As filed with the Securities and Exchange Commission on February 14, 2007
Registration No. 333-_______
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CITY NETWORK, INC.
(Name of Small Business Issuer in its Charter)
Nevada 7389 98-0467944
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
2F-1, NO. 16, JIAN BA ROAD
CHUNG HO CITY, TAIPEI COUNTY, 235
TAIWAN, ROC
(Address and Telephone Number of Principal Executive Offices)
ALICE CHEN
CHIEF EXECUTIVE OFFICER
CITY NETWORK, INC.
2F-1, NO. 16, JIAN BA ROAD
CHUNG HO CITY, TAIPEI COUNTY, 235
TAIWAN, ROC
(Name, Address and Telephone Number of Agent for Service)
Copies of all communications to:
Mitchell S. Nussbaum, Esq.
Loeb & Loeb LLP
345 Park Avenue
New York, NY 10154
Telephone: (212) 407-4159 Facsimile No. (212) 407-4990
Approximate Date of Proposed Sale to the Public: As soon as possible after this
registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box [ ]
CALCULATION OF REGISTRATION FEE
===========================================================================================================
Title of each Proposed maximum Proposed
class of securities Amount to be offering price maximum aggregate Amount of
to be registered registered per Share (1) offering Price Registration Fee
-----------------------------------------------------------------------------------------------------------
Common Stock $0.001
par value 15,069,455 (2) $0.07 $1,054,861.85 $112.87
===========================================================================================================
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended,
using the average of the bid and asked prices, as reported on the American
Stock Exchange, on February 9, 2007.
(2) The amount to be registered includes approximately 14,000,000 shares of
common stock issuable upon conversion of the secured convertible
debentures, as this amount may be adjusted as a result of, among others,
antidilution provisions.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
================================================================================
SUBJECT TO COMPLETION, DATED FEBRUARY 14, 2007
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES PUBLICLY UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
This Prospectus shall not constitute an offer to sell or the solicitation of an
offer to buy, nor shall there be any sale of these securities in any state in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such state.
PROSPECTUS
CITY NETWORK, INC.
15,069,455 Shares of Common Stock
This Prospectus relates to the resale of up to 15,069,455 shares of common
stock, par value, $.001 per share of City Network, Inc. (the "Company," "we,"
"our" or "us") by certain persons who are stockholders of the Company. Please
refer to "Selling Stockholders" beginning on page 26.
We are not selling any of the shares of our common stock in this offering and
therefore will not receive any proceeds from this offering. We will bear all
costs associated with this Prospectus.
Our shares of common stock are traded on the American Stock Exchange under the
symbol "CSN." The closing price of our common stock on February 9, 2007 was
$0.07.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS"
BEGINNING ON PAGE 3 FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN INVESTMENT
IN OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is February 14, 2007
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY.......................................................... 1
FORWARD-LOOKING STATEMENTS.................................................. 2
RISK FACTORS................................................................ 3
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................... 10
DESCRIPTION OF BUSINESS..................................................... 15
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS................ 20
EXECUTIVE COMPENSATION...................................................... 23
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 24
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE....................................................... 24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 24
SELLING STOCKHOLDER......................................................... 25
PLAN OF DISTRIBUTION........................................................ 26
DESCRIPTION OF SECURITIES................................................... 29
INDEMNIFICATION............................................................. 29
LEGAL MATTERS............................................................... 30
EXPERTS .................................................................... 30
WHERE YOU CAN FIND MORE INFORMATION......................................... 30
FINANCIAL STATEMENTS........................................................ F-1
i
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
Prospectus. This summary does not contain all of the information you should
consider before investing in shares of our common stock. You should read this
entire Prospectus, including the "Risk Factors" beginning on page 3 and our
financial statements and the notes to those financial statements beginning on
page F-1 before making an investment decision.
ABOUT CITY NETWORK
We were incorporated in 1996 and primarily develop 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 and NGL (Next Generation Loops) solutions which help companies extend
their business through to Internet Service Providers to meet customers'
communication needs.
PRODUCTS AND SERVICES
Our product line ranges from our device for the booming worldwide 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 are
able to provide a "total solution" for any customers needs. Our motto is
"Establish the Broadband Highway, Innovate A Bright New Life."
Since 2005, we have also focused on the sales of LCD panels. In 2006, we began
research and development of a backlight technology for the LCD panel.
EXECUTIVE OFFICES
Our corporate headquarters is located at 2F-1, No. 16, Jian Ba Road, Chung Ho
City, Taipei County 235, Taiwan, ROC. The telephone number at our corporate
headquarters is 011-886-2-8226-5566.
SUMMARY OF THE OFFERING
This offering relates to:
* Up to 14,000,000 shares of common stock issuable upon conversion of an
aggregate principal amount of $650,000 of secured convertible notes
* 1,000,000 shares of common stock issuable upon exercise of five-year
warrants issued to Cornell Capital Partners
* 25,000 shares of common stock under a common stock purchase warrant
and
* 44,455 shares of common stock that we issued as compensation for
placement agency services.
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Common Stock Offered Up to 15,069,455 by the selling stockholders
Offering Price Market Price
Common Stock Outstanding Before
the Offering 36,667,863 shares as of February 9, 2007
Common Stock Outstanding After
the Offering 50,036,637
Use of Proceeds We will not receive any proceeds of the
shares offered by the selling stockholders.
Risk Factors The securities offered hereby involve a high
degree of risk. See "Risk Factors."
AMEX Symbol CSN
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, including statements
regarding our capital needs, business strategy and expectations, including but
not limited to the following:
* our ability to raise funds in the future through public or private
financings;
* the timing of our introduction of products or product enhancements;
* our ability to manage costs associated with our product or technology
acquisitions;
* our ability to keep pace with rapidly changing technology, evolving
industry standards and new product and services in our industry;
* customers' acceptance of our product designs;
* our ability to integrate businesses, products and technologies and in
joint ventures and strategic relationships with other companies;
* our business expenses being greater than anticipated due to
competitive factors or unanticipated developments;
* changes in political and economic conditions in the Asian and European
countries where we do business;
* our ability to retain management and key personnel;
* our ability to protect our developed technologies, know-how,
trademarks and related intellectual properties; and
* our ability to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002.
Any statements contained herein that are not statements of historical facts may
be deemed to be forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may", "will", "should",
"expect", "plan", "intend", "anticipate", "believe", estimate", "predict",
"potential" or "continue", the negative of such terms or other comparable
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terminology. Actual events or results may differ materially. We disclaim any
obligation to publicly update these statements, or disclose any difference
between its actual results and those reflected in these statements. The
information constitutes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
RISK FACTORS
Investing in our securities is highly risky. In addition to the other
information contained in this Prospectus, our business is subject to numerous
risks which should be considered carefully in evaluating our business, operating
results, financial condition and prospects. The following matters, among others,
may have a material adverse effect on our business, operating results, financial
condition, liquidity, results or operations or prospects, financial or
otherwise. Reference to this cautionary statement in the context of a
forward-looking statement or statements shall be deemed to be a statement that
any one or more of the following factors may cause actual results to differ
materially from those in such forward-looking statement or statements.
RISKS RELATED TO OUR INTERNET BUSINESS
OUR AUDITORS HAVE ISSUED A GOING CONCERN QUALIFICATION IN THEIR OPINION, MEANING
THERE IS DOUBT WHETHER WE WILL BE ABLE TO STAY IN 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. If our
business fails, investors will lose their entire investment. 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.
OUR CASH POSITION IS PRECARIOUS.
As of June 30, 2006, our cash and accounts receivable totaled approximately
$2,150,000, compared with accounts payable and current portion of long-term debt
totaling $6,321,000. We will not be able to pay all of our current obligations
without additional financing, but we can offer no assurance that we will be able
to do so. Covenants in existing debt prohibit our borrowing any significant
additional sums, and the price of our common stock would require the sale a very
large number of shares to raise meaningful amounts, if equity financing were
even possible. If we default on outstanding debt, creditors may seize our assets
to satisfy their claims, and we would be unable to continue in business.
Investors likely would lose their entire investment.
OUR SHARES MAY BE DELISTED FROM THE AMERICAN STOCK EXCHANGE.
Due to the low trading price of our common stock, the American Stock Exchange
(Amex) has notified us that our shares may be delisted, unless we effect a
reverse stock split to raise the price. If our shares are delisted, we cannot
assure you that a there will be a market for the shares, and any market is
likely to be less liquid than the market on the Amex. As a result, you might be
unable to sell your shares or, if you could sell them, you might not receive as
favorable a price as you would if the shares traded on the Amex.
WE RISK DEFAULTS AND PENALTIES UNDER OUR CONVERTIBLE DEBT, AND BECAUSE OUR
OBLIGATIONS UNDER THE SECURED CONVERTIBLE DEBENTURES ARE SECURED BY ALL OF OUR
ASSETS, OUR ASSETS MAY BE SEIZED AS A RESULT.
Our obligations under the secured convertible debenture issued to Cornell
Capital Partners and Highgate, in the aggregate principal amount of $650,000,
are secured by all of our assets. As a result, if we default under the terms of
the secured convertible debenture or the related agreements, including our
failure to issue shares of common stock upon conversion by the holder of the
secured convertible debenture, our failure to timely file a registration
statement or have such registration statement declared effective, breach of any
covenant, representation or warranty in the Securities Purchase Agreement or
secured convertible debenture or the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against us, could require the early
repayment of the secured convertible debenture, if the default is not cured
3
within the specified grace period. In addition, we could be required to issue
and the holders would have the ability to sell additional shares of our common
stock, causing significant dilution to our stockholders.
WE ARE SUBJECT TO CASH PENALTIES UNDER A REGISTRATION RIGHTS AGREEMENT, WHICH
COULD EXACERBATE OUR CASH DEFICIENCY.
We agreed to register for resale the shares of common stock issuable to Highgate
and Cornell Capital. The agreement provides that if the registration statement
of which this prospectus forms a part was not filed by July 30, 2006 or did not
become effective by October 30, 2006, we must pay liquidated damages of
approximately $13,000 for each month that the liquidated damages condition is
not satisfied, provided that in no event shall the liquidated damages exceed 20%
of the aggregate face amount of the Convertible Debentures. Our available cash
will be further depleted by these penalties, or our failure to pay them would
constitute a default under the convertible debentures.
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 DO NOT DO OUR OWN MANUFACTURING.
We do not ourselves manufacture the products that we market. We rely on contract
manufacturers to assemble, test, and package our products and to acquire raw
materials. As a result, we cannot control product quality or costs as well as we
could if we manufactured our products.
OUR FAILURE TO COMPLY WITH RECENTLY ENACTED CHANGES IN SECURITIES LAWS COULD
MAKE OUR STOCK UNMARKETABLE.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission adopted rules requiring all public companies to include a
report of management on our internal controls over financial reporting in their
annual reports on Form 10-K or Form 10-KSB. In addition, the public accounting
firm auditing our financial statements must attest to and report on management's
assessment of the effectiveness of our 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.
4
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.
OUR REVENUE MAY BE ADVERSELY AFFECTED IF OUR CUSTOMERS DO NOT ACCEPT OUR
PROPOSED DESIGNS.
We dedicate personnel, management and financial resources to developing and
designing new products for our customers. We have modified new products such as
VoIP, upgraded software for GPS products and new technology for the OM market.
It takes about one year to modify the software, and extensive time and effort
from our research and development staff which is primarily located at Tamkang
University. If our customers do not accept our new and proposed designs, we will
fail to capitalize on the invested resources, time and effort that we expended
on a project and our revenue would be adversely affected.
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, and
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.
RISKS ASSOCIATED WITH OUR CONSTRUCTION BUSINESS
REAL PROPERTY INVESTMENTS ARE SUBJECT TO VARYING DEGREES OF RISK.
If our buildings do not generate revenues sufficient to meet operating expenses,
our cash flow will be adversely affected. A residential or commercial building's
revenues and value may be adversely affected by the general economic climates;
the local economic climate; local real estate considerations (such as over
supply of or reduced demand for offices or apartments); the perception by
prospective residents of the safety, convenience and attractiveness of the
communities or neighborhoods in which they are located and the quality of local
schools and other amenities; and increased operating costs (including real
estate taxes and utilities). Certain significant fixed expenses are generally
not reduced when circumstances cause a reduction in income from the investment.
WE HAVE LIMITED ABILITY TO VARY OUR INVESTMENTS IN REAL PROPERTY.
Real estate investments are relatively illiquid and, therefore, we have limited
ability to vary our investment quickly in response to changes in economic or
other conditions.
CERTAIN EXTRAORDINARY LOSSES MAY NOT BE COVERED BY OUR INSURANCE.
If an uninsured loss occurred, we could lose our investment in, and cash flow
from, the affected property.
WE MAY BE UNABLE TO COMPLY WITH APPLICABLE LAWS AND REGULATIONS.
Many laws and governmental regulations are applicable to our properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently. Noncompliance with such laws and regulations could
result in the imposition of fines or an award of damages to private litigants.
Although management believes that the Properties are substantially in compliance
with present requirements, we may incur additional costs in complying with the
applicable laws and regulation for both existing properties and properties
acquired in the future.
5
Under various laws, ordinances and regulations relating to the protection of the
environment, a current or previous owner or operator of real estate may be held
liable for the costs of removal or remediation of certain hazardous or toxic
substances located on, under or in the property. These laws often impose
liability without regard to whether the owner or operator was responsible for,
or even knew of, the presence of such substances. The presence of contamination
from hazardous or toxic substances, or the failure to remediate such
contaminated property properly, may adversely affect the owner's ability to rent
or sell the property or use the property as collateral. If compliance with the
various laws and regulations, now existing or hereafter adopted, exceeds our
budgets for such items, our revenues could be adversely affected.
RISKS ASSOCIATED WITH DOING BUSINESS IN ASIA.
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.
OUR 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.
STRAINED RELATIONS BETWEEN THE REPUBLIC OF CHINA AND THE PEOPLE'S REPUBLIC OF
CHINA COULD NEGATIVELY AFFECT OUR BUSINESS AND THE MARKET VALUE OF OUR SHARES.
Our principal executive offices and our principal testing facilities are located
in Taiwan and approximately 90% of our net revenues in fiscal year 2004 was
derived from our operations in Taiwan. The ROC has a unique international
political status. The People's Republic of China, or the PRC, asserts
sovereignty over all of China, including Taiwan and does not recognize the
legitimacy of the ROC government. Although significant economic and cultural
relations have been established in recent years between the ROC and the PRC,
relations have often been strained and the PRC government has indicated that it
may use military force to gain control over Taiwan in some circumstances, such
as the declaration of Taiwan's independence by the ROC. Relations between the
ROC and the PRC have been particularly strained in recent years. In particular,
on March 14, 2005, the PRC adopted an anti-secession law which states that the
PRC may use non-peaceful means and other necessary measures if Taiwan formally
declares its independence or if the PRC determines that there is no possibility
for a peaceful reunification. Political uncertainty could adversely affect the
prices of our shares. Relations between the ROC and the PRC and other factors
affecting the political or economic conditions in Taiwan could have a material
adverse effect on our financial condition and results of operations, as well as
the market price and the liquidity of our shares.
6
OUR NORMAL BUSINESS OPERATIONS AND EARNINGS COULD BE SEVERELY DISRUPTED BY
EARTHQUAKES, TYPHOONS, DROUGHT AND OTHER NATURAL DISASTERS, AS WELL AS POWER
OUTAGES AND OTHER INDUSTRIAL INCIDENTS.
Taiwan is susceptible to earthquakes and has experienced severe earthquakes
which caused significant property damage and loss of life, particularly in the
central and eastern parts of Taiwan. Taiwan is also susceptible to typhoons,
droughts and other natural disasters, which may cause damage and business
interruptions to companies with facilities located in Taiwan. Our facilities as
well as many of our suppliers and customers are located in Taiwan. If our
suppliers are affected, our production schedule could be interrupted or delayed.
If our customers are affected by an earthquake, a typhoon, a drought or any
other natural disasters, or power outage or other industrial incidents, it could
result in a decline in the demand for our services. As a result, a major
earthquake, typhoon, drought, or other natural disasters in Taiwan or power
outage and other industrial incidents could severely disrupt the normal
operation of our business and have a material adverse effect on our financial
condition and results of operations.
OUR NORMAL BUSINESS OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED BY ANY
RECURRENCE OF SARS OR OUTBREAK OF AVIAN FLU OR OTHER CONTAGIOUS DISEASE, WHICH
WOULD EFFECT THE ECONOMIES AND FINANCIAL MARKETS OF CERTAIN ASIAN COUNTRIES.
In the first half of 2003, China, Hong Kong, Taiwan, Singapore, Vietnam and
certain other countries encountered an outbreak of severe acute respiratory
syndrome, or SARS, which is a highly contagious form of atypical pneumonia. The
SARS outbreak had an adverse effect on our results of operations for the first
half of 2003, primarily due to the lower than expected demand for our packaging
and testing services that resulted from the adverse effect of such SARS outbreak
on the level of economic activity in the affected regions. Additionally, the
World Health Organization, or WHO, reported in January 2005 that "during 2004,
large parts of Asia experienced unprecedented outbreaks of highly pathogenic
avian influenza, caused by the H5N1 virus," which moved the world closer than at
any time since 1968 to an influenza pandemic "with high morbidity, excess
mortality, and social and economic disruption." There is no guarantee that an
outbreak of SARS, avian flu or other contagious disease will not occur again in
the future and that any future outbreak of SARS, avian flu or other contagious
disease, or the measures taken by the governments of the ROC, Hong Kong, the PRC
or other countries against such potential outbreaks, will not seriously
interrupt our production operations or those of our suppliers and customers,
which may have a material adverse effect on our financial condition and results
of operations. The perception that an outbreak of SARS, avian flu or other
contagious disease may occur again may have an adverse effect on the economic
conditions of certain countries in Asia.
RISKS ASSOCIATED WITH INVESTING IN OUR COMMON STOCK
OUR STOCK PRICE IS HIGHLY VOLATILE AND MAY FLUCTUATE IN THE FUTURE.
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.
7
The price in this offering will fluctuate based on the prevailing market price
of our common stock on the American Stock Exchange. Accordingly, the price you
pay in this offering may be higher or lower than the prices paid by other people
participating in this offering.
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 our common stock that 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.
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE, INCLUDING SHARES ISSUABLE UPON
CONVERSION OR EXERCISE OF OUTSTANDING SECURITIES CONVERTIBLE INTO OR EXERCISABLE
FOR OUR COMMON STOCK CAN DEPRESS MARKET PRICES.
Of the 36,667,863 shares of common stock outstanding as of February 9, 2007, all
such shares are, or will be, freely tradable without restriction, unless held by
our "affiliates." Some of these shares may be resold under Rule 144 of the
Securities Act of 1933, as amended. An additional 15,000,000 shares of common
stock are reserved for issuance upon conversion or exercise of convertible
debentures and stock purchase warrants, including shares being offered by this
prospectus. The market's recognition that a large amount of stock might enter
the market suddenly can depress market prices.
PENNY STOCK REGULATIONS MAY RESTRICT THE MARKET FOR OUR COMMON STOCK.
The SEC has adopted regulations that generally define a "penny stock" to be any
equity security having a market price (as defined) less than $5.00 per share, or
an exercise price of less than $5.00 per share, subject to certain exceptions.
As a result, broker-dealers selling our common stock are subject to additional
sales practices when they sell such securities to persons other than established
clients and "accredited investors." For transactions covered by these rules,
before the transaction is executed, the broker-dealer must make a special
customer suitability determination; receive the purchaser's written consent to
the transaction; and deliver a risk disclosure document relating to the penny
stock market. The broker-dealer must also disclose the commission payable to
both the broker-dealer and the registered representative taking the order;
current quotations for the securities; and, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Consequently, the "penny
stock" rules may restrict trading in our common stock.
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.
WE ARE SUBJECT TO CASH PENALTIES UNDER A REGISTRATION RIGHTS AGREEMENT, WHICH
COULD DEPRIVE US OF WORKING CAPITAL.
We agreed to register for resale the shares of common stock underlying the
secured convertible debentures and warrants we issued. The agreement provides
that if the registration statement of which this prospectus forms a part is not
filed by July 30, 2006 or did not become effective by October 30, 2006, we must
pay liquidated damages of approximately $13,000 for each month that the
liquidated damages condition is not satisfied, provided that in no event shall
the liquidated damages exceed 20% of the aggregate face amount of the
Convertible Debentures.
8
LIABILITY OF DIRECTORS FOR BREACH OF DUTY OF CARE IS LIMITED.
As permitted by Nevada law, our certificate of incorporation limits the
liability of our directors for monetary damages for breach of a director's
fiduciary duty, except in certain cases. Our stockholders' ability to recover
damages for fiduciary breaches may be reduced by the provision. In addition, we
are obligated to indemnify our directors and officers regarding stockholder
suits, under some circumstances.
RISKS SPECIFIC TO THIS OFFERING
SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY ADVERSELY AFFECT OUR ABILITY
TO RAISE FUNDS IN NEW STOCK OFFERINGS.
Sales may make it more difficult for us to sell equity securities or
equity-related securities in the future at a time and price that our management
deems acceptable, or at all. Of the 36,667,863 shares of common stock
outstanding as of February 9, 2007, all such shares are, or will be, freely
tradable without restriction, unless held by our "affiliates." Some of these
shares may be resold under Rule 144 of the Securities Act of 1933, as amended.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
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 the high and low
sales prices for the indicated periods, from information supplied by the
American Stock Exchange.
2004 High Low
---- ---- ---
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 $0.40 $0.20
July 1, 2005 - September 30, 2005 $0.30 $0.14
October 1, 2005 - December 31, 2005 $0.29 $0.14
2006
----
January 1, 2006 - March 30, 2006 $0.24 $0.15
April 1, 2006 - June 30, 2006 $0.18 $0.11
July 1, 2006 - September 30, 2006 $0.28 $0.08
October 1, 2006 - December 31, 2006 $0.16 $0.07
2007
----
January 1, 2007 - February 9, 2007 $0.10 $0.07
SHAREHOLDERS
As of February 9, 2007, there were approximately 36,667,863 shares of our issued
and outstanding common stock and approximately 1,347 shareholders of record of
our common stock.
DIVIDENDS
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.
EQUITY COMPENSATION PLAN INFORMATION
We do not currently have an equity compensation plan under which options,
warrants or rights are authorized for issuance to employees or non-employees. We
have not issued any options, warrants or rights under any individual
compensation arrangement.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
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 Prospectus.
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, or 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
and liabilities. See "Summary of Significant Accounting Policies" in the Notes
to Consolidated Financial Statements in this Prospectus for our critical
accounting policies. No significant changes in our critical accounting policies
have occurred since December 31, 2004.
REVENUE RECOGNITION
Revenue recognition rules are very complex, and certain judgments affect the
application of our revenue policy. The amount and timing of our revenue is
difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause our operating results to vary significantly from quarter to
quarter. In addition to determining our results of operations for a given
period, our revenue recognition determines the timing of certain expenses, such
as commissions and other variable expenses. We recognize revenue generated from
sales of products 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
We report accounts receivables 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 152 "Accounting for Real Estate Time-Sharing Transactions - An amendment of
SFAS No. 66 and 67." This Statement amends Statement of Financial Accounting
Standards, or SFAS No. 66, "Accounting for Sales of Real Estate," to reference
the financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in American Institute of Certified Public
Accountants Statement of Position (SOP) 04-2, "Accounting for Real Estate
Time-Sharing Transactions." This Statement also amends SFAS No. 67, "Accounting
for Costs and Initial Rental Operations of Real Estate Projects," to state the
guidance for (a) incidental costs and (b) costs incurred to sell real estate
projects does not apply to real estate time-sharing transactions. The accounting
for those operations and costs is subject to guidance in SOP 04-2. SFAS No. 152
is effective for financial statements for fiscal years beginning after June 15,
2005. Adoption of this Statement is not expected to have a material impact on
our financial statements.
In November 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an amendment to APBO No. 29." This Statement amends Accounting Principles
Board Opinion, or APBO, No. 29 to eliminate the 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. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. This is
10
effective for fiscal periods beginning after June 15, 2005. Adoption of this
Statement is not expected to have a material impact on our financial statements.
On December 16, 2004, the FASB issued SFAS No. 123R, "Share-Based Payment",
which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
the grant date fair value of the award. SFAS No. 123R was to be effective for
interim or annual reporting periods beginning on or after June 15, 2005, but in
April 2005 the Securities and Exchange Commission issued a rule that will permit
most registrants to implement SFAS No. 123R at the beginning of their next
fiscal year, instead of the next reporting period as required by SFAS No. 123R.
The pro forma disclosures previously permitted under SFAS No. 123 no longer will
be an alternative to financial statement recognition. Under SFAS No. 123R, we
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 No. 123R, while the
retroactive methods would record compensation expense for all unvested stock
options and restricted stock beginning with the first period restated. We have
adopted the requirements of SFAS No. 123 for the fiscal year beginning on
January 1, 2005, and we expect that the adoption of SFAS No. 123R will have no
material impact on our financial statements.
In October 2004, the FASB issued SFAS No. 151 "Inventory Costs - an amendment of
ARB No. 43, Chapter 4." This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). This Statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this Statement requires the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. Adoption of this Statement is not expected to have
a material impact on our financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces APB Opinions No. 20 "Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements - An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on
the accounting for and reporting of accounting changes and error corrections. It
establishes retrospective application, or the latest practicable date, as the
required method for reporting a change in accounting principle and the reporting
of a correction of an error. SFAS 154 is effective for accounting changes and a
correction of errors made in fiscal years beginning after December 15, 2005, and
is required to be adopted by the Company in the first quarter of fiscal year
2006. The Company is currently evaluating the effect that the adoption of SFAS
154 will have on its consolidated results of operations and financial condition
but does not expect it to have a material impact.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2006 and December 31, 2005, we had cash and cash equivalents of
$41,429 and $853,964, respectively. Our current assets totaled $3,888,037 at
September 30, 2006 as compared to $9,663,521 at December 31, 2005. Our total
current liabilities were $4,484,571 at September 30, 2006 as compared to
$10,272,005 at December 31, 2005. Working capital at September 30, 2006 was
$(596,534) and $(608,484) at December 31, 2005. For the nine months ended
September 30, 2006, total cash used in operations was $(1,358,485) as compared
to net cash used in operations of $(1,845,454) during the same period in 2005.
Net cash provided by financing activities was $1,203,311, which consisted of
loans, as compared with net cash provided by financing activities of $1,600,914
during the nine months ended September 30, 2005.
11
RESULTS OF OPERATIONS
Please refer to our interim consolidated financial statements and our audited
consolidated financial statements, which are included at the end of this
document beginning on page F-1.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2005
NET SALES. Net sales for the nine months ended September 30, 2006 were
$7,095,525 compared to $8,677,108 for the nine months ended September 30, 2005.
The decrease in net sales for the nine months ended September 30, 2006 was due
to a decrease in demand for our products.
COST OF SALES. Cost of sales for the nine months ended September 30, 2006 was
$7,222,052 or 101.8% of net sales, as compared to $8,060,736 or 92.9% of net
sales, during the nine months ended September 30, 2005. The decrease in cost of
sales is associated with the decrease in sales. The increase in the cost of
sales as a percentage of revenue was due to decreased sales of higher-margin
products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$1,892,877, or 26.7% of net sales, for the nine months ended September 30, 2006,
as compared to $1,131,776, or 13.0% of net sales, for the nine months ended
September 30, 2005. The increase was due to an increase in consulting fee for
the construction project in Vietnam. The increase in general and administrative
expenses as a percentage of net sales is due to the increase in consulting fee
for the construction project in Vietnam.
LOSS FROM OPERATIONS. Loss from operations for the nine months ended September
30, 2006 was $(2,019,404), compared to income from operations for the nine
months ended September 30, 2005 of $(515,404). The loss from operations for the
nine months ended September 30, 2006 compared with income from operations for
the nine months ended September 30, 2005 was due to a decrease in sales without
a proportionate decrease in the cost of sales and general and administrative
expenses.
OTHER (INCOME) EXPENSE. Other (income) expense was $1,457,676 for the nine
months ended September 30, 2006, as compared to $649,202 for the nine months
ended September 30, 2005. This change was the result of the reserve for bad debt
and late payment penalty charged by bank.
NET LOSS. Net loss for nine months ended September 30, 2006 was $(3,541,458)
compared to income of $(1,240,883) for the nine months ended September 30, 2005.
The net loss for the nine months ended September 30, 2006 compared with income
for the nine months ended September 30, 2005 was due to the reasons described
above.
CAPITAL EXPENDITURES. Total capital expenditures during the nine months ended
September 30, 2006 were $1,688,671 compared to $193,310 for the nine months
ended September 30, 2005.
AUDITED TWELVE MONTHS 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.
12
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.
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, investors
and Taiwanese banks 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, investors and
Taiwanese banks regarding strategic acquisitions or investments. Although these
discussions are ongoing, there can be no assurance that any of these discussions
13
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.
14
DESCRIPTION OF BUSINESS
We were incorporated in 1996 and develop 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 telecom industry, 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 and NGL (Next Generation Loops) solutions which help
companies extend their business through to Internet Service Providers in order
to meet customers' communication needs.
OUR HISTORY
Our company was incorporated on August 8, 1996 as Investment Agents, Inc. under
the laws of the State of Nevada. We acquired all of the outstanding shares of
City Network Technology, Inc., a British Virgin Islands corporation, 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 to City Network, Inc.
CNT owns all of the 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 outstanding common stock of City Construction, which was incorporated under
the laws of the Republic of China on October 10, 2003.
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."
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
obtained approximately $1.5 million in revenues from the sales of 15 inch, 17
inch and 19 inch panels. In 2006, we began the sales of 21 inch panels. In 2006,
we are developing a backlight technology for LCD panels. Our major customers for
our LCD panels are companies in Taiwan. In addition, we provide small-sized LCD
panels for handsets and GPS systems made by customers in South Korea.
15
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.
* 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 allows users convenient access their LAN or
VPN. It also lets business customers raise the level of worker
productivity and allow companies to offer efficient work-at-home
programs to their employees.
* Using authentication and verification technology, we attempt 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.
* 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.
We also furnish mobile handsets, including GSM/GPRS, CEDMA/CDMA 2000 1x mobile
handsets. We are currently developing our mobile handset business by forming a
department in Shanghai and cooperating with research and development companies
in the People's Republic of China to design handsets or our existing telecom
partners.
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 register 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.
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. 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
June 2006, our VOIP began testing products for sample orders to customers.
In March 2006, our registration for a license to provide VoIP services in Taiwan
was completed. In June 2006, we received approval from the Taiwanese government,
and we are currently in the process of obtaining the license.
16
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 and currently continue
to do so.
With our access equipment, bandwidth can be distributed 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.
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 searched for
other opportunities to outsource our GPS solution. Currently, we are developing
the design of GPS bluetooth products and are developing a sample order for a new
European Union customer.
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. In 2005, we expanded
our business to new customers in South America and Germany. 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. In
2006, we began to expand our LCD panel sales business to customers in South
America and the European Union. We have currently provided samples of our LCD
products to such customers in South American and the European Union and are
awaiting approval.
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.
17
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.
* 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 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.
18
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. Currently, we plan to obtain support from
the Taiwanese government to develop this project.
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. In 2005 and 2004, our
payment to Tamkang University consisted of rent for offices and payment for the
development of products after sales of the products. In 2006, the development of
the LCD backlight technology is done by students of Tamkang University under the
leadership of our company's research and development staff.
Currently, we are cooperating with Tamkang University in the approval of our
broadband projects in order to get funding from the Taiwanese government's
enterprise department. This government funding is a government award for
companies in Taiwan that establish research and development centers in Taiwanese
universities.
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.
EMPLOYEES
As of February 9, 2007, we had a total of 38 employees. Of these employees,
three are management, four are administrative, four are in finance, seven are in
research and development, five are in software research and development, seven
are in international partner cooperation and eight are in sales and marketing.
19
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.
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.
RECENT TRANSACTIONS
On August 10, 2005, we entered into a Securities Purchase Agreement with
Highgate ("Prior Securities Purchase Agreement"), a Standby Equity Distribution
Agreement with Cornell Capital Partners and related agreements. Under the Prior
Securities Purchase Agreement, we issued to Highgate, $250,000 principal amount
secured convertible debentures and a three-year warrant to purchase 25,000
shares of our common stock at an exercise price equal to $0.001 per share. The
Standby Equity Distribution Agreement was terminated on June 30, 2006, without
any shares being issued thereunder. In connection with the Standby Equity
Distribution Agreement, we issued to Monitor Capital, Inc., as placement agent,
44,455 shares of our common stock.
On March 13, 2006, we entered into a Securities Purchase Agreement with Cornell
Capital Partners, which was amended on June 30, 2006 by an Amendment to the
Securities Purchase Agreement by an among Cornell Capital Partners, Highgate and
us (the "Securities Purchase Agreement"). Under the Securities Purchase
Agreement, we amended and restated the previously issued secured convertible
debentures and issued an additional $400,000 principal amount debenture to
Cornell Capital Partners. These debentures bear interest at the rate of 7%, are
convertible in shares at the lesser per share price of (i) $0.268 or (ii) 95% of
the lowest Volume Weighted Average Price of the Common Stock of the 30 trading
days immediately preceding the date of conversion as quoted by Bloomberg, LP.,
and mature June 30, 2008. A 20% premium must be paid with any repayment of the
debentures, at maturity or otherwise. The secured convertible debentures are
secured by substantially all of our assets and of our wholly-owned subsidiaries,
CNT, CNT-Taiwan, and City Construction, and by the pledge of to the 6,445,455
shares of our common stock. We also issued to Cornell Capital Partners a
four-year warrant to purchase 1,000,000 shares of our common stock at a price
equal to $0.001 per share.
Under the Investor Registration Rights Agreement we are required to register the
shares issued or issuable pursuant to the foregoing by July 30, 2006 and have it
declared effective by October 30, 2006 and to pay liquidated damages in amount
equal to 2% of the face amount of the debentures for each 30-day period of
delinquency. The liquidated damages are payable in cash or shares of our common
stock, at the investor's option.
Neither us nor any of our affiliates has any material relationships with
Highgate, Cornell Capital Partners or Monitor Capital, Inc., other than in
respect of the agreements described in this Prospectus.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below are the names of the directors, executive officers and key
employees as of February 9, 2007:
Name Age Title
---- --- -----
Alice Chen 44 Chairman, Director, President and Chief
Executive Officer
Yun-Yi "Stella" Tseng 47 Chief Financial Officer and Director
I-Min Ou 36 Director, Manager - Technology Department
Chin-Yuan Liao 33 Director, Manager - Engineering Department
Mei-Chu Lai 39 Independent Director
Kao-Yu Hung 47 Independent Director
20
Chung-Chieh "Kevin" Lin 46 Independent Director
Yong Su 51 Independent Director
Pi-Liang Liu 51 Independent Director
Chun-Chih Chen 37 Independent Director
Set forth below is certain information with respect to each director, executive
officer, key employee and director nominees.
ALICE CHEN has been our Vice President and a Director 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. In
June 2006, she completed her degree in finance and investing at Beijing
University in the People's Republic of China.
YUN-YI "STELLA" TSENG has been the Chief Financial Officer and a Director of our
Board 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.
I-MIN OU has been our Manager of the Technology Department and a Director 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.
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
21
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
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.
22
Our board of directors has determined that we have at least one audit committee
financial expert, as defined in the Securities Exchange Act of 1934, as amended,
serving on our audit committee. Pi-Liang Liu is the "audit committee financial
expert" and is an independent member of our board of directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation paid or to be paid by our
company, as well as certain other compensation paid or accrued, during our last
fiscal year to each of the following named executive officers (the "Named
Executive Officers"). No executive officer received total annual compensation
exceeding $100,000.
Option All other
Name and Principal Position Year Salary($) Bonus($) Awards(1)($) compensation(2)(#) Total($)
--------------------------- ---- --------- -------- ------------ ------------------ --------
Alice Chen, Chief Executive
Officer 2006 $28,700 -- -- -- $28,700
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
None of our executive officers had any outstanding equity awards at fiscal
year-end.
OPTION GRANTS IN LAST FISCAL YEAR
None of our executive officers received any stock options in the fiscal year
ended December 31, 2006.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
None of our executive officers received any stock options in the fiscal year
ended December 31, 2006.
EQUITY COMPENSATION PLAN INFORMATION
We do not have an equity compensation plan under which options, warrants or
rights are authorized for issuance to employees or non-employees. We have not
issued any options, warrants or rights under any individual compensation
arrangement
PENSION BENEFITS
We do not sponsor any qualified or non-qualified defined benefit plans.
NONQUALIFIED DEFERRED COMPENSATION
We do not maintain any non-qualified defined contribution or deferred
compensation plans.
DIRECTORS COMPENSATION
Our directors do not receive any compensation for serving on the Board of
Directors.
23
EMPLOYMENT CONTRACTS
We have employment contracts with Alice Chen and Chin-Yuan Liao. Alice Chen's
monthly salary is $3,200 with an additional performance based bonus. Chin-Yuan
Liao's monthly salary is $2,500 with an additional performance based bonus. Both
Alice Chen and Chin-Yuan Liao are provided labor and health insurance. Our
standard employment contract provides for the employee's salary, benefits and
bonus compensation. It does not specify the duration of employment but provides
for severance payments pursuant to Taiwanese labor laws if the employee gives
notice or if we terminate his or her employment without cause.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Throughout the history of our company, certain members of our board of directors
and general management have made loans to our company to cover operating
expenses or operating deficiencies.
As of June 30, 2006, we had a non-interest-bearing loan from Stella Tseng, our
Chief Financial Officer and director, in the amount of $1,214,146. As of
December 31, 2005, we had a non-interest bearing loan from Tiao-Tsan Lai, our
former Chairman, director, President and Chief Executive Officer, in the amount
of $827,094.
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 9, 2007, 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.
Percent of
Number of Shares Common Stock
Name and Address (1) Beneficially Owned (2) Beneficially Owned
-------------------- ---------------------- ------------------
Alice Chen 2,066,000 6.7%
Yun-Yi "Stella" Tseng 844,000 2.8%
I-Min Ou 25,000 *
Chin-Yuan Liao 50,000 *
Mei-Chu Lai 648,000 2.1%
Yu-Hung Kao 1,161,000 3.8%
Chung-Chieh "Kevin" Lin 0 *
Yong Su 0 *
Pi-Liang Liu 0 *
All officers and directors
as a group (10 persons) 4,794,000 15.7%
----------
* Indicates less than one percent.
1) The address of each holder is c/o City Network, Inc., 2F-1, No. 16, Jian Ba
Road, Chung Ho City, Taipei County 235, Taiwan, ROC.
2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the shares shown. Except as indicated by
footnote, to our knowledge, the stockholders named in the table have sole
voting and investment power with respect to all of the shares of common
stock 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.
24
SELLING STOCKHOLDERS
The following table presents information regarding the selling stockholders. The
selling stockholders are the entities who assisted in or provided financing to
us. A description of each selling stockholder's relationship to us and how each
selling stockholder acquired the shares of common stock to be sold in this
offering is detailed immediately following this table.
Neither Cornell Capital Partners nor Highgate has held any position nor had any
material relationship with us or our affiliates during the past three (3) years.
Shares Maximum
Beneficially Number of Number of Shares Percentage
Name of Selling Owned Prior Shares to Beneficially Owned Ownership
Stockholder to Offering (1) be Sold (5) After Offering After Offering
----------- --------------- ----------- -------------- --------------
Highgate House Funds, Ltd. 957,836 (2) 957,836 (5) 0 0.00%
Cornell Capital Partners, LP 2,492,537 (3) 2,492,537 (5) 0 0.00%
Monitor Capital, Inc. 44,455 (4) 44,455 0 0.00%
----------
(1) Applicable percentage of ownership is based on 34,967,183 shares of common
stock outstanding as of February 9, 2007, together with securities
exercisable or convertible into shares of common stock. Beneficial
ownership is determined in accordance with Rule 13d-3(d) promulgated by the
Commission under the Securities and Exchange Act of 1934, as amended.
Shares of common stock issuable pursuant to options, warrants and
convertible securities are treated as outstanding for computing the
percentage of the person holding such securities but are not treated as
outstanding for computing the percentage of any other person. Unless
otherwise noted, each person or group identified possesses sole voting and
investment power with respect to shares, subject to community property laws
where applicable. Shares not outstanding but deemed beneficially owned by
virtue of the right of a person or group to acquire them within 60 days are
treated as outstanding only for purposes of determining the number of and
percent owned by such person or group.
(2) Includes 932,836 shares of common stock underlying the secured convertible
debenture and 25,000 shares of our common stock issuable pursuant to the
common stock purchase warrant; provided, however, the terms of the secured
convertible debentures provide that in no event shall Highgate be entitled
to convert such debentures for a number of shares which, upon giving effect
to the conversion, would cause the aggregate number of shares beneficially
owned by Highgate and its affiliates to exceed 4.9% of our outstanding
shares of common stock following such conversion. The 932,836 shares
underlying the secured convertible debenture described in this footnote is
based on the calculation using a conversion price of $0.268 and is subject
to adjustment. The convertible debentures are convertible at the lesser per
share price of (i) $0.268 or (ii) 95% of the lowest Volume Weighted Average
Price of the Common Stock of the 30 trading days immediately preceding the
date of conversion as quoted by Bloomberg, LP. Highgate is a holder of our
secured convertible debentures and shares of our common stock. All
investment decisions of Highgate are made by its general partner, Yorkville
Advisors, LLC. Mark Angelo, the managing member of Yorkville Advisors,
makes the investment decisions on behalf of and controls Yorkville
Advisors. Highgate is not a broker-dealer or an affiliate of a
broker-dealer.
25
(3) Includes 1,492,537 shares of common stock underlying the secured
convertible debenture and 1,000,000 shares of our common stock issuable
pursuant to the common stock purchase warrant; provided, however, the terms
of the secured convertible debentures provide that in no event shall
Cornell Capital Partners be entitled to convert such debentures for a
number of shares which, upon giving effect to the conversion, would cause
the aggregate number of shares beneficially owned by Cornell Capital
Partners and its affiliates to exceed 4.9% of our outstanding shares of
common stock following such conversion. The method for determining the
number shares underlying the secured convertible debenture described in
this footnote and its exercise price is the same as in footnote (2).
Cornell Capital Partners is the investor under the Securities Purchase
Agreement. All investment decisions of Cornell Capital Partners are made by
its general partner, Yorkville Advisors, LLC. Mark Angelo, the managing
member of Yorkville Advisors, makes the investment decisions on behalf of
and controls Yorkville Advisors. Cornell Capital Partners is not a
broker-dealer or an affiliate of a broker-dealer.
(4) Includes 44,455 shares of common stock issued pursuant to the placement
agent agreement. Monitor Capital, Inc. is a broker-dealer and is deemed an
underwriter with respect to the shares.
(5) The maximum number of shares to be sold is subject to adjustment in
accordance with the terms of the secured convertible debentures to Cornell
Capital Partners and Highgate, as described in footnote (2). We are
registering 15,000,000 shares of our common stock to provide for such
adjustments.
PLAN OF DISTRIBUTION
We are registering the common stock on behalf of the above selling stockholders.
The selling stockholders are offering shares of common stock that they received
in connection with each financing. As used in this Prospectus, the term "selling
stockholder" includes pledgees, transferees or other successors-in-interest
selling shares received from the selling stockholder as pledgors, assignees,
borrowers or in connection with other non-sale-related transfers after the date
of this Prospectus. This Prospectus may also be used by transferees of the
selling stockholder, including broker-dealers or other transferees who borrow or
purchase the shares to settle or close out short sales of shares of common
stock. The selling stockholder will act independently of us in making decisions
with respect to the timing, manner and size of each sale or non-sale related
transfer. We will not receive any of the proceeds of such sales by the selling
stockholders.
A selling stockholder may sell its shares of common stock directly to purchasers
from time to time. Alternatively, it may from time to time offer the common
stock to or through underwriters, broker/dealers or agents, who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the selling stockholder or the purchasers of such securities for whom they
may act as agents. The selling stockholder and any underwriters, broker/dealers
or agents that participate in the distribution of common stock may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, as amended,
and any profit on the sale of such securities and any discounts, commissions,
concessions or other compensation received by any such underwriter,
broker/dealer or agent may be deemed to be underwriting discounts and
commissions under the Securities Exchange Act of 1934, as amended. Each selling
stockholder has informed us that it does not have any agreement or
understanding, directly or indirectly, with any person to distribute the common
stock.
26
The common stock may be sold from time to time in one or more transactions at or
on any stock exchange, market or trading facility on which shares are traded or
in private transactions. The sales may be made at fixed prices, at prevailing
market prices at the time of sale, at varying prices determined at the time of
sale or at negotiated prices. The sale of the common stock may be affected by
means of one or more of the following transactions (which may involve cross or
block transactions):
* a block trade in which the broker-dealer so engaged will attempt to
sell such shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
* purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this Prospectus;
* transactions on any exchange or quotation service on which the shares
may be listed or quoted at the time of sale in accordance with the
rules of the applicable exchange;
* ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
* privately negotiated transactions;
* transactions through the settlement of short sales after the date
hereof;
* broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
* a combination of any such methods of sale;
* transactions through the writing or settlement of options or other
hedging transactions, whether through an options exchange or
otherwise; and
* any other method permitted pursuant to applicable law.
A selling stockholder may also sell shares under Rule 144 of the Securities Act
of 1933, as amended, if available, rather than under this Prospectus. To the
extent required, this Prospectus may be amended and supplemented from time to
time to describe a specific plan of distribution.
Broker-dealers engaged by the selling stockholder may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholder (or, if any broker-dealer acts as
agent for the purchase of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
27
A selling stockholder may also enter into option or other transactions with
broker-dealer's, or other financial institutions for the creation of one or more
derivative securities, which require the delivery to such broker-dealer or other
financial institution of shares offered by this Prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
Prospectus (as supplemented or amended to reflect such transaction).
In connection with the sale of the common stock or otherwise, a selling
stockholder may enter into hedging transactions with broker/dealers of other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholder may also sell shares of our common stock short and deliver these
shares to close out such short positions, or loan or pledge common stock to
broker/dealers that in turn may sell such securities.
A selling stockholder will be subject to applicable provisions of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder,
including Regulation M, which provisions may limit the timing of purchases and
sales of any of the common stock by the selling stockholders. The foregoing may
affect the marketability of such securities.
Pursuant to the registration rights agreement with the selling stockholders, all
expenses of the registration of the common stock will be paid by us, including,
without limitation, Securities and Exchange Commission filing fees; provided,
however, that a selling stockholder will pay any broker or similar commissions,
or, except to the extent otherwise provided for, any legal fees or other costs
of the selling stockholders. The selling stockholders will be indemnified by us
against certain civil liabilities, including certain liabilities under the
Securities Act of 1933, as amended, or will be entitled to contribution in
connection therewith. We will be indemnified by the selling stockholders against
certain civil liabilities, including certain liabilities under the Securities
Act of 1933, as amended, or will be entitled to contribution in connection
therewith.
To comply with the securities laws of certain jurisdictions, if applicable, the
common stock will be offered or sold in such jurisdictions only through
registered or licensed brokers or dealers.
28
DESCRIPTION OF SECURITIES
Our current authorized capital stock consists of 100,000,000 shares of common
stock, par value $.001 per share, of which 36,667,863 shares were issued and
outstanding as of February 9, 2007, and 50,000,000 shares of preferred stock,
par value $.001 per share, none of which were issued and outstanding as of June
30, 2006.
COMMON STOCK
The holders of our common stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders. Subject to the
preferential rights of the preferred stock, the holders of shares of our common
stock shall be entitled to receive dividends, when and if declared by the board
of directors, out of the assets of the corporation which are by law available
therefor. In the event of our liquidation, dissolution or winding up, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of our preferred stock, holders of our common stock shall
be entitled to received all of our remaining assets of whatever kind available
for distribution to stockholders ratably in proportion to the number of shares
of our common stock held by them respectively.
The holders of our common stock, as such, have no preemptive, or preferential
right or subscription right to any shares of our common stock or to any
obligations convertible into shares of our common stock, or to any warrant or
option for the purchase thereof, except to the extent, if any, provided by our
written agreement. All of the outstanding shares of our common stock are validly
issued, fully-paid and nonassessable.
PREFERRED STOCK
Under our Certificate of Amendment of the Articles of Incorporation, as amended,
the Board of Directors is authorized, subject to any limitations prescribed by
the laws of the State of Nevada, but without any further action by our
stockholders, to provide for the issuance of up to 50,000,000 shares of
preferred stock in one or more series, to establish from time to time the number
of shares to be included in such series, to fix the designations, powers,
preferences and rights of the shares of each such series and any qualifications,
limitations or restrictions thereof, and to increase or decrease the number of
shares of any such series. The board of directors may authorize and issue
preferred stock with voting or conversion rights that could adversely affect the
voting power or other rights of the holders of common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Pacific Stock Transfer
Company. We are currently in the process of changing transfer agents to
Interwest Transfer Co., Inc.
INDEMNIFICATION
Our articles of incorporation provide that none of our directors will be
personally liable to us or any of our shareholders for monetary damages arising
from the director's breach of fiduciary duty as a director, with certain limited
exceptions.
Pursuant to Section 78.7502 of the Nevada General Corporation Law, every Nevada
corporation has the power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation or is or was serving in such a capacity at the
request of the corporation for another corporation, partnership, joint venture,
trust or other enterprise, against any and all expenses, judgments, fines and
amounts paid in settlement and reasonably incurred in connection with such
action, suit or proceeding. The power to indemnify applies only if such person
acted in good faith and in a manner such person reasonably believed to be in the
best interests, or not opposed to the best interests, of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful.
29
The power to indemnify applies to actions brought by or in the right of the
corporation as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply. Our articles of incorporation contain provisions
authorizing it to indemnify our officers and directors to the fullest extent
permitted by Nevada General Corporation Law.
We have been advised that in the opinion of the Securities and Exchange
Commission indemnification for liabilities arising under the Securities Act of
1933, as amended, is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities is asserted by one of our directors, officers, or controlling
persons in connection with the securities being registered, we will, unless in
the opinion of our legal counsel the matter has been settled by controlling
precedent, submit the question of whether such indemnification is against public
policy to court of appropriate jurisdiction. We will then be governed by the
courts decision.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for us by
Loeb & Loeb LLP, New York, New York.
EXPERTS
The consolidated financial statements of City Network, Inc. appearing in this
Prospectus and registration statement have been audited by Simon & Edward, LLP
and Lichter, Yu & Associates, independent registered public accounting firms, to
the extent indicated in their reports (which contains an explanatory paragraph
with respect to City Network, Inc.'s ability to continue as a going concern),
appearing elsewhere in this Prospectus and registration statement, and are
included in reliance upon such reports given on the authority of such firms as
experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We are a public company and file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any document we file at the Securities and Exchange
Commission's public reference room at 100 F Street, N.E., Washington, D.C.
20549. You can request copies of these documents by writing to the Securities
and Exchange Commission and paying a fee for the copying cost. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for more information about
the operation of the public reference room. Our Securities and Exchange
Commission filings are also available to the public at the Securities and
Exchange Commission's web site at http://www.sec.gov.
This Prospectus is only part of a registration statement on Form SB-2 that we
have filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, and therefore omits certain information contained in the
registration statement. We have also filed exhibits and schedules to the
registration statement that are excluded from this Prospectus, and you should
refer to the applicable exhibit or schedule for a complete description of any
statement referring to any contract or other document. You may inspect or obtain
a copy of the registration statement, including the exhibits and schedules, as
described in the previous paragraph at no charge from us.
30
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
DECEMBER 31, 2005 AND DECEMBER 31, 2004
AND
UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2005 and December 31, 2004 F-3
Consolidated Statements of Income - Fiscal Year ended December 31, 2005
and ten months ended December 31, 2004 F-5
Consolidated Statements of Cash Flows - Fiscal Year ended December 31, 2005
and ten months ended December 31, 2004 F-6
Consolidated Statements of Changes in Stockholders' Equity -
December 31, 2005 and December 31, 2004 F-8
Notes to Consolidated Financial Statements - December 31, 2005 and 2004 F-9
Condensed Consolidated Balance Sheets - September 30, 2006 F-29
Condensed Consolidated Statements of Operations (Unaudited) -
September 30, 2006 F-31
Condensed Consolidated Statements of Cash Flows (Unaudited) -
September 30, 2006 F-32
Condensed Consolidated Statements of Changes in Stockholders' Equity -
September 30, 2006 F-34
Notes to Consolidated Financial Statements (Unaudited) -
September 30, 2006 F-35
F-1
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-2
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-3
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-4
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-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 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-6
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-7
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-8
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-9
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-10
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-11
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-12
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-13
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-14
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-15
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-16
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-17
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-18
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-19
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-20
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-21
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-22
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-23
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-24
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-25
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-26
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-27
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-28
CITY NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2006 December 31, 2005
------------------ -----------------
(Unaudited) (As Adjusted)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 41,429 $ 853,964
Accounts receivable, net 851,702 4,341,218
Inventories 645,282 252,608
Other receivables 1,243,939 234,176
Prepayment 1,105,685 3,451,482
Short-term assets - discountinued operation -- 530,073
----------- -----------
TOTAL CURRENT ASSETS 3,888,037 9,663,521
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 4,085,259 2,243,214
----------- -----------
OTHER ASSETS:
Deposits 123,388 180,915
Cash held for compensating balances -- 1,380,992
Intangible assets 865,679 925,074
Deferred assets 334,585 148,208
Equity in net assets of affilaiated company 728,769 790,842
Other assets - discountinued operation -- 322,664
----------- -----------
TOTAL OTHER ASSETS 2,052,421 3,748,695
----------- -----------
TOTAL ASSETS $10,025,717 $15,655,430
=========== ===========
F-29
CITY NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2006 December 31, 2005
------------------ -----------------
(Unaudited) (As Adjusted)
LIABILITIIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,269,906 $ 1,342,037
Convertible note payable, net -- 250,000
Due to related party 1,199,083 1,131,494
Deferred revenue 8,083 3,027,079
Current portion, long-term debt 2,007,499 4,220,230
Short-term liabilities - discountinued operation -- 301,165
------------ ------------
TOTAL CURRENT LIABILITIES 4,484,571 10,272,005
------------ ------------
NON-CURRENT LIABILITIES:
Convertible note payable, net 545,000 --
Long-term debt, net of current portion 3,532,466 572,668
------------ ------------
TOTAL NON-CURRENT LIABILITIES 4,077,466 572,668
TOTAL LIABILITIES 8,562,037 10,844,673
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 100,000,000 shares
authorized, 32,967,183 shares issued outstanding
at June 30, 2006 and December 31, 2005 32,967 32,967
Additional paid in capital 6,282,979 6,157,479
Other comprehensive income 435,265 366,384
Accumulated deficit (5,287,531) (1,746,073)
------------ ------------
TOTAL CAPITAL AND RETAINED DEFICIT 1,463,680 4,810,757
Less: cost of treasury stock -- --
------------ ------------
Total Stockholders' Equity 1,463,680 4,810,757
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,025,717 $ 15,655,430
============ ============
F-30
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
(As Adjusted) (As Adjusted)
Sales, net $ 3,916,705 $ 3,784,392 $ 7,095,525 $ 8,677,108
Cost of sales 4,369,434 3,427,726 7,222,052 8,060,736
------------ ------------ ------------ ------------
Gross Profit (452,729) 356,666 (126,527) 616,372
General and administrative expenses 1,046,465 483,047 1,892,877 1,131,776
------------ ------------ ------------ ------------
Income (loss) from operations (1,499,194) (126,381) (2,019,404) (515,404)
------------ ------------ ------------ ------------
Other (Income) Expense
Interest income (19,133) (3,543) (20,317) (5,598)
Rental income 340 (46,575) (61,720) (142,155)
Commission income 544 303 (98,752) (35,488)
(Gain) Loss on currency exchange (68) (1,346) 12,400 11,889
Other income (1,601) (31,938) (117,612) (88,177)
Reserve for bad debt 1,220,630 (5,900) 1,258,171 690,254
Equity in earnings of investee 110,033 15,870 62,072 25,993
Loss on physical inventory (234) -- 42,660 --
Miscellaneous 204,905 (3,704) 210,197 8,953
(Gain) Loss on sale of fixed assets 5 (679) (719) 79301
Interest expense 49,338 22,934 171,296 104,230
------------ ------------ ------------ ------------
Total other (income) expense 1,564,759 (54,578) 1,457,676 649,202
------------ ------------ ------------ ------------
Income (Loss) before income taxes (3,063,953) (71,803) (3,477,080) (1,164,606)
Provision for income taxes -- 161 -- 339
------------ ------------ ------------ ------------
Loss from continuing operation (3,063,953) (71,964) (3,477,080) (1,164,945)
------------ ------------ ------------ ------------
Income (Loss) from discontinued operation 10,983 (25,313) 31,275 (75,938)
Loss on disposal of discontinued operation (95,653) -- (95,653) --
------------ ------------ ------------ ------------
Net loss $ (3,148,623) $ (97,277) $ (3,541,458) $ (1,240,883)
============ ============ ============ ============
Income (Loss) per share - basic and diluted $ (0.11) $ -- $ (0.12) $ (0.04)
============ ============ ============ ============
Continuing operationgs - basic and diluted $ (0.11) $ -- $ (0.12) $ (0.04)
============ ============ ============ ============
Discontinued operation - basic and diluted $ -- $ -- $ -- $ --
============ ============ ============ ============
Weighted average number of shares
Basic 28,521,728 27,925,720 28,521,728 27,925,720
Diluted 28,521,728 27,925,720 28,521,728 27,925,720
F-31
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
---------------------------------
2006 2005
----------- -----------
(As Ajusted)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(3,541,458) $(1,316,821)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 143,084 134,330
Equity in earnings of investee 62,072 25,993
Bad debt 1,258,171 --
(Gain) Losses on disposal of fixed assets (720) 79,301
Loss on physical inventory 42,660 --
Loss (Gain) on foreign currency exchange -- 11,889
(Income) Loss from discontinued operation (31,275) 75,938
Loss on disposal of discontinued operation 95,653 --
Decrease (Increase) in receivables 2,273,493 196,964
Decrease (Increase) in other receivables (995,120) (127,674)
Decrease (Increase) in inventory (445,297) (163,945)
Decrease (Increase) in construction in progress -- (234,760)
Decrease (Increase) in prepayment and other current assets 1,937,705 (1,685,953)
Increase (Decrease) in accounts payable and accrued expenses 419,506 (1,944,445)
(Decrease) Increase in deferred revenue -- 2,879,030
(Decrease) Increase in other liabilities (3,102,747) (109,090)
Cash provided by (used in) operating activities - discontinued operation 525,788 333,789
----------- -----------
Total Adjustments 2,182,973 (528,633)
----------- -----------
Net cash provided by (used in) operating activities (1,358,485) (1,845,454)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of investment 200,000 --
Proceeds from disposal of property, plant and equipment 42,608 397,222
Purchase on investment -- --
Purchases of property, plant and equipment (1,688,671) (193,310)
Decrease (Increase) in deposit 57,452 23,443
Increase in short-term investments -- --
Payment on deferred assets (150,253) --
Decrease in other assets 1,400,047 --
Cash used in operating activities - discontinued operation (327,116) (1,434,988)
----------- -----------
Net cash provided by (used in) investing activities (465,933) (1,207,633)
----------- -----------
F-32
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
---------------------------------
2006 2005
----------- -----------
(As Adjusted)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings $ 3,871,909 $ 6,545,154
Payment on notes payable (6,101,032) (5,773,762)
Payment of loan from related party -- (6,293)
Loan from related party 406,920 710,815
Proceeds from long-term debts 3,025,514 125,000
----------- -----------
Net cash provided by (used in) financing activities 1,203,311 1,600,914
----------- -----------
Effect of exchange rate change on cash (194,011) 268,055
Net change in cash and cash equivalents (815,158) (1,184,118)
----------- -----------
Cash and cash equivalents at beginning of year 853,964 2,007,970
Cash and cash equivalents at beginning of year - discontinued operation 2,623 2,674
----------- -----------
Cash and cash equivalents at end of year $ 41,429 $ 826,526
=========== ===========
Components of cash and cash equivalents, end of period
From discontinued operation $ -- $ 1,093
From continuing operations 41,429 825,433
Supplemental cash flows disclosures:
Income tax payments $ -- $ 178
=========== ===========
Interest payments $ 146,506 $ 99,859
=========== ===========
F-33
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
September 30, 2006 December 31, 2005
------------------ -----------------
(Unaudited) (As Adjusted)
Common stock, number of shares
Balance at beginning of period 32,967,183 27,500,000
Common stock issued -- 5,467,183
------------ ------------
Balance at end of period 32,967,183 32,967,183
------------ ------------
Treasury stock, number of shares
Balance at beginning of period 4,445,455 --
Treasury stock acquired -- 4,445,455
------------ ------------
Balance at end of period 4,445,455 4,445,455
------------ ------------
Common stock, par value $.001
Balance at beginning of period $ 32,967 $ 27,500
Common stock issued -- 5,467
------------ ------------
Balance at end of period 32,967 32,967
------------ ------------
Additional paid in capital
Balance at beginning of period 6,157,479 5,937,946
Issuance of stock -- 219,533
Deemed interest due to warrants issued related to convertible notes 125,500 --
------------ ------------
Balance at end of period 6,282,979 6,157,479
------------ ------------
Other comprehensive income
Balance at beginning of period 366,384 142,453
Foreign currency translation 68,881 223,931
------------ ------------
Balance at end of period 435,265 366,384
------------ ------------
Retained earnings (deficits)
Balance at beginning of period (1,746,073) (712,383)
Net income (loss) (3,541,458) (1,033,690)
------------ ------------
Balance at end of period (5,287,531) (1,746,073)
------------ ------------
Less: Cost of treasury stock 0 0
------------ ------------
Total stockholders' equity at end of period $ 1,463,680 $ 4,810,757
============ ============
F-34
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
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 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. Collectively the three 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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements have been prepared by City Network,
Inc., pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC") Form 10-QSB and Item 310 of Regulation S-B and
generally accepted accounting principles for interim financial reporting.
These financial statements are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments and
accruals) necessary for a fair presentation of the statement of financial
position, operations, and cash flows for the periods presented. Operating
results for the nine months ended September 30, 2006 and 2005 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2006, or any future period, due to seasonal and other
factors. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting policies have been omitted in accordance with the rules and
regulations of the SEC. These financial statements should be read in
conjunction with the audited consolidated financial statements and
accompanying notes, included in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2005.
F-35
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
DISCONTINUED OPERATION
On August 31, 2006, the Company sold its 100% interest in City
Construction, Inc by entered into an agreement with two individuals (the
Buyer). The Company sold its 100% interest in City Construction to the
buyer for $200,000. The assets sold consisted primarily of cash, trade
accounts receivable, short-term investments, construction-in-progress, and
other current assets. The buyer also assumed all the outstanding debts of
City Construction. The control of City Construction has been officially
taken over by the Buyer based on the fact that the full amount of
consideration of $200,000 has been received by the Company, the application
of changing ownership signed by both parties has been filed with a relevant
government agency, and the share certificate of City Construction has been
surrendered to the Buyer.
Under the provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (FAS 144), the financial results of City
Construction are classified as discontinued operations in the accompanying
Consolidated Statements of Earnings for all periods presented.
Operating results of the discontinued operations which excluded loss on
disposal were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2006 2005 2006 2005
---------- --------- ---------- ----------
Net sales $ 269,408 $ -- $1,042,642 $ --
Total revenues 269,408 -- 1,042,642 --
Pretax income 10,983 (25,313) 31,275 (75,938)
As of December 31, 2005, assets and liabilities of the Company's
discontinued operations were classified as held for sales in the
accompanying Consolidated Balance Sheet under the following captions:
Short-term assets- discontinued operation, Long-term assets- discontinued
operation, short-term liabilities- discontinued operation, and Long-term
liabilities- discontinued operation. The discontinued assets and
liabilities at December 31, 2005 were composed of as follows:
F-36
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
DISCONTINUED OPERATION (Continued)
December 31,
2005
--------
Short-term assets -- discontinued operation
Cash $ 2,623
Trade receivables 29,892
Other receivables 7,128
Construction in progress 441,891
Prepayment 48,539
--------
Total 530,073
Other assets -- discontinued operation
Deposits 322,664
--------
Total assets -- discontinued operation $852,737
========
Short-term liabilities -- discontinued operation
Accounts payable and accrued expense $129,830
Deferred revenue 171,335
--------
Total liabilities $301,165
========
The Company assessed the loss on disposal of discontinued operation as
follows:
Carrying value of investment in City Construction
at August 30, 2006 $295,653
Proceeds expected to receive 200,000
--------
Disposal expense 0
--------
Loss on disposal of discontinued operation $ 95,653
========
F-37
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, collectively
referred to within as the Company. All material intercompany accounts,
transactions and profits have been eliminated in consolidation.
FINANCIAL STATEMENT PRESENTATION
Certain changes to the 2005 financial statements have been made to conform
to the 2006 financial statement format.
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.
F-38
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 nine months period ended September 30, 2006. 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)
As of September 30, 2006 and 2005, the transactions of City Network, Inc. -
Taiwan and City Construction were denominated in a foreign currency and are
recorded in New Taiwan Dollars ("NTD"), 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.
F-39
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
TRANSLATION ADJUSTMENT
The accounts of City Network, Inc.- Taiwan was maintained, and its
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
a component of shareholders' equity.
As of September 30, 2006 and December 31, 2005 the exchange rates between
NTD and the USD were NTD$1=USD$0.03023 and NTD$1=USD$0.03044, respectively.
The weighted-average rates of exchange between NTD and USD were
NTD$1=USD$0.03086 and NTD$1=USD$0.03117 for the period (year) ended
September 30, 2006 and December 31, 2005, respectively. Total translation
adjustment recognized as of September 30, 2006 and December 31, 2005 is
$435,265 and $366,384, 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 September 30, 2006, inventory consisted
only of finished goods.
F-40
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
F-41
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
DEFERRED OFFERING COSTS AND DISCOUNT TO CONVERTIBLE NOTES
The Company accounts for offering cost incurred in the private placements
as deferred expense and amortizes it over the economic life of these
convertible notes. In accordance with APB No. 14, the Company accounts for
the fair value of warrants and beneficial conversion feature resulting from
issuing convertible notes as discount to these convertible notes and
amortizes the discount over the economic life of these convertible notes.
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
On January 1, 2002, the Company adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". The Company evaluates
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. If the estimated future cash flows (undiscounted and without
interest charges) from the use of an asset were less than the carrying
value, a write-down would be recorded to reduce the related asset to its
estimated fair value. There have been no such impairments to date.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This
F-42
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS (Continued)
Interpretation is effective for fiscal years beginning after December 15,
2006, with earlier adoption permitted. The company is currently evaluating
the provisions of FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurement, which provides guidance
for applying the definition of fair value to various accounting
pronouncements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the provisions of SFAS 157.
In September 2006, the FASB also issued SFAS No. 158, Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans. SFAS 158 amends
SFAS 87, 88, 106, and 132R, and requires employers to recognize the
overfunded or underfunded status of defined benefit postretirement plans as
an asset or liability in its statement of financial position. SFAS No. 158
is effective as of the end of fiscal years ending after December 15, 2006.
SFAS 158 is not applicable to the Company, as it does not have a defined
benefit pension plan.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin 108 ("SAB 108"), Considering the Effect of Prior Year
Misstatements when Quantifying Misstatements in the Current Year Financial
Statements, that addresses how uncorrected errors in previous years should
be considered when quantifying errors in the current year financial
statements. SAB 108 is effective for fiscal years ending November 15, 2006
and, upon adoption, companies are allowed to record the effects as a
cumulative-effect adjustment to retained earnings. The Company will adopt
SAB 108 for its fiscal year ending December 31, 2006 and is assessing what
impact, if any, the adoption of SAB 108 will have on its financial position
and results of operations.
NOTE C - CONCENTRATION
The Company had two major customers during the nine months ended September
30, 2006. Sales to these customers were approximately $4,729,821. Those
customers comprise 67% of the total sales during the nine months ended
September 30, 2006. Included in accounts receivable is approximately
$1,510,549 from these customers as of September 30, 2006.
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 $30,230. As of September 30, 2006, there was $0 in
uninsured balances held at these banks.
F-43
NOTE E - FIXED ASSETS
Fixed assets consist of the following:
September 30, 2006 December 31, 2005
------------------ -----------------
Land $ 3,258,939 $ 1,909,023
Building and improvements 584,180 --
Other equipment 481,374 525,077
----------- -----------
$ 4,324,493 $ 2,434,100
Accumulated depreciation (239,234) (190,886)
----------- -----------
$ 4,085,259 $ 2,243,214
=========== ===========
NOTE F - INTANGIBLE ASSETS
Intangible assets consist of the following:
September 30, 2006 December 31, 2005
------------------ -----------------
Trademarks $ 2,207 $ 2,222
Intangible asset 1,058,050 1,065,400
----------- -----------
$ 1,055,843 $ 1,067,622
Accumulated amortization (190,164) (142,548)
----------- -----------
$ 865,679 $ 925,074
=========== ===========
NOTE G - COMMITMENTS
Operating Leases - The Company leases office facilities under operating
leases that terminate on various dates. Rental expense for these leases
consisted of $24,815 for the nine months ended September 30, 2006. The
Company has future minimum lease obligations as follows:
Twelve-month ended
September 30, Amount
------------- ------
2007 $27,207
-------
Total $27,207
=======
F-44
NOTE H - 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
September 30, 2006, the Company recognized a loss of $62,072 from their
acquisition.
NOTE I - COMPENSATED ABSENCES
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 September 30, 2006
vacation liability existed in the amount of $0.
NOTE J - INCOME TAXES
Total Federal and State income tax expense for the nine months ended
September 30, 2006 and 2005 were both amounted to $0. For the nine months
ended September 30, 2006 and 2005, there is no difference between the
federal statutory tax rate and the effective tax rate.
The following is a reconciliation of income tax expense:
09/30/06 U.S. State International Total
-------- ---- ----- ------------- -----
Current $ 0 $ 0 $ 0 $ 0
Deferred 0 0 0 0
------ ------ ------ ------
Total $ 0 $ 0 $ 0 $ 0
====== ====== ====== ======
09/30/05 U.S. State International Total
-------- ---- ----- ------------- -----
Current $ 0 $ 0 $ 178 $ 178
Deferred 0 0 0 0
------ ------ ------ ------
Total $ 0 $ 0 $ 178 $ 178
====== ====== ====== ======
F-45
NOTE J - INCOME TAXES (Continued)
Reconciliation of the differences between the statutory U.S. Federal income
tax rate and the effective rate is as follows:
09/30/06 09/30/05
-------- --------
Federal statutory tax rate 34% 34%
State, net of federal benefit 0% 0%
------ ------
Effective tax rate 34% 34%
====== ======
NOTE K - OTHER COMPREHENSIVE INCOME
Balances of related after-tax components comprising accumulated other
comprehensive income (loss), included in stockholders' equity, at September
30, 2006 and December 31, 2005 are as follows:
Foreign Currency Accumulated Other
Translation Adjustment Comprehensive Income
---------------------- --------------------
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
Change for 2006 $ 68,881 $ 68,881
-------- --------
Balance at September 30, 2006 $435,265 $435,265
======== ========
NOTE L - CONVERTIBLE NOTES
On June 30, 2006, the Company sold a $400,000 convertible promissory note
to Cornell Capital Partners, LP. The notes bears interest at 7% per annum
and will mature two years after issuance. A 20% redemption premium on the
principal amount of the Notes is due when they are redeemed, if the closing
bid price of the common stock is less than the Fixed Conversion Price. 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. The Company bears
$247,550 of selling expenses. For the nine months ended September 30, 2006,
the amortization of deferred offering cost was $30,944.
In connection with this transaction, the Company issued to Cornell Capital
Partners, LP a five-year warrant to purchase 1,000,000 shares of Common
Stock at an exercises price of $0.001 per share. The Company estimated the
fair value of the warrants attached to the promissory note at $120,000 by
using Black-Scholes option pricing model. In accordance with EITF 00-27,
the Company allocated the fair value of $120,000 to the warrants issued and
the fair value of $280,000 to the convertible notes in accordance with
relative fair value method. Based on the fair value of $280,000, the
Company recognized the beneficial conversion feature of $0 in accordance
F-46
NOTE L - CONVERTIBLE NOTES (Continued)
with the market price of the Company's common stock on each issuing date.
Consequently, the convertible note of $400,000 had a total discount of
$120,000. As of September 30, 2006, $15,000 of the discount related to
warrant and $0 of discount related to beneficial conversion feature have
been amortized.
On June 30, 2006, the Company amended and reissued the convertible notes
(Original Notes) originally issued to Highgate House Funds, Ltd on August
17, 2005 and December 16, 2005 in the aggregrate principal amount of
$250,000. Each note bears interest at 7% per annum and will mature two
years after issuance.
The above notes are 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. The Company is currently in default of this security agreement (see
Note M).
NOTE M - CONVERTIBLE NOTES SECURITY AGREEMENT DEFAULT
On June 30, 2006, the Company sold a $400,000 convertible promissory note
to Cornell Capital Partners, LP, and amended and reissued the convertible
notes originally issued to Highgate House Funds, Ltd on August 17, 2005 and
December 16, 2005 in the aggregate principal amount of $250,000 (Note L).
These notes are 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. However,
on August 31, 2006, the Company sold its 100% interest in City
Construction, Inc. without consent of the note holders. Based on the
security agreement in connection with the above convertible notes, the note
holders are entitled to receive all distribution with respect to the
pledged property. As of September 30, 2006, and the date of this report, no
such demand has been made.
NOTE N - SHARE-BASED PAYMENTS
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123R. The Company recognized the share-based
compensation cost based on the grant-date fair value estimated in
accordance with the new provisions of SFAS No. 123R. As of September 30,
2006, the Company had outstanding warrants totaling 1,025,000 with an
exercise price of $0.001 per share.
The fair value for the share-based awards was estimated using the
Black-Scholes option pricing model with the assumptions listed below:
September 30,
-----------------------
2006 2005
---- ----
Expected volatility 47.66 - 81.79% --%
Weighted average volatility 47.66 - 81.79% --%
Expected life (years) 3.0 - 5.0 --
Risk free interest rate 3.55 - 4.69% --%
F-47
NOTE N - SHARE-BASED PAYMENTS (Continued)
A summary of stock warrants for the nine months ended September 30, 2006 is
presented as follows:
Weighted-
Weighted- Average
Average Remaining Aggregrate
Exercise Contractual Intrinsic
Stock Warrants Shares Price Term (Months) (Values)
-------------- ------ ----- ------------- --------
Outstanding at January 1, 2006 25,000 $ 0.001 19.33
Granted 1,000,000 0.001 60.00
Exercised --
Forfeited or expired --
--------- ------- ------ --------
Outstanding at September 30, 2006 1,025,000 0.001 56.00 $121,975
========= ======= ====== ========
Exercisable at September 30, 2006 1,025,000 $ 0.001 56.00 $121,975
========= ======= ====== ========
NOTE O - DEBT
At September 30, 2006 and December 31, 2005, the Company had notes payable
outstanding in the aggregate amount of $5,539,965 and $ $4,792,898,
respectively. The notes are secured by the Company real properties and time
deposits. Payable as follows:
September 30, 2006 December 31, 2005
------------------ -----------------
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 4.022% per annum, due on interest at 3.838% per annum, due
demand. $ 2,007,499 by October 8, 2006 $ 487,040
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.30% per annum, due by interest at 3.838% per annum, due
April 4, 2021 1,541,730 by August 31, 2006 913,200
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 4.200% per annum, due by interest at 5.906% per annum, due
January 24, 2012 1,512,709 by September 28, 2006 232,483
Note payable to a corporation in Note payable to a bank in Taiwan,
Taiwan, no interest, due by February interest at 3.838% per annum, due
10, 2010 478,027 by January 27, 2006 45,660
F-48
Note payable to a bank in Taiwan,
interest at 3.838% per annum, due
by February 3, 2006 96,206
Note payable to a bank in Taiwan,
interest at 3.838% per annum, due
by February 3, 2006 123,693
Note payable to a bank in Taiwan,
interest at 3.838% per annum, due
by February 17, 2006 233,802
Note payable to a bank in Taiwan,
interest at 3.838% per annum, due
by February 21, 2006 219,739
Note payable to a bank in Taiwan,
interest at 3.838% per annum, due
by February 25, 2006 24,352
Note payable to a bank in Taiwan,
interest at 3.838% per annum, due
by March 3, 2006 69,950
Note payable to a bank in Taiwan,
interest at 3.838% per annum, due
by March 24, 2006 295,919
Note payable to a bank in Taiwan,
interest at 3.838% per annum, due
by April 1, 2006 279,553
Note payable to a bank in Taiwan,
interest at 3.838% per annum, due
by April 21, 2006 435,872
Note payable to a bank in Taiwan,
interest at 3.838% per annum, due
by April 28, 2006 422,811
Note payable to a bank in Taiwan,
interest at 3.838% per annum, due
by January 17, 2006 339,950
Note payable to a corporation in
Taiwan, no interest, due by
February 10, 2010 572,668
------------- -----------
Total $ 5,539,965 $ 4,792,898
Current portion $ 2,007,499 $ 4,220,230
------------- -----------
Long-term portion $ 3,532,466 $ 572,668
============= ===========
F-49
NOTE P - 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:
Alice Chen - As of September 30, 2006, the Company has a non
interest-bearing loan from Alice Chen, a shareholder of the Company, in the
amount of $232,769.
Stella Tseng - As of September 30, 2006, the Company has a non
interest-bearing loan from Stella Tseng, a shareholder of the Company, in
the amount of $966,314.
NOTE Q - 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 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 NT$27,313,003 or US$837,690. 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
$660,538. 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$830,000. 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$178,169 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$116,689 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.
F-50
NOTE R - LEGAL PROCEEDINGS (Continued)
On October 10, 2004, RPPI International Ltd. (or Rong-Dian), a vendor of
the Company, 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$840,000 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$396,546.
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$840,000 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$15,370 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$24,992 instead of NT$500,000 or US$15,370. As of September
30, 2006, approximately NT$5 million, or approximately US$151,150, has been
paid on this liability.
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.
F-51
NOTE R - LEGAL PROCEEDINGS (Continued)
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.
As of September 30, 2006, NT$4,100,000 or US $123,943 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-52
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by us in connection with the issuance and
distribution of the securities being registered are as follows:
SEC Registration Fee......................................... $112.87
Printing and Engraving Expenses..............................
Legal Fees and Expenses......................................
Accounting Fees and Expenses.................................
Total........................................................ $112.87
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 78.7502 of the Nevada General Corporation Law allows Nevada companies to
indemnify their directors and officers against all expenses, judgments, fines
and amounts paid in settlement under the conditions and limitations described in
the law.
Our Articles of Incorporation and By Laws provide that we shall indemnify any
person to the full extent permitted by the Nevada General Corporation Law (the
"NGCL"). Section 78.7502 of the NGCL, relating to indemnification, is hereby
incorporated herein by reference. We do not maintain Directors' and Officers'
Insurance.
RECENT SALES OF UNREGISTERED SECURITIES
We made the following sale of our unregistered securities in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended, and/or, Rule 506 of Regulation D or Regulation S, promulgated under the
Securities Act of 1933, as amended. We did not use underwriters.
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 10, 2005, we entered into a Securities Purchase Agreement with Cornell
Capital Partners and Highgate providing funding in the form of 7% Secured
Convertible Debentures in the aggregate principal amount of $250,000. The
secured convertible debentures are convertible into an aggregate of 946,970
shares of common stock at any time up to their maturity date. We also issued the
holders of the secured convertible debentures a warrant to purchase up to an
aggregate of 25,000 shares of common stock at an exercise price equal to $0.001
per share, subject to adjustment therein.
II-1
We also issued 44,455 shares of our common stock on August 10, 2005 to Monitor
Capital, Inc., as placement agent for the shares of our common stock to be
issued under the Standby Equity Distribution Agreement dated as of August 10,
2005 by and between Cornell Capital Partners and us, which was subsequently
terminated.
On March 13, 2006, we entered into a Securities Purchase Agreement with Cornell
Capital Partners providing funding in the form of 7% Secured Convertible
Debentures in the aggregate principal amount of $650,000. The secured
convertible debentures are convertible into an aggregate of 2,425,373 shares of
common stock. In addition, Highgate retained the notes issued in the Securities
Purchase Agreement dated as of August 10, 2005, which notes were amended and
re-issued in secured convertible debentures in the principal amount of $250,000.
In connection with the issuance of the secured convertible debentures, and as
consideration for Cornell Capital Partners' entry in the Securities Purchase
Agreement dated as of March 13, 2006, we issued, on June 30, 2006, a common
stock purchase warrant to Cornell Capital Partners, with an exercise price equal
to $0.001 per share, subject to adjustment therein, to purchase 1,000,000 shares
of our common stock, subject to adjustments as provided for in such warrant.
This common stock purchase warrant expires on June 30, 2011.
II-2
EXHIBITS
The following is a list of exhibits that are filed as a part of this Prospectus.
Exhibit
Number Description
2.1 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 (1)
3.1 Articles of Incorporation, as amended (2)
3.2 Certificate of Amendment to Articles of Incorporation (2)
3.3 Certificate of Amendment of the Articles of Incorporation (3)
3.4 Amended and Restated Bylaws (4)
5 Legal Opinion of Loeb & Loeb LLP*
10.1 Securities Purchase Agreement, dated as of August 10, 2005, by and
between the Company and Highgate House Funds, Ltd. (5)
10.2 Standby Equity Distribution Agreement, dated as of August 10, 2005, by
and between the Company and Cornell Capital Partners, L.P. ("Cornell
Capital Partners") (5)
10.3 Investor Registration Rights Agreement, dated as of August 10, 2005, by
and between the Company and Highgate House Funds, Ltd. (5)
10.4 Security Agreement, dated as of August 10, 2005, by and between the
Company and Highgate House Funds, Ltd. (5)
10.5 Security Agreement, dated as of August 10, 2005, by and between City
Technology, Inc. ("CTI") and Highgate House Funds, Ltd. (5)
10.6 Security Agreement, dated as of August 10, 2005, by and between City
Network, Inc. - Taiwan and Highgate House Funds, Ltd. (5)
10.7 Security Agreement, dated as of August 10, 2005, by and between City
Construction Co. Ltd. and Highgate House Funds, Ltd. (5)
10.8 Pledge and Escrow Agreement, dated as of August 10, 2005, by and among
the Company, Highgate House Funds, Ltd and David Gonzalez, Esq., as
escrow agent (5)
10.9 Secured Convertible Debentures, dated as of August 17, 2005, executed
by the Company in favor of Highgate House Funds, Ltd. (5)
10.10 Warrant, dated as of August 17, 2005, to purchase up to 25,000 shares
of Common Stock, executed by the Company in favor of Highgate House
Funds, Ltd. (5)
10.11 Registration Rights Agreement, dated as of August 10, 2005, by and
between the Company and Cornell Capital Partners (5)
10.12 Placement Agent Agreement, dated as of August 10, 2005 by and between
the Company and Monitor Capital, Inc. (5)
10.13 Securities Purchase Agreement, dated as of March 13, 2006, by and
between the Company and Cornell Capital Partners. (7)
10.14 Amendment to Securities Purchase Agreement, dated as of June 30, 2006,
by and among the Company, Cornell Capital Partners and Highgate House
Funds, Ltd.*
10.15 Investor Registration Rights Agreement, dated as of March 13, 2006, by
and between the Company and Cornell Capital Partners.*
II-3
10.16 Security Agreement, dated as of June 30, 2006, by and among the
Company, Cornell Capital Partners and Highgate House Funds, Ltd.*
10.17 Security Agreement, dated as of June 30, 2006, by and among City
Technology, Inc., Cornell Capital Partners and Highgate House Funds,
Ltd.*
10.18 Security Agreement, dated as of June 30, 2006, by and among City
Network, Inc. - Taiwan, Cornell Capital Partners and Highgate House
Funds, Ltd.*
10.19 Security Agreement, dated as of June 30, 2006, by and among City
Construction Co. Ltd., Cornell Capital Partners and Highgate House
Funds, Ltd.*
10.20 Amended and Restated Pledge and Escrow Agreement, dated as of June 30,
2006, by and among the Company, Highgate House Funds, Ltd., Cornell
Capital Partners and David Gonzalez, Esq., as escrow agent.*
10.21 Secured Convertible Debentures, dated as of June 30, 2006, executed by
the Company in favor of Cornell Capital Partners.*
10.22 Amended and Restated Secured Convertible Debenture, originally issued
on August 17, 2005, executed in favor of Highgate House Funds, Ltd.*
10.23 Amended and Restated Secured Convertible Debenture, originally issued
on December 16, 2005, executed in favor of Highgate House Funds, Ltd.*
10.24 Warrant, dated as of June 30, 2006, to purchase 1,000,000 shares of
Common Stock, executed by the Company in favor of Cornell Capital
Partners.*
10.25 Per her employment agreement, Alice Chen, the Chairman, President and
Chief Executive Officer of the Company, receives a monthly salary of
$3,200 with an additional performance based bonus.
10.26 Per his employment agreement, Chin-Yuan Liao, a director of the Company
and manager of the Company's engineering department, receives a monthly
salary of $2,500 with an additional performance based bonus.
14 Code of Ethics (6)
21 Subsidiaries of the Registrant (4)
23.1 Consent of Lichter, Yu & Associates*
23.2 Consent of Simon & Edward, LLP*
23.3 Consent of Loeb & Loeb LLP (included in the opinion filed as Exhibit 5)
24 Power of Attorney (included on signature page to this Registration
Statement)
----------
* Filed herewith
(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 Form 10-KSB
filed April 15, 2005, and incorporated herein by reference.
(5) Previously filed with the SEC as an Exhibit to City Network's Form 10-QSB
filed August 22, 2005, and incorporated herein by reference.
(6) Previously filed with the SEC as an Exhibit to City Network's Annual Report
on Form 10-KSB filed June 16, 2003, and incorporated herein by reference.
(7) Previously filed with the SEC as an Exhibit to City Network's Form 8-K
filed March 16, 2006, and incorporated here by reference.
II-4
UNDERTAKINGS
Undertaking Required by Item 512 of Regulation S B.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(I) and (a)(1)(ii) of this
section do not apply if the Registration Statement is on Form S-3, Form S-8
or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934, as amended that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended, (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934, as amended) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 hereof or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following person in the capacities
and on the dates stated.
CITY NETWORK, INC.
February 13, 2007 By: /s/ Alice Chen
--------------------------------------------
Name: Alice Chen
Title: Chief Executive Officer
February 13, 2007 By: /s/ Yun-Yi Tseng
--------------------------------------------
Name: Yun-Yi Tseng
Title: Chief Financial Officer
II-6
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Tiao-Tsan Lai and Yun-Yi Tseng, and each
of them (with full power of each to act alone), severally, as his or her true
and lawful attorneys-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place, and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments, exhibits thereto and other documents in connection therewith) to
this Registration Statement and any subsequent registration statement filed by
the registrant pursuant to Rule 462(b) of the Securities Act of 1933, as
amended, which relates to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agent, or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Name Title Date
---- ----- ----
/s/ Alice Chen
---------------------------- Director, Chairman and Chief Executive February 13, 2007
Alice Chen Officer (Principal Executive Officer)
/s/ Yun-Yi Tseng
---------------------------- Director and Chief Financial Officer February 13, 2007
Yun-Yi Tseng (Principal Accounting Officer)
/s/ Chin-Yuan Liao
---------------------------- Director February 13, 2007
Chin-Yuan Liao
/s/ I-Min Oun
---------------------------- Director February 13, 2007
I-Min Oun
/s/ Mei-Chu Lai
---------------------------- Director February 13, 2007
Mei-Chu Lai
/s/ Kao-Yu Hung
---------------------------- Director February 13, 2007
Kao-Yu Hung
/s/ Chung Chich Lin
---------------------------- Director February 13, 2007
Chung Chich Lin
---------------------------- Director
Yang Su
---------------------------- Director
Pi-Liang Lu
/s/ Chun-Chih Chen
---------------------------- Director February 13, 2007
Chun-Chih Chen
II-7