UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: March 31, 2006
COMMISSION FILE NUMBER: 001-31954
CITY NETWORK, INC.
(Name of Small Business Issuer as Specified in its Charter)
Nevada 88-0467944
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2F-1, No. 16, Jian Ba Road, Chung Ho City
Taipei County 235, Taiwan, ROC
(Address of Principal Executive Offices)
011-886-2-8226-5566
(Telephone Number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
As of May 22, 2006, there were 32,967,183 shares of common stock, par value
$0.001 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X].
Table Of Contents
PART I - FINANCIAL INFORMATION.............................................. 3
Item 1. Financial Statements............................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 26
Item 3. Controls and Procedures......................................... 30
PART II - OTHER INFORMATION................................................. 31
Item 1. Legal Proceedings............................................... 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 31
Item 3. Defaults Upon Senior Securities................................. 31
Item 4. Submission of Matters to a Vote of Security Holders............. 31
Item 5. Other Information............................................... 31
Item 6. Exhibits........................................................ 32
SIGNATURES ................................................................. 33
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND DECEMBER 31, 2005
March 31, 2006 December 31, 2005
-------------- -----------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 83,413 $ 856,587
Accounts receivable, net 4,263,567 4,371,110
Inventory 356,322 252,608
Other receivables 431,301 241,304
Prepaid expenses 5,071,441 3,500,021
Short-term investments 922,200 --
----------- -----------
Total Current Assets 11,128,244 9,221,630
----------- -----------
Fixed Assets, net 3,170,012 2,391,422
----------- -----------
Other Assets
Deposits 511,616 503,579
Cash held for compensating balances 1,291,506 1,380,992
Construction in progress 32,662 418,105
Trademarks 1,707 1,727
Equity in net assets of affiliated company 761,571 790,842
Intangible assets 914,515 923,347
----------- -----------
Total Other Assets 3,513,577 4,018,592
----------- -----------
Total Assets $17,811,833 $15,631,644
=========== ===========
3
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND DECEMBER 31, 2005
March 31, 2006 December 31, 2005
-------------- -----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 2,474,507 $ 1,471,867
Convertible note payable 250,000 250,000
Due to related party 1,106,195 1,131,494
Deferred revenue 3,220,301 3,198,414
Current portion, long-term debt 3,641,753 4,220,230
------------ ------------
Total Current Liabilities 10,692,756 10,272,005
Long-term debt, net of current portion 2,360,985 572,668
------------ ------------
Total Liabilities 13,053,741 10,844,673
------------ ------------
Stockholders' Equity
Common stock, $.001 par value, 100,000,000 shares
authorized, 32,967,183 shares issued and 28,521,728
shares outstanding at March 31, 2006 and December 31, 2005 32,967 32,967
Additional paid in capital 6,157,479 6,157,479
Other comprehensive income 443,033 366,384
Accumulated deficit (1,875,387) (1,769,859)
------------ ------------
Total capital and retained deficit 4,758,092 4,786,971
Less: cost of treasury stock 0 0
------------ ------------
Total Stockholders' Equity 4,758,092 4,786,971
------------ ------------
Total Liabilities and Stockholders' Equity $ 17,811,833 $ 15,631,644
============ ============
4
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
March 31, 2006 March 31, 2005
-------------- --------------
Sales, net $ 2,581,062 $ 1,293,350
Cost of sales 2,400,155 1,255,040
------------ ------------
Gross Profit 180,907 38,310
General and administrative expenses 358,893 323,145
------------ ------------
Income (loss) from operations (177,986) (284,835)
------------ ------------
Other (Income) Expense
Interest income (6,971) (399)
Rental income (46,470) (47,670)
Commission income (99,136) (3,921)
(Gain) loss on currency exchange 12,677 8,258
Reserve for bad debt 14,993 685,000
Equity in earnings of investee 29,271 10,654
Miscellaneous (32,192) (33,529)
Loss on sale of fixed assets -- 82,260
Interest expense 55,370 38,398
------------ ------------
Total Other (Income) Expense (72,458) 739,051
------------ ------------
Income (loss) before income taxes (105,528) (1,023,886)
Provision for income taxes 0 0
------------ ------------
Net income (loss) $ (105,528) $ (1,023,886)
============ ============
Net income (loss) per share (basic and diluted)
Basic $ (0.004) $ (0.037)
Diluted $ (0.004) $ (0.037)
Weighted average number of shares
Basic 28,521,728 27,500,000
Diluted 28,521,728 27,500,000
5
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
March 31, 2006 March 31, 2005
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (105,528) $(1,023,886)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 48,431 43,113
Equity in earnings of investee 29,271 10,654
Bad debt 14,993 --
Losses on disposal of fixed assets -- 82,260
Loss (Gain) on foreign currency exchange (12,677) 8,258
Decrease (Increase) in receivables 135,455 360,823
Decrease (Increase) in other receivables (107,469) (54,498)
Decrease (Increase) in inventory (114,033) 29,513
Decrease (Increase) in deposit -- (31,212)
Decrease (Increase) in prepaid expenses and other current assets (1,256,004) (241,871)
Increase (Decrease) in accounts payable and accrued expenses 976,929 (168,962)
(Decrease) Increase in deferred revenue -- (5,693)
(Decrease) Increase in other liabilities 10,967 --
----------- -----------
Total Adjustments (274,137) 32,385
----------- -----------
Net cash provided by (used in) operating activities (379,665) (991,501)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property, plant and equipment -- 369,042
Purchases of property, plant and equipment (774,714) --
Increase in short-term investments (921,138) --
Increase in other assets 99,908 --
----------- -----------
Net cash provided by (used in) investing activities (1,595,945) 369,042
----------- -----------
6
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
March 31, 2006 March 31, 2005
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings $ 678,950 $ 1,494,868
Payment on notes payable (1,308,210) (1,579,160)
Payment of loan from related party (215) (6,293)
Proceeds from long-term debts 1,791,307 --
Proceeds from advance 19,910 --
----------- -----------
Net cash provided by (used in) financing activities 1,181,742 (90,585)
----------- -----------
Effect of exchange rate change on cash 20,694 21,726
Net change in cash and cash equivalents (773,174) (691,318)
----------- -----------
Cash and cash equivalents at beginning of year 856,587 2,010,644
----------- -----------
Cash and cash equivalents at end of year $ 83,413 $ 1,319,326
=========== ===========
Supplemental cash flows disclosures:
Income tax payments $ -- $ --
=========== ===========
Interest payments $ 54,513 $ 38,398
=========== ===========
7
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
MARCH 31, 2006 AND DECEMBER 31, 2005
March 31, 2006 December 31, 2005
-------------- -----------------
(Unaudited)
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
------------ ------------
Balance at end of period 6,157,479 6,157,479
------------ ------------
Other comprehensive income
Balance at beginning of period 366,384 142,453
Foreign currency translation 76,649 223,931
------------ ------------
Balance at end of period 443,033 366,384
------------ ------------
Retained earnings (deficits)
Balance at beginning of period (1,769,859) (712,383)
Net income (loss) (105,528) (1,057,476)
------------ ------------
Balance at end of period (1,875,387) (1,769,859)
------------ ------------
Less: Cost of treasury stock 0 0
------------ ------------
Total stockholders' equity at end of period $ 4,758,092 $ 4,786,971
============ ============
8
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 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.
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 three months ended March 31, 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.
9
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 and City
Construction, collectively referred to within as the Company. All material
intercompany accounts, transactions and profits have been eliminated in
consolidation.
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.
10
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 three months period ended March 31, 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 March 31, 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.
11
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
TRANSLATION ADJUSTMENT
As of March 31, 2006, 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 a component of shareholders' equity.
As of March 31, 2006 and December 31, 2005 the exchange rates between NTD
and the USD were NTD$1=USD$0.03074 and NTD$1=USD$0.03044, respectively. The
weighted-average rates of exchange between NTD and USD were
NTD$1=USD$0.03098, NTD$1=USD$0.03117, and NTD$1=USD$0.02979 for the period
(year) ended March 31, 2006, December 31, 2005, and March 31, 2005,
respectively. Total translation adjustment recognized as of March 31, 2006
and December 31, 2005 is $443,033 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 March 31, 2006, inventory consisted only
of finished goods.
12
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.
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.
13
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES (Continued)
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.
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 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 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 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.
14
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS (Continued)
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 it is a derivative instrument. 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,
NOTE C - CONCENTRATION
The Company had two major customers during the three months ended March 31,
2006. Sales to these customers were approximately $2,300,569. Those
customers comprise 89% of the total sales during the three months ended
March 31, 2006. Included in accounts receivable is approximately $3,120,266
from these customers as of March 31, 2006.
15
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 $30,740. As of March 31, 2006, there was $1,330,732 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 March 31, 2006, $1,291,506 of
cash is restricted for this purpose (see Note L).
NOTE F - FIXED ASSETS
Fixed assets consist of the following:
March 31, 2006 December 31, 2005
-------------- -----------------
Land $ 1,927,837 $ 1,909,023
Machinery and equipment 673,171 512,433
Furniture and fixtures 782,333 208,705
----------- -----------
$ 3,383,341 $ 2,630,161
Accumulated depreciation (213,329) (238,739)
----------- -----------
$ 3,170,012 $ 2,391,422
=========== ===========
NOTE G - INTANGIBLE ASSETS
Intangible assets consist of the following:
March 31, 2006 December 31, 2005
-------------- -----------------
Trademarks $ 2,244 $ 2,222
Intangible asset 1,075,900 1,065,400
----------- -----------
$ 1,078,144 $ 1,067,622
Accumulated depreciation (161,922) (142,548)
----------- -----------
$ 916,222 $ 925,074
=========== ===========
16
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 $233,624 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
Mar 31, 2006, the Company has paid $92,220 as part of the refundable
security deposit and $585,982 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 March 31, 2006, the
Company received an advance of $3,000,000 on this contract and is using
these funds to purchase the related materials.
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 March
31, 2006, 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 $11,892 for the three months ended March 31, 2006. The Company
has future minimum lease obligations as follows:
Year Amount
---- ------
2007 $31,199
2008 20,888
---- -------
Total $52,087
=======
17
NOTE H- COMMITMENTS (Continued)
On March 16, 2006, the Company entered a Security Purchase Agreement with
Cornell Capital Partners, LP. 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, if the closing bid price of the common stock is less
than the Fixed Conversion Price. Additionally, an annual interest rate of
7% 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 closing the
transaction, the Company will issue to the Investor a five-year warrant
(the "Warrant") to purchase 1,000,000 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, dated
August 10, 2005, will be terminated.
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 March 31, 2006, the Purchaser has paid to the Seller for a total
amount equal to approximately $782,000 (NTD 25,450,000). 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.
18
NOTE I - LONG-TERM INVESTMENT
On August 31, 2003 the Company purchased approximately twenty-five percent
(25%) of Beijing Putain Hexin Network Technology Co., Ltd for $325,000. On
December 4, 2003 the Company purchased an additional fifteen percent (15%)
for $398,500. Beijing Putain Hexin Network Technology Co., Ltd is not
publicly traded or listed. The Company is using the complete equity method
to record its share of the subsidiary's net income and loss. As of March
31, 2006, the Company recognized a loss of $29,271 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 March 31, 2006 vacation
liability existed in the amount of $2,497.
NOTE K - INCOME TAXES
Total Federal and State income tax expense for the quarters ended March 31,
2006 and 2005 were both amounted to $0. For the three months ended March
31, 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:
03/31/06 U.S. State International Total
-------- ---- ----- ------------- -----
Current $ 0 $ 0 $ 0 $ 0
Deferred 0 0 0 0
------ ------ ------ ------
Total $ 0 $ 0 $ 0 $ 0
====== ====== ====== ======
03/31/05 U.S. State International Total
-------- ---- ----- ------------- -----
Current $ 0 $ 0 $ 0 $ 0
Deferred 0 0 0 0
------ ------ ------ ------
Total $ 0 $ 0 $ 0 $ 0
====== ====== ====== ======
19
NOTE K - INCOME TAXES (Continued)
Reconciliation of the differences between the statutory U.S. Federal income
tax rate and the effective rate is as follows:
03/31/06 03/31/05
-------- --------
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 March 31,
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 $ 76,649 $ 76,649
--------- ---------
Balance at March 31, 2006 $ 443,033 $ 443,033
========= =========
NOTE M - DEBT
At March 31, 2006 and December 31, 2005, the Company had notes payable
outstanding in the aggregate amount of $6,002,738 and $ $4,792,898,
respectively. Payable as follows:
March 31, 2006 December 31, 2005
-------------- -----------------
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.838% per annum, due
October 8, 2006 $ 491,840 by October 8, 2006 $ 487,040
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.838% per annum, due
August 31, 2006 922,200 by August 31, 2006 913,200
Secured note payable to a bank in Secured note payable to a bank in
Taiwan, interest at 3.838% per annum, Taiwan, interest at 5.906% per
due by January 12, 2007 122,960 annum, due by September 28, 2006 232,483
20
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.838% per annum, due
April 28, 2006 426,978 by January 27, 2006 45,660
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.838% per annum, due
May 12, 2007 341,582 by February 3, 2006 96,206
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.838% per annum, due
June 16, 2006 423,942 by February 3, 2006 123,693
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.838% per annum, due
June 22, 2006 205,468 by February 17, 2006 233,802
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.838% per annum, due
June 2006 63,245 by February 21, 2006 219,739
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 3.838% per annum, due
July 31, 2006 678,950 by February 25, 2006 24,352
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 4.200% per annum, due by interest at 3.838% per annum, due
January 24, 2012 1,793,371 by March 3, 2006 69,950
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 532,202 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 6,002,738 4,792,898
Current portion $ 3,641,753 $ 4,220,230
------------- -------------
Long-term portion $ 2,360,985 $ 572,668
============= =============
21
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 March 31, 2006, the Company has a non interest-bearing
loan from Andy Lai, the Company's President, in the amount of $798,795.
Stella Tseng - As of March 31, 2006, the Company has a non interest-bearing
loan from Stella Tseng, a shareholder of the Company, in the amount of
$307,400.
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 - 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).
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 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:
22
NOTE P - SEGMENT REPORTING (Continued)
Broadband
communication
and wireless
Internet access
products Other (1) Consolidated
-------- --------- ------------
1st Quarter 2006
Sales to unaffiliated customers $ 2,581,062 $ 0 $ 2,581,062
Intersegment sales 0 0 0
Net sales 2,581,062 0 2,581,062
Income (loss) before taxes 48,335 (153,863) (105,528)
Total assets (2) 12,270,995 5,540,838 17,811,833
Property additions (3) 774,714 0 774,714
Interest expense 54,513 857 55,370
Interest revenue 0 6,971 6,971
Depreciation and amortization (3) 48,431 0 48,431
(1) Revenue from segments below the quantitative thresholds is
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.
NOTE Q - 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$839,602. 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
$671,681. This case is currently ongoing.
23
NOTE Q - LEGAL PROCEEDINGS (Continued)
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.
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 March 31,
2006, approximately NT$4 million, or approximately US$122,960, 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
24
NOTE Q - LEGAL PROCEEDINGS (Continued)
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.
As of March 31, 2006, NT$2,100,000 or US $63,924 has been paid on this
liability.
NOTE R- 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.
******
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Form 10-QSB. 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
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.
26
BACKGROUND OF THE COMPANY
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 Co., Ltd. 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 product 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 Part I herein, in the notes to the financial statements.
On December 16, 2004, the Company changed its fiscal year end from February
28 to December 31.
We have suffered recurring losses from operations, cash deficiencies and
the inability to meet our maturing obligations without borrowing from related
parties and restructuring debts. These issues may raise substantial concern
about our ability to continue as a going concern.
We are currently engaged in discussions with a number of companies
regarding strategic acquisitions or potential financings. Although these
discussions are ongoing, there can be no assurance that any of these discussions
will result in actual acquisitions or a completed financing for us.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial conditions and results of
operations is based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("GAAP"). The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. See "Summary of Significant Accounting Policies" in the Notes
to Consolidated Financial Statements in Item to this Report for our critical
accounting policies. No significant changes in our critical accounting policies
have occurred since December 31, 2004.
27
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2005
NET SALES. Net sales for the three months ended March 31, 2006 were
$2,581,062 compared to $1,293,350 for the three months ended March 31, 2005. The
increase in net sales for the three months ended March 31, 2006 was due to a
general increase in business to existing and new customers.
We design, manufacture and market a comprehensive line of broadband
communication and wireless Internet access solutions, including home PNA and
xDSL broadband access equipment and related accessories, which comprise our
older, established products. In 2004, we introduced new products such as VoIP,
GSP and wireless Internet access products.
We believe that an increase in competition over the market for our older
products has contributed to a decline in the unit price of those products.
Additionally, we believe that the introduction of more technologically advanced
products to the marketplace have diminished consumer demand for our older
products. We intend to continue upgrading our older products to meet customer
expectations.
We believe that sales for our new products, such as VoIP, wireless
communication products and GSP products, can increase with improved brand name
recognition and increased sales channels. We intend to continue promoting and
marketing our new products to improve brand name recognition as well as work on
increasing sales channels.
COST OF SALES. Cost of sales for the three months ended March 31, 2006 was
$2,400,155 or 93.0% of net sales, as compared to $1,255,040 or 97.0% of net
sales, during the three months ended March 31, 2005. The decrease in the cost of
sales as a percentage of revenue is due to the increase of net sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $358,893 or 13.9% of net sales, for the three months ended March 31, 2006,
as compared to $323,145 or 25.0% of net sales, for the three months ended March
31, 2005. The increase was due to an increase in professional expenses. The
decrease in general and administrative expenses as a percentage of net sales is
due to the fixed overhead, including salary, rent, depreciation and such factors
being a big part of general and administrative expenses.
LOSS FROM OPERATIONS. Loss from operations for the three months ended March
31, 2006 was $(177,986), compared to loss from operations for the three months
ended March 31, 2005 of $(284,835). The decrease in loss from operations for the
three months ended March 31, 2006 compared with loss from operations for the
three months ended March 31, 2005 resulted primarily from reasons primarily
described above.
OTHER (INCOME) EXPENSE. Other (income) expense was $(72,457) for the three
months ended March 31, 2006, as compared to $739,051 for the three months ended
March 31, 2005. This change was the result of the decrease of bad debt reserve.
NET LOSS. Net loss for three months ended March 31, 2006 was $(105,528)
compared to net loss of $(1,023,886) for the three months ended March 31, 2005.
The decrease in net loss was due to the reasons described above.
28
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006 and December 31, 2005, we had cash and cash equivalents
of $83,413 and $856,587, respectively. Our current assets totaled $11,128,243 at
March 31, 2006 as compared to $9,221,630 at December 31, 2005. Our total current
liabilities were $10,692,756 at March 31, 2006 as compared to $10,272,005 at
December 31, 2005. Working capital at March 31, 2006 was $435,488 and
$(1,050,375) at December 31, 2005. For the three months ended March 31, 2006,
total cash used in operations was $(379,665) as compared to net cash provided by
operations of $(991,501) during the same period in 2005. Net cash provided by
financing activities was $1,181,742, which consisted of loans, as compared with
net cash used in financing activities of $(90,585) during the three months ended
March 31, 2005.
WORKING CAPITAL REQUIREMENTS
Our operations and short term financing do not currently meet our cash
needs. We currently are engaged in discussions with a number of companies
regarding strategic acquisitions or investments. Although these discussions are
ongoing, there can be no assurance that any of these discussions will result in
actual acquisitions or investment. Several potential investors have already
shown their interest to invest in our company.
FACTORS THAT INTERRUPT OUR OPERATIONS
Our major risk is incurring a large amount of bad debt. Our short-term and
long-term liquidity may be influenced by uncollected account receivables. If the
amount of bad debt is high, it will severely affect our ability to continue
operations. Therefore, we are taking precautions to manage this risk, such as
preparing accounts receivable aging reports each week and collecting the overdue
invoices. 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.
CAPITAL EXPENDITURES. Total capital expenditures during the three months
ended March 31, 2006 were $774,714 compared to $0 for the three months ended
March 31, 2005.
CONSTRUCTION. The Company has begun the development of its construction
business. The Company plans to develop and build commercial and residential
buildings, industry factory buildings, and professional buildings.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
29
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and the Chief Financial
Officer, the Company conducted an evaluation of the effectiveness of the design
and operation of its disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
as of the end of the period covered by this report (the "Evaluation Date").
Based on this evaluation, our Chief Executive Officer and the Chief Financial
Officer concluded as of the Evaluation Date that the Company's disclosure
controls and procedures were effective such that the material information
required to be included in our SEC reports is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms relating
to the Company, including our consolidating subsidiaries, and was made known to
them by others within those entities, particularly during the period when this
report was being prepared.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
HWA-CHING CO. AND RELATED LAWSUITS
In April 2004, Hwa-Ching Co. made purchases from City Network Inc.-Taiwan
for products in the aggregate amount of approximately NT$19 million or
US$575,757. In June 2004, Hwa-Ching Co. wrote a check to City Network
Inc.-Taiwan paying for such products and City Network Inc.-Taiwan successfully
cashed this check. Also in June 2004, Hwa-Ching Co. made purchases from City
Network Inc.-Taiwan for additional products in the aggregate amount of
approximately NT$18 million or US$545,454 and paid for such products with a
check that City Network Inc.-Taiwan also successfully cashed.
During June to August 2004, Hwa-Ching Co. requested additional products
from City Network Inc.-Taiwan in the aggregate amount of approximately NT$27
million or US$818,181. City Network Inc.-Taiwan filled these orders with
confidence as Hwa-Ching had paid for the prior orders from April 2004 and June
2004. However, the check, in the amount of approximately NT$27 million or
US$818,181 that Hwa-Ching Co. wrote to City Network, Inc.-Taiwan bounced upon
deposit with the bank. Immediately thereafter, Hwa-Ching Co. closed down with
this remaining account payable balance of approximately NT$27 million or
US$818,181 outstanding and payable to City Network Inc.-Taiwan.
In August 2004, City Network Inc.-Taiwan filed a lawsuit against Yune-Chang
Tsuo, the owner of Hwa-Ching Co., as well as the following eight individuals
including, Yong-Zhang Zhuo, Shu-Tao Lu, Yong-Yi Zhuo, Zhuan-Xuan Dai, Ya-Hui
Qiu, Mei-Zhen Huang, Zong-Ya Wu, Yao-Guo Cen in Taiwan Taipei district court of
Taiwan, in Taipei, 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 from Yune-Chang Tsuo to
cover the outstanding account payable. To date, the court has not yet reached a
verdict on this case.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
31
ITEM 6. EXHIBITS
(a) Exhibits:
No. Description
--- -----------
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, filed herewith.
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, filed herewith.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed
herewith.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed
herewith.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NETWORK, INC.
Dated: May 22, 2006 By: /s/ Alice Chen
-----------------------------
Alice Chen
Chief Executive Officer
(Principal Executive Officer)
Dated: May 22, 2006 By: /s/ Yun-Yi Tseng
-----------------------------
Yun-Yi Tseng
Chief Financial Officer
(Principal Financial Officer)
33