U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 333-61286
CITY NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 88-0467944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6F-3, No. 16, Jian Ba Road, Jhonghe City
Taipei County 235, Taiwan, ROC N/A
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: 011-886-2-8226-5566
Securities Registered Under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
$0.001 Common Stock American Stock Exchange
Securities Registered Under Section 12(g) of the Act:
None
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this Form 10-KSB. [X]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The issuer's revenues for the year ended December 31, 2005: $14,320,409.
As of March 31, 2006, there were 32,967,183 shares of the registrant's common
stock, $0.001 par value, outstanding. The aggregate market value of the common
stock held by non-affiliates of the issuer was approximately $5,934,093 based on
the closing price of $0.18 per share on March 31, 2006, as reported by the
American Stock Exchange.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
TABLE OF CONTENTS
Page
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PART I ....................................................................... 1
Item 1. Description of Business.......................................... 1
Item 2. Description of Property..........................................10
Item 3. Legal Proceedings................................................11
Item 4. Submission of Matters to a Vote of Security Holders..............12
PART II ......................................................................13
Item 5. Market for Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities.............13
Item 6. Management's Discussion and Analysis or Plan of Operation........14
Item 7. Financial Statements.............................................17
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................17
Item 8A. Controls and Procedures.........................................17
Item 8B. Other Information...............................................17
PART III .....................................................................17
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act................17
Item 10. Executive Compensation..........................................21
Item 11. Security Ownership of Certain Beneficial Owners and Management..22
Item 12. Certain Relationships and Related Transactions..................23
Item 13. Exhibits........................................................23
Item 14. Principal Accountant and Fees...................................24
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FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements in this annual report on Form 10-KSB are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about the plans, objectives, expectations and
intentions of City Network, Inc., a Nevada corporation, and other statements
contained in this annual report that are not historical facts. Forward-looking
statements in this annual report or hereafter included in other publicly
available documents filed with the Securities and Exchange Commission (the
"SEC"), reports to our stockholders and other publicly available statements
issued or released by us involve known and unknown risks, uncertainties and
other factors which could cause our actual results, performance (financial or
operating) or achievements to differ from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Such future results are based upon management's best
estimates based upon current conditions and the most recent results of
operations. When used in this annual report, the words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate" and similar expressions are
generally intended to identify forward-looking statements, because these
forward-looking statements involve risks and uncertainties. There are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including our plans,
objectives, expectations and intentions and other factors discussed under "Risk
Factors."
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OUR COMPANY
City Network, Inc. ("City Network," "we," "our" or "us") was incorporated
in 1996 and develops hardware and software (total solution) for broadband
communication solutions. We provide Internet broadband communication and
wireless infrastructure equipment and services for the rapidly expanding
broadband marketplace. We are dedicated to delivering the most user-friendly,
cost-effective, and customer-tailored, high-speed Internet broadband and
communication access equipment to meet the growing business needs of the
International Telecoms, ISP, SI and to a lesser degree the hospitality,
residential property, telecommunication and Small and Medium Enterprise
marketplace to solve the "last mile" problems worldwide. We also created the
Hotspot solution and the NGL (Next Generation Loops) solution, both of which
help companies extend their business to the carrier's solution to meet people's
communication inquires.
OUR HISTORY
Our company was incorporated on August 8, 1996 as Investment Agents, Inc.
under the laws of the State of Nevada. City Network Technology, Inc. (formerly
Gelcrest Investments Limited, "CNT") was incorporated under the laws of the
British Virgin Islands on March 1, 2002. On November 14, 2002, CNT became a
wholly owned subsidiary of our company through an Exchange Agreement, dated
November 14, 2002 and amended on December 11, 2002, whereby our company acquired
all of the issued and outstanding capital stock of CNT in exchange for
12,000,000 shares of common stock of our company, which represented 49% of our
issued and outstanding stock at that time. In connection with the exchange and
change in control, the name of our company was changed from Investment Agents,
Inc. to City Network, Inc., the officers and directors of City Network resigned
and new officers and directors were appointed. Upon the effective date of the
exchange and change in control, our company ceased its relationship with the
company for whom we previously acted as referral agent, which was our business
prior the exchange and change in control.
CNT owns all of the issued and outstanding common stock of City Network
Inc. - Taiwan, formerly City Engineering, Inc., which was incorporated under the
laws of the Republic of China on September 6, 1994 ("CNT-Taiwan"). CNT-Taiwan
owns all of the issued and outstanding common stock of City Construction, which
was incorporated under the laws of the Republic of China on October 10, 2003.
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OUR BUSINESS
We design, manufacture and market a comprehensive line of broadband
communication and wireless Internet access solutions. Our product line ranges
from our Home PNA device for the residential building and hospitality market to
the simple DSL bridge/modem for the home and small business user. All of our
broadband access equipment includes GUI-based remote management and routing
technology software packages for simplified setup, extensive network management
and global network connectivity capabilities. Currently, our Home PNA and xDSL
broadband access equipment is deployed by major telecommunication carriers,
ISPs, and system integrators worldwide. With the development and production of
our complete series of Internet products, we believe we are able to provide a
"total solution" for any customers' needs. Our motto is "Establish the Broadband
Highway, Innovate A Bright New Life."
In 2005, we began the development of our construction business. We plan to
develop and build commercial, industrial and residential buildings. We have
entered into co-construction agreements for the development of land in Keelung,
Taiwan and the purchase of materials and equipment related to the construction
of a commercial building in Vietnam.
PRODUCT AREAS
Our product packages contain items compatible with all major distribution
platforms designed to provide clients with a one-stop shop for all their
broadband Internet needs.
LCD PANEL
In 2004, we began the sales of LCD panels. Since the beginning of 2005, we
have sold large volumes of 15 inch, 17 inch and 19 inch panels. Our major
customers for our LCD panels are companies in Taiwan.
WIRELESS COMMUNICATION PRODUCTS
With the development of our IEEE802.11 WiFi and IEEE802.lx (authentication)
wireless solutions, our wireless networking products allow computers and
appliances to communicate through radio signals, providing added mobility and
convenience. Furthermore, customers can enjoy the stability and security of our
LAN products. All wireless solutions are equipped with a user verification
function to maximize security and reduce outside interference.
We were one of the first companies in Taiwan to develop wireless products
with IEEE802.1x in May 2002. Together with Easy-Up Corporation, we have provided
solutions to Korea Life Insurance in connection with their 1600 Enterprise
Hotspot Project and established Taiwan McDonald's 365 stores Hotspot solution
and the Mobile Taiwan project. We also extended our Wireless Hotspot solution
business with China Putian. We also furnish mobile handsets, including GSM/GPRS,
CEDMA/CDMA 2000 1x mobile handsets.
* Wireless broadband eliminates the need for phone lines, cables and
electrical outlets.
* Supports bandwidth-intensive applications such as graphic rich media,
animation, Internet phone calls and video conferencing (without
breaking up), sending and receiving of large email messages or files,
online banking, investing or online shopping. Our total solution of
wireless access devices allow users to access their LAN or VPN, as if
the remote office was connected directly to our backbone network. It
also lets business customers raise the level of worker productivity
and allow companies to offer highly efficient work-at-home programs to
their employees.
* Using authentication and verification technology, we are able to
ensure the security of a wireless network.
* Our Public Hotspot Wireless Solution (PWLAN) has what we believe to be
a good security function. We have already established successful
projects in Korea and Taiwan.
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* Our wireless products are not only for indoor use, but also for
outdoor use, to establish Hot-Zone services, a technology for wireless
Internet access. They feature special functions needed for such
products, such as security protections, load balance for avoiding
network bottlenecks and repeat functions for transmit data without
missing parts.
VOIP
In September 2004, we launched a wireless voice over Internet protocol, or
VoIP, product. There are two models available for the market. One provides one
VoIP and one public switched telephone network, or PSTN port, and the other
model provides two VoIP and two PSTN ports. Both of them have two DECT (digital
enhanced cordless telecommunications) Base Stations, and can be registered up to
sixteen DECT phones set. Users can choose H.323 or SIP mode, which is easy to
add on to the environment where co-existence with old VoIP equipment is needed.
In addition to building up a value-added network environment, in 2002, we
aligned with Easy-Up Corporation, one of Taiwan's largest IP wireless phone
service providers, to provide low cost VoIP service to end users. By connecting
to the partner's network, a user is able to save on its phone bill on GSM
cellular phone calls and international calls to China, other areas of Asia, the
United States and Canada. This cooperation with Easy-Up Corporation to provide
VoIP services in Taiwan has been completed. Our VoIP products were tested at the
VoIP service provider's site, and we believe we are in a position to sell the IP
phone ISP total solution to the Malaysia, Indonesia and Philippines markets.
In March 2006, our registration for a license to provide VoIP services in
Taiwan was completed.
ADSL/VDSL ACCESS DEVICES
Our ADSL/VDSL devices provide broadband access based on leading Internet
technologies. The ADSL 2+ and 20Mbps VDSL over Ethernet equipment allow both
developing businesses as well as home users to meet their media and
communication needs quickly and cost-effectively. They can also provide high
speed Internet access without diminishing quality over a larger distance for a
cost-effective and efficient method of broadband access. We believe that the low
level of maintenance required for this device, coupled with the high level of
connectivity should enable us to meet market demands for many years into the
future.
HPNA ACCESS DEVICES
HPNA is a broadband network access system based on the HomePNA technology
originally invented in the United States. This system can provide 1M/10Mbps
broadband data access through existing telephone lines. This technology allows
both voice and data to be shared by the same telephone line. Furthermore, our
HPNA technology extends Internet transmission distance, allows for multiple
single-line users (up to 25), and is compatible with cable, fiber, wireless and
xDSL. Combined with our ADSL and VDSL access devices, HomePNA is a great
solution to "the last mile problem." We believe that the quality and
affordability makes the product ideal for residences, schools, cafes and hotel
resorts.
FIBER AND OTHER IMPORTANT ACCESS EQUIPMENT
FTTB (Fiber to the Building) and FTTH (Fiber to the Home) optical fiber
installed directly into a home or office was a new growth market for us. To meet
our customer's needs, we began outsourcing the Fiber solutions in 2003, and have
created our own Fiber products since 2004. We have already shipped these
solutions to customers in Korea, Malaysia and Indonesia.
With our access equipment, bandwidth can be distributed efficiently to
multiple end users. For developing countries such as China, our solution of
integrating wireless with existing telephone lines or cable is often much more
attractive than building new infrastructure. From routers and hubs, to PCMCIA
cards and USB adapters, we provide customers with a wide range of networking
products to meet all customer needs.
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GPS MODULE
The Global Positioning System, or GPS, solution was another new market for
us in 2004. In the summer of 2004, we received an official purchase order of GPS
modules of approximately 50,000 units, from JuYoung Electronics. In December
2004, we shipped, for a separate order, 65,000 advanced, high performance GPS
modules and wireless blue tooth receiver units to JuYoung Electronics. In
mid-2005, our sales to JuYoung Electronics diminished, and we are currently
searching for other opportunities to outsource our GPS solution.
RECENT DEVELOPMENTS
Our subsidiary, City Construction, has been planning a new construction
project in Keelong City, Taiwan since the end of 2004. We entered into a
contract in the first quarter of 2005 for construction of a 581 square meter
residential building. Upon completion, we will have a 60% interest, and the
landowner will have a 40% interest, in the building. We anticipate that this
project will generate sales of $3 to $4 million once completed. We have agreed
to make refundable deposits, as security, payable at various agreed upon phases
of the construction. The deposits will be returned within two years after the
construction is completed. As of December 31, 2005, we have paid $91,320 as part
of the refundable security deposit and $418,105 in construction costs as
construction is in progress. At March 2006, two floors of this ten floor
building have been completed, and we anticipate completion of the building
project at the end of 2006. We have found buyers for units on six floors of the
building and have received approximately $151,515 as deposit for the units. If
the building project is not completed by February 2007, we will be in default
under the agreement with the landowners. This project is subject to risks
involving the cost of construction materials over the course of its construction
and our ability to sell this project to customers, as well as changes in the
political and overall economic conditions of Taiwan, which are outside the
control of management. We cannot assure you that adverse changes in these
factors will not occur or, if they occur, that they will not have a material
adverse effect on our business, operating results and financial condition.
In April 2004, City Construction placed a refundable performance bond in
the amount of $231,344 with a court in Taiwan for the rights to complete an
unfinished building in Keelung, Taiwan with the owners of the land. We are
currently in discussion with the landowners regarding the terms of the project.
In July 2005, we entered into a contract with a company in Vietnam. Per the
terms of this contract, we have agreed to procure materials and equipment
related to the construction of a commercial building in Hanoi, Vietnam. In July
2005, we entered into a contract with a company in Samoa to purchase the
materials and equipment related to the contract entered into with the Vietnamese
company. The total purchases will be approximately $3,000,000. As of December
31, 2005, we received an advance of $3,000,000 on the contract with the
Vietnamese company and are using these funds to purchase the agreed upon
materials. We have advanced approximately $2,740,000 to the Samoan vendor as of
December 31, 2005.
CUSTOMERS
We develop market and focus our sales efforts to broadband and wireless
Internet services providers that provide wireless solutions such as Phoneline
solution, HomePNA, xDSL, Ethernet solution, fiber solution and wireless
solutions. We also focus our sales efforts on the service provider and systems
integrator for WLAN systems and to system integrators for private broadband
systems.
We believe that we provide the best service to our existing customers and
partners such as Korea Telecom, China Telecom, Malaysia Telecom, and those
located in Finland, Japan, other areas of Asia and Africa. We do our best to
expand our business with our existing customers and to develop new partners and
customers through the quality of our product solutions and service and cost.
SERVICE PROVIDERS AND ENTERPRISE CUSTOMERS
Our customers include a cross-section of small, medium and large
telecommunications companies in the United States, Asia, Europe and Africa. We
have established business relationships with companies such as Korea Telecom,
OCC Communications in Japan and nSTREAMS in the United States as well as with
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other companies in Mainland China, Finland, Malaysia, Singapore, South Africa,
Indonesia and the Philippines, of which Singapore uses our HomePNA solution and
launched HomePNA Internet services on its network. Korea Life Insurance ("KLI")
has contracted with us to establish over 1,600 branches of WLAN Internet service
for KLI in Korea. In addition, through purchase orders from Easy-Up Corporation,
we supplied and set up approximately 360 McDonald's restaurants in Taiwan with
WLAN services.
SYSTEM INTEGRATORS
We market our private broadband data systems to domestic and international
system integrators who in turn market and sell our products to educational and
government institutions, small to large commercial enterprises, and to regional
competitive service providers and national carriers. Our system integrators
range from small local companies to volume distributors such as Easy-Up
Corporation, to country-specific integrators such as Terton Communications in
Finland, and to international integrators such as KWON C&C Ltd. in Korea and
China Telecom in China.
MARKETING AND SALES
MARKETING
We seek to increase demand for our products and to expand both the
visibility of our company and our products in the market. In addition to
customer-specific sales efforts, our marketing activities include attendance at
major industry tradeshows and conferences, the distribution of sales and product
literature, operation of a web site, direct marketing and ongoing communications
with our customers, the press, and industry analysts. As appropriate, we enter
into cooperative marketing and/or development agreements with strategic partners
that may include key customers, application manufacturers, fiber, or video
equipment manufacturers, set-top box manufacturers, and others.
SALES
We sell our products through multiple sales channels in overseas markets,
including regional value added resellers, system integrators and distributors,
data networking catalogs and directly to service providers. Internationally, we
sell and market our products through sales agents, systems integrators and
distributors. We now have a sales presence in China. For the fiscal year ended
December 31, 2005, we derived approximately 99% of our revenue from customers
outside of the United States. We believe that our products can serve a
substantial market for digital and high-speed data access products outside of
the United States.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on enhancing our existing
products and developing new products through our emphasis on early stage system
engineering. The product development process begins with a comprehensive
functional product specification based on input from the sales and marketing
organizations. We incorporate feedback from end users and distribution channels,
and through participation in industry events, industry organizations and
standards development bodies, such as the FS-VDSL Committee and MPEG-4 Industry
Forum. Key elements of our research and development strategy include:
* CORE DESIGNS. We seek to develop and/or acquire core designs that
allow for cost-effective deployment and flexible upgrades that meet
the needs of multiple markets and applications. These designs place
emphasis on the following characteristics of our products: user
friendly, high performance, robustness, standardization, and value
adding.
* PRODUCT LINE EXTENSIONS. We seek to extend our existing product lines
through product modifications and updating chipsets to provide for
greater bandwidth in order to meet the needs of particular customers
and markets. Products resulting from our product line extension
efforts include the Phoneline solution, HomeHPNA, xDSL and Fiber
solution. We also focus on updating the Wireless solution to the new
generation including WIRELESS IEEE802.11G, a worldwide
specification/standard.
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* MINIMIZE COST OF GOODS. Our design philosophy emphasizes the use of
industry standard hardware and software components whenever possible
to reduce time to market, decrease the cost of goods and reduce the
risks inherent in new design. In order to maintain low costs of our
services, we established a Components Sales Department whose main
goals are to process our current customer's business and to seek out
secondary sources of components and spare product parts in order to
continually lower the cost of manufacturing and assembly.
* NEW TECHNOLOGIES. We seek to enhance our product lines by
incorporating emerging technologies, such as IEEE802.1x Security,
higher speed interfaces and new network management software features.
Our wireless solution with IEEE802.1x Security was the first ever such
solution used in the wireless channel in Taiwan. We are now in the
process of developing the 54M , 4-Band VDSL systems.
We have joined forces with a local Taiwanese university in an effort to
encourage rapid product growth and to facilitate the continuous training of
future technical personnel. We have established an educational and development
center at Tamkang University in Taiwan, the primary focus of which is on the
technology and information industry. We believe that the establishment of this
type of partnership will have a profound effect on our product competitiveness
and marketing ability in the long term. In 2005, our educational and development
center at Tamkang University in Taiwan began to develop a surveillance system
and Internet connectivity technology, for which application may be the use of
the surveillance system on roads in Taiwan to capture video footage of traffic
violations and connect to a database.
We are responsible for providing funding for expenses such as salary and
stipends for the staff of our educational and development center at Tamkang
Univeristy, as well as other general expenditures. Expenditures for research and
development in the year ended December 31, 2005 totaled $3,500 compared to
$12,000 in the ten months ended December 31, 2004. The reason for the reduction
in these expenditures is due to a decrease in sales of products and that we have
not begun to sell the currently researched products.
MANUFACTURING
We do not manufacture any of our own products. We rely on contract
manufacturers to assemble, test and package our products. We require
International Organization for Standardization (ISO) 9002 registration for these
contract manufacturers as a condition of qualification. We monitor each
contractor's manufacturing process performance through audits, testing and
inspections.
We currently purchase a substantial portion of the raw materials and
components used in our products through contract manufacturers. We forecast our
product requirements to maintain sufficient product inventory to ensure that we
can meet the required delivery times demanded by our customers. Our future
success will depend in significant part on our ability to obtain manufacturing
on time, at low costs and in sufficient quantities to meet demand.
The manufacturers' warranty for each of our products is between one to
three years. Typically we offer the same warranty on these products to our
customers but for a shorter time period, generally 12 to 18 months. Depending on
the situation, we can extend the warranty period enhancing the quality of
service and strengthening relationships with our customers.
INTELLECTUAL PROPERTY
We consider our trademarks and similar IP important to our business.
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EMPLOYEES
As of December 31, 2005, we had a total of 58 employees. Of these, 10 are
in administration, 5 are in finance, 8 are in research and development, 6 are in
software research and development, 10 are in international partner cooperation
and 19 are in sales and marketing. None of our employees are covered by any
collective bargaining agreement. We generally consider our relationship with our
employees to be satisfactory and have never experienced a work stoppage.
REGULATIONS
We have not been materially impacted by existing government regulation and
are not aware of any potential government regulation that would materially
affect our operations.
RISK FACTORS
RISKS ASSOCIATED WITH OUR BUSINESS
Our auditors' opinion on our 2005 financial statements includes a "going
concern" qualification. We have suffered recurring losses from operations, cash
deficiencies and the inability to meet our maturing obligations without
borrowing from related parties and restructuring debts. These issues may raise
substantial concern about our ability to continue as a going concern. We are
currently engaged in discussions with a number of companies regarding strategic
acquisitions or potential financings. Although these discussions are ongoing,
there can be no assurance that any of these discussions will result in actual
acquisitions or a completed financing for us.
WE HAVE A LIMITED OPERATING HISTORY
We have a limited operating history upon which potential investors may base
an evaluation of its prospects and there can be no assurance that we will
achieve our objectives. Our prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in a rapidly evolving market such
as the market for Internet broadband and wireless infrastructure equipment and
services. Such risks include, but are not limited to: our ability to obtain and
retain customers and attract a significant number of new customers, the growth
of the satellite, wireless, broadband and Internet markets, our ability to
implement our growth strategy, especially the sales and marketing efforts,
intense competition from providers of broadband products, services and the
telecommunication industry in general, and other risks associated with
financing, liquidity requirements, rapidly changing customer requirements and
the volatility of the public markets.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES AND MAY NEVER BECOME
PROFITABLE.
We have never operated at a profit. We cannot predict whether our current
or prospective business activities will ever be profitable. If we do not
generate enough revenue to be profitable, our business might have to be
discontinued, in which case, investors would lose all or most of their
investment in us.
WE MAY INCREASE OUR INDEBTEDNESS TO FUND OUR OPERATIONS AND INVESTMENT
OBJECTIVES, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
To maintain our operations, we may need to raise additional funds through
public or private financing, including taking on additional indebtedness. We
cannot assure you that we will incur indebtedness on commercially reasonable
terms or at all. Additional indebtedness may make us more vulnerable to general
adverse economic and industry conditions; require us to dedicate a substantial
portion of our cash flow from operations to payments on our indebtedness,
thereby reducing the availability of our cash flow to fund working capital,
future investments, capital expenditures and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate; place us at a competitive disadvantage
compared to our competitors that have less debt; and limit our ability to borrow
additional funds.
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WE MAY FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES
The market segments we are targeting are characterized by rapidly changing
technology, evolving industry standards and frequent new product and service
introductions. These factors require management to continually improve the
performance, features and reliability of the array of our products. Management
may not successfully respond quickly enough or on a cost-effective basis to
these developments. We may not achieve widespread acceptance of our services
before our competitors offer products and services with speed, performance,
features and quality similar to or better than our products or that are more
cost-effective than our services, resulting in a decrease in our ability to
compete in the market.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY
The market for Internet broadband and wireless infrastructure equipment and
services is rapidly evolving and highly competitive. Many of our competitors and
potential competitors have substantially greater financial, technical,
managerial and marketing resources, longer operating histories, greater name
recognition and more established relationships than us. Since our business is
partially dependent on the overall success of the Internet as a communication
medium, it also competes with traditional hardware based access and equipment
providers. Management expects competition from these and other types of
competitors to increase significantly.
LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS
Given the early stage of development of our business, we depend highly on
the performance and efforts of our Chief Executive Officer and Chairman, Mr.
Tiao-Tsan "Andy" Lai, staff and our board of directors. If we should lose the
service of any members of our management team or other key personnel, our
business, operating results and financial condition may be materially impacted.
RISKS ASSOCIATED WITH OUR CONSTRUCTION BUSINESS
FACTORS OF NATURE MAY ADVERSELY AFFECT OUR CONSTRUCTION BUSINESS.
Typhoons and earthquakes in Taiwan may increase the time necessary to
complete our construction projects and, in turn, increase the costs to complete
such projects.
INCREASES IN THE COST OF MATERIALS MAY ADVERSELY AFFECT OUR CONSTRUCTION
BUSINESS.
The increase in the costs of construction materials will increase the costs
to complete our construction projects.
AN UNSTABLE POLITICAL RELATIONSHIP BETWEEN MAINLAND CHINA AND TAIWAN MAY
ADVERSELY AFFECT OUR CONSTRUCTION BUSINESS.
Because of the special nature of the political relationship between
Mainland China and Taiwan, if the political relationship between Mainland China
and Taiwan becomes unstable, the value and demand by customers of real estate in
Taiwan may decrease. Conversely, if the political relationship between Mainland
China and Taiwan remains stable, the value of real estate and demand by
customers may continue to increase.
RISKS ASSOCIATED WITH DOING BUSINESS IN ASIA
There are substantial risks associated with our Asian operations. The
establishment and expansion of international operations requires significant
management attention and resources. All of our current and anticipated future
revenues are derived from Asia. Our international operations are subject to
additional risks, including the following, which, if not planned and managed
properly, could have a material adverse effect on our business, financial
condition and operating results:
* language barriers and other difficulties in staffing and managing
foreign operations;
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* legal uncertainties or unanticipated changes regarding regulatory
requirements, liability, export and import restrictions, tariffs and
other trade barriers;
* longer customer payment cycles and greater difficulties in collecting
accounts receivable;
* uncertainties of laws and enforcement relating to the protection of
intellectual property;
* seasonal reductions in business activity; and
* potentially uncertain or adverse tax consequences.
In addition, changes in the political and overall economic conditions of
the Asian region, which are outside the control of management, could have a
material adverse effect on our business, operating results and financial
condition.
FLUCTUATIONS IN THE VALUE OF THE TAIWANESE CURRENCY RELATIVE TO FOREIGN
CURRENCIES COULD AFFECT OUR OPERATING RESULTS.
We have historically conducted transactions with customers, paid payroll
and other costs of operations in the Taiwanese national currency, the New Taiwan
Dollar. To the extent our future revenue may be denominated in foreign
currencies, we would be subject to increased risks relating to foreign currency
exchange rate fluctuations which could have a material adverse affect on our
financial condition and operating results. To date, we have not engaged in any
hedging transactions in connection with our international operations.
FAILURE TO COMPLY WITH THE UNITED STATES FOREIGN CORRUPT PRACTICES ACT COULD
ADVERSELY IMPACT OUR COMPETITIVE POSITION AND SUBJECT US TO PENALTIES AND OTHER
ADVERSE CONSEQUENCES.
We are subject to the United States Foreign Corrupt Practices Act, which
generally prohibits United States companies from engaging in bribery or other
prohibited payments to foreign officials for the purpose of obtaining or
retaining business. Foreign companies, including some that may compete with us,
are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs,
theft and other fraudulent practices occur from time to time in the non-U.S.
countries in which we conduct business. We have attempted to implement
safeguards to prevent and discourage such practices by our employees and agents.
We can make no assurance, however, that our employees or other agents will not
engage in such conduct for which we might be held responsible. If our employees
or other agents are found to have engaged in such practices, we could suffer
severe penalties and other consequences that may have a material adverse effect
on our business, financial condition and results of operations.
RISKS ASSOCIATED WITH INVESTING IN OUR COMMON STOCK
EFFORTS TO COMPLY WITH RECENTLY ENACTED CHANGES IN SECURITIES LAWS AND
REGULATIONS WILL INCREASE OUR COSTS AND REQUIRE ADDITIONAL MANAGEMENT RESOURCES,
AND WE STILL MAY FAIL TO COMPLY.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC
adopted rules requiring public companies to include a report of management on
the company's internal controls over financial reporting in their annual reports
on Form 10-K. In addition, the public accounting firm auditing the company's
financial statements must attest to and report on management's assessment of the
effectiveness of the company's internal controls over financial reporting. This
requirement will first apply to our annual report on Form 10-KSB for our fiscal
year ending December 31, 2006. If we are unable to conclude that we have
effective internal controls over financial reporting or if our independent
auditors are unable to provide us with an unqualified report as to the
effectiveness of our internal controls over financial reporting as of December
31, 2006 and future year ends as required by Section 404 of the Sarbanes-Oxley
Act of 2002, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the value of our securities. We
have not yet begun a formal process to evaluate our internal controls over
financial reporting. Given the status of our efforts, coupled with the fact that
guidance from regulatory authorities in the area of internal controls continues
to evolve, substantial uncertainty exists regarding our ability to comply by
applicable deadlines.
9
OUR STOCK PRICE IS HIGHLY VOLATILE.
Our stock price has fluctuated dramatically. There is a significant risk
that the market price of our common stock will decrease in the future in
response to any of the following factors, some of which are beyond our control:
* variations in our quarterly operating results;
* announcements that our revenue or income are below analysts'
expectations;
* general economic slowdowns;
* changes in market valuations of similar companies;
* sales of large blocks of our common stock;
* announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
* fluctuations in stock market prices and volumes, which are
particularly common among highly volatile securities of
internationally-based companies.
THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK.
There is currently a limited public market for our common stock. Holders of
our common stock may, therefore, have difficulty selling their common stock,
should they decide to do so. In addition, there can be no assurances that such
markets will continue or that any shares of common stock, which may be purchased
may be sold without incurring a loss. Any such market price of the common stock
may not necessarily bear any relationship to our book value, assets, past
operating results, financial condition or any other established criteria of
value, and may not be indicative of the market price for the common stock in the
future. Further, the market price for the common stock may be volatile depending
on a number of factors, including business performance, industry dynamics, news
announcements or changes in general economic conditions.
OUR COMMON STOCK IS SUBJECT TO REGULATIONS PRESCRIBED BY THE SEC RELATING TO
"PENNY STOCKS".
The SEC has adopted regulations that generally define a penny stock to be
any equity security that has a market price (as defined in such regulations) of
less than $5.00 per share, subject to certain exceptions. Our common stock meets
the definition of a penny stock and is subject to these regulations, which
impose additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors,
generally institutions with assets in excess of $5,000,000 and individuals with
a net worth in excess of $1,000,000 or annual income exceeding $200,000
(individually) or $300,000 (jointly with their spouse).
WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never declared or paid any cash dividends or distributions on our
common stock. We currently intend to retain our future earnings to support
operations and to finance expansion and therefore do not anticipate paying any
cash dividends on our common stock in the foreseeable future.
ITEM 2. DESCRIPTION OF PROPERTY.
Our main office is located at 2F-1, NO. 16, Jian Ba Road, Jhongue City,
Taipei County, Taiwan, consisting of approximately 502.64 square meters. The
landlord is Ku Shen Co. Ltd. The rent is NTD$120,000 per month and the lease
expires on May 15, 2006.
10
INVESTMENT POLICIES
We are developing construction projects with landowners at several
locations in Taiwan. There are no limitations on the percentage of assets which
may be invested in any one investment or type of investment. We acquire assets
for the purposes of both capital gain through real estate sales and income
through leasing activities. There are no specifications as to the types of real
estate in which we may invest nor limitations on the number or amount of
mortgages which may be placed on any one piece of property.
DESCRIPTION OF REAL ESTATE AND OPERATING DATA
Our subsidiary, City Construction, has been planning a new construction
project in Keelong City, Taiwan since the end of 2004. We entered into a
contract in the first quarter of 2005 for construction of a ten floor
residential building. Upon completion, we will own 60%, and the land owner will
own 40% of the building. We anticipate that this project will generate sales of
$3 to $4 million once completed. We have agreed to make refundable deposits, as
security, payable at various agreed upon phases of the construction. The
deposits will be returned within two years after the construction is completed.
As of December 31, 2005, we have paid $91,320 as part of the refundable security
deposit and $418,105 in construction costs as construction is in progress. At
March 2006, two floors of this ten floor building has been completed, and we
anticipate completion of the building project at the end of 2006. We have found
buyers for units on six floors of the building and have received approximately
$151,515 as deposit for the units. If the building project is not completed by
February 2007, we will be in default under the agreement with the landowners.
Upon completion of 50% of the building project, the title to 60% of the building
will transfer to us, and we intend to secure approximately $1.2 million from
banks in Taiwan to finance the building project.
In April 2004, City Construction placed a refundable performance bond in
the amount of $231,344 with a court in Taiwan for the rights to complete an
unfinished building in Keelung, Taiwan with the owners of the land. We are
currently in discussion with the landowners regarding the terms of the project.
On January 24, 2006, City Network, Inc. - Taiwan, our wholly-owned
subsidiary, entered into a Purchase and Sale Agreement with Wang, Rong-Zong (the
"Seller") pursuant to which City Network, Inc. - Taiwan agreed to purchase and
the Seller agreed to sell property located in the City of Tou-Liu, Yun-Lin
County, Taiwan, for an aggregate purchase price equal to approximately $2
million (NTD 64,000,000). The aggregate purchase price is payable in four
installments as follows: (i) $312,940 (NTD 10,000,000), (ii) $250,352 (NTD
8,000,000), (iii) $190,738 (NTD 6,100,000) and (iv) $1.25 million (NTD
39,900,000). As of February 1, 2006, City Network, Inc. - Taiwan has paid the
first and second payments to the Seller for a total amount equal to
approximately $562,000 (NTD 18,000,000). City Network, Inc. - Taiwan will pay
the third payment to the Seller after payment, by the Seller, of the outstanding
property taxes on the land. City Network, Inc. - Taiwan will pay the final
payment to the Seller upon receipt of a mortgage in the amount of approximately
$1.25 million (NTD 39,900,000). On January 23, 2006, City Network, Inc. - Taiwan
was approved for a mortgage in the amount of approximately $1.25 million (NTD
39,900,000) by Hua Nan Commercial Bank but City Network, Inc. - Taiwan has not
yet received the cash amount of the mortgage. On January 24, 2006, City Network,
Inc. - Taiwan issued a check to the Seller in the amount of approximately $1.25
million (NTD 39,900,000) as a guarantee of City Network, Inc. - Taiwan's payment
of the outstanding purchase price (the "Guarantee"). The Seller agreed to return
the Guarantee to City Network, Inc. - Taiwan upon the City Network, Inc. -
Taiwan's receipt of the full mortgage and the Seller's receipt of the
outstanding purchase price. Upon completion of this transaction, we intend to
sell or lease seven of the eight floors of the building to commercial businesses
and retain one of the eight floors to utilize for the development of our VoIP
business.
The building projects have not yet been completed, and the company has not
yet purchased insurance for the properties.
ITEM 3. LEGAL PROCEEDINGS.
We are not presently involved in litigation that we expect individually or
in the aggregate to have a material adverse effect on our financial condition,
results of operation or liquidity.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 27, 2005, an annual meeting of our stockholders was held at our
main corporate offices in Taipei, Taiwan. There were 32,967,183 shares of common
stock outstanding on the record date and entitled to vote at the annual meeting.
The following directors were elected:
Name of Director Vote For Votes Withheld
---------------- -------- --------------
Tiao-Tsan "Andy" Lai 11,271,037 0
Yun-Yi "Stella" Tseng 11,271,037 0
Alice Chen 11,271,037 0
I-Min Ou 11,271,037 0
Chin-Yuan Liao 11,271,037 0
Mei-Chu Lai 11,271,037 0
Kao-Yu Hung 11,271,037 0
Chung-Chieh "Kevin" Lin 11,271,037 0
Yong Su 11,271,037 0
Pi-Liang Liu 11,271,037 0
Chun-Chih Chen 11,271,037 0
The ratification of the appointment of Lichter, Yu & Associates (formerly
Lichter, Weil & Associates) as our Independent Public Accountants for the fiscal
year ending December 31, 2005 was ratified with 11,271,037 votes for, zero votes
against and zero votes abstentions.
12
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock began trading on the American Stock Exchange on January
14, 2004 under the symbol "CSN". Previously, on June 25, 2002, our common stock
was initially traded on the OTC Bulletin Board under the symbol "IVAG", and on
January 17, 2003 our symbol changed to "CYNW". Prior to June 25, 2002, there was
no public market for our stock. The following table sets forth, (i) the high and
low sales quotations for the partial period in the fiscal year ended February
29, 2004 from January 14, 2004 through February 29, 2004, the ten months ended
December 31, 2004 (including partial period) and the partial period in the first
quarter of the current fiscal year and (ii) the high and low sales quotation for
the Company for each quarter in the fiscal year ended December 31, 2005, based
upon information supplied by the American Stock Exchange.
Price Range of Common Stock
---------------------------
High Low
---- ---
2004
January 14, 2004 - February 29, 2004 $ 2.74 $ 2.10
March 1, 2004 - May 30, 2004 $ 2.38 $ 0.73
June 1, 2004 - August 31, 2004 $ 0.99 $ 0.42
September 1 - November 30, 2004 $ 1.00 $ 0.46
December 1, 2004 - December 31, 2004 $ 1.23 $ 0.64
2005
January 1, 2005 - March 31, 2005 $ 0.86 $ 0.30
April 1, 2005 - June 30, 2005 $ 0.42 $ 0.20
July 1, 2005 - September 30, 2005 $ 0.30 $ 0.14
October 1, 2005 - December 31, 2005 $ 0.30 $ 0.11
As of March 20, 2006, there were approximately 2,000 shareholders of record
of our common stock.
DIVIDEND POLICY
All shares of common stock are entitled to participate proportionally in
dividends if our board of directors declares them out of the funds legally
available. These dividends may be paid in cash, property or additional shares of
common stock. We have not paid any dividends since our inception and presently
anticipate that all earnings, if any, will be retained for development of our
business. Any future dividends will be at the discretion of our board of
directors and will depend upon, among other things, our future earnings,
operating and financial condition, capital requirements, and other factors. We
currently intend to retain our future earnings to support operations and to
finance expansion and therefore do not anticipate paying any cash dividends on
our common stock in the foreseeable future.
13
RECENT SALES OF UNREGISTERED SECURITIES
On January 15, 2004, we issued 500,000 shares of our common stock at $1.44
per share pursuant to a private placement exempt from registration pursuant to
Regulation S of the Securities Act. We received proceeds of $720,000 for this
private placement. The shares are restricted and do not have registration
rights. The offering price was negotiated with the shareholders at the time of
the offering. Of the shareholders in this offering, Yun-Yi Tseng was
subsequently appointed CFO and a director of our company.
On June 14, 2004, we issued 2,500,000 shares of our common stock in
exchange for the conversion in full of a note and short term debt payables to
third parties in the aggregate of $1,680,329. The note and short term debt
payables were converted into shares of common stock at a price of approximately
$0.672 per share. The shares are restricted and do not have registration rights.
The conversion rate was fixed in the agreements governing the note and short
term debt payables. Of the shareholders in this exchange, Yi-Min Ou, Mei-Ling
Chen, and Ching-Yuan Liao were directors of the Company at the time of such
exchange, and Yun-Yi Tseng was subsequently appointed CFO and a director of our
company.
On August 17, 2005, we issued 977,273 shares to Cornell Capital Partners,
L.P. and 44,455 shares to Monitor Capital, Inc. We issued warrants to purchase
25,000 shares of common stock for $25 total, issued to Cornell Capital Partners,
LP. We also issued 4,445,455 shares in the name of CSN: currently held by an
escrow agent as pledged shares for the notes issued to Highgate House.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Our company was incorporated on August 8, 1996 as Investment Agents, Inc.
under the laws of the State of Nevada. CNT was incorporated under the laws of
the British Virgin Islands on March 1, 2002. On November 14, 2002, CNT became a
wholly owned subsidiary of our company through an Exchange Agreement, dated
November 14, 2002 and amended on December 11, 2002, whereby our company acquired
all of the issued and outstanding capital stock of CNT in exchange for
12,000,000 shares of common stock of our company, which represented 49% of our
issued and outstanding stock at that time. In connection with the exchange and
change in control, the name of our company was changed from Investment Agents,
Inc. to City Network, Inc. the officers and directors of City Network resigned
and new officers and directors were appointed. Upon the effective date of the
exchange and change in control, our company ceased its relationship with the
company for whom it previously acted as referral agent for.
CNT owns all of the issued and outstanding common stock of CNT-Taiwan,
which was incorporated under the laws of the Republic of China on September 6,
1994. CNT-Taiwan owns all of the issued and outstanding common stock of company
of City Construction, which was incorporated under the laws of Republic of China
on October, 10, 2003.
On December 16, 2004, our board of directors determined to change our
fiscal year end from February 28 to December 31.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Form 10-KSB. The following discussion contains forward-looking statements. Our
actual results may differ significantly from those projected in the
forward-looking statements. Factors that may cause future results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, those discussed in "Risk Factors" and elsewhere in this Form
10-KSB.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial conditions and results of
operations is based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("GAAP"). The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
14
and liabilities. See "Summary of Significant Accounting Policies" in the Notes
to Consolidated Financial Statements in Item to this Report for our critical
accounting policies. No significant changes in our critical accounting policies
have occurred since December 31, 2005.
REVENUE RECOGNITION
Revenue generated from sales of products is recognized upon shipment or
when title passes to customers based on terms of sales, and is recorded net of
returns, discounts and allowances. Service income is recognized as the related
services are provided per terms of the service agreement.
ACCOUNTS RECEIVABLE
Accounts receivables are reported as the outstanding unpaid balances
reduced by an allowance for doubtful accounts. We estimate doubtful accounts
based on historical bad debts, factors related to specific customer's ability to
pay, and current economic trends. We write off accounts receivable against the
allowance when a balance is determined to be uncollectible.
NOTES RECEIVABLE
Our subsidiary, CNT-Taiwan usually receives post-dated checks as permitted
by Taiwanese law. CNT-Taiwan will typically send an invoice to the customer
after which the customer will issue a check dated two to three months, sometimes
longer, from the date of the invoice. On CNT-Taiwan's books, the post dated
checks are categorized as notes receivables and the invoice is then taken off on
the accounts receivables side.
OVERVIEW - RESULTS OF OPERATIONS
AUDITED YEAR ENDED DECEMBER 31, 2005 COMPARED TO AUDITED TEN MONTHS ENDED
DECEMBER 31, 2004
NET REVENUE. Net sales for the year ended December 31, 2005 totaled
$14,320,409, compared to $15,674,613 for ten months ended December 31, 2004. The
decrease in revenues for the year ended December 31, 2005 was due to a decline
in the amount of sales of certain merchandise.
COST OF SALES. Cost of revenue for the year ended December 31, 2005 totaled
$12,881,717, compared to $14,924,938 for the ten months ended December 31, 2004.
The decrease in cost of revenues was due to a decrease in sales. Also, our gross
profit increased due to the higher margin of certain merchandise and their
decline in cost but not their sales price for the year ended December 31, 2005.
GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses
for the year ended December 31, 2005 totaled $1,535,808, compared to $1,395,388
for ten months ended December 31, 2004. The increase was due to an increase in
professional fees.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2005
totaled $147,914, compared to $112,922 for ten months ended December 31, 2004.
The increase in interest expense was due to the increase in debt.
As a result of the foregoing, Income (loss) Before Income Taxes totaled
$(1,057,140) for the year ended December 31, 2005 and $(854,770) for ten months
ended December 31, 2004. Provision for income taxes expenses is $336 for the
year ended December 31, 2005 and $109,890 for ten months ended December 31,
2004. The result of the above tax calculations resulted in a net loss of
$(1,057,476) and a net loss of $(964,660), respectively, for the year ended
December 31, 2005 and ten months ended December 31, 2004.
INCOME TAXES
Provisions of $336 for taxes have been recorded for the year ended December
31, 2005.
15
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $856,587 at December 31, 2005 and $2,010,644
at December 31, 2004. The Company's current assets totaled $9,221,630 at
December 31, 2005 as compared to $6,186,420 at December 31, 2004. The Company's
total current liabilities were $10,272,005 at December 31, 2005 as compared to
$6,656,116 at December 31, 2004. Working capital at December 31, 2005 was
$(1,050,375) and $(469,696) at December 31, 2004. During the year ended December
31, 2005, net cash (used in) operating activities was $(2,631,318) as compared
to net cash used in operating activities of $(1,293,162) during the ten months
in 2004. Net cash provided by financing activities was $1,496,272 and $627,153
for the year ended December 31, 2005 and ten months ended December 31, 2004,
respectively. The net change in cash and cash equivalents was $(1,154,057) and
$(712,929) for the year ended 2005 and ten months ended 2004, respectively.
We have suffered recurring losses from operations, cash deficiencies and
the inability to meet our maturing obligations without borrowing from related
parties and restructuring debts. These issues may raise substantial concern
about our ability to continue as a going concern.
We are currently engaged in discussions with a number of companies
regarding strategic acquisitions or potential financings. Although these
discussions are ongoing, there can be no assurance that any of these discussions
will result in actual acquisitions or a completed financing for us.
CAPITAL EXPENDITURES
Total capital expenditures during the year ended December 31, 2005 was
$66,795 for the purchase of fixed assets.
WORKING CAPITAL REQUIREMENTS
Our operations and short term financing do not currently meet our cash
needs. We currently are engaged in discussions with a number of companies
regarding strategic acquisitions or investments. Although these discussions are
ongoing, there can be no assurance that any of these discussions will result in
actual acquisitions or investment. Several potential investors have already
shown their interest to invest in our company.
FACTORS THAT INTERRUPT OUR OPERATIONS
Our major risk is incurring a large amount of bad debt. Our short-term and
long-term liquidity may be influenced by uncollected account receivables. If the
amount of bad debt is high, it will severely affect our ability to continue
operations. Therefore, we are taking precautions to manage this risk. We will
try to diversify our customer base and control credit risk related to accounts
receivable through credit approvals, credit limits and monitoring procedures.
Although we have already taken these measures, it is still possible to incur a
large amount of bad debt.
Financial instruments that potentially subject us to concentrations of
credit risk are cash, accounts receivable and other receivables arising from its
normal business activities. We place our cash in what we believe to be
credit-worthy financial institutions. We have a diversified customer base, most
of which are related parties. We control credit risk related to accounts
receivable through credit approvals, credit limits and monitoring procedures. We
routinely assess the financial strength of its customers and, based upon factors
surrounding the credit risk, establish an allowance, if required, for
un-collectible accounts and, as a consequence, believe that our accounts
receivable credit risk exposure beyond such allowance is limited.
OFF-BALANCE SHEET TRANSACTIONS
We do not have any off-balance sheet transactions.
16
ITEM 7. FINANCIAL STATEMENTS
Our Financial Statements together with the independent auditor's report
thereon are included on pages F-1 through F-27 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes nor any disagreements with the accountants or
the accountant's findings.
ITEM 8A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our chief executive officer and the chief financial officer, we
conducted an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as of the end of the period covered
by this report (the "Evaluation Date"). Based on this evaluation, our chief
executive officer and chief financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective such that the
material information required to be included in our SEC reports is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms relating to our company, including our consolidating
subsidiaries, and was made known to them by others within those entities,
particularly during the period when this report was being prepared.
Additionally, there were no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the Evaluation Date. We have not identified any significant deficiencies or
material weaknesses in our internal controls, and therefore there were no
corrective actions taken.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS.
Set forth below are the names of our directors, executive officers and key
employees of as of December 31, 2005.
Name Age Title
---- --- -----
Tiao-Tsan "Andy" Lai 43 Chairman, Director, President and Chief
Executive Officer
Yun-Yi "Stella" Tseng 45 Chief Financial Officer and Director
Alice Chen 42 Vice President and Director
I-Min Ou 36 Director, Manager - Technology Department
Chin-Yuan Liao 33 Director, Manager - Engineering Department
Mei-Chu Lai 38 Independent Director
Kao-Yu Hung 47 Independent Director
Chung-Chieh "Kevin" Lin 45 Independent Director
Yong Su 50 Independent Director
Pi-Liang Liu 50 Independent Director
Chun-Chih Chen 36 Independent Director
17
Set forth below is certain information with respect to each director,
executive officer, key employee and director nominees.
TIAO-TSAN "ANDY" LAI has been Chairman, President and Director of our
company (and its predecessors) since 1994. As a pioneer in the network equipment
market he was the first entrepreneur to bring the Home PNA solution to Taiwan,
China and Asia. With Mr. Lai's guidance, we implemented Home PNA in a winning
design for an Internet Service Model for the Taipei city government in 1998. In
1999, Mr. Lai also procured an open tender for a Home PNA project with Korea
Telecom. From 1999 to the present, we have had our products approved for
purchase and sale by China Telecom, Taiwan's HiNet, Japan OCC and Finland
Telecom. In addition, Mr. Lai established business projects with Shanghai
Telecom, Fujian Telecom and Guang Dong Telecom. In October, 2000, Mr. Lai was
presented the "Excellent Manager" industry award in Taiwan for outstanding
service as Chairman of our company. In June 2002, Mr. Lai was also awarded the
"The Excellent Alumnus" award for his success in business beyond graduation from
the Taiwan National Military Academy. Mr. Lai holds an MBA degree from the
University of St. Thomas in Minnesota, USA, and a bachelor's degree in business
from Metropolitan University in Minnesota, USA.
YUN-YI "STELLA" TSENG has been the Chief Financial Officer and a Director
of the Board of our company since November 2004. In 1998, Ms. Tseng established
the asset management and financial consulting group called Chief Securities
Investment Inc., where she was the chairman until December 2003. Over the course
of five years, Ms. Tseng gradually developed Chief Securities Investment Inc.
into a Taiwanese nation-wide operation with more than ten branch offices and
over 400 employees. Furthermore, Ms. Tseng has participated in the financing of
numerous private and public companies both in Taiwan and abroad. She is an
experienced financial planner and experienced in company finance, accounting and
auditing. In 2003, Ms. Tseng helped found Hyo-On Biotechnology Corp., where she
is a company director and is primarily responsible for strategic growth and
financial development. Ms. Tseng graduated from Shih-Hsin University in Taipei,
Taiwan with a degree in Communications and Journalism.
ALICE CHEN has been Vice President and a Director of our company since
October 2002. Ms. Chen has been Vice General Manager of Sales and Marketing and
a Director of CNT-Taiwan since January 1999. Ms. Chen's duty is to implement and
develop our worldwide sales and marketing plan. Before joining our company, Ms.
Chen had ten years experience working for the Taiwanese National Security Agency
as a national policy analyst. Additionally, Ms. Chen spent three years working
as head of sales and marketing for a Taiwanese public company. Ms. Chen
possesses a degree in Legal Policy from a government university in the Republic
of China.
I-MIN OU has been Manager of the Technology Department and a Director of
our company since October 2002. From February 2001 to October 2002, Mr. Ou
served as a Manager of the Tongnan Technology Company. From June 1999 to January
2001, he served as a Manager of the Gulite Technology Company. From February
1998 to May 1999, Mr. Ou was a Manager for the Hueng Kwuo Technology Company.
From 1991 to 1997, he served as a Manager of the Ikuani Technology Company.
Since graduating with a bachelor's degree in Electrical Engineering from the
Tung Nan Institute of Technology in July 1991, I-Min Ou has been primarily
engaged in electronics engineering and computer automation industry.
CHIN-YUAN LIAO has been a Director and Manager of the Engineering
Department since October 2002. From January 2000 to October 2002, Mr. Liao
served as Manager of the Engineering Department for CNT-Taiwan. Previously, he
was a Manager with A Best Information Technology, Inc., a network technology
company, from 1998 to 2000. Mr. Liao received a bachelor's degree in electrical
engineering from the Oriental Institute of Technology in 1996.
MEI-CHU LAI has been a Director of our company since October 2002. In 1992,
Ms. Lai began her career serving four years as an accountant and finance
department chief for New Land Developers Co. Ltd. Ms. Lai has been working for
ING Antai since 1996 and is currently a financial safety planner responsible for
the asset management, financial advisory, inheritance taxation and tax planning
of major company clients. She was promoted at ING Antai to the position of
Division Supervisor in 1997 and then took the post of Assistant General Manager
in 2001. Ms. Lai graduated from the Department of International Trading at Ming
Chuan University in 1991. Ms. Lai currently serves on our board of directors'
audit committee.
18
YU-HUNG KAO has been a Director of our company since October 2002. Ms. Hung
specializes in import and export customs and regulations of many countries
around the world as well as corporate financial reporting, accounting and
auditing. In 1983, Ms. Hung personally founded her own trading, customs and
product transport company called Ce Young Customs Brokerage Co., Ltd. For the
past 20 years, Ms. Hung has managed and directed the development of Ce Young
Customs Brokerage Co, Ltd., developing the business into a profitable and
well-known brand name in Taiwan and throughout Asia. From 1980 to 1983, she was
previously employed by Min Hwa Inc., working as the company's General Manager
supervising the handling of customs brokerage-related sales finance, taxation
and accounting. She graduated from Hsing Wu College in 1978 with majors in
international trading and business administration. Ms. Kao currently serves on
our board of directors' audit committee.
CHUNG-CHIEH "KEVIN" LIN has been a Director of our company since November
2004. Since 1996, Mr. Lin has been the chairman of Chun-Yang Investment Co.,
Ltd., an investment company involved in corporate finance and securities
consulting, since April 1997 and chairman of Sino-Freeze Biotechnology Co., Ltd.
since February 2003. Mr. Lin has also been involved in venture capital and
strategic investments and has invested in, developed and managed more than
fifteen public and private companies in Taiwan and China. Mr. Lin's investment
experience has been particularly in the biotech and electronics industries. Mr.
Lin has a degree in Civil Engineering from Tamkang University.
YONG SU has been a Director of our company since November 2004. Mr. Su is
currently a professor at the Business Administration Department at Fudan
University and director of the Business Administration Department of the
university's advanced studies and post-graduate program. He has worked for many
companies as a corporate consultant, utilizing his expertise in corporate
strategies planning, corporate culture management, company organization and
marketing to provide operational guidelines and strategies. Mr. Su graduated
from Fudan University in 1986 with a master's degree in Cultural History and
acquired a doctorate degree in Economics from Fudan University in 1994,
whereupon he took a teaching position at the university immediately following
his graduation. He is the author of over fifty journal articles and industry
essays.
PI-LIANG LIU has been a Director of our company since November 2004. He is
currently a director of Mega Financial Holding Company and Resident Supervisor
at Chiao Tung Bank. He was the CEO of the Southern Taiwan Joint Services Center
of the Executive Yuan of Taiwan from 1999 to 2001. From 1997 to 1999, he held
the position of Secretary General at the Legislative Yuan of Taiwan's
parliament. From 1991 to 1997, Mr. Liu was an Advisor and Director of the
Liaison Office with the governing administration's cabinet for the Executive
Yuan of Taiwan. He has also served at the post of Chairman of the Budget
Committee for the Legislative Yuan of Taiwan. Mr. Liu obtained his master's
degree in Arts from the School of Industrial Education at Northeastern Missouri
State University in 1988. He was an Invited Researcher at the School of Public
Administration of the University of Southern California in 1986. He obtained a
bachelor's degree in law from the School of Law at the National Taiwan
University in 1984. Also, he is an author of books such as Research on
Developing Countries' Government Budgeting System and Research on Modern
Democratic Governments' Budgeting Systems. Mr. Liu currently serves on our board
of directors' audit committee.
CHUN-CHIH CHEN has been a Director of our company since January 2006. He
has been a Certified Public Accountant of Gu-Da Certified Public Accountant
Company since August 1988. His responsibilities include preparing certified
financial statements, and tax statements for Companies and individuals. From
July 1985 to June 1987, Mr. Chen worked as an auditor for Wei-Shi Certified
Public Accountant's Company. Mr. Chen received a Bachelor's degree in
International Trade from Vanung University in 1981.
The directors named above will serve until the next annual meeting of our
stockholders or until their successors are duly elected and have qualified.
Directors will be elected for one-year terms at the annual stockholders meeting.
Officers will hold their positions at the pleasure of the board of directors,
absent any employment agreement, of which none currently exists. There is no
arrangement or understanding between any of the directors or officers of our
company and any other person pursuant to which any director or officer was or is
to be selected as a director or officer, and there is no arrangement, plan or
understanding as to whether non-management shareholders will exercise their
voting rights to continue to elect the current directors to our board of
directors. There are also no arrangements, agreements or understandings between
non-management shareholders that may directly or indirectly participate in or
influence the management of our company's affairs. There are no agreements or
19
understandings for any of our officers or directors to resign at the request of
another person and none of the officers or directors are acting on behalf of or
will act at the direction of any other person.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Our board of directors adopted a written charter for its audit committee, a
copy of which was attached as an exhibit to our definitive proxy statement, as
filed with the SEC December 10, 2004, and is incorporated by reference herein.
The audit committee's charter states that the responsibilities of the audit
committee shall include:
* reviewing our charter, annual report to stockholders and reports
submitted to the SEC;
* recommending our independent auditors, confirming and reviewing their
independence, and approving their fees;
* reviewing the independent auditors' performance;
* considering the independent auditors' judgments about our accounting
principals;
* considering and approving major changes to our auditing and accounting
principals;
* establishing reporting systems to the committee by management and the
independent auditors regarding management's significant judgments in
preparing financial statements;
* following an audit, reviewing significant difficulties encountered
during the audit;
* reviewing significant disagreements among management and the
independent auditors in the preparation of our financial statements;
* reviewing the extent to which improvements in financial or accounting
practices approved by the committee have been implemented; and
* Review with counsel any legal matters that could have a significant
impact on our financial statements.
The audit committee met one time during the ten months ended December 31,
2005.
The audit committee members during the year ended December 31, 2005
consisted of Mei-Chu Lai, Yu-Hung Kao and Chien-Hui Lin (later replaced by
Pi-Liang Liu). Chien-Hui Lin resigned from the board of directors in August
2004. Our board of directors appointed Pi-Liang Liu to serve on the audit
committee upon his appointment as director in November 2004. All of the
above-listed audit committee members were or are considered "independent" under
Section 121(A) (as currently applicable to us) of the listing standards of The
American Stock Exchange, as determined by our board of directors. The audit
committee recommends to the board of directors the annual engagement of a firm
of independent accountants and reviews with the independent accountants the
scope and results of audits, our internal accounting controls and audit
practices and professional services rendered to us by our independent
accountants.
Our board of directors has determined that we have at least one audit
committee financial expert, as defined in the Exchange Act, serving on our audit
committee. Pi-Liang Liu is the "audit committee financial expert" and is an
independent member of our board of directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, as amended, requires the executive
officers and directors of our company and every person who is directly or
indirectly the beneficial owner of more than 10% of any class of security of our
company to file reports of ownership and changes in ownership with the SEC. Such
20
persons also are required to furnish our company with copies of all Section
16(a) forms they file. Based solely on its review of copies of such forms
received by it, we believe that all other Section 16(a) filing requirements
applicable to the reporting persons were complied with by such persons during
2005,
CODE OF ETHICS
We have adopted a code of ethics that applies to our Chief Executive
Officer and Chief Financial Officer, and other persons who perform similar
functions. A copy of our Code of Ethics is available to any person, without
charge, upon request to our principal executive offices at 2F-1, No. 16, Jian Ba
Road, Jhonghe City, Taipei County 235, Taiwan, ROC and was filed as an exhibit
to our Annual Report on Form 10-KSB for the fiscal year ended February 29, 2004.
Our Code of Ethics is intended to be a codification of the business and ethical
principles which guide us, and to deter wrongdoing, to promote honest and
ethical conduct, to avoid conflicts of interest, and to foster full, fair,
accurate, timely and understandable disclosures, compliance with applicable
governmental laws, rules and regulations, the prompt internal reporting of
violations and accountability for adherence to this Code.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the fiscal year indicated the compensation
paid by our company to the Chief Executive Officer at December 31, 2005. No
other executive officer received a total annual salary and bonus exceeding
$100,000.
Name and Principal Position Year Salary (US$) Bonus (US$)
--------------------------- ---- ------------ -----------
Tiao-Tsan "Andy" Lai 2005 $24,400 $1,700
2004(1) $26,000 $2,600
2003 $31,200 $2,600
----------
(1) For the ten month period ended December 31, 2004.
Our directors do not receive any compensation for serving on the board of
directors.
REPORT OF THE AUDIT COMMITTEE
The role of the Audit Committee is to assist the Board of Directors in its
oversight of City Network, Inc.'s (the "Company") financial reporting process.
The Board of Directors, in its business judgment, has determined that all
members of the committee are "independent" as required by applicable listing
standards of the American Stock Exchange. The Committee operates pursuant to a
Charter that was approved by the Board. As set forth in the Charter, management
of the Company is responsible for the preparation, presentation and integrity of
the Company's financial statements, accounting and financial reporting
principles and internal controls and procedures designed to assure compliance
with accounting standards and applicable laws and regulations. The independent
auditors are responsible for auditing the Company's financial statements and
expressing an opinion as to their conformity with generally accepted accounting
principles.
In the performance of this oversight function, the Committee has reviewed
and discussed the audited financial statements with management and the
independent auditors. The Committee has discussed with the independent auditors
the matters required to be discussed by Statement of Auditing Standards No. 61,
Communication with Audit Committee, as currently in effect. Finally, the
Committee has received written disclosures and the letter from the independent
auditors required by Independence Standard Board Standard No. 1, Independence
Discussions with Audit Committees, as currently in effect, and has considered
whether the provision of non-audit services by the independent auditors to the
Company is compatible with maintaining the auditor's independence and has
discussed with the auditors the auditors' independence.
The members of the Audit Committee are not professionally engaged in the
practice of auditing or accounting, are not experts in the fields of accounting
or auditing, including in respect of auditor independence. Members of the
Committee rely without independent verification on the information provided to
21
them and on the representations made by management and the independent
accountants. Accordingly, the Audit Committee's oversight does not provide an
independent basis to determine that management has maintained appropriate
accounting and financial reporting principles or appropriate internal control
and procedures designed to assure compliance with accounting standards and
applicable laws and regulations. Furthermore, the Audit Committee's
consideration and discussions referred to above do not assure that the audit of
the Company's financial statements has been carried out in accordance with
generally accepted accounting principles or that the Company's auditors are in
fact "independent".
Based upon the reports, review and discussions described in this report,
and subject to the limitations on the role and responsibilities of the Committee
referred to above and in the Charter, the Committee recommended to the Board
that the audited financial statements be included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2005, as filed with the
Securities and Exchange Commission.
The Audit Committee
Kao-Yu Hung
Mei-Chu Lai
Pi-Liang Liu
Independent Directors, City Network, Inc.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth as of December 31, 2005, the number and
percentage of our outstanding shares of common stock that were beneficially
owned by (i) each person who is currently a director, (ii) each executive
officer, (iii) all current directors and executive officers as a group and (iv)
each person who, to our knowledge is the beneficial owner of more than 5% of the
outstanding common stock.
Number of Percent of
Shares Common Stock
Beneficially Beneficially
Name and Address (1) Owned (2) Owned
-------------------- --------- -----
Tiao-Tsan "Andy" Lai 2,000,000 6.0%
Yun-Yi "Stella" Tseng 844,000 2.5%
Alice Chen 66,000 *
I-Min Ou 25,000 *
Chin-Yuan Liao 50,000 *
Mei-Chu Lai 648,000 2.0%
Yu-Hung Kao 1,161,000 3.5%
Chung-Chieh "Kevin" Lin 0 *
Yong Su 0 *
Pi-Liang Liu 0 *
Chun-Chih Chen 0 *
All officers and directors as a
group (10 persons) 4,794,000 14.5%
----------
* Indicates less than one percent.
(1) The address of each holder is c/o City Network, Inc., 2F-1, No. 16, Jian Ba
Road, Jhonghe City, Taipei County 235, Taiwan, ROC.
(2) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to the
shares shown. Except as indicated by footnote and subject to community
property laws where applicable, to our knowledge, the stockholders named in
the table have sole voting and investment power with respect to all common
stock shares shown as beneficially owned by them. A person is deemed to be
the beneficial owner of securities that can be acquired by such person
within 60 days upon the exercise of options, warrants or convertible
securities (in any case, the "Currently Exercisable Options"). Each
beneficial owner's percentage ownership is determined by assuming that the
Currently Exercisable Options that are held by such person (but not those
held by any other person) have been exercised and converted.
22
CHANGE IN CONTROL
There are currently no arrangements which would result in a change in
control of our company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 2005, we had a non-interest-bearing loan from Tiao-Tsan
Lai, our Chairman, director, President and Chief Executive Officer, in the
amount of $827,094. As of December 31, 2005, we had a non-interest-bearing loan
from Stella Tseng, our Chief Financial Officer and director, in the amount of
$304,400.
ITEM 13. EXHIBITS
(a) The following documents are filed as part of this Form 10-KSB.
1. The following financial statements of our company, with the
independent auditor's report, are filed as part of this Form 10-KSB:
Independent Auditor's Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flow F-5
Consolidated Statements of Changes in Stockholders' Equity F-7
Notes to Consolidated Financial Statements F-8
2. The following exhibits are filed with this report and incorporated by
reference as set forth below:
Exhibit Description
------- -----------
2.1 (1) Exchange Agreement dated December 4, 2002 by and among City Network,
Inc., the shareholders of City Network, Inc., Investment Agents,
Inc., Pamela Ray Stinson, Raymond Robert Acha, and Joseph H.
Panganiban
3.1 (2) Articles of Incorporation
3.2 (2) Certificate of Amendment to Articles of Incorporation
3.3 (3) Certificate of Amendment of the Articles of Incorporation
3.4 (4) Amended and Restated Bylaws
14.1 (5) Code of Ethics
21.1 Subsidiaries
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
23
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
----------
(1) Previously filed with the SEC as an Exhibit to City Network's Form 8-K
filed March 5, 2003, and incorporated herein by reference.
(2) Previously filed with the SEC as an Exhibit to City Network's Form SB-2
filed May 18, 2001, and incorporated herein by reference.
(3) Previously filed with the SEC as an Exhibit to City Network's Proxy
Statement filed March 21, 2003, and incorporated herein by reference.
(4) Previously filed with the SEC as an Exhibit to City Network's Annual Report
on Form 10-KSB filed on April 15, 2005, and incorporated herein by
reference
(5) Previously filed with the SEC as an Exhibit to City Network's Annual Report
on Form 10-KSB filed June 16, 2004, and incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT AND FEES
During fiscal year ended December 31, 2005, our principal independent
auditor was Simon & Edward, LLP. The following are the services provided and the
amount billed.
AUDIT FEES
The aggregate fees billed by Simon & Edward, LLP for professional service
rendered for the audit of our annual financial statements for the fiscal year
ended December 31, 2005, were $42,500.
AUDIT RELATED FEES
Other than the fees described under the caption "Audit Fees" above, Simon &
Edward, LLP did not bill any fees for services rendered to us during the fiscal
year ended December 31, 2005 for assurance and related service in connection
with the audit or review of our consolidated financial statements.
TAX FEES
Simon & Edward, LLP did not provide any tax services to the Company during
the fiscal year ended December 31, 2005.
ALL OTHER FEES
There were no fees billed by Simon & Edward, LLP for other professional
services rendered during the fiscal year ended December 31, 2005.
PRE-APPROVAL OF SERVICES
The Audit Committee pre-approves all services, including both audit and
non-audit services, provided by our independent accountants. For audit services,
each year the independent auditor provides the Audit Committee with an
engagement letter outlining the scope of the audit services proposed to be
performed during the year, which must be formally accepted by the Committee
before the audit commences. The independent auditor also submits an. audit
services fee proposal, which also must be approved by the Committee before the
audit commences.
24
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CITY NETWORK, INC.
By: /s/ Tiao-Tsan Lai
--------------------------------------
Tiao-Tsan Lai
Chief Executive Officer
Date: April 17, 2006
By: /s/ Yun-Yi Tseng
--------------------------------------
Yun-Yi Tseng
Chief Financial Officer
Date: April 17, 2006
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Name Title Date
Name Title Date
---- ----- ----
/s/ Tiao-Tsan Lai Director, Chairman and Chief April 17, 2006
-------------------------- Executive Officer (Principal
Tiao-Tsan Lai Executive Officer)
/s/ Yun-Yi Tseng Director and Chief Financial April 17, 2006
-------------------------- Officer (Principal Accounting
Yun-Yi Tseng Officer)
/s/ Alice Chen Director April 17, 2006
--------------------------
Alice Chen
/s/ Chin Yuan Liao Director April 17, 2006
--------------------------
Chin-Yuan Liao
/s/ I-Min Oun Director April 17, 2006
--------------------------
I-Min Oun
25
/s/ Mei-Chu Lai Director April 17, 2006
--------------------------
Mei-Chu Lai
/s/ Kao-Yu Hung Director April 17, 2006
--------------------------
Kao-Yu Hung
/s/ Chung Chich Lin Director April 17, 2006
--------------------------
Chung Chich Lin
/s/ Yang Su Director April 17, 2006
--------------------------
Yang Su
/s/ Pi-Liang Lu Director April 17, 2006
--------------------------
Pi-Liang Lu
26
CITY NETWORK, INC. AND
SUBSIDIARIES
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004 AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
DECEMBER 31, 2005 AND DECEMBER 31, 2004
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flows F-5 - F-6
Consolidated Statements of Changes in Stockholders' Equity F-7
Notes to Consolidated Financial Statements F-8 - F-27
Simon & Edward, LLP
17700 Castleton Street, Suite 200
City of Industry, CA 91748
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of City Network, Inc.
Gentlemen:
We have audited the accompanying consolidated balance sheet of City Network,
Inc. and subsidiaries (the "Company") as of December 31, 2005, and the related
consolidated statements of income, stockholders' equity, and cash flows for year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of City Network, Inc.
for the ten months ended December 31, 2004 were audited by other auditors whose
report, dated March 7, 2005, on those statements included an explanatory
paragraph that described the litigation discussed in Note O to the financial
statements.
We conducted our audit 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2005, and the results of its operations and its cash flows for year then ended,
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note S to the
financial statements, the Company has suffered recurring losses from operations
and the inability to meet its maturing obligations without borrowing from
related parties and restructuring debts. These conditions raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note S. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Simon & Edward, LLP
City of Industry, California
March 11, 2006
F-1
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND DECEMBER 31, 2004
December 31, 2005 December 31, 2004
----------------- -----------------
ASSETS
Current Assets
Cash and cash equivalents $ 856,587 $ 2,010,644
Accounts receivable, net 4,371,110 3,333,990
Inventory 252,608 732,027
Other receivables 241,304 6,863
Prepaid expenses 3,500,021 102,896
----------- -----------
Total Current Assets 9,221,630 6,186,420
----------- -----------
Fixed Assets, net 2,391,422 2,586,872
----------- -----------
Other Assets
Deposits 503,579 1,724,542
Cash held for compensating balances 1,380,992 0
Construction in progress 418,105 0
Trademarks 1,727 1,812
Equity in net assets of affiliated company 790,842 829,008
Intangible assets 923,347 961,053
Other assets 0 8,255
----------- -----------
Total Other Assets 4,018,592 3,524,670
----------- -----------
Total Assets $15,631,644 $12,297,962
=========== ===========
See Accompanying Notes and Auditor's Report
F-2
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND DECEMBER 31, 2004
December 31, 2005 December 31, 2004
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 1,471,867 $ 3,335,286
Convertible note payable 250,000 0
Due to related party 1,131,494 80,083
Deferred revenue 3,198,414 14,566
Current portion, long-term debt 4,220,230 3,226,181
------------ ------------
Total Current Liabilities 10,272,005 6,656,116
Long-term debt, net of current portion 572,668 246,330
------------ ------------
Total Liabilities 10,844,673 6,902,446
------------ ------------
Stockholders' Equity
Common stock, $.001 par value, 100,000,000 shares
authorized, 32,967,183 shares issued and 28,521,728
shares outstanding at December 31, 2005, and 27,500,000
shares issued and outstanding at December 31, 2004 32,967 27,500
Additional paid in capital 6,157,479 5,937,946
Other comprehensive income 366,384 142,453
Accumulated deficit (1,769,859) (712,383)
------------ ------------
Total capital and retained deficit 4,786,971 5,395,516
Less: cost of treasury stock 0 0
------------ ------------
Total Stockholders' Equity 4,786,971 5,395,516
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,631,644 $ 12,297,962
============ ============
See Accompanying Notes and Auditor's Report
F-3
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED DECEMBER 31, 2005 AND TEN MONTHS ENDED DECEMBER 31, 2004
December 31, 2005 December 31, 2004
----------------- -----------------
Sales, net $ 14,320,409 $ 15,674,613
Cost of sales 12,881,717 14,924,938
------------ ------------
Gross Profit 1,438,692 749,675
General and administrative expenses 1,535,808 1,395,388
------------ ------------
Income (loss) from operations (97,116) (645,713)
------------ ------------
Other (Income) Expense
Interest income (8,985) (3,785)
Rental income (187,020) (17,858)
Commission income (3,846) (281)
(Gain) loss on currency exchange 9,721 (10,720)
Other income (expense) 24,518 (32,120)
Reserve for bad debt 848,517 185,858
Equity in earnings of investee 38,167 (58,330)
Miscellaneous 12,791 1,303
Loss on sale of fixed assets 78,247 32,068
Interest expense 147,914 112,922
------------ ------------
Total Other (Income) Expense 960,024 209,057
------------ ------------
Income (loss) before income taxes (1,057,140) (854,770)
Provision for income taxes 336 109,890
------------ ------------
Net income (loss) $ (1,057,476) $ (964,660)
============ ============
Net income (loss) per share (basic and diluted)
Basic $ (0.038) $ (0.035)
Diluted $ (0.038) $ (0.035)
Weighted average number of shares
Basic 27,925,720 27,500,000
Diluted 27,925,720 27,500,000
See Accompanying Notes and Auditor's Report
F-4
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED DECEMBER 31, 2005 AND TEN MONTHS ENDED DECEMBER 31, 2004
December 31, 2005 December 31, 2004
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $(1,057,476) $ (964,660)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 182,518 161,296
Equity in earnings of investee 38,167 (58,330)
Bad debt 848,517 185,858
Losses on fixed assets obsolescence 6,412 0
Inventory valuation loss and obsolescence 7,186 0
Loss (Gain) on disposal of property, plant and equipment 78,247 32,068
Loss (Gain) on foreign currency exchange 9,721 (10,720)
Decrease (Increase) in notes and accounts receivables (1,922,705) 3,839,159
Decrease (Increase) in other receivables (299,175) 119,629
Decrease (Increase) in inventories 35,470 178,163
Decrease (Increase) in deposit 1,222,390 (1,468,836)
Decrease (Increase) in prepaid expenses and other current assets (3,191,788) 446,848
Increase (Decrease) in accounts payable and accrued expenses (1,883,119) (3,503,334)
(Decrease) Increase in deferred revenue 3,202,876 (245,932)
(Decrease) Increase in deposits payable 0 (4,371)
(Decrease) Increase in other liabilities 91,441 0
----------- -----------
Total Adjustments (1,573,842) (328,502)
----------- -----------
Net cash provided by (used in) operating activities (2,631,318) (1,293,162)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property, plant and equipment 389,160 35,462
Purchases of property, plant and equipment (66,795) (5,008)
Increase in deferred expenses (155,850) 0
----------- -----------
Net cash provided by investing activities 166,515 30,454
----------- -----------
See Accompanying Notes and Auditor's Report
F-5
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED DECEMBER 31, 2005 AND TEN MONTHS ENDED DECEMBER 31, 2004
December 31, 2005 December 31, 2004
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings $ 9,028,025 $ 5,621,631
Payment on notes payable (8,156,025) (5,217,702)
Payment of loan from related party (6,256) (455,227)
Cash held for compensating balances (1,263,540) 0
Loan from related party 1,057,667 200,498
Issuance of convertible notes payable 250,000 0
Issuance of notes payable 586,401 477,953
----------- -----------
Net cash provided by financing activities 1,496,272 627,153
----------- -----------
Effect of exchange rate change on cash (185,526) (77,374)
Net change in cash and cash equivalents (1,154,057) (712,929)
----------- -----------
Cash and cash equivalents at beginning of year 2,010,644 2,723,573
----------- -----------
Cash and cash equivalents at end of year $ 856,587 $ 2,010,644
=========== ===========
Supplemental cash flows disclosures:
Income tax payments $ 163,284 $ 35,750
----------- -----------
Interest payments $ 147,914 $ 112,922
----------- -----------
Non cash transaction:
Conversion of debt to equity $ 0 $ 1,680,329
----------- -----------
Issuance of common stock for prepayment of stock issuance costs $ 225,000 $ 0
----------- -----------
See Accompanying Notes and Auditor's Report
F-6
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
DECEMBER 31, 2005 AND DECEMBER 31, 2004
December 31, 2005 December 31, 2004
----------------- -----------------
Common stock, number of shares
Balance at beginning of period 27,500,000 25,000,000
Common stock issued 5,467,183 2,500,000
------------ ------------
Balance at end of period 32,967,183 27,500,000
------------ ------------
Treasury stock, number of shares
Balance at beginning of period 0 0
Treasury stock acquired 4,445,455 0
------------ ------------
Balance at end of period 4,445,455 0
------------ ------------
Common stock, par value $.001
Balance at beginning of period $ 27,500 $ 25,000
Common stock issued 5,467 2,500
------------ ------------
Balance at end of period 32,967 27,500
------------ ------------
Additional paid in capital
Balance at beginning of period 5,937,946 4,260,117
Issuance of stock 219,533 1,677,829
------------ ------------
Balance at end of period 6,157,479 5,937,946
------------ ------------
Other comprehensive income
Balance at beginning of period 142,453 29,663
Foreign currency translation 223,931 112,790
------------ ------------
Balance at end of period 366,384 142,453
------------ ------------
Retained earnings (deficits)
Balance at beginning of period (712,383) 252,277
Net income (loss) (1,057,476) (964,660)
------------ ------------
Balance at end of period (1,769,859) (712,383)
------------ ------------
Less: Cost of treasury stock 0 0
------------ ------------
Total stockholders' equity at end of period $ 4,786,971 $ 5,395,516
============ ============
See Accompanying Notes and Auditor's Report
F-7
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A - ORGANIZATION
City Network, Inc., formerly Investment Agents, Inc., was incorporated on
August 8, 1996 under the laws of the State of Nevada. City Network
Technology, Inc., formerly Gelcrest Investments Limited, was incorporated
under the laws of the British Virgin Islands on March 1, 2002. City
Network, Inc. -Taiwan, formerly City Engineering, Inc., was incorporated
under the laws of Republic of China on September 6, 1994. City
Construction was incorporated under the laws of Republic of China on
October 10, 2003. City Network, Inc. owns 100% of the capital stock of
City Network Technology, Inc., and City Network Technology, Inc. owns 100%
of the capital stock of City Network, Inc. - Taiwan, and City
Construction. Collectively the four corporations are referred to herein as
the "Company".
The Company designs, manufactures and markets a comprehensive line of
broadband communication and wireless internet access products and
solutions. Also, the broadband communication product line includes VOIP,
GUI-based remote management and routing technology software packages for
simplified setup, extensive network management and global network
connectivity capabilities, home PNA and xDSL broadband access equipment,
ADSL/VDSL ACCESS DEVICES, HPNA ACCESS DEVICES, FTTB (Fiber to the
Building) and FTTH (Fiber to the Home), PCMCIA cards and USB adapters. The
other wireless Internet access solutions are used in both individual and
corporate.
The Company has also recently begun the development of its construction
business. The Company plans to develop and build commercial and
residential buildings, industry factory buildings, and professional
buildings. The Company has entered co-construction agreements for the
development of land in Keelung, Taiwan and the purchase of materials with
a company in Vietnam, as further described in Note H herein.
On December 16, 2004, the Company changed its fiscal year end from
February 28 to December 31.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from sales of products to customers is recognized upon shipment or
when title passes to customers based on the terms of the sales, and is
recorded net of returns, discounts and allowances. Service income is
recognized as the related services are provided pursuant to the terms of
the service agreement.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of City
Network, Inc., and its wholly owned subsidiaries City Network Technology,
Inc. and its wholly owned subsidiaries, City Network, Inc. - Taiwan and
City Construction, collectively referred to within as the Company. All
material intercompany accounts, transactions and profits have been
eliminated in consolidation.
F-8
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RISKS AND UNCERTAINTIES
The Company is subject to substantial risks from, among other things,
intense competition from the providers of broadband products, services and
the telecommunication industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, and the volatility of public markets.
CONTINGENCIES
Certain conditions may exist as of the date the financial statements are
issued, which may result in a loss to the Company but which will only be
resolved when one or more future events occur or fail to occur. The
Company's management and legal counsel assess such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending
against the Company or unasserted claims that may result in such
proceedings, the Company's legal counsel evaluates the perceived merits of
any legal proceedings or unasserted claims as well as the perceived merits
of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a
material loss has been incurred and the amount of the liability can be
estimated, then the estimated liability would be accrued in the Company's
financial statements. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or
is probable but cannot be estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss if
determinable and material would be disclosed.
Loss contingencies considered to be remote by management are generally not
disclosed unless they involve guarantees, in which case the guarantee
would be disclosed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Significant estimates include collectibility of accounts
receivable, accounts payable, sales returns and recoverability of
long-term assets.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company has made an allowance for doubtful accounts for trade
receivables based on a combination of write-off history, aging analysis,
and any specific known troubled accounts.
F-9
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FIXED ASSETS
Property and equipment are stated at cost less accumulated depreciation.
Expenditures for major additions and improvements are capitalized and
minor replacements, maintenance and repairs are charged to expense as
incurred. Depreciation is provided on the straight-line method over the
estimated useful lives of the assets, or the remaining term of the lease,
as follows:
Furniture and Fixtures 5 years
Equipment 5 years
Computer Hardware and Software 3 years
Building and Improvements 50 years
INTANGIBLE ASSETS
Effective July 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." The
adoption of SFAS No. 142 required an initial impairment assessment
involving a comparison of the fair value of trademarks, patents and other
intangible assets to current carrying value. No impairment loss was
recognized for the years ended December 31, 2005 and 2004. Trademarks and
other intangible assets determined to have indefinite useful lives are not
amortized. The Company tests such trademarks and other intangible assets
with indefinite useful lives for impairment annually, or more frequently
if events or circumstances indicate that an asset might be impaired.
Trademarks and other intangible assets determined to have definite lives
are amortized over their useful lives or the life of the trademark and
other intangible asset, whichever is less.
EXCHANGE GAIN (LOSS)
During year ended December 31, 2005 and 2004, the transactions of City
Network, Inc. - Taiwan and City Construction were denominated in a foreign
currency and are recorded in New Taiwan dollars at the rates of exchange
in effect when the transactions occur. Exchange gains and losses are
recognized for the different foreign exchange rates applied when the
foreign currency assets and liabilities are settled.
TRANSLATION ADJUSTMENT
As of December 31, 2005 and 2004, the accounts of City Network, Inc. -
Taiwan and City Construction were maintained, and their financial
statements were expressed, in New Taiwan Dollars (NTD). Such financial
statements were translated into U.S. Dollars (USD) in accordance SFAS No.
52, "Foreign Currency Translation", with the NTD as the functional
currency. According to the Statement, all assets and liabilities were
translated at the current exchange rate, stockholder's equity are
translated at the historical rates and income statement items are
translated at the weighted average exchange rate for the period. The
resulting translation adjustments are reported under other comprehensive
income in accordance with SFAS No. 130, "Reporting Comprehensive Income".
As of December 31, 2005 and 2004 the exchange rates between NTD and the
USD was NTD$1=USD$0.03044 and NTD$1=USD$0.03128, respectively. The
weighted-average rate of exchange between NTD and USD was
NTD$1=USD$0.03117 and NTD$1=USD$0.02998,
F-10
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
TRANSLATION ADJUSTMENT (Continued)
respectively. Total translation adjustment recognized for the year ended
December 31, 2005 and 2004 is $366,384 and $142,453, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including accounts receivable (trade and
related party), notes receivable and accounts payable (trade and related
party), and accrued expenses, the carrying amounts approximate fair value
due to their short maturities. The amounts owed for long-term debt and
revolving credit facility also approximate fair value because interest
rates and terms offered to the Company are at current market rates.
STATEMENT OF CASH FLOWS
In accordance with SFAS No. 95, "Statement of Cash Flows", cash flows from
the Company's operations are based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheet.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable and other
receivables arising from its normal business activities. The Company has a
diversified customer base. The Company controls credit risk related to
accounts receivable through credit approvals, credit limits and monitoring
procedures. The Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk, establishes
an allowance, if required, for un-collectible accounts and, as a
consequence, believes that its accounts receivable credit risk exposure
beyond such allowance is limited.
INVENTORY
Inventory is valued at the lower of cost or market. Cost is determined on
the weighted average method. As of December 31, 2005 and 2004, inventory
consisted only of finished goods.
PRODUCT WARRANTIES
The Company estimates its warranty costs based on historical warranty
claim experience and applies this estimate to the revenue stream for
products under warranty. Future costs for warranties applicable to revenue
recognized in the current period are charged to cost of revenue. The
warranty accrual is reviewed quarterly to verify that it properly reflects
the remaining obligation based on anticipated expenditures over the
balance of the obligation period. Adjustments are made when accrual
warranty claim experience differs from estimate.
F-11
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LONG-TERM EQUITY INVESTMENTS
Long-term equity investments are accounted for by the equity method when
the Company and its subsidiaries owns 20% or more of the investee's voting
shares, or less than 20% of investee's voting shares but is able to
exercise significant influence over the investee's operation and financial
polices, but not more then 50%. All other long-term equity investments are
accounted for by either the lower-of-cost-or-market method or cost method.
For long-term equity investments accounted for under the equity method
related to investee's that are publicly listed companies, unrealized
losses resulting from declines in the market value below cost are recorded
as a separate component of stockholders' equity.
For long-term equity investments in non-listed companies accounted for
under the cost method, investments are stated at original cost. A
write-down of the investment balance to earnings is taken only if it is
determined that there is a permanent decline in the investment's value.
Stock dividends do not result in the recognition of investment income.
For long-term equity investments accounted for by the equity method, the
investment is initially recorded at cost, then reduced by dividends and
increased or decreased by investor's proportionate share of the investee's
net earnings or loss.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with initial
maturities of three months or less to be cash equivalents.
ADVERTISING
Advertising costs are expensed in the year incurred.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for
the current year and deferred taxes on temporary differences between the
amount of taxable income and pretax financial income and between the tax
bases of assets and liabilities and their reported amounts in the
financial statements.
Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period
in which the deferred tax assets and liabilities are expected to be
realized or settled as prescribed in SFAS No. 109, "Accounting for Income
Taxes". As changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income taxes.
F-12
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER SHARE
The Company uses SFAS No. 128, "Earnings Per Share", for calculating the
basic and diluted earnings (loss) per share. Basic earnings (loss) per
share are computed by dividing net income (loss) attributable to common
stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share are computed similar to basic earnings per
share except that the denominator is increased to include common stock
equivalents, if any, as if the potential common shares had been issued.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provision of The Financial Accounting Standards
Board ("FASB") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of". This statement
requires that long-lived assets and certain identifiable intangibles be
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 future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed the fair values of the assets. In
assessing the impairment of these identifiable intangible assets,
identifiable goodwill will be allocated on a pro rata basis using fair
values of the assets at the original acquisition date. In estimating
expected future cash flows for determining whether an asset is impaired
and if expected future cash flows are used in measuring assets that are
impaired, assets will be grouped at the lowest level (entity level) for
which there are identifiable cash flows that are largely independent of
the cash flows of other groups of assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell. In recording an impairment loss, any related goodwill would be
reduced to zero before reducing the carrying amount of any identified
impaired asset.
For goodwill not identifiable with an impaired asset, the Company will
establish benchmarks at the lowest lever (entity level) as its method of
assessing impairment. In measuring impairment, unidentifiable goodwill
will be considered impaired if the fair value at the lowest level is less
than its carrying amount. The fair value of unidentifiable goodwill will
be determined by subtracting the fair value of the recognized net asset at
the lowest level (excluding goodwill) from the value at the lowest level.
The amount of the impairment loss should be equal to the difference
between the carrying amount of goodwill and the fair value of goodwill. In
the event that impairment is recognized, appropriate disclosures would be
made.
F-13
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS
In September 2004, the EITF Issue No. 04-08, "The Effect of Contingently
Convertible Debt on Diluted Earnings per Share" ("EITF 04-08") was issued
stating that contingently convertible debt should be included in diluted
earnings per share computations regardless of whether the market price
trigger has been met. EIFT 04-08 is effective for reporting periods ending
after December 15, 2004. EITF 04-08 will have no material impact on the
Company's financial statements.
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R
requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based
on their fair values, beginning with the first interim or annual period
after June 15, 2005. The pro forma disclosures previously permitted under
SFAS 123 no longer will be an alternative to financial statement
recognition. The Company is required to adopt SFAS 123R in its three
months ending September 30, 2005. Under SFAS 123R, The Company must
determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and
the transition method to be used at date of adoption. The transition
methods include prospective and retroactive adoption options. Under the
retroactive options, prior periods may be restated either as of the
beginning of the year of adoption or for all periods presented. The
prospective method requires that compensation expense be recorded for all
unvested stock options and restricted stock at the beginning of the first
quarter of adoption of SFAS 123R, while the retroactive methods would
record compensation expense for all unvested stock options and restricted
stock beginning with the first period restated. The Company is evaluating
the requirements of SFAS 123R, and it expects that the adoption of SFAS
123R will have no material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," which will become effective for the
Company beginning January 1, 2006. This standard clarifies that abnormal
amounts of idle facility expense, freight, handling costs and wasted
material should be expensed as incurred and not included in overhead. In
addition, this standard requires that the allocation of fixed production
overhead costs to inventory be based on the normal capacity of the
production facilities. The Company is currently evaluating the potential
impact of this standard on its financial position and results of
operations, but does not believe the impact of the change will be
material.
In December 2004, the FASB issued SFAS No. 152,"Accounting for Real Estate
Time-Sharing Transactions". The FASB issued this Statement as a result of
the guidance provided in AICPA Statement of Position (SOP)
04-2,"Accounting for Real Estate Time-Sharing Transactions". SOP 04-2
applies to all real estate time-sharing transactions. Among other items,
the SOP provides guidance on the recording of credit losses and the
treatment of selling costs, but does not change the revenue recognition
guidance in SFAS No. 66,"Accounting for Sales of Real Estate", for real
estate time-sharing transactions. SFAS No. 152 amends Statement No. 66 to
reference the guidance provided in SOP 04-2. SFAS No. 152 also amends SFAS
No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate
Projects", to state that SOP 04-2 provides the relevant guidance on
accounting for incidental operations and costs related to the sale of real
estate time-sharing
F-14
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS (Continued)
transactions. SFAS No. 152 is effective for years beginning after June 15,
2005, with restatements of previously issued financial statements
prohibited. This statement is not applicable to the Company.
In December 2004, the FASB issued SFAS No. 153,"Exchanges of Nonmonetary
Assets," an amendment to Opinion No. 29,"Accounting for Nonmonetary
Transactions". Statement No. 153 eliminates certain differences in the
guidance in Opinion No. 29 as compared to the guidance contained in
standards issued by the International Accounting Standards Board. The
amendment to Opinion No. 29 eliminates the fair value exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. Such an exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary asset
exchanges occurring in periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in
periods beginning after December 16, 2004. Management does not expect
adoption of SFAS No. 153 to have a material impact on the Company's
financial statements.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and
Error Corrections", a replacement of Accounting Principles Board Opinion
No. 20, "Accounting Changes", and Statement No. 3, "Reporting Accounting
Changes in Interim Financial Statements" ("SFAS 154"). SFAS 154 changes
the requirements for the accounting for, and reporting of, a change in
accounting principle. Previously, voluntary changes in accounting
principles were generally required to be recognized by way of a cumulative
effect adjustment within net income during the period of the change. SFAS
154 requires retrospective application to prior periods' financial
statements, unless it is impracticable to determine either the period of
specific effects or the cumulative effect of the change. SFAS 154 is
effective for accounting changes made in fiscal years beginning after
December 15, 2005; however, the statement does not change the transition
provisions of any existing accounting pronouncements. The Company does not
believe adoption of SFAS 154 will have a material effect on its financial
position, cash flows or results of operations.
In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155, "Accounting for Certain Hybrid Financial Instruments"
("SFAS 155"), which amends SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities" ("SFAS 133") and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 140"). SFAS 155 amends SFAS 133 to
narrow the scope exception for interest-only and principal-only strips on
debt instruments to include only such strips representing rights to
receive a specified portion of the contractual interest or principle cash
flows. SFAS 155 also amends SFAS 140 to allow qualifying special-purpose
entities to hold a passive derivative financial instrument pertaining to
beneficial interests that itself is a derivative instruments. The Company
is currently evaluating the impact this new Standard, but believes that it
will not have a material impact on the Company's financial position,
F-15
NOTE C - CONCENTRATION
The Company had three major customer during the year ended December 31,
2005. Sales to these customers were approximately $5,538,182. Those
customers comprise 39% of the total sales during the year ended December
31, 2005. Included in accounts receivable is approximately $2,765,202 from
these customers as of December 31, 2005.
Note D -CASH
The Company maintains its cash balances at various banks in Taiwan. The
balances are insured by the Central Deposit Insurance Corporation (CDIC)
up to approximately $30,440. As of December 31, 2005, there were
$1,836,846 in uninsured balances held at these banks.
Note E - COMPENSATING BALANCES
The company, under the terms of its lines of credit with two banks in
Taiwan, has agreed to maintain a compensating balance equal to at least
30% to 35% of the outstanding loan balance. As of December 31, 2005,
$1,380,992 of cash is restricted for this purpose (see Note L).
Note F - FIXED ASSETS
Fixed assets consist of the following:
December 31, 2005 December 31, 2004
----------------- -----------------
Land $ 1,909,023 $ 1,916,328
Building 0 283,977
Machinery and equipment 512,433 430,880
Furniture and fixtures 208,705 143,655
----------- -----------
$ 2,630,161 $ 2,774,840
Accumulated depreciation (238,739) (187,968)
----------- -----------
$ 2,391,422 $ 2,586,872
=========== ===========
F-16
Note G - INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31, 2005 December 31, 2004
----------------- -----------------
Trademarks $ 2,222 $ 2,150
Intangible asset 1,065,400 1,000,000
----------- -----------
$ 1,067,622 $ 1,002,150
Accumulated depreciation (142,548) (39,285)
----------- -----------
$ 925,074 $ 962,865
=========== ===========
Note H- COMMITMENTS
A Best Information Technology, Inc. - City Network, Inc. - Taiwan, signed
an agreement with A Best Information Technology, Inc. in 2002 for the
exclusive right to sell A Best Information's products. The rights are
perpetual and transferable.
Reseller Agreements - City Network, Inc. - Taiwan has several signed
reseller agreements with various customers. These resellers are given
special sales prices and are paid commissions for their sales orders.
Co-Construction Agreements - In April 2004, City Construction Co., Ltd.
placed a refundable performance bond in the amount of $231,344 with the
court in Taiwan for the rights to complete an unfinished building in
Keelung, Taiwan with the owners of the land. The Company is currently in
discussion with the landowners regarding the terms of the project.
In March 2005, City Construction Co., Ltd. entered a Co-Construction
Agreement with three individuals who own a tract of land in Keelung,
Taiwan. Under the agreement, the Company will finance, construct and, upon
completion, will own 60% of the building project. The Company agreed to
make refundable deposits, as security, totaling approximately $91,320
payable at various agreed upon phases of the construction. The deposits
will be returned within 2 years after the construction is completed. As of
December 31, 2005, the Company has paid $91,320 as part of the refundable
security deposit and $418,105 as construction in progress on the building.
On July 20, 2005, and as amended on September 22, 2005, the Company
entered into a contract with a company in Vietnam. Per the terms of the
contract the Company has agreed to procure materials and equipment related
to the construction of a commercial building in Vietnam. As of December
31, 2005, the Company received an advance of $3,000,000 on this contract
and is using these funds to purchase the related materials.
F-17
Note H- COMMITMENTS (Continued)
On July 25, 2005 the Company entered into a contract with a company in
Samoa to purchase materials from them related to the above Vietnam
contract. The total purchases will be approximately $3,000,000. As of
December 31, 2005, the Company advanced approximately $2,740,000 to this
vendor.
Operating Leases - The Company leases office facilities under operating
leases that terminate on various dates. Rental expense for these leases
consisted of $50,335 for the year ended December 31, 2005. The Company has
future minimum lease obligations as follows:
Year Amount
---- ------
2006 $43,834
2007 20,090
-------
Total $63,924
=======
On December 16, 2005, the Company entered a letter agreement (the "Term
Sheet") with Cornell Capital Partners, LP committing to enter into
definitive documents for a proposed transaction. In the transaction, the
Company will issue secured convertible debentures (the "Notes") in an
aggregate principal amount of up to $650,000 to Cornell Capital or
Highgate House Funds, Ltd. ("Highgate House," and together with Cornell
Capital, the "Investor"), an affiliate of Cornell Capital. The Company
plans to use a portion of the Notes to redeem $250,000 in aggregate
principal amount, plus accrued interest, of secured convertible debentures
issued pursuant to a Securities Purchase Agreement, dated August 10, 2005,
by and between the Company and Highgate House (the "Original Notes").
Under the Term Sheet, the Notes will mature three years after issuance. A
20% redemption premium on the principal amount of the Notes is due when
they are redeemed. Additionally, an annual interest rate of 7% (calculated
on the basis of a 360-day year) accrues on the outstanding principal
amount of the Notes. The Notes will be secured by substantially all of the
assets of the Company and its direct and indirect wholly-owned
subsidiaries, City Technology, Inc., City Network, Inc.--Taiwan and City
Construction Co., Ltd.; a pledge of the 4,445,455 shares of common stock,
par value $0.001 per share, securing the Original Notes; and a pledge of
2,000,000 additional shares of common stock. The 2,000,000 additional
shares of common stock will be pledged only if Notes exceeding $275,000 in
aggregate principal amount are issued. The Notes are convertible into
Common Stock based on at the lower of (a)$0.268 per share or (b)
ninety-five percent (95%) of the lowest volume weighted average price of
the Common Stock, as reported by Bloomberg, LP, for the thirty (30)
trading days preceding the conversion. Upon signing the definitive
documents for the transaction, the Company will issue to the Investor a
five-year warrant (the "Warrant") to purchase 500,000 shares of Common
Stock (the "Warrant Shares") at an exercises price of $0.001 per share.
The Company will also agree to register the Common Stock underlying the
Notes and the Warrant.
Upon signing definitive documents for the transaction, the Standby Equity
Distribution Agreement between the Company and Cornell Company, the
Investor Registration Rights Agreement between the Company and Cornell
Capital, the Escrow Agreement among the Company, Cornell Capital and David
Gonzalez, Esq., as escrow agent, and the Registration Rights Agreement
between the Company and Cornell Capital, each dated August 10, 2005, will
be terminated, and each party to the agreements will release the other
parties from all obligations under the agreements.
The aggregate number of shares of Common Stock to be issued pursuant to
the definitive agreements for the transaction may not equal or exceed
5,500,000 shares in the aggregate (constituting 20% of the Company's
outstanding Common Stock as of August 10, 2005).
F-18
Note I - LONG-TERM INVESTMENT
On August 31, 2003 the Company purchased approximately twenty-five percent
(25%) of Beijing Putain Hexin Network Technology Co., Ltd for $325,000. On
December 4, 2003 the Company purchased an additional fifteen percent (15%)
for $398,500. Beijing Putain Hexin Network Technology Co., Ltd is not
publicly traded or listed. The Company is using the complete equity method
to record its share of the subsidiary's net income and loss. As of
December 31, 2005 and 2004 the Company recognized a loss of $38,167 and an
income of $58,330 from their acquisition.
Note J - COMPENSATED ABSENSES
Employees earn annual vacation leave at the rate of seven (7) days per
year for the first three years. Upon completion of the third year of
employment, employees earn annual vacation leave at the rate of ten (10)
days per year for years four through five. Upon completion of the fifth
year of employment, employees earn annual vacation leave at the rate of
fourteen (14) days per year for years six through ten. Upon completion of
the tenth year of employment, one (1) additional day for each additional
year, until it reaches thirty (30) days per year. At termination,
employees are paid for any accumulated annual vacation leave. As of
December 31, 2005 and 2004 vacation liability existed in the amount of
$911 and $1,892 respectively.
Note K - INCOME TAXES
Total Federal and State income tax expense for the years ended December
31, 2005 and 2004 amounted to $336 and $109,890, respectively. For the
years ended December 31, 2005 and 2004, there is no difference between the
federal statutory tax rate and the effective tax rate.
The following is a reconciliation of income tax expense:
12/31/05 U.S. State International Total
-------- ---- ----- ------------- -----
Current $ 0 $ 0 $ 336 $ 336
Deferred 0 0 0 0
-------- -------- -------- --------
Total $ 0 $ 0 $ 336 $ 336
======== ======== ======== ========
12/31/04 U.S. State International Total
-------- ---- ----- ------------- -----
Current $ 0 $ 0 $109,890 $109,890
Deferred 0 0 0 0
-------- -------- -------- --------
Total $ 0 $ 0 $109,890 $109,890
======== ======== ======== ========
F-19
Note K - INCOME TAXES (Continued)
Reconciliation of the differences between the statutory U.S. Federal
income tax rate and the effective rate is as follows:
12/31/05 12/31/04
-------- --------
Federal statutory tax rate 34% 34%
State, net of federal benefit 0% 0%
---- ----
Effective tax rate 34% 34%
==== ====
Note L - OTHER COMPREHENSIVE INCOME
Balances of related after-tax components comprising accumulated other
comprehensive income (loss), included in stockholders' equity, at December
31, 2005 and 2004 are as follows:
Foreign Currency Accumulated Other
Translation Adjustment Comprehensive Income
---------------------- --------------------
Balance at February 29, 2004 $ 29,663 $ 29,663
Change for 2004 $112,790 $112,790
-------- --------
Balance at December 31, 2004 $142,453 $142,453
Change for 2005 $223,931 $223,931
-------- --------
Balance at December 31, 2005 $366,384 $366,384
======== ========
F-20
NOTE M - DEBT
At December 31, 2005 and 2004, the Company had notes payable outstanding
in the aggregate amount of $4,792,898 and $ $3,472,511, respectively.
Payable as follows:
December 31, 2005 December 31, 2004
----------------- -----------------
Note payable to a bank in Taiwan, Secured note payable to a bank in
interest at 3.838% per annum, due by Taiwan, interest at 3.175% per
October 8, 2006 $ 487,040 annum, due by May 29, 2016 $ 280,689
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.616% per annum, due
August 31, 2006 913,200 by October 8, 2005 500,480
Secured note payable to a bank in Note payable to a bank in Taiwan,
Taiwan, interest at 5.906% per annum, interest at 3.828% per annum, due
due by September 28, 2006 232,483 by February 13, 2005 125,120
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 4.42% per annum, due
January 27, 2006 45,660 by March 29, 2005 246,921
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 4.42% per annum, due
February 3, 2006 96,206 by March 15, 2005 68,004
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 4.42% per annum, due
February 3, 2006 123,693 by April 11, 2005 76,548
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 4.42% per annum, due
February 17, 2006 233,802 by April 10, 2005 54,995
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 4.42% per annum, due
February 21, 2006 219,739 by May 29, 2005 233,493
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.616% per annum, due
February 25, 2006 24,352 by March 10, 2005 196,563
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.616% per annum, due
March 3, 2006 69,950 by February 15, 2005 60,761
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.616% per annum, due
March 24, 2006 295,919 by March 8, 2005 141,511
F-21
NOTE M - DEBT (Continued)
December 31, 2005 December 31, 2004
----------------- -----------------
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.616% per annum, due
April 1, 2006 279,553 by March 2, 2005 35,121
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.616% per annum, due
April 21, 2006 435,872 by March 15, 2005 43,498
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.616% per annum, due
April 28, 2006 422,811 by March 11, 2005 13,085
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.616% per annum, due
January 17, 2006 339,950 by April 9, 2005 591,192
Note payable to a corporation in Note payable to a bank in Taiwan,
Taiwan, no interest, due by February interest at 3.616% per annum, due
10, 2010 572,668 by April 9, 2005 53,895
Note payable to a bank in Taiwan,
interest at 3.616% per annum, due
by April 9, 2005 59,521
Note payable to a bank in Taiwan,
interest at 3.26% per annum, due
by March 11, 2005 312,752
Note payable to a bank in Taiwan,
interest at 3.26% per annum, due
by April 22, 2005 121,866
Note payable to a corporation in
Taiwan, interest at 6.265% per
annum, due by November 20, 2005,
personally guaranteed by
an office of the Company 256,496
---------- ----------
Total 4,792,898 3,472,511
Current portion $4,220,230 $3,226,181
---------- ----------
Long-term portion $ 572,668 $ 246,330
========== ==========
F-22
NOTE N - RELATED PARTY TRANSACTIONS
Throughout the history of the Company, certain members of the Board of
Directors and general management have made loans to the Company to cover
operating expenses or operating deficiencies.
Andy Lai - As of December 31, 2005 and 2004, the Company has a non
interest-bearing loan from Andy Lai, the Company's President, in the
amount of $827,094 and $73,827, respectively.
Huang Hui Maio - As of December 31, 2004, the Company has a non
interest-bearing loan from Huang Hui Maio, a shareholder of the Company,
in the amount of $6,256.
Stella Tseng - As of December 31, 2005, the Company has a non
interest-bearing loan from Stella Tseng, a shareholder of the Company, in
the amount of $304,400.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
deposits and accounts payable approximate their fair value because of the
short maturity of those instruments.
The carrying amounts of the Company's long-term debt approximate their
fair value because of the short maturity and/or interest rates which are
comparable to those currently available to the Company on obligations with
similar terms.
NOTE P - STOCK
In May 2004, the Company issued 2,500,000 shares of its common stock as
consideration for the conversion in full of a note and short term debt
payable to third parties in the aggregate of $1,680,329. The note and
short term debt payable were converted into shares of common stock at a
price of approximately $0.672 per share.
NOTE Q - SEGMENT REPORTING
The Company has two principal operating segments which are (1) the
production of broadband communication and wireless internet access
products, (2) other, including building constructions and procurement of
material and equipment related to construction. These operating segments
were determined based on the nature of the products offered. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and in
assessing performance. The Company's chief executive officer and chief
financial officer have been identified as the chief operating decision
makers. The Company's chief operating decision makers direct the allocation
of resources to operating segments based on the profitability, cash flows,
and other measurement factors of each respective segment.
The Company has determined that broadband communication and wireless
internet access products operating segment are reportable segments as they
meet the quantitative thresholds under Financial Accounting Standards Board
Statement No. 131 (Disclosures about Segments of an Enterprise and Related
Information).
F-23
NOTE Q - SEGMENT REPORTING (Continued)
The Company evaluates performance based on several factors, of which the
primary financial measure is business segment income before taxes. The
Company's construction operating segment is currently in the development
stage during 2005 and has no revenues. The accounting policies of the
business segments are the same as those described in "Note A: Summary of
Significant Accounting Policies." The table on the following page shows
the operations of the Company's reportable segments:
Broadband
communication
and wireless
internet access
products Other (1) Consolidated
-------- --------- ------------
2004
Sales to unaffiliated customers $ 15,674,613 $ 0 $ 15,674,613
Intersegment sales 0 0 0
Net sales 15,674,613 0 15,674,613
Income (loss) before taxes (836,465) (18,305) (854,770)
Total assets (2) 11,895,348 402,614 12,297,962
Property additions (3) 5,008 0 5,008
Interest expense 112,922 0 112,922
Interest revenue 3,785 0 3,785
Depreciation and amortization (3) 161,296 0 161,296
2005
Sales to unaffiliated customers $ 14,320,409 $ 0 $ 14,320,409
Intersegment sales 0 0 0
Net sales 14,320,409 0 14,320,409
Income (loss) before taxes (376,521) (680,619) (1,057,140)
Total assets (2) 10,769,071 4,637,573 15,406,644
Property additions (3) 66,795 0 66,795
Interest expense 147,914 0 147,914
Interest revenue 8,985 0 8,985
Depreciation and amortization (3) 182,518 0 182,518
----------
(1) Revenue from segments below the quantitative thresholds are
attributable to two operating segments of the Company. Those segments
include building constructions and procurement of material and
equipment related to construction. None of those segments has ever met
any of the quantitative thresholds for determining reportable
segments.
(2) Total business assets are the owned or allocated assets used by each
business. Corporate assets consist of cash and cash equivalents,
unallocated fixed assets of support divisions and common facilities,
and certain other assets.
(3) Corporate property additions and depreciation and amortization expense
include items attributable to the unallocated fixed assets of support
divisions and common facilities.
Also, because all of the Company's sales are derived from the sales of
products outside of the United States, all long-lived assets are located
outside the United States.
F-24
NOTE R - LEGAL PROCEEDINGS
The Company is party to certain litigation that has arisen in the normal
course of its business and that of its subsidiary.
Hwa-Ching - In August 2004, a customer closed business and did not pay the
remaining balance due to City Network - Taiwan on outstanding receivables
in the amount of $880,649. City Network - Taiwan has filed criminal and
civil litigation against the customer for fraud. The Company has recorded
a reserve against this account in the amount of $695,280. This case is
currently ongoing.
In August 2004, City Network Inc.-Taiwan filed a lawsuit against the owner
of Hwa-Ching Co., as well as the following eight individuals in Taiwan,
alleging fraud for closing down Hwa-Ching Co. without payment for the
delivered merchandise. City Network Inc.-Taiwan sought approximately NT$27
million or approximately US$900,000. In January 27 2006, the court reached
a verdict and found three individuals guilty of fraud and another two
individual not guilty. In connection to the litigation against the other
three individuals, the court has not yet reached a verdict.
In December 2004, the Company filed a lawsuit against Tain-Kang Co., a
customer of Hwa-Ching Co. in Taipei District Court claiming damages owed
to Hwa-Ching from Tain-Kang in the amount of approximately NT$5,796,000 or
US$172,963 to cover the outstanding account payable owed by Hwa-Ching to
the Company. In November 2005, Taipei District Court reached the judgment
in favor of defendant. The Company filed appeal to Taiwan High Court.
During the appeal, the Company reduced the claimed amount to NT$3,796,000
or US$115,550 due to Tain-Kang has provided the proof of payments of
NT$2,000,000 in the court. To date, the court has not yet reached a
verdict on this case.
RPPI International Ltd. - As of June 21, 2005, City Network Inc.-Taiwan
settled a litigation with RPPI International Ltd. (or Rong-Dian), a vendor
of the Company.
On October 10, 2004, Rong-Dian filed a lawsuit against City Network
Inc.-Taiwan in the Taiwan Taipei district court of Taiwan, in Taipei,
Taiwan, alleging breach of contract for two different purchase agreements
that City Network Inc.-Taiwan entered with them and two third parties.
Rong-Dian sought the aggregate amount of approximately NT$40.2 million or
US$1.2 million for the alleged breaches. One purchase agreement was for an
order that City Network Inc.-Taiwan sold to Hwa-Ching Co. in the amount of
approximately NT$27.3 million or US$900,000 and the other purchase
agreement was for an order City Network Inc.-Taiwan sold to a separate
customer of the Company in the amount of approximately NT$12.9 million or
US$390,909.
On June 21, 2005, City Network Inc.-Taiwan entered a settlement agreement
with Rong-Dian and on June 29, 2005, the district court lifted the lawsuit
against us. In the June 2005 settlement agreement, City Network
Inc.-Taiwan agreed to pay Rong-Dian a total of approximately NT$40.2
million or US$1.2 million, to cover the full amount City Network
Inc.-Taiwan owed under the two purchase agreements. In August 2005, City
Network Inc.-Taiwan paid Rong-Dian approximately NT$12.9 million or
US$390,909 of the total amount owed upon receipt of such amount from our
customer. City Network Inc.-Taiwan intends to pay the balance of
approximately NT$27.3 million or US$827,272 to Rong-Dian in 54 separate
checks, issued and payable by Tai-Wang Technology Co., Ltd. These checks
will be in increments of NT$500,000 or US$15,910 and payable for 53
consecutive months, beginning on August 10, 2005 with the last and 54th
payment being in the amount of NT$813,003 or US$25,870 instead of
NT$500,000 or US$15,910. To date approximately NT$2.5 million, or
approximately US$76,000, has been paid on this liability.
F-25
NOTE R - LEGAL PROCEEDINGS (Continued)
Pursuant to the June 2005 settlement agreement, City Network Inc.-Taiwan
agreed to pay Rong-Dian the balance of NT$27.3 million in monthly
payments. However, as a result of its relationship with Tai-Wang and the
fact that Tai-Wang is the vendor who introduced City Network Inc.-Taiwan
to Rong-Dian, Tai-Wang assumed the responsibility for the payment of
NT$27.3 million or US$827,272 to Rong-Dian. Tai-Wang wrote each monthly
check in advance and thereafter provided all 54 checks to Rong-Dian.
Rong-Dian will cash one check each month until it receives payment of the
full NT$27.3 million. However, as Tai-Wang has no written obligation with
City Network Inc.-Taiwan to make each monthly payment, beyond an oral
promise to do so, there is no assurance that each monthly check will be
properly cashed by Rong-Dian. Therefore the Company continues to report
the total liability to Rong-Dian. As each payment is successfully paid by
Tai-Wang the Company will reduce the liability accordingly and recognize
other income as the benefit provided by Tai-Wang.
Additionally, as part of the June 2005 settlement agreement, we secured
our obligation that Tai-Wang would pay Rong-Dian the outstanding balance
of NT$27.3 million or US$827,272 by giving Rong-Dian a first priority
mortgage on certain property including lots 701-4 and 701-6 in
Jay-hou-xiao-duan, Xi-zhi Duan, Xixhi City, Taipei County, Taiwan. The
value of the first priority mortgage on the property is approximately
NT$27.3 million or US$827,272, the aggregate amount owed to Rong-Dian.
City Network Inc.-Taiwan agreed with Rong Dian that this mortgage will
expire in 2010.
Shanghai Bank - On January 24, 2005, Shanghai Commercial and Savings Bank
("Shanghai Bank") filed a lawsuit with the Taipei District Court against
the Company claiming approximately NT$12 million or approximately
US$387,000 for the payment of an unpaid purchase price for goods. The
Company purchased such goods from Chin Shin and Chin Shin assigned the
account receivable to Shanghai Bank. As such, Shanghai Bank sued the
Company for the payment of those goods. However,the Company returned the
said goods because they were defective.
On November 24, 2005, the Company entered a settlement agreement with
Shanghai Bank and the district court lifted the lawsuit against the
Company. In the settlement agreement, the City Network Inc.- Taiwan agreed
to pay Shanghai Bank a total of NT$5,100,000 or US$ 155,244. In December
2005, City Network, Inc.- Taiwan paid Shanghai Bank NT$1,100,000 or
US$33,484. City Network, Inc.- Taiwan intends to pay the balance of
NT$4,000,000 or US$121,760 to Shanghai Bank in 4 separate checks. These
checks will be payable for each 2 months, beginning on February 25, 2006.
To date NT$2,100,000 or US $63,924 has been paid on this liability.
NOTE S- GOING CONCERN
The Company has suffered recurring losses from operations, cash
deficiencies and the inability to meet its maturing obligations without
borrowing from related parties and restructuring debts. These issues may
raise substantial concern about its ability to continue as a going
concern.
Management has prepared the following statement to address these and other
concerns:
The Company is currently engaged in discussions with a number of companies
regarding strategic acquisitions or potential financings. Although these
discussions are ongoing, there can be no assurance that any of these
discussions will result in actual acquisitions or a completed financing
for the Company.
F-26
NOTE T - SUBSEQUENT EVENTS
On January 24, 2006, City Network, Inc. - Taiwan (the "Purchaser"),
entered into a Purchase and Sale Agreement with Wang, Rong-Zong (the
"Seller") pursuant to which the Purchaser agreed to purchase and the
Seller agreed to sell property located in the City of Tou-Liu, Yun-Lin
County, including Lots 38-436, 37-126 and 37-125, and otherwise known as
Building B, #222, Chunghwa Rd., Tou-Liu City, Yun-Lin County, Taiwan ROC,
for an aggregate purchase price equal to approximately $2 million (NTD
64,000,000). The aggregate purchase price is payable in four installments
as follows: (i) $312,940 (NTD 10,000,000), (ii) $250,352 (NTD 8,000,000),
(iii) $190,738 (NTD 6,100,000) and (iv) $1.25 million (NTD 39,900,000).
As of the date hereof, the Purchaser has paid the first and second
payments to the Seller for a total amount equal to approximately $562,000
(NTD 18,000,000). The Purchaser will pay the third payment to the Seller
after payment, by the Seller, of the outstanding property taxes on the
land. The Purchaser will pay the final payment to the Seller upon receipt
of a mortgage in the amount of approximately $1.25 million (NTD
39,900,000). On January 23, 2006, the Purchaser was approved for a
mortgage in the amount of approximately $1.25 million (NTD 39,900,000) by
Hua Nan Commercial Bank but the Purchaser has not yet received the cash
amount of the mortgage.
On January 24, 2006, the Purchaser issued a check to the Seller in the
amount of approximately $1.25 million (NTD 39,900,000) as a guarantee of
the Purchaser's payment of the outstanding purchase price (the
"Guarantee"). The Seller agreed to return the Guarantee to the Purchaser
upon the Purchaser's receipt of the full mortgage and the Seller's receipt
of the outstanding purchase price.
******
F-27