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 47 for more information
about the selling shareholders.
Our common stock is presently not traded on any market or securities
exchange. The offering price may not reflect the market price of our shares
after the offering.
INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. A
DETAILED EXPLANATION OF THESE RISKS IS INCLUDED IN THE SECTION ENTITLED "RISK
FACTORS" OF THIS PROSPECTUS, BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
June 14, 2006
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................3
RISK FACTORS...................................................................5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..............................9
DILUTION......................................................................10
DETERMINATION OF OFFERING PRICE...............................................10
DIVIDEND POLICY...............................................................10
USE OF PROCEEDS...............................................................10
SELECTED FINANCIAL DATA.......................................................10
HISTORICAL EXCHANGE RATES.....................................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................................12
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................20
BUSINESS......................................................................21
MANAGEMENT....................................................................32
EXECUTIVE COMPENSATION........................................................34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................36
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................37
TAXATION......................................................................39
DESCRIPTION OF SECURITIES.....................................................41
SELLING STOCKHOLDERS..........................................................47
PLAN OF DISTRIBUTION..........................................................50
LEGAL MATTERS.................................................................51
EXPERTS.......................................................................51
ADDITIONAL INFORMATION........................................................52
REPORTS TO STOCKHOLDERS.......................................................52
INDEX TO FINANCIAL STATEMENTS.................................................52
2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should carefully read this entire prospectus and the financial
statements contained in this prospectus before purchasing our securities.
TITANIUM GROUP LIMITED
Titanium Group Limited was incorporated on May 17, 2004 as an
international business company pursuant to the International Business Companies
Act of the British Virgin Islands ("BVI"). On June 22, 2005, we acquired all of
the entire issued share capital of Titanium Technology Limited, a company
incorporated in Hong Kong on February 14, 2001 with limited liability ("Titanium
Technology"). On September 20, 2002, Titanium Technology and EAE Productions
(HK) Limited, a company incorporated in Hong Kong on October 8, 1997,
established Titanium Technology (Shenzhen) Co., Ltd., a wholly foreign owned
enterprise in China.
We established a BVI company to hold Titanium Technology, as we
believed that it would be easier to attract investment capital into a BVI
company rather than a Hong Kong company. While the BVI entity is the parent
company, our accounting history is that of Titanium Technology and therefore our
operations go back to 2001 when Titanium Technology began operations.
Through our wholly-owned subsidiary, Titanium Technology, we develop
and market biometrics technologies. Based in Hong Kong, with a research and
development center in ShenZhen, People's Republic of China ("PRC"), and a sales
representative office in the United States, we have built a network of over 40
IT practitioners and researchers, enabling us to provide proprietary biometrics
products and professional services. In order to ensure the sustainability of
technological development, we have engaged both Tsinghua University and the
Chinese Academy of Science, Institute of Automation to perform certain research
and development work on our behalf.
Our primary office is located at 4/F, BOCG Insurance Tower, 134-136 Des
Voeux Road Central, Hong Kong, where our telephone number is 852 3427 3177. Our
website is located at WWW.TITANIUM-TECH.COM. Information contained in our
website is not part of this prospectus.
THE OFFERING
Securities offered..................9,956,000 shares of common stock.
Use of proceeds.....................We will not receive any of the proceeds from
the selling stockholders of shares of our
common stock.
Securities outstanding..............50,000,000 shares of common stock.
Plan of distribution................The offering is made by the selling
stockholders named in this prospectus, to
the extent they sell shares. Sales may be
made in the open market or in private
negotiated transactions, at fixed or
negotiated prices. See "Plan of
Distribution."
RISK FACTORS
Investing in our securities involves a high degree of risk. You should
consider carefully the information under the caption "Risk Factors" in deciding
whether to purchase the Units.
SUMMARY FINANCIAL INFORMATION
The following summary financial data (expressed in both United States
Dollars (US$) and Hong Kong Dollars (HK$)) is derived from the unaudited
financial statements for the three-month period ended March 31, 2006 and the
fiscal years ended December 31, 2005, 2004 and 2003, included elsewhere in this
prospectus. In June 2005, we acquired 100% ownership of Titanium Technology, but
did not have any operations prior to the acquisition.
3
Accordingly, for accounting purposes, the historical financial statements of
Titanium Technology are the historical financial statements of the company.
We have prepared the financial statements in accordance with generally
accepted accounting principles. Our results of operations for any interim period
do not necessarily indicate our results of operations for the full year. You
should read this summary financial data in conjunction with "Management's
Discussion and Analysis or Plan of Operation," "Business," and our financial
statements.
As stated in United States dollars:
INCOME STATEMENT DATA: THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------------------------------------------------
MARCH 31, 2005 2004 2003
2006 (US$) (US$) (US$) 2002
(US$) (RESTATED) (RESTATED) (US$)
------------ -------------------------------------------------------------------
Revenues $ 394,673 $ 1,710,528 $ 814,006 $ 558,679 $ 547,095
Net income (loss) $ 7,468 $ 101,924 $ 162,844 $ (101,951) $ 66,801
Net income (loss) per common share $ 0.00 $ 0.002 $ 0.003 $ (0.002) $ 0.00
BALANCE SHEET DATA: DECEMBER 31,
-------------------------------------------------------------------
MARCH 31, 2005 2004 2003 2002
2006 (US$) (US$) (US$) (US$)
(US$) (RESTATED) (RESTATED)
------------ -------------------------------------------------------------------
Working capital $ 767,751 $ 777,119 $ 236,560 $ 112,106 $ 104,727
Total assets $ 1,411,865 $ 1,351,479 $ 535,896 $ 394,350 $ 331,051
Long-term debt $ - $ - $ 182,051 $ 120,086 $ -
Stockholders' equity $ 1,060,020 $ 1,051,859 $ 181,263 $ 18,730 $ 120,809
As stated in Hong Kong dollars:
INCOME STATEMENT DATA: THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------------------------------------------------
MARCH 31, 2005 2004 2003
2006 (HK$) (HK$) (HK$) 2002
(HK$) (RESTATED) (RESTATED) (HK$)
------------ -------------------------------------------------------------------
Revenues $ 3,078,442 $ 13,342,121 $ 6,349,252 $ 4,357,694 $ 4,267,341
Net income (loss) $ 58,249 $ 795,004 $ 1,270,181 $ (795,221) $ 521,046
Net income (loss) per common share $ 0.001 $ 0.016 $ 0.027 $ (0.017) $ 0.01
BALANCE SHEET DATA: DECEMBER 31,
-------------------------------------------------------------------
MARCH 31, 2005 2004 2003 2002
2006 (HK$) (HK$) (HK$) (HK$)
(HK$) (RESTATED) (RESTATED)
------------ -------------------------------------------------------------------
Working capital $ 5,988,455 $ 6,061,528 $ 1,845,168 $ 874,425 $ 816,872
Total assets $11,012,543 $ 10,541,537 $ 4,179,992 $ 3,075,927 $ 2,582,201
Long-term debt $ - $ - $ 1,420,000 $ 936,667 $ -
Stockholders' equity $ 8,268,149 $ 8,204,496 $ 1,413,851 $ 146,097 $ 942,309
4
RISK FACTORS
Before deciding to invest in us or to maintain or increase your
investment, you should carefully consider the risk factors described below that
discuss the material risks related to an investment in us, together with all
other information in this prospectus and in our other filings with the SEC,
before making an investment decision. If any of the following risks actually
occurs, our business, financial conditions or operating results could be
materially adversely affected. In such case, the trading price of our common
stock could decline, and you may lose all or part of your investment.
WE HAVE ONLY A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE
YOUR INVESTMENT IN OUR STOCK.
Your evaluation of our business will be difficult because we have a
limited operating history. Titanium Technology has been in business since
February 2001. We face a number of risks encountered by early-stage companies,
including our need to develop infrastructure to support growth and expansion;
our need to obtain long-term sources of financing; our need to establish our
marketing, sales and support organizations, as well as our distribution
channels; our need to manage expanding operations; and our dependence on
technology which could become incompatible or out of date. Our business strategy
may not be successful, and we may not successfully address these risks.
OUR SUCCESS AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE AND
PROTECT OUR PROPRIETARY TECHNOLOGY.
Our success depends on our ability to protect our proprietary
technology. In the event that a third party misappropriates or infringes on our
intellectual property, our business would be seriously harmed. Third parties may
independently discover or invent competing technologies or reverse engineer our
technology. We expect that if we should successfully licenses to use our
technology, competitors may attempt to duplicate our technology. Even though we
have been issued a patent from Hong Kong and even if we were to obtain copyright
protection on the software, we would still have to enforce our rights against
those who might attempt to infringe on our intellectual property, as patent
protection does not necessarily deter infringement. Such enforcement efforts are
likely to be expensive and time-consuming and we may lack the ability to engage
in any significant enforcement efforts.
THE LOSS OF OUR OFFICERS AND DIRECTORS OR OUR FAILURE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL COULD IMPAIR OUR ABILITY TO MAINTAIN OUR BUSINESS
OPERATIONS.
Our success depends largely upon the efforts, abilities, and
decision-making of our executive officers and directors. Although we believe
that we maintain a core group sufficient for us to effectively conduct our
operations, the loss of any of our key personnel could, to varying degrees, have
an adverse effect on our operations and system development. We do not currently
maintain "key-man" life insurance on any of our executives or directors, but we
intend to have such policies in place in the near future. On the other hand, all
of the key officers have employment contracts in place and significant stock
ownership and we strongly believe that the stability of the core team will be
maintained for a long period of time. Nevertheless, the loss of any one of them
would have a material adverse affect on us and technically, there can be no
assurance that the services of any member of our management will remain
available to us for any period of time.
The knowledge and expertise of our officers and directors are critical
to our operations. There is no guarantee that we will be able to retain our
current officers and directors, or be able to hire suitable replacements in the
event that some or all of our current management leave our company. In the event
that we should lose key members of our staff, or if we are unable to find
suitable replacements, we may not be able to maintain our business and might
have to cease operations, in which case you might lose all of your investment.
WE DERIVE OVER HALF OF OUR REVENUES FROM A FEW CUSTOMERS, THE LOSS OF WHICH
COULD HAVE AN ADVERSE EFFECT ON OUR REVENUES.
For the year ended December 31, 2005, four customers accounted for over
50% of our revenue. The following four customers were each over 10%: Elixir
Group (Macau) Ltd. (13.2%), MTR Corporation Ltd. (12.0%), GuangXi Hai Tin
Electric Ltd. (11.5%) and Adamson & Gonzalez SL (11.5%). Since a small number of
customers account for a substantial portion of our revenues, the loss of any of
our significant customers would cause revenue to
5
decline and could have a material adverse effect on our business. While the
customers who each accounted for over 10% of our revenue for the 2004 fiscal
year are not the same as the four customers for the 2005 fiscal year, this
indicates that we need to expand our client base so that we will no longer be
subject to this risk.
WE FACE COMPETITION FROM EXISTING AND POTENTIAL COMPETITORS IN THE BIOMETRICS
INDUSTRY, WHICH COULD FORCE US TO OFFER LOWER PRICES AND/OR NARROW OUR FOCUS,
RESULTING IN REDUCED REVENUES.
The current global political climate has heightened interest in the use
of security solutions, and we expect competition in this field, which is already
substantial, to intensify. Competitors in biometrics are developing and bringing
to market products that use face recognition as well as eye, fingerprint, and
other forms of biometric verification. Our products also will compete with other
non-biometric technologies, such as certificate authorities and traditional
keys, cards, surveillance systems, and passwords. Widespread adoption of one or
more of these technologies or approaches in the markets we intend to target
could significantly reduce the potential market for our systems and products.
Due to our small size, it can be assumed that most if not all of our competitors
have significantly greater financial, technical, marketing and other competitive
resources. Many of our competitors and potential competitors have greater name
recognition and more extensive customer bases that could be leveraged, for
example, to position themselves as being more experienced, having better
products, and being more knowledgeable than us. To compete, we may be forced to
offer lower prices and narrow our marketing focus, resulting in reduced
revenues.
SECURITY BREACHES IN SYSTEMS THAT WE SELL OR MAINTAIN COULD RESULT IN THE
DISCLOSURE OF SENSITIVE GOVERNMENT INFORMATION OR PRIVATE PERSONAL INFORMATION
THAT COULD RESULT IN THE LOSS OF CLIENTS AND NEGATIVE PUBLICITY.
Many of the systems we sell manage private personal information and
protect information involved in sensitive government functions. A security
breach in one of these systems could cause serious harm to our business as a
result of negative publicity and could prevent us from having further access to
such systems or other similarly sensitive areas for other governmental clients.
Our systems may also be affected by outages, delays and other difficulties. We
do not have insurance coverage that would cover losses and liabilities that may
result from such events.
THE MARKET FOR OUR SOLUTIONS IS STILL DEVELOPING AND IF THE INDUSTRY ADOPTS
STANDARDS OR A PLATFORM DIFFERENT FROM OUR PLATFORM, THEN OUR COMPETITIVE
POSITION WOULD BE NEGATIVELY AFFECTED.
The market for identity solutions is still emerging. The evolution of
this market is in a constant state of flux that may result in the development of
different technologies and industry standards that are not compatible with our
current products or technologies. In particular, the face recognition market
lacks widely recognized industry standards for commercial use.
A LIMITED NUMBER OF STOCKHOLDERS WILL COLLECTIVELY CONTINUE TO OWN OVER 75% OF
OUR COMMON STOCK AFTER THIS OFFERING AND MAY ACT, OR PREVENT CERTAIN TYPES OF
CORPORATE ACTIONS, TO THE DETRIMENT OF OTHER STOCKHOLDERS.
Immediately after this offering, our directors and officers will
continue to own more than 75% of our outstanding common stock. Accordingly,
these stockholders may, if they act together, exercise significant influence
over all matters requiring stockholder approval, including the election of a
majority of the directors and the determination of significant corporate actions
after this offering. This concentration could also have the effect of delaying
or preventing a change in control that could otherwise be beneficial to our
stockholders.
THERE IS A LACK OF A PUBLIC MARKET FOR OUR COMMON SHARES, WHICH LIMITS OUR
SHAREHOLDERS ABILITY TO RESELL THEIR SHARES OR PLEDGE THEM AS COLLATERAL.
There is currently no public market for our shares, and we cannot
assure you that a market for our stock will develop. It is our understanding
that a broker-dealer plans to submit a Form 211 to commence quotation of our
stock on the OTC Bulletin Board. However, we cannot assure you that our common
stock will be listed for quotation on the OTC Bulletin Board. If this effort
should be unsuccessful, we intend to pursue listing on the OTC Bulletin Board
through another broker-dealer. Consequently, investors may not be able to use
their shares for collateral or loans and may not be able to liquidate at a
suitable price in the event of an emergency. In addition,
6
investors may not be able to resell their shares at or above the price they paid
for them or may not be able to sell their shares at all.
Due to the registration of the shares, we will be subject to the
reporting requirements of the Securities Exchange Act of 1934. As a company that
files reports under this Act, our common stock will be considered a "covered
security" under the National Securities Market Improvement Act of 1996 for
secondary trading transactions in most states. We also intend to obtain coverage
in Standard & Poor's Corporation Records, which we believe will facilitate
secondary trading of our shares.
REGULATIONS RELATING TO "PENNY STOCKS" MAY LIMIT THE ABILITY OF OUR SHAREHOLDERS
TO SELL THEIR SHARES AND, AS A RESULT, OUR SHAREHOLDERS MAY HAVE TO HOLD THEIR
SHARES INDEFINITELY.
If a market develops for our common stock, our common stock would, most
likely, be subject to rules promulgated by the SEC relating to "penny stocks,"
which apply to non-NASDAQ companies whose stock trades at less than US$5.00 per
share or whose tangible net worth is less than US$2,000,000 (HK$15,600,000).
These rules require brokers who sell "penny stocks" to persons other than
established customers and "accredited investors" to complete certain
documentation, make suitability inquiries of investors, and provide investors
with certain information concerning the risks of trading in the security. These
rules may discourage or restrict the ability of brokers to sell our common stock
and may affect the secondary market for the common stock.
AS WE HAVE PLEDGED ALL OF OUR ASSETS TO SECURE AN OVERDRAFT FACILITY AT OUR
BANK, THE FAILURE TO COLLECT OUR ACCOUNTS RECEIVABLE COULD IMPAIR OUR
OPERATIONS.
We have a banking facilities arrangement with the bank where we
maintain our checking account that allows us to overdraft our account up to
US$256,410 (HK$2,000,000). Our officers and directors have provided their
personal guarantees up to that amount for the banking facilities arrangement.
Essentially this is a receivables revolving line of credit, as the borrowing is
based on a percentage of our eligible accounts receivable. The bank charges
interest on the overdraft at the higher of 1.5% over the Hong Kong prime rate or
2% over the overnight HIBOR (Hong Kong Interbank Offered Rate). At December 31,
2005, the rate charged was 9.5%, with the weighted average rate charged for 2005
being 8.5%. At March 31, 2006, the rate charged was 9.75%. The consequences of
not paying according to the terms of our agreement with the bank are the same as
for any other secured loan. The bank would be entitled to foreclose on the
collateral and/or seek repayment from the guarantors. If foreclosure were to
occur, our operations would be disrupted.
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
7
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.
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
8
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.
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.
9
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.
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$)) is derived from the unaudited
financial statements for the three-month period ended March 31, 2006 and the
fiscal years ended December 31, 2005, 2004 and 2003, included elsewhere in this
prospectus. In June 2005, we acquired 100% ownership of Titanium Technology, but
did not have any operations prior to the acquisition. Accordingly, for
accounting purposes, the historical financial statements of Titanium Technology
are the historical financial statements of the company.
We have prepared the financial statements in accordance with generally
accepted accounting principles. Our results of operations for any interim period
do not necessarily indicate our results of operations for the full year. You
should read this summary financial data in conjunction with "Management's
Discussion and Analysis or Plan of Operation," "Business," and our financial
statements.
10
As stated in United States dollars:
INCOME STATEMENT DATA: THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------------------------------------------------
MARCH 31, 2005 2004 2003
2006 (US$) (US$) (US$) 2002
(US$) (RESTATED) (RESTATED) (US$)
------------ -------------------------------------------------------------------
Revenues $ 394,673 $ 1,710,528 $ 814,006 $ 558,679 $ 547,095
Net income (loss) $ 7,468 $ 101,924 $ 162,844 $ (101,951) $ 66,801
Net income (loss) per common share $ 0.00 $ 0.002 $ 0.003 $ (0.002) $ 0.00
BALANCE SHEET DATA: DECEMBER 31,
-------------------------------------------------------------------
MARCH 31, 2005 2004 2003 2002
2006 (US$) (US$) (US$) (US$)
(US$) (RESTATED) (RESTATED)
------------ -------------------------------------------------------------------
Working capital $ 767,751 $ 777,119 $ 236,560 $ 112,106 $ 104,727
Total assets $ 1,411,865 $ 1,351,479 $ 535,896 $ 394,350 $ 331,051
Long-term debt $ - $ - $ 182,051 $ 120,086 $ -
Stockholders' equity $ 1,060,020 $ 1,051,859 $ 181,263 $ 18,730 $ 120,809
As stated in Hong Kong dollars:
INCOME STATEMENT DATA: THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------------------------------------------------
MARCH 31, 2005 2004 2003
2006 (HK$) (HK$) (HK$) 2002
(HK$) (RESTATED) (RESTATED) (HK$)
------------ -------------------------------------------------------------------
Revenues $ 3,078,442 $ 13,342,121 $ 6,349,252 $ 4,357,694 $ 4,267,341
Net income (loss) $ 58,249 $ 795,004 $ 1,270,181 $ (795,221) $ 521,046
Net income (loss) per common share $ 0.001 $ 0.016 $ 0.027 $ (0.017) $ 0.01
BALANCE SHEET DATA: DECEMBER 31,
-------------------------------------------------------------------
MARCH 31, 2005 2004 2003 2002
2006 (HK$) (HK$) (HK$) (HK$)
(HK$) (RESTATED) (RESTATED)
------------ -------------------------------------------------------------------
Working capital $ 5,988,455 $ 6,061,528 $ 1,845,168 $ 874,425 $ 816,872
Total assets $11,012,543 $ 10,541,537 $ 4,179,992 $ 3,075,927 $ 2,582,201
Long-term debt $ - $ - $ 1,420,000 $ 936,667 $ -
Stockholders' equity $ 8,268,149 $ 8,204,496 $ 1,413,851 $ 146,097 $ 942,309
HISTORICAL EXCHANGE RATES
Since October 17, 1983, the Hong Kong dollar has been pegged to the
U.S. dollar at HK$7.80 to US$1.00.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In June 2005, we acquired 100% ownership of Titanium Technology, but
did not have any operations prior to the acquisition. Accordingly, for
accounting purposes, the historical financial statements of Titanium Technology
are the historical financial statements of the company.
As Titanium Technology is a software development company, it earns
revenues primarily through license sales of its products, which utilize the
proprietary technology it develops. Development of the technology requires a
significant outlay of cash before a viable product is developed that utilizes
the technology. After development of a product, even more cash is required to
market the product before any revenues are realized. Accordingly, the challenge
that faces many software development companies is being able to obtain enough
cash to fund research and development and marketing expenses and sustain the
company until revenues are generated. Such funds are needed fairly quickly after
products are developed, as the environment in which the products are used is
constantly changing. Companies face the risk of discovering that their products
do not meet the needs of the potential customers or are technologically outdated
after a marketing campaign is launched. If that happens, the research and
development costs are never recouped.
Titanium Technology has been able to generate revenues rather early in
the company's development, which have funded research and development expenses,
as well as selling, general and administrative expenses. For example, during the
year ended December 31, 2002, revenues were US$547,095 (HK$4,267,341) and the
gross profit was US$295,190 (HK$2,302,481). This amount was sufficient to
sustain our selling, general and administrative expenses of US$143,299
(HK$1,117,729), as well as our research and development costs of US$84,936
(HK$662,500).
As compared to companies located in the United States, we believe that
we have lower personnel costs, which are our primarily costs of doing business.
We believe that this has been the main reason for our having generated net
income for three of the last four fiscal years.
While we have been able to develop proprietary products mainly based on
proceeds from sales revenues and from subsidy income received from the Hong Kong
government, we believe that external funding from investors can stimulate and
accelerate product development and marketing for a number of reasons. First, the
company has now achieved a certain amount of recognition in the biometrics
industry, especially in Hong Kong and the surrounding region. It has also
established several important marketing channels, most notably a sole
distributor in Japan who brought along opportunities and major customers such as
the NTT Group. Second, there is increased awareness in the personal security
area in which biometric technologies are some of the most commonly used
applications. We expect the global market size to grow due to concerns about
identity theft and security. Third, we have developed technology within the past
year that we believe can be utilized in a one-to-many application. Based on this
developed technology, management believes that the company should try to market
its products and services in areas outside of Asia and compete in a larger
market.
We raised net proceeds of US$517,425 (HK$4,035,915) through a private
placement of securities. These proceeds are being used to provide the funds
necessary to implement the next step in our business plan, which is becoming a
publicly-held company in the United States. Funds are being used for legal,
accounting, and corporate consulting services and working capital. We believe
that by becoming a publicly-held company, we will enhance the visibility of our
products and services and our ability to obtain additional financing in the
future.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. We generate revenues principally from contracts
for facial-based biometric identification and security projects, which typically
include outside purchased workstations and live-scan devices, bundled with our
proprietary software. In all cases, the customers are granted a license to use
the software in perpetuity so long as the software is installed on the hardware
for which it was originally intended. The contract price of our facial-based
biometric identification and security projects generally includes twelve months
of free post-contract customer support. We also generate revenues from services
performed under fixed-price and time-and-material agreements. To a lesser
extent, we also generate revenues from sales of our proprietary biometrics
products
12
and re-sales of products sourced from outside third parties. We classify the
revenues generated by these activities as either project products revenue,
project services revenue, or maintenance services revenue. Maintenance services
are what the customer purchases if support and software upgrades are desired
after the free twelve-month period.
We apply the provisions of Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions." For
arrangements that require significant production, modification, or customization
of software, we apply the provisions of Accounting Research Bulletin ("ARB") No.
45, "Long-Term Construction-Type Contracts," and SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts." We also
consider the guidance of the Emerging Issues Task Force ("EITF") Topic 00-21,
"Revenue Arrangements with Multiple Deliverables" with respect to the
recognition of revenue from the sale of hardware components (separate accounting
units) of a multiple deliverable arrangement. While these statements govern the
basis for revenue recognition, significant judgment and the use of estimates are
required in connection with the determination of the amount of product,
maintenance and service revenue as well as the amount of deferred revenue to be
recognized in each accounting period. Material differences may result in the
amount and timing of our revenue for any period if actual results differ from
management's judgment or estimates.
PRODUCTS REVENUE. The timing of product revenue recognition is
dependent on the nature of the product sold. Product arrangements comprising
multiple deliverables including software, hardware, professional services, and
maintenance are generally categorized into one of the following:
o FACIAL-BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS
THAT DO NOT REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION
OF OUR SOFTWARE: Revenue associated with these arrangements,
exclusive of amounts allocated to maintenance, for which we
have vendor-specific objective evidence of fair value
("VSOE"), is recognized upon installation and receipt of
written acceptance of the project by the customer when
required by the provisions of the contract, provided that all
other criteria for revenue recognition have been met. Revenue
resulting from arrangements for which VSOE of the maintenance
element does not exist is recognized ratably over the
maintenance period.
To date, we have not made an allocation of contract revenue to
separate accounting units since all of the products have been
delivered simultaneously and no deferral of revenue would
result.
o FACIAL-BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS
THAT REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION OF OUR
SOFTWARE: Revenue associated with these arrangements is
recognized using the percentage of completion method as
described by SOP 81-1. The percentage of completion method
reflects the portion of the anticipated contract revenue,
excluding maintenance that has VSOE, which has been earned,
equal to the ratio of labor effort expended to date to the
anticipated final labor effort, based on current estimates of
total labor effort necessary to complete the project. Revenue
resulting from arrangements for which VSOE of the maintenance
element does not exist is recognized ratably over the
contractual maintenance period.
o SELF-DEVELOPED SOFTWARE PRODUCTS SALES AND RE-SALE OF
PURCHASED THIRD PARTIES PRODUCTS: Revenue associated with the
sale of these products, excluding maintenance when applicable,
is recognized upon shipment to the customer. The amount of
these revenues has historically not been significant.
SERVICES REVENUE. Services revenue is primarily derived from computer
engineering services, system design, consulting and integration and maintenance
services that are not an element of an arrangement for the sale of products.
These services are generally billed on a time and materials basis. The majority
of our professional services are performed under time-and-materials
arrangements. Revenue from such services is recognized as the services are
provided.
MAINTENANCE SERVICES REVENUE. Maintenance revenue consists of fees for
providing technical support and software updates, primarily to customers
purchasing the primary products. We recognize all maintenance revenue ratably
over the applicable maintenance period. We determine the amount of maintenance
13
revenue to be deferred through reference to substantive maintenance renewal
provisions contained in the arrangement.
INTEREST INCOME. Interest income is recognized on a time apportionment
basis, taking into account the principal amounts outstanding and the interest
rates applicable.
REVENUE RECOGNITION CRITERIA. We recognize revenue when persuasive
evidence of an arrangement exists, the element has been delivered, the fee is
fixed or determinable, collection of the resulting receivable is probable and
VSOE of the fair value of any undelivered element exists. A discussion about
these revenue recognition criteria and their applicability to our transactions
follows:
o PERSUASIVE EVIDENCE OF AN ARRANGEMENT: We use either contracts
signed by both the customer and us or written purchase orders
issued by the customer that legally bind us and the customer
as evidence of an arrangement.
o PRODUCT DELIVERY: We deem delivery to have occurred when the
products are installed and, when required under the terms of
the arrangement, when accepted by the customer. Delivery of
other re-sale products are recognized as revenue when products
are shipped and title and risk of ownership has passed to the
buyer.
o FIXED OR DETERMINABLE FEE: We consider the fee to be fixed or
determinable if the fee is not subject to refund or adjustment
and the payment terms are within our normal established
practices. If the fee is not fixed or determinable, we
recognize the revenue as amounts become due and payable.
o COLLECTION IS DEEMED PROBABLE: We conduct a credit review for
all significant transactions at the time of the arrangement to
determine the credit-worthiness of the customer. Collection is
deemed probable if we expect that the customer will pay
amounts under the arrangement as payments become due.
SALES TO AUTHORIZED DISTRIBUTORS. We also use authorized distributors
to sell certain of our products and only the authorized distributors are allowed
to resell those products. We require the authorized distributors to purchase the
products and then sell through the authorized distributors' own distribution
channels to the end customers. From our perspective, the authorized distributors
are the ordinary customers and the only preferential treatment to them is that
the sales prices to distributors have been predetermined in accordance with the
distribution agreements, and are approximately 30% to 40% off the recommended
retail prices. Once the products are delivered and the distributor has accepted
the products, we bill the distributor and the distributor is obligated to
settle the bill accordingly within the credit period granted. There is no right
of return or other incentives given to the distributors. We are not required to
provide training to authorized distributors.
RESEARCH AND DEVELOPMENT COSTS. Research costs are expensed as
incurred. The major components of these research and development costs are the
labor cost.
INTANGIBLE ASSETS/SOFTWARE DEVELOPMENT COSTS. Intangible assets consist
primarily of capitalized software development costs. We review software
development costs incurred in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") 86 "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," which requires that certain
costs incurred in the development of computer software to be sold or leased be
capitalized once technological feasibility is reached. We capitalized US$108,722
(HK$848,034) and US$116,735 (HK$910,536) for the years ended December 31, 2004
and 2005, respectively, for projects ProAccess and ProFacer. The purchased
software license costs, patent costs, and the capitalized software development
costs are amortized over an estimated economic life of five years, which is
consistent with the expected life of these assets.
We received government funding in the amounts of US$136,515
(HK$1,064,820), US$150,557 (HK$1,174,345) and US$97,016 (HK$756,723) for the
years ended December 31, 2003, 2004 and 2005, respectively. This funding income
was offset to software-development costs incurred prior to the beginning of the
capitalization period. According to paragraph 73 of SOP 97-2, if capitalization
of the software-development costs
14
commences pursuant to SFAS No. 86, any income from the funding party under a
funded software-development arrangement should be credited first to the
development costs prior to capitalization. The following table illustrates the
movement of the capitalized software development costs:
AS OF DECEMBER 31,
2005 2005 2004 2004
---- ---- ---- ----
US$ HK$ US$ HK$
Software development costs 213,751 1,667,259 259,279 2,022,379
Grant income (97,016) (756,723) (150,557) (1,174,345)
----------------- ---------------- ---------------- ----------------
Capitalized development costs 116,735 910,536 108,722 848,034
================= ================ ================ ================
Grant and subsidy income represents subsidy from the Government of the
Hong Kong Special Administrative Region ("HKSAR") for assisting us in the
development of products of innovative nature. The products developed under this
subsidy plan include ProAccess and ProFacer. Pursuant to the agreements made
between us and HKSAR, HKSAR is required to provide funding to us for product
development. The funding is made available to us in accordance with the
milestones as established by us and is subject to a ceiling of US$256,410
(HK$2,000,000). We are not required to repay the Government grant, but we are
required to contribute approximately 50% of the overall project cost in
accordance with the grant agreement. Also, upon completion of the project, we
have to tender to the Government its pro rata share of the residual funds
remaining in the project account. In addition we are obligated to pay the
Government a royalty fee of 5% on the gross revenue earned from any activities
in connection with the project, up to an aggregate amount equal to the amount
subsidized to us. The royalty fee paid by us for each of the years ended
December 31, 2003, 2004 and 2005 amounted to US$4,186 (HK$32,647), US$4,427
(HK$34,532) and US$6,166 (HK$48,092), respectively. We are entitled to retain
ownership of the intellectual property resulting from the project.
FOREIGN CURRENCY TRANSLATION METHODOLOGY. Our functional currency is
the Hong Kong dollar because the majority of our revenues, capital expenditures,
and operating and borrowing costs are either denominated in Hong Kong dollars or
linked to the Hong Kong dollar exchange rate. Accordingly, transactions and
balances not already measured in Hong Kong dollars, which are primarily
transactions involving the United States dollar and the PRC Yuan, have been
re-measured into Hong Kong dollars in accordance with the relevant provisions of
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation." The object of this re-measurement process 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
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH
31, 2005. For the three months ended March 31, 2006, project revenues increased
by US$145,758 (HK$1,136,915) (60.9%) over the same period in 2005, mainly due to
an increased volume of business, as opposed to an increase in prices. The
increase in volume can be attributed to orders from existing customers and a
large order from a newly acquired customer of over US$100,000.
The gross margin as a percentage of project revenues was 43.4% for the
2006 quarter, as compared to 42.0% for the 2005 quarter, and also increased in
terms of dollars by US$66,555 (HK$519,131) because of the increase in sales.
15
Maintenance revenues, as a percentage of all revenues, decreased from
2.7% in 2005 to 2.4% in 2006. Management believes that more customers have
elected to forego purchasing a maintenance contract at the end of the
twelve-month free post-contract customer support following the sale.
Selling, general, and administrative expenses increased by US$61,398
(HK$478,904) (68.9%) in 2006 as compared to 2005. This significant increase was
due primarily to the increase in professional fees of approximately US$38,000
(HK$296,400) and increase in depreciation and amortization of approximately
US$8,000 (HK$62,400). We have incurred substantial legal and accounting fees as
part of the process of becoming a public company, most of which were incurred in
connection with the preparation of the registration statement of which this
prospectus is a part. Depreciation and amortization increased because of the
leasehold improvements made in 2005 to our office facilities and the additions
to capitalized software development costs in 2005. The remainder of the increase
in selling, general and administrative expenses were due to an increase of
overall general expenditures because of our larger scale of operations.
Primarily as a result of the increased selling, general and
administrative expenses, and to a lesser extent to research and development
expenses of US$12,115 (HK$94,494) in 2006, operating income decreased 25.7% in
2006 to US$12,763 (HK$99,547) from US$17,171 (HK$133,934) in 2005.
Other income in 2006 of US$3,273 (HK$25,530), which consisted of
government grant income and interest income, increased from US$2,073 (HK$16,172)
in 2005. Income taxes for 2006 were 29.1% lower than in 2005, but the minority
interest in 2006 was a charge of US$5,901 (HK$46,028), as compared to an
addition to income of US$56,082 (HK$7,190) in 2005. The charge to minority
income represents income that belongs to the minority owner of our 92%-owned
subsidiary, Titanium Technology (Shenzhen) Co., Ltd. During the quarter ended
March 31, 2006, that subsidiary generated income because of a large sale to a
Shenzhen-based company. For the past few years, this subsidiary has conducted
research and development operations for us and has generated losses. We do not
expect the first quarter results for this subsidiary to be indicative of results
for the full fiscal year.
In summary, while we generated 60.5% more revenues in the quarter ended
March 31, 2006, our increased operating costs and charge for minority interest
resulted in net income 54.5% lower than that of the comparable 2005 quarter.
FISCAL YEAR ENDED DECEMBER 31, 2005 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2004. Project revenues increased by US$897,180 (HK$6,998,002)
(121.1%) comparing the 2005 year to the 2004 year, due to sales of ProAccess
FaceGuard and the commencement of projects such as sales of a facial recognition
system and physical access control system to the Elixir Group of Macau. Sales to
the Elixir Group were US$225,000 (HK$1,755,000). Prices for our products and
services were constant in 2004 and 2005. Accordingly, the increase in sales was
due to increased volume of products and services sold in 2005. For 2005, none of
the project revenues was derived from sales of product to related parties, as
compared to 4.6% of project revenues in 2004 and 21.6% in 2003.
The gross margin as a percentage of project revenues showed a
negligible decrease in 2005 to 45.3% from 46.0% in 2004. Gross margin on project
revenues in terms of dollars increased to US$741,357 (HK$5,782,591) in 2005 from
US$340,741 (HK$2,657,783) in 2004 due to the increase in sales revenues.
As a percentage of all revenues, maintenance revenue was 8.9% in 2004
and 4.2% in 2005. As part of the product purchase, we provide both product
warranty and post-contract customer support to our customers for a period of
twelve months, free of charge and then at the discretion of the customers, enter
into definite maintenance contracts. Management believes that the decrease in
percentage is due to more customers opting to forego a definite maintenance
contract at the end of the twelve-month period.
Selling, general and administrative expenses increased from US$233,180
(HK$1,818,804) in 2004 to US$655,769 (HK$5,115,000) in 2005 due to the expansion
of our operations, which included hiring more personnel. The increase in
personnel and increase in outside professional fees each accounted for
approximately 25% (US$105,600; HK$823,700) of the increase in selling, general
and administrative expenses. Outside professional fees included patent
application preparation and filing, product design, and testing expense. The
remaining 50% of the increase can be attributed to setup expenditures for our
new research and development center facility in Beijing
16
(20%; US$84,500; HK$659,100), an increase in marketing and promotional expenses
(20%; US$84,500; HK$659,100) and an increase of overall general expenditures
because of our larger scale of operations (10%; US$42,300; HK$330,000). As a
percentage of revenues, these selling, general and administrative expenses
increased from 28.6% in 2004 to 38.3% in 2005.
Primarily as a result of the increased selling, general and
administrative expenses, and to a lesser extent to research and development
expenses of US$24,372 (HK$190,100) in 2005, operating income decreased 27.3% in
2005 to US$124,944 (HK$974,561) from US$171,946 (HK$1,341,182) in 2004.
Other income in 2005 of US$9,806 (HK$76,491), which consisted primarily
of government grant income, increased from US$8,092 (HK$63,117) in 2004. Income
taxes for 2005 were 59.8% higher than in 2004. As a result, while we generated
110% more revenues in 2005, our increased operating costs and provision for
income taxes resulted in net income 37.4% lower than that of 2004.
FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2003. During the 2004 fiscal year, we had the entire year to market
our ProAccess FaceOK, which had obtained recognition at Comdex, an acronym for
Computer Dealer's Exhibition, which was a computer and information technology
exposition held in Las Vegas, Nevada. Accordingly, project revenues increased by
US$250,636 (HK$1,954,958) (51.1%) comparing the 2004 fiscal year to the 2003
fiscal year, due to the beginning of significant sales of ProAccess FaceOK. We
benefited from both an improved pricing structure for our products in 2004 as
compared to 2003 and from increased volume of projects sold. We were able to
charge approximately 5% to 10% more for the same product in 2004 as compared to
2003 for the reasons described in the paragraph below. This increase improved
both our revenues and gross margin on products. In addition, we experienced a
growth in the number of customers, from 52 in 2003 to 70 in 2004, which resulted
in increased volume at these higher prices.
The gross margin related to projects also improved as a percentage of
sales in 2004, from 35.2% to 46.0%, and in terms of dollars, from US$172,782
(HK$1,347,699) to US$340,741 (HK$2,657,783), due to the accumulation of
experience, which led to better project management in general, and due to the
fact that in 2004 we had greater name recognition and did not have to bid as
competitively to secure contracts for projects. In 2003, the Hong Kong economy
was adversely affected by the Severe Acute Respiratory Syndrome (SARS) epidemic,
which depressed the market price for software products, such as ours. When
comparing the gross margin on project products revenue versus project services
revenue in 2004 and 2003, it could be stated that all of the improvement in the
gross margin can be attributed to an increase in the project products revenue.
Maintenance revenue increased by 6.9% from US$68,154 (HK$531,603) in
2003 to US$72,847 (HK$568,203) in 2004, as with more completed installations,
there was greater demand for maintenance contracts. As a percentage of all
revenues, maintenance revenue was 12.2% in 2003 and 8.9% in 2004, primarily due
to the significantly greater project revenues in 2004.
Selling, general and administrative expenses decreased from US$260,138
(HK$2,029,078) in 2003 to US$233,180 (HK$1,818,804) in 2004, despite an increase
in the number of employees, due to the assignment of some technical related
tasks to inland China, where salary cost is significantly lower. We established
our research center in Shenzhen, PRC, in 2003, causing the 2003 expenses to be
higher.
Also in 2004, no research and development costs were incurred, as
compared to US$89,092 (HK$694,918) in 2003, which was primarily for the research
expenses on the ProFacer project. As both projects, ProAccess and ProFacer,
reached the stage of development where they were available for general release
to the public, expenses incurred for product development were capitalized, and
therefore, no research and development expenses were incurred for 2004.
Accordingly, we reported operating income of US$171,946 (HK$1,341,182)
for 2004, as compared to an operating loss of US$116,756 (HK$910,694) for 2003.
Other income in 2004 was US$6,253 (HK$48,774) less in 2004 than in
2003, primarily due to a decrease in government grant income. However, we
generated net income of US$162,844 (HK$1,270,181) for 2004, as compared to a net
loss of US$101,951 (HK$795,221) for 2003.
17
LIQUIDITY AND CAPITAL RESOURCES
AS OF MARCH 31, 2006. At March 31, 2006, we had working capital of
US$767,751 (HK$5,988,455), as compared to US$777,119 (HK$6,061,528) at December
31, 2005. The slight decrease was due primarily to a temporary increase in trade
accounts payable. Shortly after March 31, 2006, these trade payables were paid
in due course.
During the three months ended March 31, 2006, our operating activities
used cash of US$30,711 (HK$239,542), as compared to cash of US$14,953
(HK$116,636) being provided by operating activities in 2005. In addition, we
used US$47,443 (HK$370,054) for investing activities, which were primarily for
capitalized software development costs, and US$72,589 (HK$566,191) for the
repayment of our bank overdraft (discussed below). In comparison, during the
three months ended March 31, 2005, we used US$21,351 (HK$166,535) for investing
activities, again primarily for capitalized software development costs, and
US$8,584 (HK$66,959) for our financing activities.
AS OF DECEMBER 31, 2005 AND 2004. At December 31, 2005, we had working
capital of US$777,119 (HK$6,061,528), as compared to US$236,560 (HK$1,845,168)
at December 31, 2004. The increase was due primarily to the completion of the
private placement, resulting in net proceeds of US$517,425 (HK$4,035,915).
The proceeds from the private placement are being used to provide the
funds necessary to implement the next step in our business plan, which is
becoming a publicly-held company in the United States. We believe that by
becoming a publicly-held company, we will enhance the visibility of our products
and services and our ability to obtain additional financing in the future.
Accordingly, the net proceeds are being used as follows:
o approximately US$280,000 (HK$2,184,000) for legal, accounting,
and corporate consulting services necessitated by this plan of
becoming a public company, such as the legal fees for
preparing and filing the registration statement of which this
prospectus is a part, the cost of auditing our financial
statements, and guidance and advice about the stock markets in
the United States;
o approximately US$125,000 (HK$975,000) for setting up our
Beijing office for research and development and marketing
efforts in China; and
o approximately US$110,000 (HK$858,000) for the purchase of
tooling for the production of the ProAccess FaceGuard product.
In 2005, our operating activities and investing activities used cash of
US$230,958 (HK$1,801,477) and US$219,422 (HK$1,711,493), respectively. Our
accounts receivable increased by US$419,892 (HK$3,275,164) and our deposits and
other receivables increased by US$132,394 (HK$1,032,672). We increased
intangible assets by US$118,942 (HK$927,752) in 2005, with US$116,735
(HK$910,536) of the amount being capitalized product development costs. Also, we
used US$100,480 (HK$783,741) primarily to renovate our newly leased offices.
Financing activities provided a total of US$700,417 (HK$5,463,260),
with most of the amount provided by net proceeds of our private placement. The
remainder was provided by a bank overdraft. While we had a cash balance of
US$317,010 (HK$2,472,677) at December 31, 2005, most of that amount represented
the net proceeds from the private placement, which were held in a segregated
bank account in US dollars. As indicated above, over half of the private
placement proceeds will be used for costs incurred in becoming a public company
in the United States. Keeping these funds in US dollars avoids us having to
convert Hong Kong dollars into US dollars when we pay these costs.
We chose not to use the private placement proceeds for operating
expenses and instead to incur an overdraft in Titanium's Hong Kong dollar
checking account that we use for our operations. By doing so, we believe that we
can better track the performance of our operations as the only funds deposited
into the operating account are revenues from sales and the only items paid from
this account are directly related to our operations. Therefore, this operating
account gives management a quick snapshot of the financial health of our
operations.
18
At December 31, 2005, our bank overdraft was US$193,187 (HK$1,506,862).
We have a banking facilities arrangement with the bank where we maintain our
checking account that allows us to overdraft our account up to US$256,410
(HK$2,000,000). Our officers and directors have provided their personal
guarantees up to that amount for the banking facilities arrangement. Essentially
this is a receivables revolving line of credit, as the borrowing base is based
on a percentage of our eligible accounts receivable. The bank charges interest
on the overdraft at the higher of 1.5% over the Hong Kong prime rate or 2% over
the overnight HIBOR (Hong Kong Interbank Offered Rate). At December 31, 2005,
the rate charged was 9.5%, with the weighted average rate charged for 2005 being
8.5%. Generally, the overdraft situation does not exist for any significant
length of time. We incurred US$2,845 (HK$22,188) of interest expenses on this
overdraft facility in 2005 and an annual facility fee of US$321 (HK$2,500) for
2005. For 2006, the facility fee is US$962 (HK$7,500). We believe that the
benefit of being able to better monitor the performance of our operating
subsidiary and avoiding the costs of converting currency from US dollars to Hong
Kong dollars outweighs these borrowing costs. As an example, our interest income
from the US dollar account exceeded our interest expense for the quarter ended
March 31, 2006. The consequences of not paying according to the terms of our
agreement with the bank are the same as for any other secured loan. The bank
would be entitled to forclose on the collateral and/or seek repayment from the
guarantors.
In addition, 2005 non-cash financing activities included debt
forgiveness by shareholders, who agreed to do so, so that a better cash position
could be maintained. The amount of the forgiveness, after offsetting against
amounts due from related parties, was contributed to the capital of the company
and aggregated approximately US$251,395 (HK$1,960,882).
For the 2004 fiscal year, operating activities provided cash of
US$85,201 (HK$664,568), primarily due to our profitable operations. Included in
the US$19,434 (HK$151,586) provided by financing activities was a shareholders'
loan of US$64,103 (HK$500,000) and repayment of a bank loan of US$25,641
(HK$200,000). The bank loan was personally guaranteed by our directors. Of the
US$132,870 (HK$1,036,389) used for investing activities, US$117,247 (HK$914,524)
was capitalized product development costs.
In comparison, 2003 financing activities provided cash of US$172,656
(HK$1,346,716). Financing activities included a shareholders' loan of US$117,949
(HK$920,000) and proceeds of a loan in the amount of US$38,462 (HK$300,000) from
HKCB Finance Limited, the repayment of which was personally guaranteed by our
officers and directors. Operating activities used cash of US$113,262
(HK$883,441), primarily due to the net loss of US$101,951 (HK$795,221).
Investing activities used US$27,812 (HK$216,931). We capitalized US$17,537
(HK$136,788) and used US$10,275 (HK$80,143) for office furniture and computer
equipment.
At December 31, 2005, we had contractual obligations as set forth
below, as stated in United States dollars (US$):
- -----------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
(US$) (US$) (US$) (US$) (US$)
- -----------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations Nil Nil Nil Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Capital (Finance) Lease Obligations Nil Nil Nil Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Operating Lease Obligations $91,135 $36,454 $54,681 Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Purchase Obligations Nil Nil Nil Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities Reflected on the Nil Nil Nil Nil Nil
Company's Balance Sheet
- -----------------------------------------------------------------------------------------------------------------
Total $91,135 $36,454 $54,681 Nil Nil
- -----------------------------------------------------------------------------------------------------------------
19
These amounts stated in Hong Kong dollars (HK$) are as follows:
- -----------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
(HK$) (HK$) (HK$) (HK$) (HK$)
- -----------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations Nil Nil Nil Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Capital (Finance) Lease Obligations Nil Nil Nil Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Operating Lease Obligations $710,850 $284,340 $426,510 Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Purchase Obligations Nil Nil Nil Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities Reflected on the Nil Nil Nil Nil Nil
Company's Balance Sheet
- -----------------------------------------------------------------------------------------------------------------
Total $710,850 $284,340 $426,510 Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Under the terms of the Technology Partnership and Research and
Development Contract entered into in June 2005 with the Institute, we have
agreed to provide the capital and operational technicians, while the Institute
has agreed to provide the location and technical technicians to perform research
for the application of facial recognition operation technology. Any new facial
recognition technology that is developed shall be owned by both parties. While
the contract required us to have paid all of the costs by September 30, 2005,
certain payment installments were delayed. Accordingly, at September 30, 2005,
we had paid approximately half of the roughly US$25,000 (HK$192,000) required
under the contract, and paid the remainder in February 2006.
We also entered into a similar contract with Tsing Hua University
(Shenzhen research campus) in November 2005, under which the University will
perform research of a multi-media home intelligence system, covering the receipt
of digital TV signals, OSD (Open Software Description) capability, PVR (Personal
Video Recorder) capability, and Blue tooth facial recognition capability. We
have agreed to bear all costs of the research, while the University provides the
necessary technical people. The total cost of the research, approximately
US$25,000 (HK$192,000) was paid by December 30, 2005. The University will own
the new intellectual property that is developed, but we will have the right to
use the property.
In light of our working capital of US$767,751 (HK$5,988,455) at March
31, 2006, we believe that we have current and available capital resources
sufficient to fund planned operations for a period of not less than twelve
months. Our current fixed overhead is approximately $57,700 (HK$450,000) per
month, without giving any effect to any revenues that we generate. Fixed
overhead comprises salaries, office rent and maintenance, utilities, telephone,
travel, office supplies, employee benefits, insurance and licenses and
professional fees. 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 March 31, 2006, our backlog of orders believed to be firm
was approximately US$1,900,000 (HK$14,820,000), as compared to approximately
US$520,000 (HK$4,056,000) at March 31, 2005. We expect that approximately
US$1,050,000 (HK$8,190,000) will not be filled by June 30, 2006. We expect that
the above fixed overhead amount will increase by approximately 10% towards the
end of 2006, as we plan to increase research and development efforts.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
We engaged Zhong Yi (Hong Kong) C.P.A. to audit our financial
statements on May 17, 2005. We did not consult that firm prior to its
engagement.
20
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 network of over 40 IT practitioners and
researchers, enabling us to provide proprietary biometrics products and
professional services. We have developed and sold Automatic Face Recognition
Systems, or AFRS, and other biometric and security solutions to governments, law
enforcement agencies, gaming companies, and other organizations in China and
other parts of Asia. Our AFRS products enable customers to capture human face
images electronically, encode facial image into searchable files (faceprint),
and precisely compare a set of faces to a database containing potentially
thousands of faces in seconds.
Although different biometrics, e.g. finger scan, may be widely employed
in similar applications, we believe that face recognition has several advantages
over the existing alternatives. First, there is no direct contact between the
device and users, and hence the problems of cleanliness and wear on the
equipment are greatly reduced. Second, the core component is a digital (Charge
Coupled Device (CCD)/Complementary Metal-Oxide-Semiconductor (CMOS) camera,
which is relatively low in production cost. Last but not least, we believe that
users have less concern on privacy issues with regard to facial pictures and the
market acceptance is much higher, since photographs of facial images for
identification are commonly used, such as in passports, driver's licenses, and
other forms of identification cards.
For over five years, we have researched, developed, and marketed face
biometrics technologies that incorporate advanced concepts in neural networks,
artificial intelligence, image processing, pattern recognition, data mining, and
massively parallel computing. Our researchers have taken recognition algorithms
and, using advanced methods of software engineering, turned core mathematical
modules into practical applications. 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
21
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, financial
institutions, universities, telecommunication companies, and international
corporations.
TI-FACE
Ti-Face is the core face recognition engine developed and implemented
by Titanium Technology. A proprietary algorithm, named Dynamic Local Feature
Analysis (DLFA), was invented to utilize the specific features for
identification instead of the entire representation of the face. This technology
is capable of selecting specific areas of the face, such as the eyes or mouth,
which in turn are used as distinguishable features for recognition. Embedded
with the Ti-Face module, a system can select sets of blocks, or features, in
each face that differ from other faces in a data repository with an outstanding
processing speed.
Based on this innovative face recognition technology, our research and
development group modularized and realized this concept into the Ti-Face
Software Development Kit (SDK) in 2002. This SDK is not only our core technology
but serves as the blueprint for further extending our security access control
applications for various situations.
TI-FACE SDK 3.0 FOR WINDOWS. Features included in Ti-Face SDK 3.0 are
face detection, high speed face tracking, matching and authentication, detecting
motion or changes in a scene, extracting imagery from a video or live-stream,
comparing and matching non-facial images, and performing both "one-to-one"
verification and "one-to-many" identification. Independent developers can use
Ti-Face SDK as a tool to build custom applications based on our proprietary face
detection and recognition technology. Examples of applications include physical
access control solutions that can integrate with reporting modules and alarm
systems, logical access control solutions that can integrate with existing
authentication systems and replace the use of passwords, and ticketing systems
that can insure that a single ticket is not being shared by multiple customers.
Furthermore, by integrating our face recognition engine into third-party
solutions and applications, end users can obtain a solution that is customized
to fulfill their specific requirements. We intend to develop additional modules
on face recognition. By combining several modules, greater security and more
accurate identification methods can be obtained. Furthermore, a multimodal
biometric system can be easily integrated into an application to greatly enhance
security, privacy and user convenience.
PRODUCTS
Powered by our innovative face recognition technology, our core
products can be grouped into two categories: PROACCESS and PROFACER. The
ProAccess series fulfills the fundamental security and trust needs of the
information world by logical and physical access control. The ProFacer series
provides an ultimate solution for intelligent surveillance.
22
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 a high degree of security against unauthorized access, especially when
compared to authentication methods such as unsecured simple text input and
unreliable memories. In addition, ProAccess FaceOK offers features such as audit
trail, face learning, active user monitoring, and web-based single sign-on
services and integrated with directory services.
Audit Trail is enabled to capture all unauthorized login attempts (with
images of trespassers and hackers) and store that information in a log file. The
Face Learning function allows the user to learn the latest face whenever a login
occurs. Natural facial progression does not compromise system accuracy. Active
Monitoring monitors the environment actively to ensure continuous access
control. The system proactively locks itself out when the authorized user is not
detected. Hidden Encryption encrypts a file and masks it with an image file type
so that only authorized users can retrieve its true content, while it appears as
a normal file to others. Furthermore, users can logon to different Directory
Services with the use of FaceOK. Those directories can be Novell eDirectory,
Microsoft Active Directory, NT Domain, NDS, iPlanet and other LDAP compliant
directories. We also have a module that focuses on web Single-sign on
technology, which is integrated in FaceOK.
Considering our variety of clients, our FaceOK is released into two
editions, Professional edition and Enterprise edition. Enterprise edition is
suited for the corporate buyers (such as MTRC, Mass Transit Railway Corp) and
government agencies (Department of Health), whereas Professional edition is
designed for the small office and home office or small to medium-sized
enterprises. The product is currently available in four language versions:
English, traditional Chinese, simplified Chinese, and Japanese.
PROACCESS FACEGUARD. Conventional access control systems relying on
cards, keys or codes are vulnerable to those wishing to gain unauthorized entry
to a facility. The card, key or code may be lost, stolen or illegally copied.
Once an intruder has gained access to a building using a stolen entry device,
there is often little evidence to help in apprehending or prosecuting the
culprit. Personal property, office equipment and intellectual property are all
at risk. "FaceGuard" has been designed to not only provide secure access to
buildings, but to also detect and identify anyone attempting to gain access
without authorization.
ProAccess FaceGuard is a biometric physical access control system,
which identifies an individual's identity from their facial characteristics by
comparison with recorded data, and enables keyless entry based not on what the
entrant has or knows, but based on the identity of the entrant. In contrast to
conventional automatic systems, which only check for possession of a valid card,
pass or PIN number, this digital image analysis system recognizes individual
people and turns away those who try to enter using borrowed or stolen IDs. The
proprietary algorithm utilized in the software is designed in such a way that
the software is not fooled by life-size photos, and
23
will only admit living, breathing humans with faces it "recognizes". Therefore,
the technology allows access that we believe is convenient, personal, private,
and extremely secure.
ProAccess FaceGuard is empowered by Ti-Face. It can be operated in both
online and offline mode. The templates of the authorized user list can be stored
in a server or in the internal memory of the device. Although ProAccess
FaceGuard may be networked in an enterprise environment, it is a stand-alone
device that can be operated independently. The installation is simple and,
except for the electric lock, there is no hidden cost in the installation.
ProAccess FaceGuard is primarily being used by commercial customers for
physical access controls to areas such as office premises, data centers, and
server rooms.
PROACCESS FACEATTEND. ProAccess FaceAttend is a stand-alone, face
recognition- based time attendance recorder. It is suitable for medium and large
offices, branches, factories, or other sites. ProAccess FaceAttend provides an
accurate data collection solution by ensuring that employees must be present in
order to record their attendance. It brings the flexibility of a full-function
time and attendance terminal together with the sophistication of identification
technology. Using face biometric technology, FaceAttend terminals scan
employees' faces to identify their identities from a huge database each time
they punch or clock-in. No fingerprints or palm prints are utilized.
ProAccess FaceAttend can be installed at convenient locations
throughout a facility to make it easy for employees to clock in. Punching or
clocking in is performed using biometric face scans, and the resulting
transactions are periodically uploaded to a host PC running the automated
timekeeping system. It eliminates "buddy-punching," the practice of employees
punching in or out for other employees who are not present at work.
We believe that use of ProAccess FaceAttend eases concerns and boosts
security by ensuring that the people on-site actually belong there. Attendance
of each employee is printed on the attendance report. The attendance report is
particularly useful for payroll purposes. Wages and salaries can be paid
according to the employee's worked hours, overtime etc. Given the continual
growth of China as a worldwide manufacturing base, and specifically the fact
that the Southern part of China houses the largest network of factories in Asia,
based on gross domestic product statistics, we believe that we have a
significant marketing opportunity in this region and perhaps a distinct
advantage of physical and cultural proximity. To date, purchasers have installed
this product primarily in factories for time attendance purposes.
PROACCESS FACEMOBILE. ProAccess FaceMobile is the security solution
using biometric technology for the mobile computing market. As the mobile
ownership becomes more universal and third generation mobiles become more
popular, we are keen to introduce advanced biometric security solution to this
market.
This technology uses the camera equipped in the mobile phone to perform
the logon process. As a result, no additional hardware cost is incurred on the
capturing device. Utilizing our face recognition technology, mobile users do not
require special knowledge to use it. Users simply look at the camera embedded in
their phone, automatically triggering and processing authentication for the
logon process. The FaceMobile supports two different system architectures. The
difference between the two architectures (user authenticated on the device and
on the operator) is the location where authentication is processed.
USER AUTHENTICATED ON THE DEVICE. In this architecture, the device
captures and authenticates the user by the same device. This architecture is
optimal for the following situations:
o The device may be operated offline;
o The device stores sensitive information locally; or
o The device has high processing power.
In general, this architecture is applicable in the PDA market.
24
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.
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.
- -----------------------------------------------------------------------------------------------------------------------
25
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 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.
26
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 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
27
the distributor and the distributor is obligated to settle the bill accordingly
within the credit period granted. There is no right of return or other
incentives given to the distributors.
Our distributor agreement and reseller agreement dictate the terms and
conditions of the relationship with us, such as pricing, warranties, exclusivity
or non-exclusivity, and term.
We organize exhibitions and seminars periodically to create awareness
of the importance of biometrics applications. We participated in four
exhibitions and one seminar in Japan in 2004 and 2005. The main purpose of these
exhibitions and seminars is to introduce our products to the Japanese market,
especially in the retail sector.
We also prepare marketing materials such as brochures, product white
papers and pricing references for the distributors and provide complete sales
support and technical consulting services to them.
Our markets include the following:
o Hong Kong, including the Hong Kong government and commercial
sectors;
o China, mainly the government;
o Macau, mainly casinos; and
o For Japan and the US markets, we form a distribution
partnership with the local agents to sell our products.
Clients in Japan came from both retail and commercial sectors.
Titanium Technology not only focuses on two core activities,
biometrics-based technology development and professional services, but also
operates a distribution business and distributes a number of commercially
available software, such as software from Microsoft, Novell, Symantec and IBM.
At times, our customers may require software that is not within Titanium's
product range, but is available from these large software manufacturers and
vendors. Most of the software consists of security-related products. We buy
software from these vendors to resell to our customers. In most cases, we
perform a certain amount of customization and system integration services with
respect to the purchased software.
In March 2003, Titanium Technology was selected by the HKSAR government
as a supplier of PC/LAN software in Category C to all departments in HKSAR
government for three years under a bulk tender. The bulk tender is an initiative
from the HKSAR government with the purpose of streamlining and insuring the
process and quality of the procurement of all information technology products by
the government. The government selected companies that it believed to be
qualified for specific categories of products. Category C is software
applications. This means that the government departments have to purchase from
the selected companies and that Titanium Technology is one of the few vendors
from whom the Hong Kong government purchases software. At the time of the award,
there was one other company that received an award in the same category as us.
To strengthen our distributor network, we are authorized resellers for
software marketed by Microsoft, Novell, SiS International Ltd, JOS, and others.
We sell to end users and we can also purchase their products at discounted
prices from the suggested retail prices. In addition, with our expertise in
security technologies, eEye Digital Security has appointed Titanium Technology
to be a regional distributor for eEye products. We estimate that our
distribution business accounted for approximately 8%, 8% and 11% of our business
in fiscal 2005, 2004 and 2003, respectively.
CUSTOMERS
Titanium Technology's major customers include:
o In Hong Kong: the Hong Kong government
o In China: People's Bank of China
o In Macau: Elixir Group, a supplier to an entertainment
corporation - Sociedade de Jogos de Macau
o In Japan: NTT Group
For the year ended December 31, 2005, four customers accounted for over
50% of our revenue. The following four customers were each over 10%: Elixir
Group (Macau) Ltd. (13.2%), MTR Corporation Ltd. (12.0%),
28
GuangXi Hai Tin Electric Ltd. (11.5%) and Adamson & Gonzalez SL (11.5%). During
the fiscal year ended December 31, 2004, eight customers accounted for
approximately 75% of revenues. Sales to Beacon Base Software Ltd. and
Information Security One (Hong Kong) Ltd. were 20.1% and 12.7% of revenues,
respectively. In 2003, four customers accounted for 56% of our revenue and were
each over 10%: Ericorps Creation (HK) Limited (19.0%), MTR Corporation Limited
(15.2%), Labor Department of HKSAR (11.9%) and Hong Kong Academy of Medicine
(10.1%).
Since a small number of customers account for a substantial portion of
our revenues, the loss of any of our significant customers would cause revenue
to decline and could have a material adverse effect on our business. While the
customers who each accounted for over 10% of our revenue for a particular fiscal
year are not the same as the significant customers for other fiscal years, this
indicates that we need to expand our client base so that we will no longer be
subject to this risk.
There is no law in Hong Kong or any provisions in our contracts with
the Hong Kong government that specifies or triggers a termination at the
election of the government.
At December 31, 2005, our backlog of orders believed to be firm was
approximately US$1,000,000 (HK$7,800,000), as compared to approximately
US$320,000 (HK$2,500,000) at December 31, 2004. We expect that approximately
US$577,000 (HK$4,500,000) will not be filled by March 31, 2006.
INTELLECTUAL PROPERTY
PATENTS. Titanium Technology was issued patent number HK1053239 for
"Apparatus and Method for Recognizing Images" in September 2002. The patent
expires September 10, 2010. Even though we have been issued a patent from Hong
Kong and even if we were to obtain copyright protection on the software, we
would still have to enforce our rights against those who might attempt to
infringe on our intellectual property as patent protection does not necessarily
deter infringement. Such enforcement efforts are likely to be expensive and
time-consuming and we may lack the ability to engage in any significant
enforcement efforts. Instead, we have chosen to use our resources on product
development and the expansion of market share.
TRADEMARK AND TRADE NAME. Titanium Technology has the following
registered trademarks for "ProAccess FaceOK":
o United States - Serial No. 78/414377
o Hong Kong - Trade Mark No. 300053478
o China - Serial No. ZC3732931SL
COMPETITION
The biometrics industry is fragmented and undeveloped, with a plethora
of methods for gathering biometric information, processing the data, and
interconnecting with applications. All the major prevailing biometrics systems
have limitations.
The biometric industry is global in scope, with many competitors and
customers located in US and Europe. While Asia has some companies in the
biometrics arena, many of the biggest projects have been in nations installing
national identification systems. Strategic focus is quite diverse, as well, with
some firms specializing in the proprietary technology associated with capturing
biometric information, others in providing enterprise-level integration
services, and still others in offering managed or hosted services for outsourced
systems. Large players in intermediate or end-use markets for biometrics (e.g.
banking/financial services, security, PCs/peripherals, software/enterprise
systems, and wireless equipment and services) have been active in investing in
or sponsoring biometric technologies.
We intend to compete by utilizing the following strategies:
o put more funding into research and development to strengthen
the quality of our products;
o gain more share in the Asian market before the big competitors
step in;
o seek potential partnerships and strategic alliances; and
29
o organize more exhibitions of our products.
We believe that we have two major competitors: Identix Incorporated and
Viisage Technology, Inc., from the United States.
Identix is a multi-biometrics security technology company in both
fingerprint identification and facial recognition solutions has set to the
growing demand for biometrics products and solutions access multiple security
markets.
Viisage delivers advance technology identity solutions for governments,
law enforcement agencies and business concerned with enhancing security,
reducing identity theft, and protecting personal privacy. It has been renowned
for its facial recognition technologies.
On January 12, 2006, Identix and Viisage announced that they have
entered into a definitive agreement to merge. As of the date of this prospectus,
the merger has not been completed.
RESEARCH AND DEVELOPMENT
During the fiscal years ended December 31, 2005, 2004 and 2003, we
spent $ nil, $nil and US$89,092 (HK$694,918), respectively, on research and
development activities.
We have engaged both Tsinghua University and the Chinese Academy of
Science, Institute of Automation to perform certain research and development
work on our behalf.
Under the terms of the Technology Partnership and Research and
Development Contract entered into in June 2005 with the Institute, we have
agreed to provide the capital and operational technicians, while the Institute
has agreed to provide the location and technical technicians to perform research
for the application of facial recognition operation technology. Any new facial
recognition technology that is developed shall be owned by both parties. While
the contract required us to have paid all of the costs by September 30, 2005,
certain payment installments have been delayed. Accordingly, at September 30,
2005, we had paid approximately half of the roughly US$25,000 (HK$192,000)
required under the contract, and paid the remainder in February 2006.
We also entered into a similar contract with Tsing Hua University
(Shenzhen research campus) in November 2005, under which the University will
perform research of a multi-media home intelligence system, covering the receipt
of digital TV signals, OSD (Open Software Description) capability, PVR (Personal
Video Recorder) capability, and Blue tooth facial recognition capability. We
have agreed to bear all costs of the research, while the University provides the
necessary technical people. The total cost of the research, approximately
US$25,000 (HK$192,000) was paid by December 30, 2005. The University will own
the new intellectual property that is developed, but we will have the right to
use the property.
EMPLOYEES
As of February 28, 2006, we employed a total of 47 persons, of which 40
were full-time. None of our employees is covered by a collective bargaining
agreement.
FACILITIES
Our principal offices are located at 4/F, BOCG Insurance Tower, 134-136
Des Voeux Road, Central, Hong Kong. We have entered into a lease contract with
this new property that runs through June 2008, with an option to renew for an
additional term of two years. The lease requires monthly rent of HK$23,695
(approximately US$3,050) and a monthly management fee and air conditioning
charge of HK$12,863 (approximately US$1,656).
Our research and development center is located at 15/F, Wen Jin Plaza
23, Tian Bei Road 1, Luo Hu Qu, Shenzhen, China, while the sales representative
office in the United States is located at 3723 Haven Avenue, Menlo Park,
California. We have another research and development center at No. 95
ZhongGuanCun East Road, Haidan District, Beijing, China.
30
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.
31
MANAGEMENT
OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors, and key employees are:
NAME AGE POSITION
Dr. Kit Chong "Johnny" Ng 31 Chairman of the Board of
Directors
Jason Ma 33 Chief Executive Officer
Prof. Stan Li 47 Chief Scientific Advisor
Kin Kwong "Humphrey" Cheung 34 Chief Technology Officer and
Director
Wai Hung "Billy" Tang 32 Chief Operation Officer and
Director
Patrick Lo 34 Director of Business
Development of Titanium
Technology
Eric Wong 51 Consultant
Our shareholders elect our directors annually and our board of
directors appoints our officers annually. Vacancies in our board are filled by
the board itself. Set forth below are brief descriptions of the recent
employment and business experience of our executive officers and directors.
DR. KIT CHONG "JOHNNY" NG, CHAIRMAN. Dr. Ng is the Chairman of the
Board of Directors of the Company. Currently, Dr. Ng's duties include his
functioning as our principal financial and accounting officer. Dr. Ng received
his bachelor's degree in manufacturing engineering in 1996 and doctorate degree
in industrial and systems engineering in 2002 from The Hong Kong Polytechnic
University, and has been an Adjunct Associate Professor there, specializing in
biometrics technology. Dr. Ng first organized his own technology start-up, 303
Company Limited, in 1998. This company, which was sold to a listed company in
2001, was a solution provider of fingerprint authentication technology. He
served as the Chief Executive Officer of that company from August 1999 to August
2001. Shortly after this transaction, he started Titanium Technology in
September 2001 with research and development as its primary activity, and
gradually expanded his business venture beyond Hong Kong.
Dr. Ng has received a great deal of recognition for his achievements,
which include the following:
o one of the "Ten Outstanding Young Digi Persons 2000" by the
Hong Kong Productivity Council and Hong Kong Junior Chamber;
o "Innovative Entrepreneur of the Year" for 2003 by the Hong
Kong Junior Chamber; and
o one of the "Top 100 Cosmopolitan Chinese Confucian Businessman
in 2004" by the Chinese Confucian Foundation and China
Economic Daily. Dr. Ng is the youngest recipient in this
event.
The "Innovative Entrepreneur of the Year" award recognizes successful
and creative entrepreneurs in greater China. According to the selection
criteria, this award recognized Titanium as one of the best companies in terms
of products and services, originality of ideas, uniqueness in the market,
management and marketing strategies, revenues of the company, the future
prospect and potential of the company. He is a highly sought after speaker at
high level industry conferences and a frequent commentator in the media. He was
one of the speakers, representing Hong Kong, at one of the Asia-Pacific Economic
Cooperation ("APEC") business conferences held in Korea in 2005.
MR. JASON MA, CHIEF EXECUTIVE OFFICER. Mr. Ma became the Chief
Executive Officer of Titanium Technology in May 2005 and is responsible for
formulating business strategies, overseeing the entire business operation, and
establishing and executing global alliances and mergers and acquisitions for the
company. Mr. Ma was born and raised in Hong Kong and went to the United States
for his university education, where he received a
32
bachelor's degree in engineering and computer science from the University of
California at Berkeley in 1995, and an MBA degree from the University of
Southern California's Marshall School of Business in 1998. During his stays in
the United States he had worked for different companies in the fields of
computer science and marketing. Mr. Ma returned Hong Kong in 1998 and has since
been involved in various IT related endeavors. Before joining Titanium
Technology in April 2004, he was the general manager for Laurentia Technologies
Ltd., a consumer electronics company (February 2003 to March 2004), and he was
the director of project management for Ebiz Incubation Co., Ltd. from February
2000 to February 2003. Ebiz Incubation was a Hong Kong private equity fund for
incubation and investment in technology-related ventures. From November 1998 to
January 2000, he was the assistant marketing manager for Ball Asia Pacific Ltd.,
a joint venture of Ball Corporation, a publicly-held company based in
Broomfield, Colorado. Ball Asia Pacific Ltd. supplies metal beverage containers
in the PRC and Hong Kong.
PROF. STAN LI, CHIEF SCIENTIFIC ADVISOR. Prof. Li has been a Researcher
at National Lab of Pattern Recognition (NLPR), Institute of Automation, Chinese
Academy of Sciences (CASIA), and the Director of the Center for Biometrics
Research and Testing (CBRT) since August 2004. He worked at Microsoft Research
Asia (MSRA) as a Researcher from May 2000 to Aug 2004. His role was to lead the
MSRA group to develop facial recognition technologies. Prior to that, he was an
Associate Professor of Nanyang Technological University, Singapore. His current
research interest is in face recognition technologies, biometrics, intelligent
surveillance, pattern recognition, and machine learning. Prof. Li has been the
Chief Scientific Advisor to Titanium Technology since June 2005. He has
published several books, including "Handbook of Face Recognition"
(Springer-Verlag, 2004) and "Markov Random Field Modeling in Image Analysis"
(Springer-Verlag, 2nd edition in 2001), and over 180 reference papers and book
chapters in these areas. He obtained a B.Eng from Hunan University, an M.Eng
from National University of Defense Technology, and a PhD. from Surrey
University where he also worked as a research fellow. All the degrees are in
Electrical and Electronic Engineering. He is a senior member of IEEE and
currently serves as editorial board of Pattern Recognition, and program
committees of various international conferences.
MR. KIN KWONG "HUMPHREY" CHEUNG, CHIEF TECHNOLOGY OFFICER AND DIRECTOR.
Mr. Cheung has been the Chief Technology Officer of Titanium Technology since
July 2001. He received a bachelor's degree in Electronic Engineering from The
Chinese University of Hong Kong in 1994 and a master's degree in Manufacturing
Engineering from The Hong Kong Polytechnic University in 1998. Mr. Cheung is
responsible for overseeing the technical development of all product lines as
well as the integration of the technologies into product, systems and platforms
into deliverables that will best serve market demands. Prior to founding
Titanium Technology, Mr. Cheung worked at the Computer Graphics Laboratory for
the Hong Kong Polytechnic University as a research assistant. He was also a
co-founder of 303 Company Limited with Dr. Johnny Ng and Mr. Billy Tang, serving
as the Chief Technical Officer from April 1999 to March 2001. He has published
several papers in the fields of computer graphics, solid modeling, biometrics,
and pattern recognition.
MR. WAI HUNG "BILLY" TANG, CHIEF OPERATION OFFICER AND DIRECTOR. Mr.
Tang has been the Chief Operation Officer of Titanium Technology since July 2001
and is responsible for its management and overall operation. He holds Bachelor's
degree in Mathematics from the Hong Kong University of Science and Technology.
Under his leadership, Titanium Technology has experienced tremendous growth and
has increased its employee base to over 30 employees worldwide in just over a
year. Prior to co-founding Titanium Technology, he was also a co-founder of 303
Company Limited with Dr. Johnny Ng and Mr. Humphrey Cheung. He served as
Chairman of that company from April 1998 to January 2001. Mr. Tang previously
was an instrumental member of the research team in the department of Industrial
and Systems Engineering of the Hong Kong Polytechnic University from November
1996 to March 1997, where he focused on the research of virtual reality
technology. He was a system engineer for Internet Access Hong Kong Limited, one
of the largest Internet Service Providers in Hong Kong, from June 1997 to April
1998.
PATRICK LO, DIRECTOR OF BUSINESS DEVELOPMENT OF TITANIUM TECHNOLOGY.
Mr. Lo joined Titanium Technology in May 2003. From January 2001 to March 2003,
he worked for Information Security One, a Hong Kong company that distributes
security products in China, such as intrusion detection systems, firewalls, and
log analysis tools. As the director for enterprise security services, he was
responsible for sales operations in Hong Kong and China.
ERIC WONG, CONSULTANT. Mr. Wong has over 25 years of experience in the
areas of production development, sales and marketing in Southeast Asia and
Europe. Accordingly, we use Mr. Wong as a consultant.
33
For the past five years, he has been involved primarily as the chairman of BTC
Consultant Co., Ltd., a company incorporated in Hong Kong that provides
professional consultancy and business services with regard to foreign investment
in China. It focuses on assisting multinational companies in obtaining
commercial opportunities offered by China's consumer market.
CONFLICTS OF INTEREST
Members of our management are associated with other firms involved in a
range of business activities. Consequently, there are potential inherent
conflicts of interest in their acting as officers and directors of our company.
While the officers and directors are engaged in other business activities, we
anticipate that such activities will not interfere in any significant fashion
with the affairs of our business. Due to the ownership of stock in our company
by management, we believe that they are sufficiently motivated to focus
primarily on the business of the company. Additionally the employment agreements
with members of management state that any and all industrial property rights,
including patents, to which they are or may be entitled or which are created as
a result of their services under their employment agreements belong to and are
the exclusive property of Titanium Technology. The employment agreements also
contain a non-compete provision that prohibits them from engaging or being
interested in any capacity in any business whose activities are substantially
similar to or compete with any of the business activities of Titanium Technology
or any of its subsidiaries, being involved in any projects or products handled
or produced by Titanium Technology or its subsidiaries, or dealing with any
existing customers of Titanium Technology or its subsidiaries.
Our officers and directors are now and may in the future become
shareholders, officers or directors of other companies, which may be formed for
the purpose of engaging in business activities similar to us. Accordingly,
additional direct conflicts of interest may arise in the future with respect to
such individuals acting on behalf of us or other entities. Moreover, additional
conflicts of interest may arise with respect to opportunities which come to the
attention of such individuals in the performance of their duties or otherwise.
Currently, we do not have a right of first refusal pertaining to opportunities
that come to their attention and may relate to our business operations.
Our officers and directors are, so long as they are our officers or
directors, subject to the restriction that all opportunities contemplated by our
plan of operation which come to their attention, either in the performance of
their duties or in any other manner, will be considered opportunities of, and be
made available to us and the companies that they are affiliated with on an equal
basis. A breach of this requirement will be a breach of the fiduciary duties of
the officer or director. If we or the companies with which the officers and
directors are affiliated both desire to take advantage of an opportunity, then
said officers and directors would abstain from negotiating and voting upon the
opportunity. However, all directors may still individually take advantage of
opportunities if we should decline to do so. Except as set forth above, we have
not adopted any other conflict of interest policy with respect to such
transactions.
EXECUTIVE COMPENSATION
The following table sets forth information about the remuneration of
our chief executive officers for the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
AS SHOWN IN UNITED STATES DOLLARS (US$)
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------------------------------
AWARDS PAYOUTS
----------------------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION ($) ($) SARS (#) ($) TION ($)
- -----------------------------------------------------------------------------------------------------------------------
Johnny Ng (1) 2003 $41,538 $-0- $-0- $-0- -0- $-0- $-0-
2004 $30,512 $-0- $-0- $-0- -0- $-0- $-0-
2005 $-0- $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
Humphrey Cheung 2003 $58,974 $-0- $-0- $-0- -0- $-0- $-0-
2004 $51,282 $-0- $-0- $-0- -0- $-0- $-0-
2005 $46,154 $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
Billy Tang 2003 $58,974 $-0- $-0- $-0- -0- $-0- $-0-
2004 $51,282 $-0- $-0- $-0- -0- $-0- $-0-
2005 $46,154 $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
34
SUMMARY COMPENSATION TABLE
AS SHOWN IN HONG KONG DOLLARS (HK$)
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------------------------------
AWARDS PAYOUTS
----------------------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION ($) ($) SARS (#) ($) TION ($)
- -----------------------------------------------------------------------------------------------------------------------
Johnny Ng (1) 2003 $323,996 $-0- $-0- $-0- -0- $-0- $-0-
2004 $237,994 $-0- $-0- $-0- -0- $-0- $-0-
2005 $-0- $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
Humphrey Cheung 2003 $459,997 $-0- $-0- $-0- -0- $-0- $-0-
2004 $400,000 $-0- $-0- $-0- -0- $-0- $-0-
2005 $360,000 $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
Billy Tang 2003 $459,997 $-0- $-0- $-0- -0- $-0- $-0-
2004 $400,000 $-0- $-0- $-0- -0- $-0- $-0-
2005 $360,000 $-0- $-0- $-0- -0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------
- --------------------------
(1) Mr. Johnny Ng functioned as the Chief Executive Officer from September
2001 to April 2005. Mr. Ng waived his salary for 2005.
During the last fiscal year, there were no grants of stock options,
stock appreciation rights, benefits under long-term incentive plans or other
forms of compensation involving our officers. We reimburse our officers and
directors for reasonable expenses incurred during the course of their
performance.
EMPLOYMENT CONTRACTS
We entered into agreements with our executive officers, Jason Ma,
Humphrey Cheung, and Billy Tang as of January 1, 2005. While each of the
agreements provides for permanent employment, each agreement may be terminated
by either party at any time without cause upon two weeks' notice. In the event
of termination, the employee is subject to a 12-month non-competition provision
during which he cannot engage in any business that competes with us or deal with
any of our existing customers. The agreements provide for monthly salaries of US
$2,564 (HK$20,000) for Mr. Ma, US$3,846 (HK$30,000) for Mr. Cheung, and US$3,846
(HK$30,000) for Mr. Tang, with annual salary reviews on January 1 of each year.
During 2005, there were unpaid salaries to Jason Ma, Humphrey Cheung,
and Billy Tang in the amount of $7,692 (HK$60,000) to each person. On June 30,
2005, these three officers agreed to forgive the unpaid salaries due from us
through that date in the total amount of $23,076 (HK$180,000).
STOCK OPTION PLAN
On November 22, 2005, our board of directors approved a stock option
plan under which options to purchase up to 5,000,000 shares of common stock may
be granted. We anticipate that the plan will provide for the granting of
incentive stock options to our employees and non-statutory options to our
employees, advisors and consultants.
The board of directors or the compensation committee of the board would
determine the exercise price for each option at the time the option is granted.
The exercise price for shares under an incentive stock option would not be less
than 100% of the fair market value of the common stock on the date such option
is granted. The fair market value price is the closing price per share on the
date the option is granted. The committee would also determine when options
become exercisable. The term of an option would be no more than ten (10) years
from the date of grant. No option would be exercised after the expiration of its
term.
Unless otherwise expressly provided in any option agreement, the
unexercised portion of any option granted to an optionee would automatically
terminate one year after the date on which the optionee's employment or service
is terminated for any reason, other than by reason of cause, voluntary
termination of employment or service by the optionee, or the optionee's death.
Options would terminate immediately upon the termination of an optionee's
employment for cause or 30 days after the voluntary termination of employment or
service by the optionee. If an optionee's employment or consulting relationship
terminates as a result of his or her death, then all options he or she could
have exercised at the date of death, or would have been able to exercise within
the following
35
year if the employment or consulting relationship had continued,
would be exercisable within the one year period following the optionee's death
by his or her estate or by the person who acquired the exercise right by bequest
or inheritance.
Options granted under the plan would not transferable other than by
will or the laws of descent and distribution and may be exercised during the
optionee's lifetime only by the optionee, except that a non-statutory stock
option would be transferable to a family member or trust for the benefit of a
family member if the committee's prior written consent is obtained.
We anticipate that we will have the right to redeem any shares issued
to any optionee upon exercise of the option granted under the plan immediately
upon the termination of optionee's employment or service arising from
disability, the death of the optionee, the voluntary termination of employment
or services of the optionee, or the termination of employment or services of the
optionee for cause. The redemption price would be the fair market value of the
shares on the date of the event of redemption.
In the event that our stock changes by reason of any stock split,
dividend, combination, reclassification or other similar change in our capital
structure effected without the receipt of consideration, appropriate adjustments
shall be made in the number and class of shares of stock subject to the plan,
the number and class of shares of stock subject to any option outstanding under
the plan, and the exercise price for shares subject to any such outstanding
option.
In the event of a merger in which our shareholders immediately before
the merger own 50% or more of the issued and outstanding shares of stock of the
resulting entity after the merger, then existing options shall automatically
convert into options to receive stock of the resulting entity. Unless otherwise
expressly provided in any option, the committee in its sole discretion may
cancel, effective upon the date of the consummation of any change of control,
any option that remains unexercised on such date.
We anticipate that the plan will authorize the board to amend, alter,
suspend, or terminate the plan, or any part thereof, at any time and for any
reason. However, the plan would require shareholder approval for any amendment
to the plan to the extent necessary and desirable to comply with applicable
laws. No such action by the board or shareholders would alter or impair any
option previously granted under the plan without the written consent of the
optionee. The plan would remain in effect until terminated by action of the
board or operation of law.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides certain information as to the officers and
directors individually and as a group, and the holders of more than 5% of the
our common stock, as of the date of this prospectus:
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1> NUMBER OF SHARES OWNED PERCENT OF CLASS (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
36
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1> NUMBER OF SHARES OWNED PERCENT OF CLASS (2)<F2>
- ----------------------------------------------------------------------------------------------------------------------
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)
- ------------------
<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 the date of this
prospectus. 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 any of
our former directors, senior officers or principal shareholders, nor any family
member of such former directors, officers or principal shareholders, has or had
any material interest, direct or indirect, in any transaction, or in any
proposed transaction which has materially affected or will materially affect us.
ERICORPS CREATION (HK) LIMITED
Ericorps Creation (HK) Limited is owned by Eric Wong and his wife, who
own indirectly 10.0% of our outstanding shares through their ownership of Golden
Mass Technologies Ltd. Ericorps is also one of our distributors of ProAccess
FaceOK. We sell our products to distributors at prices based on the quantities
purchased. The price decreases as the quantity increases. The terms that we have
with Ericorps are the same as those with other third party distributors.
Therefore, we believe that the terms of the transactions with Ericorps have been
no less favorable than the terms of similar transactions with non-affiliates.
During the years ended December 31, 2005, 2004 and 2003, we sold products to
Ericorps Creation (HK) Limited in the amounts of $nil, US$34,204 (HK$266,791)
and US$105,874 (HK$825,820), respectively.
AMOUNTS DUE FROM RELATED PARTIES
We have paid for the expenses related to the annual company secretary
fee, similar to a corporate annual report fee, of Golden Mass Technologies
Limited ("Golden Mass"), a shareholder that is controlled by, among
37
others, Johnny Ng, Humphrey Cheung, and Billy Tang, who are our officers and
directors, since 2002. Johnny Ng, Humphrey Cheung, and Billy Tang own indirectly
41%, 19% and 19%, respectively, of Golden Mass. 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$769 (HK$6,000), US$705 (HK$5,500) and US$705 (HK$5,500)
for the years ended December 31, 2005, 2004 and 2003, respectively. This
practice has ceased effective January 1, 2006.
In 2003, when we decided to establish an office in PRC, we established
an annual budget for the subsidiary and we remitted cash in those budgeted
amounts to Humphrey Cheung. Due to the fact that non-cash payment methods are
not widely accepted in the PRC, we have advanced cash to Humphrey Cheung, who
then pays expenditures for our PRC subsidiary, such as salaries, fees, and rent,
in cash. This practice continued in 2003 and 2004. The amounts paid to Humphrey
Cheung for this purpose were US$165,879 (HK$1,293,860), US$86,439 (HK$674,225)
and US$59,710 (HK$465,737) during the years ended December 31, 2005, 2004 and
2003, respectively. In 2005, after review of its cash levels and its related
party transactions, management concluded that it would discontinue this practice
and would also prohibit the practice of advancing funds to related parties.
The following table sets forth the advances and repayments, as stated
in Hong Kong dollars (HK$):
Humphrey Golden Mass Total
Cheung
Cash Non-cash HKD HKD HKD
- ------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 - -
Personal expenses paid on behalf v 19,434 6,100 25,534
Unpaid share capital v - 360,000 360,000
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 19,434 366,100 385,534
Loan to director for PRC subsidiary expenses v 465,737 - 465,737
Repayment v (48,441) - (48,441)
Personal expenses paid on behalf v - 5,500 5,500
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 436,730 371,600 808,330
Loan to director for PRC subsidiary expenses v 674,225 - 674,225
Repayment v (79,370) - (79,370)
Share capital paid up by set-off with - (360,000) (360,000)
shareholder's loan v
Personal expenses paid on behalf v - 5,500 5,500
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 1,031,585 17,100 1,048,685
Loan to director for PRC subsidiary expenses v 1,293,860 - 1,293,860
Personal expenses paid on behalf v - 6,000 6,000
Repayment v (681,684) (681,684)
Amount setting off against "Amount due to
related parties" v (1,643,761) (23,100) (1,666,861)
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 - - -
========================================================================================================================
AMOUNTS DUE TO RELATED PARTIES
In 2002 and 2003, Johnny Ng, Billy Tang, and Goldford Consultancy
Limited ("Goldford"), a company owned by Johnny Ng, advanced US$37,190
(HK$290,085), to us, net of repayments. In 2004, we repaid the advances from
Goldford in full. Johnny Ng and Billy Tang also advanced funds to us and at
December 31, 2004, the aggregate amounts of these advances were US$27,025
(HK$210,797). During the year ended December 31, 2005, Johnny Ng and Billy Tang
loaned us US$457,629 (HK$3,569,508) and we repaid them US$201,611
(HK$1,572,562), leaving a balance of US$283,044 (HK$2,207,743). Both Johnny Ng
and Billy Tang agreed to offset US$213,700 (HK$1,666,861) of this amount against
amounts due from related parties. Johnny Ng and Billy Tang then forgave the
balance of US$69,344 (HK$540,882) and this amount was contributed to the capital
of the
38
company. We believe that the terms of these transactions were no less favorable
than what could have been obtained from non-affiliates.
The following table sets forth the movement of the amounts due to
related parties in Hong Kong dollars (HK$). Amounts for Goldford are included
in Johnny Ng's column as he owns that company.
Billy Tang Johnny Ng Total
HKD HKD HKD
- --------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 - 4,716 4,716
Advances to us during the year 77,649 330,755 408,404
Repayment by us during the year (36,925) (181,930) (218,855)
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 40,724 153,541 194,265
Advances to us during the year 54,146 578,811 632,957
Repayment by us during the year - (537,137) (537,137)
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 94,870 195,215 290,085
Advances to us during the year 133,300 308,212 441,512
Repayment by us during the year (50,000) (470,800) (520,800)
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 178,170 32,627 210,797
Advances to us during the year 3,564,508 5,000 3,569,508
Repayment by us during the year (1,534,935) (37,627) (1,572,562)
Amount offset against amounts due from related parties (1,666,861) - (1,666,861)
Amount forgiven and contributed to additional paid-in (540,882) - (540,882)
capital
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 - - -
==============================================================================================================
SHAREHOLDERS LOANS
In 2003 and 2004, Johnny Ng, Billy Tang, and Humphrey Cheung, through
Golden Mass, loaned us US$117,949 (HK$920,000) and US$64,102 (HK$500,000),
respectively, leaving a balance of US$182,051 (HK$1,420,000) owed to them at
December 31, 2004. During the year ended December 31, 2005, no additional money
was loaned. These loans were unsecured, interest-free, and not repayable within
the next twelve months. The whole amount of US$182,051 (HK$1,420,000) was
forgiven by the shareholders and contributed to the company as additional
paid-in capital in 2005. We believe that the terms of these transactions were
no less favorable than what could have been obtained from non-affiliates.
PERSONAL GUARANTEES
Billy Tang, Johnny Ng, and Humphrey Cheung personally guaranteed our
installment loan from a financial institution in the amount of US$38,462
(HK$300,000). None of these individuals received any remuneration for the
guarantee. This loan was repaid in 18 monthly installments of US$2,313
(HK$18,042) in 2005.
On February 6, 2006, Billy Tang, Johnny Ng, and Humphrey Cheung
personally guaranteed our banking facilities arrangement with the bank where we
maintain our checking account. The arrangement allows us to overdraft our
account up to US$256,410 (HK$2,000,000) and Messrs. Tang, Ng and Cheung have
provided their personal guarantees up to that amount. We believe that the terms
of these transactions were no less favorable than what could have been obtained
from non-affiliates.
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
39
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 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.
40
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.
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.
41
BRITISH VIRGIN ISLANDS DELAWARE
======================================== ==========================================
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.
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.
42
BRITISH VIRGIN ISLANDS DELAWARE
======================================== ==========================================
Special meeting of Under British Virgin Islands law, unless Under Delaware law, a special meeting of
stockholders otherwise provided by a company's stockholders may be called by the board of
memorandum of association or articles of directors or any other person authorized
association, special meetings of to do so in the certificate of
stockholders may be called by the incorporation or bylaws.
directors at any time.
Under British Virgin Islands law,
directors are required to call meetings
upon a written request from the
stockholders holding more than 50% of the
outstanding voting shares, unless the
memorandum of association or articles of
association provide for a lesser
percentage.
Action by written consent Under British Virgin Islands law, unless Under Delaware law, unless otherwise
in lieu of a stockholders' otherwise provided by a company's provided in the certificate of
meeting memorandum of association or articles of incorporation, stockholders may take
association, stockholders may take action action by written consent in lieu of
by written consent in lieu of voting at a voting at a stockholders meeting.
stockholders' meeting.
Record date for determining Under British Virgin Islands law, the Under Delaware law, the record date for
stockholders and notice of directors of a company may fix the date determining stockholders of record at a
meeting notice is given of a meeting as the meeting is a date fixed by the directors
record date for determining those shares that is not more than 60 days nor less
that are entitled to vote at the than 10 days before such meeting.
meeting.
Written notice of all meetings of
The company's articles of association stockholders, stating the time, place and
provide that written notice of all date thereof, shall be given no less than
meetings of stockholders, stating the 10 nor 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 meeting.
given at least 7 days before the date of
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.
43
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
the stockholders or the existing next annual meeting.
directors for such term as the members
of the directors may determine.
Removal of directors The company's articles of association Under Delaware law, any director or the
provide that a director shall vacate entire board of directors may be removed,
office if the director (a) is removed by with or without cause, by the holders of a
a resolution of the stockholders or majority of the shares then entitled to
directors; (b) becomes bankrupt or makes vote at an election of directors.
any arrangement or composition with his
creditors generally; (c) becomes of
unsound mind or of such infirm health as
to be incapable of managing his affairs;
or (d) resigns.
Board of director The company's articles of association Under Delaware law, vacancies and newly
vacancies provide that any vacancy on the board of created directorships may be filled by a
directors may be filled either by the majority of the directors then in office,
stockholders or by the remaining even though less than a quorum, unless
directors. otherwise provided in the certificate
of incorporation or bylaws.
44
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
decision of the directors as to whether for all expenses, liability and loss,
the person acted appropriately is, in the including attorneys' fees, judgments, fines,
absence of fraud, sufficient. ERISA 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
45
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.
46
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.
47
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>
48
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 200,000 (2)<F2> 100,000 100,000 (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>
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 (15)<F15> 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 (16)<F16> 100,000 (2)<F2> 50,000 50,000 (4)<F4>
David Simas FBO Kasey Simas (16)<F16> 20,000 (2)<F2> 10,000 10,000 (4)<F4>
Kyle P. Simas and David L. Simas (16)<F16> 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 (17)<F17> 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%.
49
(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>David H. Jackson exercises voting and/or dispositive powers over these
securities.
(16)<F16>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.
(17)<F17>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 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
50
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
Harney Westwood & Riegels has given an opinion on the validity of the
securities.
EXPERTS
We have included the financial statements of the company as of December
31, 2004 and 2003, and for the years ended December 31, 2005, 2004 and 2003, in
reliance upon the report of Zhong Yi (Hong Kong) C.P.A. Company Limited, an
independent registered public accounting firm, to the extent and for the periods
indicated in their report also incorporated by reference, and are included in
reliance upon such report and upon the authority of such firm as experts in
accounting and auditing.
51
ADDITIONAL INFORMATION
We have not previously been subject to the reporting requirements of
the Securities and Exchange Commission. We have filed with the Commission a
registration statement on Form S-1 under the Securities Act with respect to the
shares offered hereby. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules thereto.
For further information with respect to our securities and us you should review
the registration statement and the exhibits and schedules thereto. Statements
made in this prospectus regarding the contents of any contract or document filed
as an exhibit to the registration statement are not necessarily complete. You
should review the copy of such contract or document so filed.
You can inspect the registration statement and the exhibits and the
schedules thereto filed with the commission, without charge, at the office of
the Commission at 100 F Street, NE, Washington, D.C. 20549. You can also obtain
copies of these materials from the public reference section of the commission at
100 F Street, NE, Washington, D.C. 20549, at prescribed rates. You can obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The Commission maintains a web site on the Internet that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Commission at
HTTP://WWW.SEC.GOV.
REPORTS TO STOCKHOLDERS
As a result of filing the registration statement, we are subject to the
reporting requirements of the federal securities laws, and are required to file
periodic reports and other information with the SEC. We will furnish our
shareholders with annual reports containing audited financial statements
certified by independent public accountants following the end of each fiscal
year and quarterly reports containing unaudited financial information for the
first three quarters of each fiscal year following the end of such fiscal
quarter.
INDEX TO FINANCIAL STATEMENTS
Financial Statements - Three Months Ended March 31, 2006 and 2005
Consolidated Balance Sheets (Unaudited)
March 31, 2006......................................................F-1
Consolidated Statements of Income (Unaudited
Three Months Ended March 31, 2006 and 2005..........................F-2
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2006 and 2005..........................F-3
Notes to Consolidated Financial Statements (Unaudited)..................F-4
Financial Statements - Years Ended December 31, 2005, 2004 and 2003
Report of Independent Registered Public Accounting Firm................FF-1
Consolidated Balance Sheets
December 31, 2005 and 2004.........................................FF-2
Consolidated Statement of Income
Years Ended December 31, 2005, 2004 and 2003.......................FF-4
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 2005, 2004 and 2003.......................FF-6
Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004 and 2003.......................FF-7
Notes to Consolidated Financial Statements.............................FF-9
52
Titanium Group Limited and its Subsidiaries
Consolidated Balance Sheet
As of March 31, 2006
(Original currency expressed in Hong Kong Dollars ("HK$"))
(Unaudited)
US$ HK$
ASSETS
Current assets:
Cash and cash equivalents $ 166,961 $ 1,302,294
Accounts receivable, trade 721,208 5,625,424
Inventories 5,806 45,287
Deposits and other recievables 219,720 1,713,816
-------------- ---------------
Total current assets 1,113,695 8,686,821
-------------- ---------------
Property and equipment, at cost, net of accumulated depreciation
Cost 147,902 1,153,640
Accumulated depreciation (52,135) (406,661)
-------------- ---------------
95,767 746,979
-------------- ---------------
Other assets 202,403 1,578,743
-------------- ---------------
Total assets $ 1,411,865 $ 11,012,543
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 120,599 $ 940,671
Accounts payable, trade 164,940 1,286,540
Other taxes payable 6,518 50,840
Income Taxes payable 53,887 420,315
-------------- ---------------
Total current liabilities 345,944 2,698,366
-------------- ---------------
Minority interest 5,901 46,028
-------------- ---------------
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 318,820 2,486,797
Retained earnings 241,082 1,880,432
Accumulated other comprehensive income 118 920
-------------- ---------------
1,060,020 8,268,149
-------------- ---------------
$ 1,411,865 $ 11,012,543
============== ===============
See accompanying notes to unaudited consolidated financial statements.
F-1
Titanium Group Limited and its Subsidiaries
Consolidated Statements of Income
Three Months Ended March 31, 2006 and 2005
(Original currency expressed in Hong Kong Dollars ("HK$"))
(Unaudited)
2006 2006 2005
-------------- -------------- --------------
US$ HK$ HK$
Revenue
Projects
Products $ 254,240 $ 1,983,063 $ 724,447
Services 130,800 1,020,239 1,141,940
385,040 3,003,302 1,866,387
-------------- -------------- --------------
Maintenance
Services 9,633 75,140 52,000
-------------- -------------- --------------
Total Revenue 394,673 3,078,442 1,918,387
-------------- -------------- --------------
Cost of sales
Projects
Cost of products sold 138,677 1,081,681 244,268
Cost of services 79,428 619,537 839,166
-------------- -------------- --------------
218,105 1,701,218 1,083,434
Maintenance
Cost of services 1,167 9,100 5,840
-------------- -------------- --------------
Total cost of sales 219,272 1,710,318 1,089,274
-------------- -------------- --------------
Gross profit 175,401 1,368,124 829,113
-------------- -------------- --------------
Selling, general and administrative expenses 150,523 1,174,083 695,179
Research and development 12,115 94,494 -
-------------- -------------- --------------
162,638 1,268,577 695,179
-------------- -------------- --------------
Income from operations 12,763 99,547 133,934
-------------- -------------- --------------
Other income (expense):
Government grant income 3,043 23,733 17,533
Interest income 2,426 18,922 14
Interest expense (2,196) (17,125) (1,375)
-------------- -------------- --------------
3,273 25,530 16,172
-------------- -------------- --------------
Income before provision for income taxes and
minority interest 16,036 125,077 150,106
Income tax (2,667) (20,800) (29,350)
-------------- -------------- --------------
Income before minority interest 13,369 104,277 120,756
Minority interest (5,901) (46,028) 7,190
-------------- -------------- --------------
Net income $ 7,468 $ 58,249 $ 127,946
============== ============== ==============
Per share information:
Basic and diluted income
per common share $ - $ 0.001 $ 0.003
============== ============== ==============
Weighted average shares outstanding basic
and fully diluted 50,000,000 50,000,000 47,000,000
============== ============== ==============
Net income $ 7,468 $ 58,249 $ 127,946
Other comprehensive income
Effect of foreign currency transactions 693 5,404 3,871
-------------- -------------- --------------
Comprehensive income $ 8,161 $ 63,653 $ 131,817
============== ============== ==============
See accompanying notes to unaudited consolidated financial statements.
F-2
Titanium Group Limited and its Subsidiaries
Consolidated Statement of Cash Flows
Three Months Ended March 31, 2006 and
2005 (Original currency expressed in Hong Kong Dollars ("HK$"))
(Unaudited)
2006 2006 2005
-------------- --------------- --------------
US$ HK$ HK$
Net cash provided by (used in) operating activities $ (30,711) $ (239,542) $ 116,636
-------------- --------------- --------------
Cash flows from investing activities:
Acquisition of intangible assets (36,023) (280,977) (148,855)
Acquisition of plant and equipment (11,420) (89,077) (17,680)
-------------- --------------- --------------
Net cash used in investing activities (47,443) (370,054) (166,535)
-------------- --------------- --------------
Cash flows from financing activities:
Repayment of bank overdraft (72,588) (566,191) (50,292)
Repayment of long term bank loan - - (16,667)
-------------- --------------- --------------
Net cash used in financing activities (72,588) (566,191) (66,959)
-------------- --------------- --------------
Effect of exchange gain on cash and cash equivalents 693 5,404 3,871
-------------- --------------- --------------
Net decrease in cash and cash equivalents (150,049) (1,170,383) (112,987)
Cash and cash equivalents, beginning of period 317,010 2,472,677 523,543
-------------- --------------- --------------
Cash and cash equivalents, end of period $ 166,961 $ 1,302,294 $ 410,556
============== =============== ==============
Supplemental cash flows information:
Cash paid for interest $ 2,196 $ 17,125 $ 1,375
============== =============== ==============
Income tax paid $ 2,243 $ 17,500 $ 3,677
============== =============== ==============
Non-cash transactions
Comprehensive income $ 693 $ 5,404 $ 3,871
============== =============== ==============
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
Titanium Group Limited ("Company") was incorporated as an International Business
Company with limited liability in the British Virgin Islands ("BVI") under the
International Business Companies Act, Cap 291 of the British Virgin Islands on
May17, 2004. The Company, through its subsidiary companies, Titanium Technology
Limited and Titanium Technology (Shenzhen) Co., Ltd., mainly focus in the
development of advanced biometric technology and installation and implement of
advanced facial based biometric identification and security projects for law
enforcement, mass transportation, and other government and private sector
customers.
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) Co., Ltd. (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 March 31,
2006 and for the three-month periods ended March 31, 2006 and 2005 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 March 31, 2006 and 2005 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 - PER SHARE INFORMATION
Basic net income per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding for the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company. For the period ended March 31, 2006, outstanding
warrants to purchase 3,000,000 shares of common stock of the Company which were
issued in connection with the prior sale of common stock were not considered to
have a dilutive effect since the exercise price of the warrants exceeded the
average market price of the common stock for that period.
F-4
Titanium Group Limited and its Subsidiaries.
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
Note 4 - INCOME TAXES
The Group accounts for income taxes in interim periods as required by Accounting
Principles Board Opinion No. 28 "Interim Financial Reporting" and as interpreted
by FASB Interpretation No. 18, "Accounting for Income Taxes in Interim Periods".
The Group has determined an estimated annual effect tax rate. The rate will be
revised, if necessary, as of the end of each successive interim period during
the Groups fiscal year to the Groups best current estimate.
The estimated annual effective tax rate is applied to the year-to-date ordinary
income (or loss) at the end of the interim period.
F-5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Titanium Group Limited
We have audited the accompanying consolidated balance sheets of Titanium Group
Limited and subsidiaries ("the Company") as of December 31, 2004 and 2005, and
the related consolidated statements of operations, changes in stockholders'
equity and comprehensive income, and cash flows for each of the three years in
the period ended December 31, 2005. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Titanium Group
Limited and subsidiaries at December 31, 2004 and 2005, and the consolidated
results of operations and cash flows for each of the three years in the period
ended December 31, 2005, in conformity with accounting principles generally
accepted in the United States of America.
As described in Notes 3 and 4 to the consolidated financial statements, the
accompanying 2003 and 2004 financial statements have been restated to correct
accounting errors and reclassifications made to the consolidated financial
statements.
/s/ ZHONG YI (HONG KONG) C.P.A. COMPANY LIMITED
Zhong Yi (Hong Kong) C.P.A. Company Limited
Certified Public Accountants
Hong Kong, China
March 7, 2006
(except as to Notes 3 and 6, as to which
the date is April 3, 2006
and Notes 2 & 19, as to which the date is April 27, 2006)
FF-1
TITANIUM GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
AS OF DECEMBER 31,
2005 2005 2004
(US$) (HK$) (HK$)
(restated)
ASSETS
Current assets:
Cash and cash equivalents 317,010 2,472,677 523,543
Accounts receivable from a related
party - - 1,048
Accounts receivable 604,104 4,712,014 1,436,850
Amount due from related parties - - 1,048,685
Inventories 8,941 69,737 20,953
Deposits and other receivables 146,684 1,144,141 111,469
-------------- -------------- --------------
Total current assets 1,076,739 8,398,569 3,142,548
-------------- -------------- --------------
Plant and equipment
Computer system 30,003 234,026 218,495
Leasehold improvements 96,424 752,110 36,430
Furniture and fixtures 2,867 22,360 19,660
Office equipment 7,188 56,067 42,667
-------------- -------------- --------------
136,482 1,064,563 317,252
Less: accumulated depreciation (42,169) (328,924) (142,253)
-------------- -------------- --------------
Plant and equipment, net 94,313 735,639 174,999
-------------- -------------- --------------
Intangible assets, net 180,427 1,407,329 862,445
-------------- -------------- --------------
Total assets 1,351,479 10,541,537 4,179,992
============== ============== ==============
See accompanying notes to consolidated financial statements.
FF-2
TITANIUM GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
AS OF DECEMBER 31,
2005 2005 2004
(US$) (HK$) (HK$)
(restated)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft 193,187 1,506,862 62,850
Current portion of bank borrowings - - 16,667
Amount due to related parties - - 210,797
Accounts payable 52,970 413,164 607,044
Deferred revenue - - 263,662
Income taxes payable 53,463 417,015 136,360
-------------- -------------- --------------
Total current liabilities 299,620 2,337,041 1,297,380
-------------- -------------- --------------
Long-term debt, shareholders' loans - - 1,420,000
-------------- -------------- --------------
Minority interest - - 7,190
-------------- -------------- --------------
Deferred tax liabilities - - 41,571
-------------- -------------- --------------
Stockholders' equity:
Common stock, US$0.01
(HK$0.078) par value,
100,000,000 shares authorized,
47,000,000 shares and 50,000,000
shares issued and outstanding
at December 31, 2004 & 2005
respectively 500,000 3,900,000 390,000
Additional paid-in capital 318,820 2,486,797 -
Retained earnings 233,614 1,822,183 1,027,179
Accumulated other comprehensive
Income (575) (4,484) (3,328)
-------------- -------------- --------------
1,051,859 8,204,496 1,413,851
-------------- -------------- --------------
Total liabilities and stockholders' equity 1,351,479 10,541,537 4,179,992
============== ============== ==============
See accompanying notes to consolidated financial statements.
FF-3
TITANIUM GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
YEAR ENDED DECEMBER 31,
2005 2005 2004 2003
(US$) (HK$) (HK$) (HK$)
(restated) (restated)
Revenues
Projects
Products 1,009,875 7,877,028 4,099,371 2,048,412
Products sold to related parties - - 266,791 825,820
Services 628,464 4,902,023 1,414,887 951,859
-------------- -------------- -------------- --------------
1,638,339 12,779,051 5,781,049 3,826,091
-------------- -------------- -------------- --------------
Maintenance
Services 72,189 563,070 568,203 531,603
-------------- -------------- -------------- --------------
Total revenues 1,710,528 13,342,121 6,349,252 4,357,694
-------------- -------------- -------------- --------------
Cost of sales
Projects
Cost of products sold 431,918 3,368,963 1,975,940 1,277,876
Cost of products sold to related
parties - - 128,607 515,178
Cost of services 465,064 3,627,497 1,018,719 685,338
-------------- -------------- -------------- --------------
896,982 6,996,460 3,123,266 2,478,392
-------------- -------------- -------------- --------------
Maintenance
Services 8,461 66,000 66,000 66,000
-------------- -------------- -------------- --------------
Total cost of sales 905,443 7,062,460 3,189,266 2,544,392
-------------- -------------- -------------- --------------
Gross profit 805,085 6,279,661 3,159,986 1,813,302
-------------- -------------- -------------- --------------
Expenses
Selling, general and
administrative expenses (655,769) (5,115,000) (1,818,804) (2,029,078)
Research and development costs (24,372) (190,100) - (694,918)
-------------- -------------- -------------- --------------
680,141 (5,305,100) (1,818,804) (2,723,996)
-------------- -------------- -------------- --------------
Income (loss) from operations 124,944 974,561 1,341,182 (910,694)
-------------- -------------- -------------- --------------
Other income (expense)
Interest expense (3,021) (23,563) (16,532) (6,877)
Government grant income 8,854 69,067 55,200 117,615
Other income 3,973 30,987 24,449 1,153
-------------- -------------- -------------- --------------
Total other income 9,806 76,491 63,117 111,891
-------------- -------------- -------------- --------------
Income before provision for
income taxes and minority interest 134,750 1,051,052 1,404,299 (798,803)
Income tax (33,748) (263,238) (164,688) (36,203)
-------------- -------------- -------------- --------------
Income before minority interest 101,002 787,814 1,239,611 (835,006)
Minority interest 922 7,190 30,570 39,785
-------------- -------------- -------------- --------------
Net income 101,924 795,004 1,270,181 (795,221)
============== ============== ============== ==============
Net income per share 0.002 0.016 0.027 (0.017)
============== ============== ============== ==============
Weighted average shares
outstanding
Basic 48,250,000 48,250,000 47,000,000 47,000,000
============== ============== ============== ==============
Diluted 48,250,000 48,250,000 47,000,000 47,000,000
============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
FF-4
TITANIUM GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
YEAR ENDED DECEMBER 31,
2005 2005 2004 2003
(US$) (HK$) (HK$) (HK$)
(restated) (restated)
Net income 101,924 795,004 1,270,181 (795,221)
Other comprehensive income (loss)
Effect of foreign currency
transactions (148) (1,156) (2,427) (991)
-------------- -------------- -------------- --------------
Comprehensive income 101,776 793,848 1,267,754 (796,212)
============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
FF-5
TITANIUM GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Common stock Additional Accumulated
paid-in comprehensive Retained
Shares Amount Capital Income Earnings Total
------ ------ ------- ------ -------- -----
At January 1, 2003 47,000,000 390,000 - 90 552,219 942,309
Foreign currency
translation adjustment - - - (991) - (991)
Loss for the year - - - - (795,221) (795,221)
--------------------------- ------------ --------------- -------------- ------------
At December 31, 2003 47,000,000 390,000 - (901) (243,002) 146,097
Foreign currency
translation adjustment - - - (2,427) - (2,427)
Profit for the year - - - - 1,270,181 1,270,181
--------------------------- ------------ --------------- -------------- ------------
At December 31, 2004 47,000,000 390,000 - (3,328) 1,027,179 1,413,851
Private placement of
common stock, net 3,000,000 234,000 3,801,915 - - 4,035,915
Forgiveness of
shareholders' loan - - 1,960,882 - - 1,960,882
Par value reclassification 3,276,000 (3,276,000) - - -
Foreign currency
translation adjustment - - - (1,156) - (1,156)
Profit for the year - - - - 795,004 795,004
--------------------------- ------------ --------------- -------------- ------------
At December 31, 2005 50,000,000 3,900,000 2,486,797 (4,484) 1,822,183 8,204,496
=========================== ============ =============== ============== ============
See accompanying notes to consolidated financial statements.
FF-6
TITANIUM GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
YEAR ENDED DECEMBER 31,
2005 2005 2004 2003
(US$) (HK$) (HK$) (HK$)
(restated) (restated)
Cash flow from operating activities:
Net income 101,924 795,004 1,270,181 (795,221)
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities:
Depreciation and amortization 73,952 576,825 269,316 69,542
Minority interest in earnings of
subsidiaries (922) (7,190) (30,570) 40,215
Loss on disposals of long term assets 3,736 29,144 - -
Changes in assets and liabilities:
Accounts receivable from a related party 134 1,048 (780) 6
Accounts receivable (419,892) (3,275,164) (233,957) 349,457
Amount due from related parties - - (600,355) (422,797)
Inventories (6,254) (48,784) (20,953) -
Deposits and other receivables (132,394) (1,032,672) (63,609) (27,650)
Amount due to related parties 176,765 1,378,770 280,712 95,820
Accounts payable (24,856) (193,880) (80,708) (663,231)
Deferred revenue (33,803) (263,662) (263,662) 527,324
Deferred taxation (5,330) (41,571) 17,299 24,272
Income taxes payable 35,982 280,655 121,654 (81,178)
--------------- ------------ ------------- -------------
Net cash provided by operating activities (230,958) (1,801,477) 664,568 (883,441)
--------------- ------------ ------------- -------------
Cash flows from investing activities:
Additions to plant and equipment (100,480) (783,741) (121,865) (80,143)
Additions to intangible assets (118,942) (927,752) (914,524) (136,788)
--------------- ------------ ------------- -------------
Net cash used for investing activities (219,422) (1,711,493) (1,036,389) (216,931)
--------------- ------------ ------------- -------------
Cash flows from financing activities :
Proceeds from long term bank loan - - - 300,000
Repayments of long term bank loan (2,137) (16,667) (200,000) (83,333)
Proceeds from shareholders' loan - - 500,000 920,000
Net increase/(decrease) in bank overdraft
185,129 1,444,012 (148,414) 210,049
Net proceeds from private placement 517,425 4,035,915 - -
--------------- ------------ ------------- -------------
Net cash provided by (used in) financing
activities 700,417 5,463,260 151,586 1,346,716
--------------- ------------ ------------- -------------
Effect of exchange gain / (loss) on cash and
cash equivalents (148) (1,156) (2,427) (991)
--------------- ------------ ------------- -------------
Net increased/ (decreased) in cash and cash
equivalents 249,889 1,949,134 (222,662) 245,353
See accompanying notes to consolidated financial statements.
FF-7
TITANIUM GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
YEAR ENDED DECEMBER 31,
2005 2005 2004 2003
(US$) (HK$) (HK$) (HK$)
(restated) (restated)
Cash and cash equivalents, beginning of
the year 67,121 523,543 746,205 500,852
------------- ------------ ------------- -------------
Cash and cash equivalents, end of the
year 317,010 2,472,677 523,543 746,205
============= ============ ============= =============
Supplemental cash flows information:
Cash paid for interest 3,021 23,563 16,532 6,877
Income tax paid 3,073 23,971 25,735 93,109
Non-cash transactions
Comprehensive income / (loss) (148) (1,156) (2,427) (991)
Forgiveness of amount due to related
parties and shareholders' loan 251.395 1,960,882 - -
Netting off between the amount due from
related parties with the amount due to
related parties 134,447 1,048,685 360,000 -
See accompanying notes to consolidated financial statements.
FF-8
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
1. ORGANIZATION AND BUSINESS BACKGROUND
Titanium Group Limited ("Company") was incorporated as an International
Business Company with limited liability in the British Virgin Islands
("BVI") under the International Business Companies Act, Cap 291 of the
British Virgin Islands on May17, 2004. The Company, through its subsidiary
companies, Titanium Technology Limited and Titanium Technology (Shenzhen)
Co., Limited, mainly focus in the development of advanced biometric
technology and installation and implement of advanced facial based
biometric identification and security projects for law enforcement, mass
transportation, and other government and private sector customers.
Facial based biometric identification and security projects are made up of
two elements, the biometric products and professional services. The
biometric products consist of 3 major proprietary software products 1)
Ti-Face, the face recognition engine, 2) ProAccess, a facial based
biometric authentication system and 3) ProFacer, a facial based biometric
integrated surveillance system. These software products are always bundled
with other outside purchased identification and security hardware
products, including workstations and live-scan devices, to sell to
customers. The professional services include the design, development and
integration services of biometric identification and security solutions to
customers using the products.
Titanium Technology Limited also provides other professional services and
technical support services to its customers, including information
security consulting, remote monitoring system consulting and security
audit consulting services.
The Company and subsidiaries are hereinafter collectively referred to as
the "Group".
Details of the Company's subsidiaries as at December 31, 2005 are
described below:
Place of Particulars of
incorporation Principal activities issued/ Effective
and kind of legal and place of registered share interest
Name entity operation capital Held
---- ------ --------- ------- ----
Titanium Technology Hong Kong, company Sales and marketing 30,000 ordinary 100%
Limited with limited of biometric shares of HK$1 each
("TTL") liability identification and
security products and HK$30,000 (US$3,846)
services
Titanium Technology China, company with Development of Registered capital 92%
(Shenzhen) Co., Limited limited liability biometric technology
("TTLSZ") and new products HK$1,000,000
development
FF-9
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
o Basis of consolidation
The consolidated financial statements include the financial statements of
Titanium Group Limited and its subsidiaries and have been prepared in
accordance in accordance with generally accepted accounting principles in
the United States of America ("US GAAP"). All significant inter-company
balances and transactions have been eliminated in consolidation.
The interest of the Company in the subsidiaries was acquired by means of
exchange for shares in the Company pursuant to a share exchange agreement
on June 20, 2005. The transaction is considered to be transfer between
entities under common control, within the meaning of US GAAP. Accordingly,
the assets and liabilities transferred have been accounted for at
historical cost or at their "fair value" at the date of their original
acquisition and have been included in the foregoing financial statements
as of the beginning of the periods presented.
o Use of Estimates
The preparation of the consolidated financial statements requires
management to make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the period. Significant items subject to such estimates and
assumptions include the carrying amount of property, plant and equipment,
intangibles and goodwill; valuation allowances for receivables,
inventories and deferred income tax assets; valuation of derivative
instruments; and assets and obligations related to employee benefits.
Actual results could differ from those estimates.
o Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the weighted average method for all inventories.
Inventories consist of computer accessories purchased from various
suppliers.
o Accounts receivable
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Group's best
estimate of the amount of probable credit losses in the Group's existing
accounts receivable. The Group determines the allowance based on
historical write-off experience of the Group. The Group reviews its
allowance for doubtful accounts on a regular basis. Past due balances over
90 days and over a specified amount are reviewed individually for
collectibility. All other balances are reviewed on a pooled basis by
industry. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote. The Group does not have any off-balance-sheet credit
exposure related to its customers.
FF-10
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
o Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalent include
cash on hand, amounts due from banks and highly liquid investments with a
remaining contractual maturity at the date of purchase of three months or
less.
o Property and equipment
Property and equipment are stated at cost less accumulated depreciation
and provision for impairment, if any.
Property and equipment are depreciated at rates sufficient to write off
their cost less provision for impairment, if any, over their estimated
useful lives on a straight-line basis. Management considers that property
and equipment have no significant residual value. The estimated useful
lives are as follows:
Computer system 5 years
(hardware and software)
Furniture and fixtures and office 5 years
equipment
Leasehold improvements The shorter of their useful
lives or over the lease terms
Expenditure for maintenance and repairs is expensed as incurred.
o Revenue recognition
The Group generates revenues principally from contracts for facial based
biometric identification and security projects, which typically include
outside purchased workstations and live-scans devices, bundled with the
Group's proprietary software. In all cases, the customers are granted
a license to use the software in perpetuity so long as the software is
installed on the hardware for which it was originally intended. The
contract price of the Group's facial based biometric identification and
security projects generally includes twelve months free post-contract
customer support (details see Note 18). The Company also generates
revenues from services performed under fixed-price and time-and-material
agreements. To a lesser extent, the Company also generates revenues from
sales of its proprietary biometrics products and re-sales of products
sourced from outside third parties. The Company classifies the revenues
generated by these activities as either project products revenue, project
services revenue or maintenance services revenue. Maintenance services are
what the customer purchases if support and software upgrades are desired
after the free twelve-month period.
FF-11
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
The Group applies the provisions of Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended by SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions." For arrangements that require significant production,
modification, or customization of software, the Company applies the
provisions of Accounting Research Bulletin ("ARB") No. 45, "Long-Term
Construction-Type Contracts," and SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." The Group
also considers the guidance of the Emerging Issues Task Force ("EITF")
Topic 00-21, "Revenue Arrangements with Multiple Deliverables" with
respect to the recognition of revenue from the sale of hardware components
(separate accounting units) of a multiple deliverable arrangement. While
these statements govern the basis for revenue recognition, significant
judgment and the use of estimates are required in connection with the
determination of the amount of product, maintenance and service revenue
as well as the amount of deferred revenue to be recognized in each
accounting period. Material differences may result in the amount and
timing of the Group's revenue for any period if actual results differ
from management's judgments or estimates.
(1) Products revenue
The timing of product revenue recognition is dependent on the nature of
the product sold. Product arrangements comprising multiple deliverables
including software, hardware, professional services, and maintenance are
generally categorized into one of the following:
FACIAL BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS THAT DO
NOT REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION OF THE
GROUP'S SOFTWARE
Revenue associated with these arrangements, exclusive of amounts
allocated to maintenance, for which the Group has vendor-specific
objective evidence of fair value ("VSOE"), is recognized upon
installation and receipt of written acceptance of the project by
the customer when required by the provisions of the contract,
provided that all other criteria for revenue recognition have been
met. Revenue resulting from arrangements for which VSOE of the
maintenance element does not exist is recognized ratably over the
maintenance period.
To date the Group has not made an allocation of contract revenue
to separate accounting units since all of the products have been
delivered simultaneously and no deferral of revenue would result.
FACIAL BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS THAT
REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION OF THE GROUP'S
SOFTWARE:
Revenue associated with these arrangements is recognized using the
percentage of completion method as described by SOP 81-1. The
percentage of completion method reflects the portion of the
anticipated contract revenue, excluding maintenance that has VSOE,
which has been earned, equal to the ratio of labor effort expended
to date to the anticipated final labor effort, based on current
estimates of total labor effort necessary to complete the project.
Revenue resulting from arrangements for which VSOE of the
maintenance element does not exist is recognized ratably over the
contractual maintenance period.
SELF-DEVELOPED SOFTWARE PRODUCTS SALES AND RE-SALE OF PURCHASED
THIRD PARTIES PRODUCTS:
Revenue associated with the sale of these products, excluding
maintenance when applicable, is recognized upon shipment to the
customer. The amount of these revenues has historically not been
significant.
FF-12
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
(2) Services revenue
Services revenue is primarily derived from computer engineering services,
system design, consulting and integration and maintenance services that
are not an element of an arrangement for the sale of products. These
services are generally billed on a time and materials basis. The majority
of the Group's professional services are performed under
time-and-materials arrangements. Revenue from such services is recognized
as the services are provided.
(3) Maintenance services revenue
Maintenance revenue consists of fees for providing technical support and
software updates, primarily to customers purchasing the primary products.
The Group recognizes all maintenance revenue ratably over the applicable
maintenance period. The Group determines the amount of maintenance revenue
to be deferred through reference to substantive maintenance renewal
provisions contained in the arrangement.
(4) Interest income
Interest income is recognized on a time apportionment basis, taking into
account the principal amounts outstanding and the interest rates
applicable.
(5) Revenue recognition criteria
The Group recognizes revenue when persuasive evidence of an arrangement
exists, the element has been delivered, the fee is fixed or determinable,
collection of the resulting receivable is probable, and VSOE of the fair
value of any undelivered element exists. A discussion about these revenue
recognition criteria and their applicability to the Group's transactions
as follows:
PERSUASIVE EVIDENCE OF AN ARRANGEMENT: The Group uses either contracts
signed by both the customer and the Group or written purchase orders
issued by the customer that legally bind the Group and the customer as
evidence of an arrangement.
PRODUCT DELIVERY: The Group deems delivery to have occurred when the
products are installed and, when required under the terms of the
arrangement, when accepted by the customer. Delivery of other re-sale
products are recognized as revenue when products are shipped and title and
risk of ownership has passed to the buyer.
FIXED OR DETERMINABLE FEE: The Group considers the fee to be fixed or
determinable if the fee is not subject to refund or adjustment and the
payment terms are within its normal established practices. If the fee is
not fixed or determinable, the Group recognizes the revenue as amounts
become due and payable.
COLLECTION IS DEEMED PROBABLE: The Group conducts a credit review for all
significant transactions at the time of the arrangement to determine the
credit-worthiness of the customer. Collection is deemed probable if the
Group expects that the customer will pay amounts under the arrangement as
payments become due.
FF-13
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
(6) Sales to authorized distributors
The Group also uses authorized distributors to sell certain of its
products and only the authorized distributors are allowed to resell those
products. The Group requires the authorized distributors to purchase the
products and then sell through the authorized distributors' own
distribution channel to the end customers. From the Group's perspective,
the authorized distributors are the ordinary customers and the only
preferential treatment to them is that the sales prices to distributors
have been predetermined in accordance with the distribution agreements,
and are approximately 30% to 40% off the recommended retail prices. Once
the products are delivered and the distributor has accepted the products,
the Group bills the distributor and the distributor is obligated to settle
the bill accordingly within the credit period granted. There is no right
of return or other incentives given to the distributors. The Group is not
required to provide training to authorized distributors.
o Deferred Revenue
Deferred revenue consists primarily of payments received in advance of
revenue recognition from maintenance. Revenues from maintenance fees are
recognized ratably over the term of the maintenance period.
o Intangible assets / Software development costs
Intangible assets consist of 1) the software licenses costs and patent
costs paid to third parties and 2) the capitalized software development
costs. The Group reviews software development costs incurred in accordance
with the provisions of Statement of Financial Accounting Standards
("SFAS") 86 "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed" which requires that certain costs incurred
in the development of computer software to be sold or leased be
capitalized once technological feasibility is reached. The Group
capitalized HK$848,034 and HK$910,536 for the years ended December 31,
2004 and 2005, respectively, for projects ProAccess and ProFacer. The
purchased software license costs, patent costs and the capitalized
software development costs are amortized over an estimated economic life
of 5 years which is consistent with the expected life of these assets. For
a detailed breakdown of the intangible assets please refer to Note 7.
The Group received government funding in the amounts of HK$1,064,820,
HK$1,174,345 and HK$756,723 for the years ended December 31, 2003, 2004
and 2005 respectively. This funding income was offset to
software-development costs incurred prior to the beginning of the
capitalization period. According to paragraph 73 of SOP 97-2, if
capitalization of the software-development costs commences pursuant to
SFAS No. 86, any income from the funding party under a funded
software-development arrangement should be credited first to the
development costs prior to capitalization. The following table illustrates
the movement of the capitalized software development costs:
AS OF DECEMBER 31,
2005 2004
---- ----
HK$ HK$
Software development costs 1,667,259 2,022,379
Grant income (756,723) (1,174,345)
------------ -------------
Capitalized development costs 910,536 848,034
============ =============
FF-14
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Below is a description of the Group's government funding income:
Grant and subsidy income represents subsidy from the Government of the
Hong Kong Special Administrative Region ("HKSAR") for assisting the Group
in development of products of innovative nature. The products developed
under this subsidy plan include ProAccess and ProFacer. Pursuant to the
agreements made between the Group and HKSAR, HKSAR is required to provide
funding to the Group for product development. The funding is made
available to the Group in accordance with the milestones as established by
the Group and is subject to a ceiling of HK$2,000,000. The Group is not
required to repay the Government grant. However, the Group is required to
contribute approximately 50% of the overall project cost in accordance
with the grant agreement. Upon completion of the project, the Group
tenders to the Government its pro rata share of the residual funds
remaining in the project account. In addition the Group is obligated to
pay the Government a royalty fee of 5% on the gross revenue earned from
any activities in connection with the project, up to an aggregate amount
equal to the amount subsidized to the Group. The royalty fee paid by the
Group for each of the years ended December 31, 2003, 2004 and 2005
amounted to HK$32,647 and HK$34,532 and HK$48,092 respectively.
The Group is entitled to retain ownership of the intellectual property
resulting from the project.
o Research and development costs
Research and development costs are expensed when incurred. The major
components of these research and development costs are the labor cost.
o Advertising costs
The Group expenses advertising costs as incurred in accordance with the
American Institute of Certified Public Accountants SOP 93-7, "Reporting
for Advertising Costs". Advertising expenses amounted to HK$80,303,
HK$63,143 and HK$103,749 for the years ended December 31, 2003, 2004 and
2005 respectively.
o Income taxes
The Group accounts for income tax using SFAS No. 109 "Accounting for
Income Taxes", which requires the asset and liability approach for
financial accounting and reporting for income taxes. Under this approach,
deferred income taxes are provided for the estimated future tax effects
attributable to temporary differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases, and for
the expected future tax benefits from loss carry-forwards and provisions,
if any. Deferred tax assets and liabilities are measured using the enacted
tax rates expected in the years of recovery or reversal and the effect
from a change in tax rates is recognized in the statement of operations in
the period of enactment. A valuation allowance is provided to reduce the
amount of deferred tax assets if it is considered more likely than not
that some portion of, or all of the deferred tax assets will not be
realized. For details please refer to Note 13.
FF-15
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
o Segment Reporting
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about
operating segments on a basis consistent with the Group's internal
organization structure as well as information about geographical areas,
business segments and major customers in financial statements. The Group
operates in one principal business segment.
o Comprehensive income
Comprehensive income as defined includes all changes in equity during a
period from non-owner sources. Accumulated comprehensive income, as
presented in the accompanying consolidated statement of stockholders'
equity consists of changes in unrealized gains and losses on foreign
currency translation. This comprehensive income is not included in the
computation of income tax expense or benefit.
o Foreign currency translation
The Group's functional currency is the Hong Kong dollar because the
majority of the Group's revenues, capital expenditures and operating and
borrowing costs are either denominated in Hong Kong dollars or linked to
the Hong Kong dollar exchange rate. Accordingly, transactions and balances
not already measured in Hong Kong dollars (primarily transactions
involving the United States dollar and the PRC Yuan) have been re-measured
into Hong Kong dollars in accordance with the relevant provisions of SFAS
No. 52, "Foreign Currency Translation". The objective of this
re-measurement process is to produce largely the same results that would
have been reported if the accounting records had been kept in Hong Kong
dollars. The exchange rate adopted throughout the consolidated financial
statements where US dollars are presented was US$1 / HK$7.8.
Cash, receivables, payables, and loans are considered monetary assets and
liabilities and have been translated using the exchange rate as of the
balance sheet dates. Non-monetary assets and liabilities, including
non-current assets and shareholders' equity, are stated at their actual
dollar cost or are restated from their historic cost, by applying the
historical exchange rate as monthly average exchange rates to underlying
transactions.
o Equity-based compensation
The Group adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
beginning at its inception. Upon adoption of SFAS No. 123, the Group
continued to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees". The Group did not pay any stock-based compensation
during any period presented.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (R), "Share-Based Payment." SFAS No. 123 (R) amends SFAS No.
123, "Accounting for Stock-Based Compensation," and APB Opinion 25,
"Accounting for Stock Issued to Employees." SFAS No. 123 (R) requires that
the cost of share-based payment transactions (including those with
employees and non-employees) be recognized in the financial statements.
SFAS No. 123 (R) applies to all share-based payment transactions in which
an entity acquires goods or services by issuing (or offering to issue) its
shares, share options, or other equity instruments (except for those held
by
FF-16
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
an ESOP) or by incurring liabilities (1) in amounts based (even in
part) on the price of the entity's shares or other equity instruments, or
(2) that require (or may require) settlement by the issuance of an
entity's shares or other equity instruments. This statement is effective
(1) for public companies qualifying as SEC small business issuers, as of
the first fiscal year beginning after December 15, 2005, or (2) for all
other public companies, as of the first fiscal year or interim period
beginning after June 15, 2005, or (3) for all nonpublic entities, as of
the first fiscal year beginning after December 15, 2005. Management does
not expect adoption of SFAS No. 123 (R) to have a material impact on the
Group's financial statements.
o Paid vacation leave and long service leave obligation
No accrual for paid vacation leave and long service leave obligation has
been provided in the financial statements of the Group. Pursuant to Hong
Kong law, Hong Kong employees are generally only entitled to severance pay
upon their retirement or upon the termination of their employment without
cause provided that they have been employed by the Group for a period of
more than five years. As the Group had been in existence for less than
five years, the management believes that the provision for long service
leave obligation is not required. For paid leave obligation, the Group has
adopted a policy that employees would be entitled to take paid holiday
leave in each year in accordance with their employment contracts. Any
unused vacation leave is forfeited at the end of each calendar year.
In accordance with the PRC's rules and regulations on employment, the
subsidiary is required to pay the employee a payment equals to a month
salary for every full year of employment. However, the payment should not
be more than twelve month of salary normally earned by that employee.
Since all the employees have taken their entitlement of paid vacation
leave and management considers that the provision for long service leave
obligation would be insignificant, no provision for unused annual paid
vacation leave and long service leave obligation has been provided in the
financial statements for the years ended December 31, 2004 and 2005.
o Impairment of long-lived assets
In accordance with SFAS Statement No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", long-lived assets, such as plant, and
equipment and intangible assets subject to depreciation or amortization
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of would be separately
presented in the balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated.
The assets and liabilities of a disposal group classified as held for sale
would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Intangible assets are tested annually for impairment and are tested for
impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset's fair value. This
determination is made at the reporting unit.
FF-17
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
o Related parties
For the purposes of these financial statements, parties are considered to
be related if one party has the ability, directly or indirectly, to
control the party or exercise significant influence over the party in
making financial and operating decisions, or vice versa, or where the
Group and the party are subject to common control or common significant
influence. Related parties may be individuals or other entities.
All material related party transactions have been disclosed in Note 14 to
these financial statements.
o Per share information
Basic net income per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding for the
period. Diluted net income per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. For the
period ended December 31, 2005, warrants to purchase 3,000,000 shares of
common stock of the Company which were issued in connection with the sale
of common stock (see Note 11) were not considered to have a dilutive
effect since the exercise price of the warrants exceeded the average
market price of the common stock for that period.
o Recently issued accounting standards
In December 2004, the FASB issued SFAS Statement No.151, "Inventory Costs
- an amendment of ARB No. 43, Chapter 4" ("SFAS 151"), which clarifies the
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Under this Statement, such
items will be recognized as current-period charges. In addition, the
Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement will be effective for the Group for inventory
costs incurred on or after January 1, 2006. The Group is currently
evaluating the impact of SFAS 151 on its financial statements.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non-monetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153"),
which eliminates an exception in APB 29 for non-monetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial substance.
This Statement will be effective for the Group for non-monetary asset
exchanges occurring on or after January 1, 2006. The Group is currently
evaluating the impact of SFAS 153 on its financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3" ("SFAS 154"). SFAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. These requirements
apply to all voluntary changes and changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. SFAS 154 is effective for fiscal
years beginning after December 15, 2005. As such, the Group is required to
adopt these provisions at the beginning of the fiscal year ended December
31, 2006. The Group is currently evaluating the impact of SFAS 154 on its
financial statements.
FF-18
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
In February 2006, the FASB issued SFAS Statement No. 155, "Accounting for
Certain Hybrid Financial Instruments--an amendment of FASB Statements No.
133 and 140" ("SFAS 155"). This Statement amends FASB Statements No. 133,
"Accounting for Derivative Instruments and Hedging Activities", and No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This Statement resolves issues addressed
in Statement 133 Implementation Issue No. D1, "Application of Statement
133 to Beneficial Interests in Securitized Financial Assets." This
Statement permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and
principal-only strips are not subject to the requirements of Statement
133, establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives
or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives and amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument.
SFAS 155 is effective for all financial instruments acquired or issued for
the Group for fiscal years beginning after September 15, 2006. The Group
is currently evaluating the impact of SFAS 155 on its financial
statements.
3. RESTATEMENT OF FISCAL YEAR 2003 AND 2004 CONSOLIDATED FINANCIAL STATEMENTS
We have determined that our accounting for 1) income taxes and 2) grant
and subsidy income included in previous filings with the U.S. Securities
and Exchange Commission was incorrect. Deferred taxation was previously
not recorded as required by SFAS No. 109 "Accounting for Income Taxes"
while the grant and subsidy income was not credited to the
software-development costs before capitalization as required by paragraph
73 of SOP 97-2 "Software Revenue Recognition". As a result, the
consolidated financial statements for the years ended December 31, 2003
and 2004 have been restated to correct the error and their effect is
summarized in the table below.
FOR THE YEAR ENDED DECEMBER 31, 2003
AS FILED ADJUSTMENT TO RESTATED
RESTATE
HK$ HK$ HK$
--- --- ---
CONSOLIDATED STATEMENTS OF OPERATIONS
Grant and subsidy income 1,182,435 (1,064,820) 117,615
Cost of sales 2,691,355 (212,963) 2,478,392
Amortization expense (included in Cost of
sales above) 237,135 (212,963) 24,172
Income tax 11,931 24,272 36,203
Net income 80,908 (876,129) (795,221)
Net income per share, basic and diluted 0.00 (0.02) (0.02)
CONSOLIDATED BALANCE SHEETS
Intangible assets, net 999,677 (851,857) 147,820
Deferred taxation - 24,272 24,272
FF-19
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
FOR THE YEAR ENDED DECEMBER 31, 2004
AS FILED ADJUSTMENT TO RESTATED
RESTATE
HK$ HK$ HK$
--- --- ---
CONSOLIDATED STATEMENTS OF OPERATIONS
Grant and subsidy income 1,229,545 (1,174,345) 55,200
Cost of sales 3,571,098 (447,832) 3,123,266
Amortization expense (included in Cost of sales
above) 641,610 (447,832) 193,778
Income tax 147,389 17,299 164,688
Net income 2,013,993 (743,812) 1,270,181
Net income per share, basic and diluted 0.04 (0.01) 0.03
CONSOLIDATED BALANCE SHEETS
Intangible assets, net 2,440,815 (1,578,370) 862,445
Deferred taxation - 41,571 41,571
The consolidated balance sheets, consolidated statements of cash flows and
consolidated statements of changes in stockholders' equity and accumulated
comprehensive income are adjusted accordingly to accommodate for the
restatements in the consolidated statements of operations.
4. RECLASSIFICATIONS
For fiscal year 2004 and 2003, reclassifications have been made to the
presentation of the following items:
o Accounts receivable
Certain of the items in the accounts receivable and other receivables in
the consolidated balance sheets as of December 31, 2003 and 2004 were
reclassified to separately present the accounts receivable from third
parties and accounts receivable from a related party. The consolidated
statements of cash flows are adjusted accordingly.
o Accounts payable and deferred revenue
Certain of the items in the accounts payable in the consolidated balance
sheets as of December 31, 2003 and 2004 were reclassified to separately
present the accounts payable and deferred revenue. The consolidated
statements of cash flows are adjusted accordingly.
o Revenue
Revenue in the consolidated statements of operations for the years ended
December 31, 2003 and 2004 were reclassified to separately present the
revenue from third parties and revenue from related party.
o Cost of sales
Cost of sales in the consolidated statements of operations for the years
ended December 31, 2003 and 2004 were reclassified to 1) separately
present the cost of revenue for third parties and cost of revenue for
related parties and 2) present the cost of maintenance service, mainly the
salary cost, from selling, general and administrative expenses.
FF-20
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
These reclassifications were made to conform with the presentation for the
fiscal year 2005 and did not have any impact on the Group's previously
reported net income for those years.
5. ACCOUNTS RECEIVABLE
AS OF DECEMBER 31,
2005 2004
---- ----
HK$ HK$
Accounts receivable, gross 4,712,014 1,436,850
============= ============
No general provision of bad and doubtful debts has been made in these
consolidated financial statements. The management considers that the
accounts receivable are from reputable customers and expects to collect
their outstanding balances in full.
6. AMOUNT DUE FROM/TO RELATED PARTIES
Set out below is a summary of amounts due from/to related parties:
AS OF DECEMBER 31,
2005 2004
---- ----
HK$ HK$
Due from:
Shareholder - 17,100
Director - 1,031,585
------------- --------------
Total - 1,048,685
============= ==============
Due to:
Directors - 210,797
============= ==============
The balances due from a shareholder and a director are unsecured,
non-interest bearing and have no fixed terms of repayment.
The amount due from a shareholder relates to the payment of the
shareholder's non-business related expenses, mainly its annual company
secretary fee, over the years. The amount due from a director relates to
the Group's advances to the director, who then paid expenditures for the
Group's PRC subsidiary, such as salaries, fees, and rent, in cash, since
non-cash payment methods are not widely accepted in the PRC. The amount
due to directors mainly relates to the business traveling expenses paid by
the directors on behalf of the Group.
FF-21
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
7. INTANGIBLE ASSETS (RESTATED)
AS OF DECEMBER 31,
2005 2004
---- ----
HK$ HK$
(restated)
Product development costs 1,879,428 968,892
Patent and license right registration fee 139,636 122,420
------------ ------------
2,019,064 1,091,312
Less accumulated amortization (611,735) (228,867)
------------ ------------
Total intangible assets, net 1,407,329 862,445
============ ============
The amortization of the intangible assets is five years and charged to the
statements of operations on a straight-line basis.
8. DEPOSITS AND OTHER RECEIVABLES
AS OF DECEMBER 31,
2005 2004
---- ----
HK$ HK$
Deposits paid 967,118 -
Sundry debtors 1,932 -
Prepayments 30,243 -
Rental and utility deposits 144,848 111,469
------------ -------------
1,144,141 111,469
============ =============
The deposits paid represented the trade deposits paid to certain vendors
in PRC for the manufacture of hardware products.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The board of directors considers that the estimated fair value of
the Group's financial instruments at 2004 and 2005 are their respective
carrying amounts.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents, trade accounts receivable, amounts due from
related parties, bank borrowings, trade accounts payable and shareholders'
loan. Except shareholders' loan, the carrying amount of the other
financial instruments approximates fair value because of their short
maturity. The fair value of non-current shareholder loans (discussed in
Note 6) could not be reasonably estimated as there is no fixed repayment
dates associated with the instruments.
FF-22
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
10. LONG TERM BORROWINGS
AS OF DECEMBER 31,
2005 2004
---- ----
HK$ HK$
Bank borrowings - 16,667
Current portion of bank borrowings - (16,667)
----------- ------------
Long term portion of bank borrowings - -
----------- ------------
Loan from shareholders - 1,420,000
----------- ------------
- 1,420,000
=========== ============
In 2003, TTL entered into a financing agreement with a financial
institution in which the financial institution would lend the Group
HK$300,000. The bank borrowings were unsecured and bearing interest at
5.5% per annum. The loan was to be repaid by 18 monthly installments of
HK$18,042. The financing agreement was secured by personal guarantees
given by TTL's directors. The loan was fully repaid in 2004
11. COMMON STOCK
At the time of incorporation, the Company's authorized capital was
1,000,000 shares of common stock, par value US$0.05. On June 20, 2005, the
authorized capital was changed to 100,000,000 shares of common stock, par
value US$0.01.
Pursuant to a share exchange agreement dated June 22, 2005, the Company
issued 47,000,000 shares in exchange for the then outstanding shares of
TTL and TTSL. They then became wholly owned subsidiaries of the Company.
On September 30, 2005, certain shareholders agreed to forgive loans made
to the Group through that date. The amount of the forgiveness (net of
loans made to the shareholders) was contributed to the capital of the
Company and aggregated HK$1,106,393.
During the year ended December 31, 2005, the Company sold 3,000,000 shares
of common stock at US$0.20 per share through a private placement and
received aggregate gross proceeds of HK$4,680,000. Expenses of the
offering were approximately HK$644,085, leaving a net proceeds of
HK$4,035,915. In addition, the Company issued 3,000,000 common stock
purchase warrants to the investors. Each common stock purchase warrant
entitles the investor to purchase one share of common stock at an exercise
price of US$0.50 per share through June 30, 2008. The Group has determined
that the fair value of the warrants at their issue date is not a material
amount.
A reclassification of HK$3,276,000 was made to common stock and additional
paid in capital to agree the cumulative amounts paid to the common stock's
par value.
FF-23
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
12. EMPLOYEEE STOCK OPTIONS
On November 22, 2005, the Company adopted a stock option plan under which
options to purchase up to 5,000,000 shares of common stock may be granted.
The board of directors will determine the exercise price for each option
at the time the options are granted. The exercise price for shares will be
no less than 100% of the fair value of the common stock at the date such
options are granted. The board will also determine when options become
exercisable. The term of an option would be no more than 10 years from the
date of grant. No option would be exercised after the expiration of its
term. No options have been granted to any employees.
13. INCOME TAXES (RESTATED)
Under the current BVI law, the Company's income is not subject to
taxation. Subsidiaries operating in Hong Kong and the PRC are subject to
income taxes. The provision for current income taxes of the subsidiary
operating in Hong Kong has been calculated by applying the current rate of
taxation of 17.5% for 2003 to 2005 to the estimated taxable income earned
in or derived from Hong Kong during the period, if applicable. Deferred
tax, where applicable, is provided under the liability method at the rate
of 17.5% for 2003 to 2005, being the effective Hong Kong statutory income
tax rate applicable to the ensuing financial year, on the difference
between the financial statement and income tax bases of measuring assets
and liabilities. The basic corporate tax rate for Foreign Investment
Enterprises ("FIEs") in the PRC is currently 33% (30% state tax and 3%
local tax).
The provision for income tax consists of the following:
YEAR ENDED DECEMBER 31,
2005 2004 2003
---- ---- ----
HK$ HK$ HK$
(restated) (restated)
Current tax 304,809 147,389 11,931
Deferred tax (41,571) 17,299 24,272
------------ ------------- -------------
263,238 164,688 36,203
============ ============= =============
The income (loss) generated in BVI, HKSAR and PRC before income taxes for
the years ended December 31, 2003, 2004 and 2005 respectively, was as
follows:
YEAR ENDED DECEMBER 31,
2005 2004 2003
---- ---- ----
HK$ HK$ HK$
(restated) (restated)
Loss in British Virgin Islands before income
taxes (987,760) - -
Profit/(loss) in Hong Kong before income
taxes 2,326,412 1,786,427 (301,480)
Loss in PRC before income taxes (287,600) (382,128) (497,323)
------------- ------------- --------------
1,051,052 1,404,299 (798,803)
============= ============= ==============
FF-24
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
A reconciliation of the income tax expense to the amount computed by
applying the current tax rate to the income before income taxes in the
consolidated statements of income is as follows:
YEAR ENDED DECEMBER 31,
2005 2004 2003
---- ---- ----
HK$ HK$ HK$
(restated) (restated)
Income before income taxes and minority
interests 1,051,052 1,404,299 (798,803)
HKSAR Income tax rate 17.5% 17.5% 17.5%
Income tax expenses at HKSAR tax rate on
income before income tax 183,934 245,752 (139,790)
Effect of BVI and PRC tax losses 223,188 66,872 87,031
Tax benefit (expenses) arising from items
which are not assessable (deductible)
for tax purposes (102,313) (165,235) 40,828
---------------- ----------------- -----------------
304,809 147,389 11,931
================ ================= =================
The primary components of temporary differences which give rise to the
Group's deferred tax liabilities are as follows:
AS OF DECEMBER 31,
2005 2004
---- ----
HK$ HK$
(restated)
Plant and equipment - 41,571
========== ============
14. RELATED PARTY TRANSACTIONS
YEAR ENDED DECEMBER 31,
2005 2004 2003
---- ---- ----
HK$ HK$ HK$
Sales of products to a related company (a)
controlled by a shareholder of the Group - 266,791 825,820
Notes:
(a) For the years ended December 31, 2003 and 2004, the Group had
entered into sales contracts with Ericorps Creation (HK) Limited, a
company owned by a shareholder of the Group. Pursuant to these sales
contracts, the Group sold its proprietary software products to
Ericorps Creation (HK) Limited. The prices were determined with
reference to the market prices. As of December 31, 2004 and 2005 the
balances due from Ericorps Creation (HK) Limited amounted to
HK$1,048 and HK$0 respectively.
FF-25
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
15. SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
The Group considers its business activities to constitute one single
segment. The Group's chief operating decision makers use consolidated
results to make operating and strategic decisions. The geographic
distribution of the Group's customers are:
- Hong Kong, including the government and commercial sectors;
- PRC, mainly the government sector;
- International, mainly casino, retail and commercial sectors.
An analysis of the Group's revenues and net assets by region are as
follows:
AS OF DECEMBER 31,
2005 2004
---- ----
HK$ HK$
(restated)
Net assets
- Hong Kong 7,552,245 1,327,319
- PRC (202,238) 86,532
- International - -
------------ --------------
7,350,007 1,413,851
============ ==============
YEAR ENDED DECEMBER 31,
2005 2004 2003
---- ---- ----
HK$ HK$ HK$
Revenue
- Hong Kong 7,081,868 5,123,767 4,209,989
- PRC 2,344,574 810,065 -
- International 3,915,679 415,420 147,705
------------- ------------ --------------
13,342,121 6,349,252 4,357,694
============= ============ ==============
16. COMMITMENTS AND CONTINGENCIES
Leases
The Group rented offices under operating lease agreements. The net
aggregate future lease payments under non-cancelable operating leases as
of December 31, 2005 is as follows:
2005
HK$
2006 284,340
2007 284,340
2008 142,170
-------------
710,850
=============
FF-26
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
The Group expenses rental payments as incurred and includes such payments
in administrative expenses in the consolidated statements of operations.
Rental payments amounted to HK$ 205,637, HK$ 207,088 and HK$ 262,518 for
each of the years ended December 31, 2003, 2004 and 2005 respectively.
17. CONCENTRATIONS AND RISKS
Major Customers
The following is a table summarizing the revenues from customers that
individually represent greater than 10% of the total revenues for the
years ended December 31, 2003, 2004 and 2005 and their outstanding
balances as at each year-end date:
YEAR ENDED DECEMBER 31,
2005 2004 2003
---- ---- ----
HK$ HK$ HK$
Customer A (a) 1,755,000 - -
Customer B (b) 1,538,642 - -
Customer C (c) 1,532,700 - -
Customer D (d) 1,606,855 351,662 662,272
Customer E (e) - 1,277,656 5,000
Customer F (f) 62,400 809,200 -
Customer G (g) - 266,791 825,820
Customer H (h) 42,878 96,888 517,520
Customer I (i) 364,770 585,158 438,580
(a) As of December 31, 2003, 2004 and 2005, the balances due to the Group
amounted to $Nil, $Nil and $1,316,250.
(b) As of December 31, 2003, 2004 and 2005, the balances due to the Group
amounted to $Nil, $Nil and $1,538,462.
(c) As of December 31, 2003, 2004 and 2005, the balances due to the Group
amounted to $Nil, $Nil and $Nil.
(d) As of December 31, 2003, 2004 and 2005, the balances due to the Group
amounted to $1,940, $Nil and $200,000.
(e) As of December 31, 2003, 2004 and 2005, the balances due to the Group
amounted to $5,000, $Nil and $Nil.
(f) As of December 31, 2003, 2004 and 2005, the balances due to the Group
amounted to $Nil, $801,550 and $13,750.
(g) As of December 31, 2003, 2004 and 2005, the balances due to the Group
amounted to $268, $1,048 and $Nil.
(h) As of December 31, 2003, 2004 and 2005, the balances due to the Group
amounted to $187,630, $Nil and $Nil.
(i) As of December 31, 2003, 2004 and 2005, the balances due to the Group
amounted to $Nil, $Nil and $50,950.
FF-27
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Credit Risk
Financial instruments that are potentially subject to credit risk consist
principally of trade receivables. The Group believes the concentration of
credit risk in its trade receivables is substantially mitigated by its
ongoing credit evaluation process and relatively short collection terms.
The Group does not generally require collateral from customers. The Group
evaluates the need for an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical
trends and other information.
Exchange risk
The Group cannot guarantee that the current exchange rate will remain
steady; therefore there is a possibility that the Group could post the
same amount of profit for two comparable periods and because of the
fluctuating exchange rate actually post higher or lower profit depending
on exchange rate of HK$ converted to US$ on that date. The exchange rate
could fluctuate depending on changes in political and economic
environments without notice.
18. PRODUCT WARRANTIES AND POST-CONTRACT CUSTOMER SUPPORT
Under the terms of the contracts, the Group will provide both product
warranty and post-contract customer support ("PCS") to its customers for a
period of twelve months, free of charge and then at the discretion of the
customers, enter into definite maintenance contracts.
The Group's standard warranty for its software products generally covers a
twelve-month period. The Group has not experienced any material returns
where it was under obligation to honor this standard warranty provision.
Warranty claims on hardware deficiencies are covered by the particular
hardware suppliers. As such, no reserve for product warranty has been
provided in the accompanying consolidated balance sheets or reflected in
the result of operations for the three years ended December 31, 2003, 2004
and 2005.
The nature of the PCS consists of the provision of a technical support
telephone hotline to the customers. As the usage of this hotline is very
seldom, the Group did not maintain any specific personnel to operate this
hotline. As a result, the cost of the PCS during the free support period
is insignificant and no reserve for the cost of PCS is required.
19. BANK OVERDRAFT
TTL had a bank overdraft balance of HK$62,850 at December 31, 2004. That
overdraft was not subject to a formal credit facility agreement with the
bank. In June 2005, TTL entered into a formal overdraft facility agreement
with a Hong Kong bank. The overdraft facility agreement was amended in
February 2006. The maximum amount that TTL may draw is calculated as 60%
of eligible accounts receivable or HK$2,000,000, whichever is lower. The
amount of the overdraft at December 31, 2005 was HK$1,506,862. The average
month end amount of the overdraft for the year ended December 31, 2005 was
HK$841,596. The bank overdraft is subject to an interest rate of 1.5% per
annum over the Hong Kong Prime Rate (8% at December 31, 2005) or 2% per
annum over the overnight HIBOR (6.32% at December 31, 2005), whichever is
higher. The interest rate being charged on the loan at December 31, 2005
was 9.5% per annum. The weighted average interest rate for the year ended
December 31, 2005 was 8.5%. TTL incurred interest expense on this
overdraft facility of HK$22,188 for the year ended December 31, 2005. The
FF-28
TITANIUM GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
overdraft facility is reviewed by the bank on a monthly basis and is
subject to cancellation at the discretion of the bank. TTL is required to
deposit payments of accounts receivable in the account to which the
overdraft applies. The overdraft facility is secured by all of the assets
of TTL and is personally guaranteed by the directors of TTL. The annual
facility fee for 2005 was HK$2,500. The annual facility fee for 2006 is
HK$7,500.
FF-29
Until September 12, 2006, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligations to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.