
------------- ------------- -------------- ------------- -------------
At 31 December 2004 47,000,000 $ 390,000 $ (3,328) $ 2,647,120 $ 3,033,792
============= ============= ============== ============= =============
See accompanying notes to consolidated financial statements.
FF-6
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002
---- ---- ---- ----
US$ HK$ HK$ HK$
(restated) (restated) (restated)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 258,204 $ 2,013,993 $ 80,908 $ 521,046
Adjustments:
Depreciation and amortization 91,942 717,148 282,505 20,520
Minority interest in earnings of
subsidiaries (3,919) (30,570) 40,215 (2,455)
Loss on disposals of long term assets - - - 18,868
Decrease/ (increase) in:
Inventories (2,686) (20,953) - -
Trade and other receivables (30,094) (234,737) 349,462 (1,470,128)
Deposits (8,155) (63,609) (27,650) 12,270
Amount due from related parties (30,815) (600,355) (422,796) (25,534)
Increase/(decrease) in:
Trade and other payables (63,177) (492,784) 74,142 1,327,900
Amount due to related parties (10,166) 280,712 95,820 107,053
Tax payable 15,597 121,654 (81,178) 95,884
Shareholders loan 64,103 500,000 920,000 -
------------- -------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 280,834 2,190,499 1,311,428 605,424
------------- -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities - - - (187,727)
Disposal of investment securities - - - 170,381
Purchases of fixed assets (15,624) (121,865) (80,143) (56,534)
Increase of intangible assets (267,804) (2,088,869) (1,201,608) (40,000)
------------- -------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (283,428) (2,210,734) (1,281,751) (113,880)
------------- -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES :
Proceeds from long term debt - - 300,000 -
Repayments of long term debt (25,641) (200,000) (83,333) -
------------- -------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (25,641) (200,000) 216,667 -
------------- -------------- ------------- -------------
EFFECT OF EXCHANGE GAIN / (LOSS) ON CASH AND
CASH EQUIVALENTS (311) (2,427) (991) 90
------------- -------------- ------------- -------------
NET INCREASED/(DECREASED) IN CASH AND CASH
EQUIVALENTS (28,546) (222,662) 245,353 491,634
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE YEAR 95,667 746,205 500,852 9,218
------------- -------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT THE END OF
THE YEAR $ 67,121 $ 523,543 $ 746,205 $ 500,852
============= ============== ============= =============
See accompanying notes to consolidated financial statements.
FF-7
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31 2004, 2003 AND 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2004 2003 2002
---- ---- ---- ----
US$ HK$ HK$ HK$
(restated) (restated) (restated)
Other information
Interest paid on bank overdraft and
bank borrowing $ 2,119 $ 16,532 $ 6,877 $ -
============== ============= ============= ============
Income tax paid $ 423 $ 25,735 $ 93,109 $ -
============== ============= ============= ============
Non-cash disclosure
Comprehensive income / (loss) $ (311) $ (2,427) $ (991) $ 90
============== ============= ============= ============
Supplemental information of non-cash investing and financing activities
The Group has the following non-cash investing and financing activities for each
of the following years:
For the year ended December 31, 2002
Common stock issued by TGL but not contributed by the
shareholder $ 390,000
Payment of investment in subsidiary by the shareholder
on behalf of TGL (30,000)
-----------
Total of non-cash investing and financing activities for
the year ended December 31, 2002 $ 360,000
===========
For the year ended December 31, 2003
There was no such activity.
For the year ended December 31, 2004
Netting off between the amount due from related parties
with the amount due to related parties $ (360,000)
============
See accompanying notes to consolidated financial statements.
FF-8
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
1. ORGANIZATION AND BASIS OF PRESENTATION
Titanium Group Limited ("the Company") was incorporated as an
International Business Company with limited liability in the British
Virgin Island under the International Business Companies Act, Cap 291 of
the British Virgin Islands on May17, 2004.
The Company was established to be the holding company for Titanium
Technology Limited ("TTL") and Titanium Technology (Shenzhen) Co.,
Limited, a subsidiary in which TTL has a 92% equity interest,
(collectively known as "the Operating Enterprises" or "the Group"). The
Operating Enterprises are distinct legal entities with limited liability
The following are the particulars of the Operating Enterprises included in
the consolidated financial statements:
Titanium Technology Limited ("TTL")
TTL was incorporated in Hong Kong on February 14, 2001 by certain
individuals. The issued ordinary share capital of TTL was HK$30,000.
TTL is engaged in developing products utilizing biometrics technology,
licensing of technologies, professional services and project contracting.
Listed below are the technology and products which TTL has developed and
sold during the year ended December 31, 2004: -
Technology
Ti-Face
Ti-Face is the core face recognition engine developed and implemented by
TTL. The technology is capable of selecting intelligently specific areas
of the face, such as the eyes or mouth, which in turn are used as
distinguishable features for recognition.
Products
ProAccess
Applying TTL's Ti-Face technology, the ProAccess suite is a
high-performance, secure, user-friendly solution to enhance the
authentication method of physical door, personal computer, and mobile
phones by advance recognition technology.
FF-9
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
ProFacer
ProFacer is a biometrically integrated surveillance system. TTL employs a
full range of technology to enhance and automate existing surveillance
techniques. The characteristic processes enabling ProFacer to function
effectively are detection, alignment, normalization, representation and
matching.
Besides, TTL also provides consulting services to its customers. TTL's
consulting team works with the client from the earliest stages of the
project and takes accountability for the success of the project. In
generally, TTL provides consulting services in the areas of security
service and system integration/development projects.
TTL's principal markets/customer base as well as the geographic area
served can be summarized as below:
- Hong Kong, including Hong Kong government and commercial sectors;
- China, mainly the government;
- Macau, mainly casinos; and
- For Japan and the US markets, TTL has formed distribution partnership
with the local agents to sell its products. Customers in Japan came from
both retail and commercial sectors.
Titanium Technology (Shenzhen) Limited ("TTLSZ")
TTLSZ was registered in Shenzhen, the People's Republic of China ("PRC")
on September, 20 2002. The registered and contributed capital of TTLSZ was
HK$1,000,000. TTLSZ was established by TTL and EAE Production HK Limited
("EAE"). TTL owns 92% of the registered capital of TTLSZ while EAE owns
the remaining 8%.
TTLSZ is responsible for the product development activities for TTL.
An analysis of the Group's revenues and net assets by region are as
follows: -
2004 2004 2003 2002
---- ---- ---- ----
US$ HK$ HK$ HK$
Net assets
- Hong Kong 727,158 5,671,830 3,456,697 2,551,602
- PRC 11,094 86,532 471,087 30,599
- International - - - -
------------ ----------- ------------ -----------
738,252 5,758,362 3,927,784 2,582,201
============ =========== ============ ===========
2004 2004 2003 2002
---- ---- ---- ----
US$ HK$ HK$ HK$
Revenue
- Hong Kong 656,893 5,123,767 4,209,989 4,267,341
- PRC 103,854 810,065 - -
- International 53,259 415,420 147,705 -
------------ ----------- ------------ -----------
814,006 6,349,252 4,357,694 4,267,341
============ =========== ============ ===========
FF-10
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
The Group manages its business on the basis of one reportable segment: the
development of products utilizing biometrics technology, licensing of
products, bundling sales of own products with third parties software
products and the provision of related consulting services. The Group's
chief operating decision makers use consolidated results to make operating
and strategic decision.
For the year ended December 31, 2004, each of Information Security One
(Hong Kong) Limited, Beacon Base Software Limited and Hong Kong Academy of
Medicine accounted for 20.12%, 12.74% and 9.22% of the Group's turnover
for the year respectively. As of December 31, 2004, the accounts
receivable for Beacon Base Software Limited amounted to HK$801,550 which
was settled in full in the subsequent year. There were no amounts
receivable from Information Security One (Hong Kong) Limited and Hong Kong
Academy of Medicine.
For the year ended December 31, 2003, each of Ericorps Creation (HK)
Limited, MTR Corporation Limited and the Labor Department of Hong Kong
Special Administrative Region ("HKSAR") accounted for 18.95%, 15.20% and
11.88% of the Group's turnover for the year respectively. As of December
31, 2003, the accounts receivable balances amounted to HK$268, HK$187,630
and HK$1,940 for each of Ericorps Creation (HK) Limited, MTR Corporation
Limited and the Labor Department of HKSAR respectively. All of these
account receivable balances were settled in full in the subsequent year.
For the year ended December 31, 2002, each of MTR Corporation Limited,
Hong Kong Academy of Medicine and Ericorps Creation (HK) Limited accounted
for 33.38%, 24.15% and 11.72% of the Group's turnover for the year
respectively. As of December 31, 2002, the accounts receivable balances
amounted to HK$1,424,500, HK$10,500 and HK$273 from each of MTR
Corporation Limited, Hong Kong Academy of Medicine and Ericorps Creation
(HK) Limited respectively. All of these account receivable balances were
settled in full in the subsequent year.
The accompanying consolidated financial statements present the
consolidated assets, liabilities, results of operations and cash flows of
the Company and its subsidiaries (collectively known as "the Group") as if
the Company had been in existence throughout the three years ended
December 31, 2004.
The interest of the Company in the Operating Enterprises was acquired in
exchange for shares in the Company subsequent to December 31, 2004. These
transactions are considered to be transfer between entities under common
control, within the meaning of generally accepted accounting principles in
the United States of America ("US GAAP"). Accordingly, the assets and
liabilities transferred have been accounted for at historical cost or at
their "fair value" at the date of their original acquisition and have been
included in the foregoing financial statements as of the beginning of the
periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the financial statements of
Titanium Group Limited and its subsidiaries and have been prepared in
accordance in accordance with US GAAP. All significant inter-company
balances and transactions have been eliminated on consolidation.
FF-11
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the weighted average method for all inventories.
Inventories consist of computer accessories purchased from various
suppliers.
Accounts receivable
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Group's best
estimate of the amount of probable credit losses in the Group's existing
accounts receivable. The Group determines the allowance based on
historical write-off experience of the Group. The Group reviews its
allowance for doubtful accounts on a regular basis. Past due balances over
90 days and over a specified amount are reviewed individually for
collectibility. All other balances are reviewed on a pooled basis by
industry. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote. The Group does not have any off-balance-sheet credit
exposure related to its customers.
No general provision of bad and doubtful debts has been made in these
consolidated financial statements. The management considers that the
accounts receivables are from reputable customers and expects to collect
their outstanding balances in full.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalent include
cash on hand, amounts due from banks and highly liquid investments with a
remaining contractual maturity at the date of purchase of three months or
less.
Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation on plant and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. The estimated useful
life of machinery and equipment is 5 years. Total depreciation for each of
the three years ended December 31, 2002, 2003 and 2004 was HK$18,520,
HK$42,574 and HK$69,417 respectively.
Intangible assets
Intangible assets primarily consist of completed development cost of
ProAccess and ProFacer projects and patents costs. These intangible assets
are amortized using the straight-line method over their estimated useful
lives of 5 to 20 years.
Revenue recognition
The Group delivers facial recognition technology and related services
primarily to commercial customers and the HKSAR government. The Group
recognizes revenue when persuasive evidence of a sale arrangement exists,
delivery occurs or services are rendered, the sales price is fixed or
determinable and collectibility is reasonably assured. Revenue is
classified into project revenue and maintenance revenue.
FF-12
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
PROJECT REVENUE
Product revenue on contracts where title to the products pass to the
customer mainly consist of sales of OEM digital video recorders, OEM face
recognition equipment, the Group's Pro-Access and Pro-Facer software pack,
Pro-Access and Pro-Facer software license keys and other Microsoft,
Novell, Symantec and IBM OEM software products. Revenue on products is
recognized when the products are accepted by the customer. The Group also
provides consulting services to its customers primarily in connection with
implementation and use of the products. Revenue on time and material
services is recognized as the services are rendered. Expenses on all
services are recognized when the costs are incurred.
During the three years ended December31, 2002, 2003 and 2004, the Group
adopted the provisions of Emerging Issues Task Force 00-21, ACCOUNTING FOR
REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES, (EITF 00-21). EITF 00-21
governs how to determine whether separate units of accounting exist in a
revenue arrangement with multiple deliverables and, if so, how the
arrangement consideration should be allocated among separate units of
accounting. When elements such as products and services are contained in a
single arrangement, or in related arrangements with the same customer, the
Company allocates revenue to each element based on its relative fair
value, provided that such element meets the criteria for treatment as a
separate unit of accounting. The price charged when the element is sold
separately generally determines fair value.
The Group enters into contracts with customers who require the production
of tailor-made facial recognition solutions. Under these contracts, the
first element usually consists of hardware, system design, implementation
and training which is accounted for as equipment and related executory
services in accordance with SFAS No. 13. The second element consists of
customized software which is accounted for as a long term contract in
accordance with AICPA Statement of Position 97-2, SOFTWARE REVENUE
RECOGNITION, (SOP 97-2), on a unit of delivery method of measurement.
Nonperformance of training, consumables management and support services
would prevent receipt of payment for the costs incurred in the
customization, design and installation of the system. EITF 00-21 limits
the amount of revenue allocable to the customization, design and
installation of the system to the amount that is not contingent upon the
function of the products. Revenue on these contracts under EITF 00-21 is
earned based on, and is contingent upon, the full function of the
products. Due to the contingent performance of function of the products,
the Group defers revenue recognition for the system design and
installation phase of such contracts, including customized software and
equipment, and recognizes revenue when a user acceptance certificate is
obtained.
MAINTENANCE REVENUE
The Group also provides maintenance services, primarily to customers
purchasing its products. There are two types of maintenance contracts,
fixed priced maintenance contracts and one-off maintenance contracts.
Revenue from the fixed priced maintenance contracts is recorded ratably
over the maintenance contract term, while revenue for one-off maintenance
contracts are recorded when the services are rendered.
FF-13
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
SALES TO AUTHORIZED DISTRIBUTORS
The Group also uses authorized distributors to sell certain of its
products and only the authorized distributors are allowed to resell those
products. The Group requires the authorized distributors to purchase the
products and then sell through the authorized distributors' own
distribution channel to the end customers. From the Group's perspective,
the authorized distributors are ordinary customers and so the same revenue
recognition policy above applies. The sales prices to distributors have
been predetermined in accordance with the distribution agreements, and are
approximately 30% to 40% off the recommended retail prices. Once the
products are delivered and the distributor has accepted the products, we
bill the distributor and the distributor is obligated to settle the bill
accordingly within the credit period granted. There is no right of return
or other incentives given to the distributors.
POST-CONTRACT CUSTOMER SUPPORT
Under the terms of the contracts, the Group will provide post-contract
customer support ("PCS") to the customers for a period of twelve months
free of charge and then will at the discretion of the customers to enter
into a definite maintenance contracts. The nature of the PCS is the
provision of a technical support telephone hotline to the customers and as
the usage of this hotline is very seldom, the Group did not maintain any
specific personnel to operate this hotline. As a result, the cost of the
PCS during the free support period is insignificant and no reserve for the
cost of PCS is required.
Interest income is recognized on a time apportionment basis, taking into
account the principal amounts outstanding and the interest rates
applicable.
Research and development costs
Research costs are expensed as incurred. Product development expenses,
consist primarily of labor cost. The products are developed by in-house
technicians who perform research and development, enhance and maintain
existing products and provide quality assurance. Product development costs
are required to be capitalized when a product's technological feasibility
has been established by completion of a working model of the product and
ending when a product is available for general release to customers. To
date, management considers that the products, "ProAccess" and "ProFacer"
have reached this stage of development, therefore, they have capitalized
HK$1,185,678 and HK$2,022,379 of product development costs associated with
ProAccess ProFacer as intangible assets for the years ended December 2003
and 2004 respectively.
These intangible assets are being amortized using the straight-line method
over a period of 5 years. Amortization amounted to HK$237,135 and
HK$641,610 and was charged to operations for the years ended December 31,
2003 and 2004 respectively.
Grant and subsidy income
Grant and subsidy income represents subsidy from the Government of HKSAR
for assisting the Group in development of products of innovative nature.
The products developed under this subsidy plan include ProAccess and
ProFacer.
Pursuant to the agreements made between the Group and the Government of
HKSAR, the Government of HKSAR will provide funding to the Group for
product development. The funding will be made available to the specific
project in accordance with the milestones as established by the Group and
is subject to a ceiling of HK$2,000,000.
FF-14
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
The Group is not required to repay the Government grant. However, the
Group is required to contribute approximately 50% of the overall project
cost in accordance with the grant agreement. The Group has contributed
HK$2,309,313 for the ProAccess and ProFacer projects.
Upon completion of the project, the Group will have to tender to the
Government its pro rata share of the residual funds remaining in the
project account. Beside that, the Group will have to pay the Government a
royalty fee of 5% on the gross revenue earned from any activities in
connection with the project. The royalty fee paid by the Group for each of
the years ended December 31, 2003 and 2004 amounted to HK$32,647 and
HK$34,532 respectively.
The Group is entitled to retain ownership of the intellectual property
resulting from the project.
Advertising costs
The Group expenses advertising costs as incurred in accordance with the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 93-7, "Reporting for Advertising Costs". Advertising expenses
amounted to HK$129,573, HK$80,303 and HK$45,643 for the year ended
December 31, 2002, 2003 and 2004 respectively.
Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Comprehensive income
Comprehensive income as defined includes all changes in equity during a
period from non-owner sources. Accumulated comprehensive income, as
presented in the accompanying consolidated statement of stockholder's
equity consists of changes in unrealized gains and losses on foreign
currency translation. This comprehensive income is not included in the
computation of income tax expense or benefit.
Foreign currency translation methodology
The Group's functional currency is the Hong Kong dollar because the
majority of the Group's revenues, capital expenditure and operating and
borrowing costs are either denominated in Hong Kong dollars or linked to
the Hong Kong dollar exchange rate. Accordingly, transactions and balances
not already measured in Hong Kong dollars (primarily transactions
involving the United States dollar and the PRC Yuan) have been re-measured
into Honk Kong dollars in accordance with the relevant provisions of
Statement of Financial Accounting Standards (`SFAS") No. 52, "Foreign
Currency Translation". The objective of this re-measurement process is to
produce largely the same results that would have been reported if the
accounting records had been kept in Hong Kong dollars. The exchange rate
adopted throughout the consolidated financial statement where US dollars
are presented was US$1 / HK$7.8.
FF-15
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Cash, receivables, payables, and loans are considered monetary assets and
liabilities and have been translated using the exchange rate as of the
balance sheet dates. Non-monetary assets and liabilities, including
non-current assets and shareholders' equity, are stated at their actual
dollars costs or are restated from their historic cost, by applying the
historical exchange rate as monthly average exchange rates to underlying
transactions.
Equity-based compensation
The Company adopted Statement of Financial Accounting Standard ("FAS") No.
123 ("FAS 123"), Accounting for Stock-Based Compensation beginning at its
inception. Upon adoption of FAS 123, the Company continued to measure
compensation expense for its stock-based employee compensation plans using
the intrinsic value method prescribed by Accounting Principals Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB
25"). The Company did not pay any stock based compensation during any
period presented.
Use of estimates
The preparation of the consolidated financial statements requires
management to make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the period. Significant items subject to such estimates and
assumptions include the carrying amount of property, plant and equipment,
intangibles and goodwill; valuation allowances for receivables,
inventories and deferred income tax assets; environmental liabilities;
valuation of derivative instruments; and assets and obligations related to
employee benefits. Actual results could differ from those estimates.
Paid vacation leave and long service leave obligation
No accrual for paid vacation leave and long service leave obligation has
been provided in the financial statements of the Group. Pursuant to Hong
Kong law, Hong Kong employees are generally only entitled to severance pay
upon their retirement or upon the termination of their employment without
cause provided that they have been employed by the Group for a period of
more than five years. As the Group had been in existence for less than
five years, the management believes that the provision for long service
leave obligation is not required. For paid leave obligation, the Group has
adopted a policy that employees would be entitled to take paid holiday
leave in each year in accordance with their employment contracts. Any
unused vacation leave is forfeited at the end of each calendar year.
With the approval from the management, an employee of the PRC subsidiary
is entitled to carry forward the unused annual vacation leave to the
subsequent year once. Furthermore, it is also obligated to pay long
service leave to employee upon termination of employment. In accordance
with the PRC's rules and regulations on employment, the subsidiary is
required to pay the employee a payment equals to a month salary for every
full year of employment. However, the payment should not be more than
twelve month of salary normally earned by that employee. Since all the
employee have taken their entitlement of paid vacation leave and the
management considers that the provision for long service leave obligation
would be insignificant, therefore, no provision for unused annual paid
vacation leave and long service leave obligation has been provided in the
financial statements for the year ended December 31, 2004.
FF-16
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Provision for products warranties
The Group's standard warranty for its software products generally covers a
twelve-month period and warrants against substantial non-conformance to
the published documentation at time of delivery. The Group has not
experienced any material returns where it was under obligation to honor
this standard warranty provision. Warranty claims on hardware deficiencies
are covered by the particular hardware suppliers. As such, no warranty
provision has been provided in the accompanying consolidated balance sheet
or reflected in the result of operations for the three years ended
December 31, 2004, 2003 and 2002.
Impairment of long-lived assets
In accordance with Statement 144, long-lived assets, such as plant, and
equipment and intangible assets subject to amortization are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposal group classified as held for sale would be
presented separately in the appropriate asset and liability sections of
the balance sheet.
Intangible assets are tested annually for impairment and are tested for
impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset's fair value. This
determination is made at the reporting unit.
Recently issued accounting standards
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
SHARE-BASED PAYMENT, which addresses the accounting for transactions in
which an entity exchanges its equity instruments for goods or services,
with a primary focus on transactions in which an entity obtains employee
services in share-based payment transactions. This Statement is a revision
to Statement 123 and supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and its related implementation guidance. For
nonpublic companies, this Statement will require measurement of the cost
of employee services received in exchange for stock compensation based on
the grant-date fair value of the employee stock options. Incremental
compensation costs arising from subsequent modifications of awards after
the grant date must be recognized. This Statement will be effective for
the Company as of January 1, 2006. The adoption of FASB No. 123 did not
have a material impact on the Group's financial position, cash flow or
results of operations.
In December 2004, the FASB issued FASB Statement No.151, INVENTORY COSTS,
which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). Under
this Statement, such items will be recognized as current-period charges.
In addition, the Statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of
the production facilities. This Statement will be effective for the
Company for inventory costs incurred on or after January 1, 2006. The
adoption of FASB No. 151 did not have a material impact on the Group's
financial position, cash flows or results of operations.
FF-17
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
In December 2004, the FASB issued FASB Statement No. 153, EXCHANGES OF
NON-MONETARY ASSETS, which eliminates an exception in APB 29 for
non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets that do not have
commercial substance. This Statement will be effective for the Company for
non-monetary asset exchanges occurring on or after January 1, 2006. The
adoption of FASB No. 153 did not have a material impact on the Group's
financial position, cash flows or results of operation.
3. AMOUNT DUE FROM RELATED PARTIES
The outstanding amounts represent cash advanced to a director and
shareholder of the Group.
The cash advanced to a shareholder was for the payment of the
shareholder's non-business related expenses over the years. The cash
advanced to a director relates to the temporary cash payment to the
directors who will then transfer the cash to the Group's subsidiary in
PRC. It form part of the remittance procedures from the Group's subsidiary
in Hong Kong to its subsidiary in PRC.
These amounts due from related parties are unsecured, interest free and
are repayable on demand.
Set out below are the movement of the amount due from related companies
during each of the three years ended December 31, 2002, 2003 and 2004:
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Balance brought forward $808,330 $ 385,534 $ -
Advances during the year 679,725 471,237 385,534
Repayment during the year (439,370) (48,441) -
--------------- --------------- -------------
Balance carried forward $ 1,048,685 $ 808,330 $ 385,534
=============== =============== =============
Maximum balance during the year $ 1,408,685 $ 808,330 $ 385,534
=============== =============== =============
4. INTANGIBLE ASSETS
As of December 31, 2004
---------------------------------------------------
Weighted
Gross average
carrying amortization Accumulated
amount period amortization
------ ------ ------------
HK$ HK$
Intangible assets:
Products development costs $ 3,208,057 5 years $ 878,745
Patent and license right registration fee 122,420 20 years 10,917
------------- ------------
$ 3,330,477 $ 889,662
============= ============
Aggregate amortization expense for intangible assets was HK$2,000,
HK$239,931 and HK$647,731 for the years ended December 31, 2002, 2003 and
2004 respectively.
FF-18
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The board of directors considers that the estimated fair value of
the Group's financial instruments at December 31, 2002, 2003 and 2004 are
their respective carrying amount.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents, trade accounts receivable, amounts due from
related parties, bank borrowings, trade accounts payable and shareholders'
loan. Except shareholders' loan, the carrying amount of the other
financial instruments approximates fair value because of their short
maturity. The fair value of non-current shareholder loans (discussed in
Note 6) could not be reasonably estimated as there are no fixed repayment
dates associated with the instruments.
6. LONG TERM BORROWINGS
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Bank borrowings $ - $ 216,667 $ -
Current portion of bank borrowings - (200,000) -
--------------- ---------------- ----------------
Long term portion of bank borrowings - 16,667 -
--------------- ---------------- ----------------
Loan from shareholders 1,420,000 920,000 -
--------------- ---------------- ----------------
$ 1,420,000 $936,667 $ -
=============== ================ ================
In 2003, TTL entered into a financing agreement with a financial
institution in which the financial institution would lend the Group
HK$300,000. The bank borrowings were unsecured and bearing interest at
5.5% per annum. The loan was to be repaid by 18 monthly installments of
HK$18,042. The financing agreement was secured by personal guarantees
given by TTL's directors.
The loans from shareholders are unsecured, interest free and are not
repayable within the next twelve months.
FF-19
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
7. COMMON STOCK
The description of the Company's shares is as follows:
Each outstanding share of common stock is entitled to one vote. The common
stockholders do not have cumulative voting rights in the election of
directors, and accordingly, holders of a majority of shares voting are
able to elect all of the directors.
Holders of common stock are entitled to receive ratably such dividends as
may be declared by the board of directors out of funds legally available
therefore as well as distributions to the stockholders.
At the time of incorporation, the Company's authorized capital was
1,000,000 shares of common stock, par value US$0.05. On June 20, 2005, the
authorized capital was changed to 100,000,000 shares of common stock, par
value US$0.01.
Pursuant to a share exchange agreement dated June 22, 2005, the Company
issued 47,000,000 shares in exchange for the then outstanding shares of
TTL and TTL then became a wholly owned subsidiary of the Company.
Subsequent to the balance sheet date, the Company sold 3,000,000 shares of
common stock through a private placement and received aggregate gross
proceeds of HK$4,680,000. Expenses of the offering were approximately
HK$507,000. In addition, the Company issued 3,000,000 common stock
purchase warrants to the investors. Each common stock purchase warrant
entitles the investor to purchase one share of common stock at an exercise
price of US$0.50 per share through June 30, 2008.
8. INCOME TAXES
Income tax consists of:
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Hong Kong Profit Tax:
- current year $ 147,389 $ 11,931 $ 95,884
=========== =========== ===========
Income tax is calculated at 17.5% (2003: 17.5% and 2002: 16%) based on the
estimated assessable profit for each year. No income tax has been provided
for the Group's subsidiary registered in the PRC as the subsidiary has no
profit earned which is subject to tax in accordance with the relevant law
and regulation in the PRC.
As the tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 2004, 2003 and 2002 is
immaterial to the Group; therefore, no provision for deferred tax has been
made in these consolidated financial statements.
A reconciliation between total income tax expense and the amount computed
by applying the statutory income tax rate to income before tax is as
follows: -
FF-20
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2004 2003 2002
----- ---- ----
Statutory rate 17.50% 17.50% 16.00%
Temporary book - tax difference (10.58%) 4.99% (0.40%)
----------- ---------- ----------
Effective tax rate 6.92% 22.49% 15.60%
=========== ========== ==========
9. OPERATING LEASE COMMITMENTS
At December 31, 2004 the Group had total future minimum lese payments
under non-cancelable operating leases falling due as follows:
2004
----
2005 235,656
2006 58,914
2007 -
2008 -
2009 -
---------
294,570
=========
The Group expenses rental payments as incurred and is included in
administrative expenses in the consolidated statement of income. Rental
payments amounted to HK$45,587, HK$99,052 and HK$207,088 for the years
ended December 31, 2002, 2003 and 2004 respectively.
10. RELATED PARTY TRANSACTIONS
For each of the years in the three-year period ended December 31, 2002,
2003 and 2004, TTL had sold goods to Ericorps Creation (HK) Limited
amounting to HK$500,000, HK$825,820 and HK$266,791 respectively.
Ericorps Creation (HK) Limited is owned by certain beneficial shareholders
of the Group who control an aggregate of 10% of the outstanding shares.
11. SUBSEQUENT EVENTS
On May 13, 2005, the Group subsidiary signed a new operating lease
effective from July 1, 2005. The future minimum lease payments for the
next three years under the lease are HK$106,627 for 2005, HK$284,340 for
2006, HK$284,340 for 2007 and HK$142,170 for 2008.
On June 30, 2005, certain shareholders agreed to forgive loans made to the
Group through that date. The amount of the forgiveness (net of loans made
to the shareholders) was contributed to the capital of the Company and
aggregated approximately HK$387,000.
FF-21
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
12. OPERATING RISK
Concentration of credit risk
The carrying amount of cash and cash equivalents, trade receivables and
due from related parties represented the Group's maximum exposure to
credit risk in relation to financial assets.
The majority of the Group's trade receivables relate to sales of
goods/provision of services to third party customers. The Group does not
have fixed credit period for its trade receivables. The Group performs
ongoing credit evaluations of its customer's financial condition and
generally does not require collateral on trade receivables.
No other financial assets carry a significant exposure to credit risk.
Exchange risk
The Group cannot guarantee that the current exchange rate will remain
steady, therefore there is a possibility that the Group could post the
same amount of profit for two comparable periods and because of the
fluctuating exchange rate actually post higher or lower profit depending
on exchange rate of HK$ converted to US$ on that date. The exchange rate
could fluctuate depending on changes in political and economic
environments without notices.
13. RESTATEMENT OF FINANCIAL STATEMENT
The Group determined that the previously filed audited consolidated
financial statements for the three years ended December 31, 2002, 2003 and
2004, contained classification errors that required restatement of the
Group's Consolidated Statements of Income and Cash Flows.
The restatement resulted primarily from changes of classification of the
following transactions: 1) correction to classification of amortization of
intangible assets, 2) correction to the segmental classification of
revenue and cost of sales in the consolidated statement of income, 3)
correction to the classification of non-cash investment and financing
activities. In addition, modifications have been made to the following
financial statement footnotes: Footnote 1 "Organization and Basis of
Presentation", footnote 2 "Summary of Significant Accounting Policies",
footnote 5 "Fair Value of Financial Instruments", footnote 8 "Income
Taxes" and footnote 9 "Operating Lease Commitments".
FF-22
TITANIUM GROUP LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 & 2002
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
The components of the restatement are summarized in the table below:
AS FILED ADJUSTMENT TO RESTATED
RESTATE
For the year ended December 31, 2002
CONSOLIDATED STATEMENT OF CASH FLOWS
Net cash provided by operating activities $ 245,424 $ 360,000 $ 605,424
Net cash used in investing activities (143,880) 30,000 (113,880)
Non-cash transactions - 360,000 360,000
For the year ended December 31, 2003
AS FILED ADJUSTMENT TO RESTATED
RESTATE
CONSOLIDATED STATEMENT OF INCOME
Cost of sales $ 2,454,220 $ 237,135 $ 2,691,355
Selling, general and administrative
expenses 2,332,213 (237,135) 2,095,078
For the year ended December 31, 2004
AS FILED ADJUSTMENT TO RESTATED
RESTATE
CONSOLIDATED STATEMENT OF INCOME
Cost of sales $ 2,929,488 $ 641,610 $ 3,571,098
Selling, general and administrative
expenses 2,526,414 (641,610) 1,884,804
CONSOLIDATED STATEMENT OF CASH FLOWS
Non-cash transaction - - (360,000)
FF-23
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the registrant in connection with the
securities being registered are as follows (stated in US dollars):
Securities and Exchange Commission filing fee........$ 234.36
Accounting fees and expenses......................... 70,000.00
Blue sky fees and expenses........................... 1,000.00
Legal fees and expenses.............................. 25,000.00
Transfer agent fees and expenses..................... 5,550.00
Printing expenses.................................... 2,000.00
Miscellaneous expenses............................... 1,215.64
--------------
Total................................................$ 105,000.00
==============
All amounts are estimates except the SEC filing fee. The Selling
Stockholders will be bearing the cost of its own brokerage fees and commissions
and its own legal and accounting fees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the International Business Companies Act of the British Virgin
Islands, the registrant has broad powers to indemnify its directors and officers
against liabilities they may incur in such capacities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). Section 74
of the registrant's Articles of Association (Exhibit 3.2 hereto) states that
every officer and director shall be entitled to be indemnified out of the assets
of the registrant against all losses or liabilities which he may sustain or
incur in or about the execution of the duties of his office or otherwise in
relation thereto, and no director or other officer shall be liable for any loss,
damage, or misfortune which may happen to, or be incurred by the registrant in
the execution of the duties of his office, or in relation thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the registrant has issued and sold the
unregistered securities set forth in the tables below.
- ------------------------------------------------------------------------------------------------------------------------
PERSONS OR
CLASS OF
DATE PERSONS SECURITIES CONSIDERATION EXEMPTION CLAIMED
- ------------------------------------------------------------------------------------------------------------------------
May 2004 5 persons 5,000,000 shares of common US$50,000 Section 4(2)
stock
- ------------------------------------------------------------------------------------------------------------------------
June 2005 Golden Mass 42,000,000 shares of common Shares of capital stock of Section 4(2)
Technolo-gies stock Titanium Technology Limited
Ltd.
- ------------------------------------------------------------------------------------------------------------------------
July 2005 - 64 2,460,000 Units, each Unit US$492,000 aggregate offering Rule 506
August 2005 accredited consisting of one share of price; selling commissions of
investors common stock and one common US$49,200
stock purchase warrant
- ------------------------------------------------------------------------------------------------------------------------
II-1
- ------------------------------------------------------------------------------------------------------------------------
PERSONS OR
CLASS OF
DATE PERSONS SECURITIES CONSIDERATION EXEMPTION CLAIMED
- ------------------------------------------------------------------------------------------------------------------------
July 2005 - 13 non-U.S. 540,000 Units, each Unit US$108,000 aggregate offering Regulation S
August 2005 Persons consisting of one share of price; selling commissions of
common stock and one common US$10,800
stock purchase warrant
- ------------------------------------------------------------------------------------------------------------------------
No underwriters were used in the recapitalization and reorganization of
the registrant. Underwriters were used in connection with the sale of the Units
made from July 2005 to August 2005. The registrant relied upon the exemption
from registration contained in Section 4(2) as to all of the transactions except
for the sales of Units to accredited investors. The registrant relied upon Rule
506 and Regulation S for the sales of Units from July 2005 to August 2005, as
all of the purchasers were either accredited investors or non-US persons. With
regard to the transactions made in reliance on the exemption contained in
Section 4(2), the purchasers were deemed to be sophisticated with respect to the
investment in the securities due to their financial condition and involvement in
the registrant's business. Restrictive legends were placed on the stock
certificates evidencing the securities issued in all of the above transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- --------------------------------------------------------------------------------
REGULATION S-K
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
3.1 Memorandum of Association, as amended (1)
- --------------------------------------------------------------------------------
3.2 Articles of Association, as amended (1)
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4.1 Form of Warrant
- --------------------------------------------------------------------------------
4.2 Form of Subscription Agreement
- --------------------------------------------------------------------------------
5.1 Opinion of Stevenson, Wong & Co.
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10.1 Employment agreement with Jason Ma dated January 1, 2005 (1)
- --------------------------------------------------------------------------------
10.2 Employment agreement with Humphrey Cheung dated January 1, 2005
(1)
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10.3 Employment agreement with Billy Tang dated January 1, 2005 (1)
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10.4 Office lease dated June 22, 2005 (1)
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10.5 2005 Stock Plan (2)
- --------------------------------------------------------------------------------
10.6 Technical Service Agreement with IBM China/Hong Kong Limited
dated October 5, 2004 and Amendment to Supplier Agreement dated
December 3, 2004 (2)
- --------------------------------------------------------------------------------
10.7 Technology Partnership and Research & Development Contract with
China Scientific Automation Research Center dated June 15, 2005
(2)
- --------------------------------------------------------------------------------
10.8 Technology Research and Development Contract with Tsing Hua
University dated November 4, 2005 (2)
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
REGULATION S-K
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
10.9 Form of Distributor Agreement
- --------------------------------------------------------------------------------
10.10 Form of Reseller Agreement
- --------------------------------------------------------------------------------
21 Subsidiaries of the registrant (1)
- --------------------------------------------------------------------------------
23.1 Consent of Stevenson, Wong & Co. (2)
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23.2 Consent of Zhong Yi (Hong Kong) C.P.A. Company Limited
- --------------------------------------------------------------------------------
- ------------------
(1) Filed as an exhibit to the initial filing of the registration statement on
September 14, 2005.
(2) Filed as an exhibit to Amendment No.1 to the registration statement on
December 9,2005.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the issuer pursuant to the foregoing provisions, or
otherwise, the issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the issuer in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Hong Kong,
on January 25, 2006.
TITANIUM GROUP LIMITED
By: /s/ JASON MA
-----------------------------------
Jason Ma, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated:
SIGNATURE TITLE DATE
Chief Executive Officer (Principal
/s/ JASON MA Executive Officer) January 25, 2006
- --------------------------------------------
Jason Ma
Chairman of the Board of Directors
(Principal Financial and Accounting Officer)
/s/ DR. JOHNNY NG January 25, 2006
- --------------------------------------------
Dr. Johnny Ng
/s/ HUMPHREY CHEUNG Director January 25, 2006
- --------------------------------------------
Humphrey Cheung
/s/ BILLY TANG Director December 9, 2005
- --------------------------------------------
Billy Tang
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