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: JUNE 30, 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 August 21, 2006, there were 34,967,183 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....................................... 27
Item 3. Controls and Procedures......................................... 31
PART II - OTHER INFORMATION.................................................. 32
Item 1. Legal Proceedings............................................... 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 32
Item 3. Defaults Upon Senior Securities................................. 32
Item 4. Submission of Matters to a Vote of Security Holders............. 32
Item 5. Other Information............................................... 32
Item 6. Exhibits........................................................ 33
SIGNATURES................................................................... 34
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITY NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2006 December 31, 2005
------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,889 $ 856,587
Accounts receivable, net 2,119,117 4,371,110
Inventories 857,950 252,608
Construction in progress 864,540 418,105
Other receivables 533,136 241,304
Prepayment 5,227,351 3,500,021
Short-term investments-net 920,100 --
----------- -----------
TOTAL CURRENT ASSETS 10,553,083 9,639,735
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 4,172,917 2,243,214
----------- -----------
OTHER ASSETS:
Deposits 423,296 503,579
Cash held for compensating balances 1,289,143 1,380,992
Intangible assets 896,207 925,074
Deferred assets 377,124 148,208
Equity in net assets of affiliated company 838,803 790,842
----------- -----------
TOTAL OTHER ASSETS 3,824,573 3,748,695
----------- -----------
TOTAL ASSETS $18,550,573 $15,631,644
=========== ===========
3
CITY NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,2006 December 31, 2005
------------ -----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,583,860 $ 1,471,867
Convertible note payable, net -- 250,000
Due to related party 993,095 1,131,494
Deferred revenue 4,100,930 3,198,414
Current portion, long-term debt 4,737,422 4,220,230
------------ ------------
TOTAL CURRENT LIABILITIES 11,415,307 10,272,005
------------ ------------
NON-CURRENT LIABILITIES:
Convertible note payable, net 530,000 --
Long-term debt, net of current portion 2,049,155 572,668
------------ ------------
TOTAL NON-CURRENT LIABILITIES 2,579,155 572,668
TOTAL LIABILITIES 13,994,462 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 450,374 366,384
Accumulated deficit (2,210,209) (1,769,859)
------------ ------------
TOTAL CAPITAL AND RETAINED DEFICIT 4,556,111 4,786,971
Less: cost of treasury stock -- --
------------ ------------
Total Stockholders' Equity 4,556,111 4,786,971
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,550,573 $ 15,631,644
============ ============
4
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Sales, net $ 597,758 $ 3,599,366 $ 3,178,820 $ 4,892,716
Cost of sales 452,463 3,377,970 2,852,618 4,633,010
------------ ------------ ------------ ------------
Gross Profit 145,295 221,396 326,202 259,706
General and administrative expenses 534,576 376,241 893,469 699,386
------------ ------------ ------------ ------------
Income (loss) from operations (389,281) (154,845) (567,267) (439,680)
------------ ------------ ------------ ------------
Other (Income) Expense
Interest income (11,680) (1,688) (18,651) (2,087)
Rental income (15,590) (47,910) (62,060) (95,580)
Commission income (160) (31,870) (99,296) (35,791)
(Gain) Loss on currency exchange (209) 4,977 12,468 13,235
Other income (69,680) (56,239) (118,378) (56,239)
Reserve for bad debt 22,548 11,154 37,541 696,154
Equity in earnings of investee (77,232) (531) (47,961) 10,123
Loss on physical inventory 42,874 -- 42,894 --
Miscellaneous (11,194) 46,186 5,292 12,657
Loss on sale of fixed assets (724) (2,280) (724) 79,980
Interest expense 66,588 42,898 121,958 81,296
------------ ------------ ------------ ------------
Total other (income) expense (54,459) (35,303) (126,917) 703,748
------------ ------------ ------------ ------------
Loss before income taxes (334,822) (119,542) (440,350) (1,143,428)
Provision for income taxes -- 178 -- 178
------------ ------------ ------------ ------------
Net loss $ (334,822) $ (119,720) $ (440,350) $ (1,143,606)
============ ============ ============ ============
Net loss per share (basic and diluted)
Basic $ (0.012) $ (0.004) $ (0.015) $ (0.042)
============ ============ ============ ============
Diluted $ (0.012) $ (0.004) $ (0.015) $ (0.042)
============ ============ ============ ============
Weighted average number of shares
Basic 28,521,728 27,500,000 28,521,728 27,500,000
Diluted 28,521,728 27,500,000 28,521,728 27,500,000
5
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-------------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (440,350) $(1,143,606)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 96,521 87,730
Equity in earnings of investee (47,961) 10,123
Bad debt 37,541 --
(Gain) Losses on disposal of fixed assets (724) 79,980
Loss on physical inventory 42,894 --
Loss on foreign currency exchange -- 13,235
Decrease in receivables 2,274,300 711,181
Increase in other receivables (87,183) (15,953)
Increase in inventory (653,410) (51,102)
Increase in construction in progress (448,480) (30,316)
Increase in prepayment and other current assets (1,950,812) (421,023)
Increase (Decrease) in accounts payable and accrued expenses 135,000 (164,439)
Increase in deferred revenue 930,900 33,802
Decrease in other liabilities (38,608) --
----------- -----------
Total Adjustments 289,978 253,218
----------- -----------
Net cash used in operating activities (150,372) (890,388)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property, plant and equipment 42,843 397,222
Purchase on investment -- (72,931)
Purchases of property, plant and equipment (1,707,283) (194,717)
Decrease (Increase) in deposit 85,075 (66,917)
Increase in short-term investments (930,900) --
Payment on deferred assets (151,081) --
Increase in other assets 103,485 --
----------- -----------
Net cash provided by (used in) investing activities (2,557,861) 62,657
----------- -----------
6
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-------------------------------
2006 2005
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings $ 2,153,941 $ 3,550,525
Payment on notes payable (1,759,802) (4,249,488)
Payment of loan from related party (105,125) (6,293)
Loan from related party -- 26,554
Proceeds from long-term debts 1,582,530 --
----------- -----------
Net cash provided by (used in) financing activities 1,871,544 (678,702)
----------- -----------
Effect of exchange rate change on cash 10,991 192,578
Net change in cash and cash equivalents (825,698) (1,313,855)
----------- -----------
Cash and cash equivalents at beginning of period 856,587 2,010,644
----------- -----------
Cash and cash equivalents at end of period $ 30,889 $ 696,789
=========== ===========
Supplemental cash flows disclosures:
Income tax payments $ -- $ 178
=========== ===========
Interest payments $ 116,459 $ 81,296
=========== ===========
7
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
June 30, 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
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 83,990 223,931
------------ ------------
Balance at end of period $ 450,374 $ 366,384
============ ============
Retained earnings (deficits)
Balance at beginning of period $ (1,769,859) $ (712,383)
Net income (loss) (440,350) (1,057,476)
------------ ------------
Balance at end of period $ (2,210,209) $ (1,769,859)
============ ============
Less: Cost of treasury stock 0 0
------------ ------------
Total stockholders' equity at end of period $ 4,556,111 $ 4,786,971
============ ============
8
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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
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 six months ended June 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.
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.
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.
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 six months period ended June 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 June 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.
11
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
TRANSLATION ADJUSTMENT
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 June 30, 2006 and December 31, 2005 the exchange rates between NTD
and the USD were NTD$1=USD$0.03067 and NTD$1=USD$0.03044, respectively.
The weighted-average rates of exchange between NTD and USD were
NTD$1=USD$0.03103 and NTD$1=USD$0.03117for the period (year) ended June
30, 2006 and December 31, 2005, respectively. Total translation adjustment
recognized as of June 30, 2006 and December 31, 2005 is $450,374 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 June 30, 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.
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 March 2005, FASB issued FASB Interpretation ("FIN") No. 47, "Accounting
for Conditional Asset Retirement Obligations." FIN 47 clarifies that the
term "Conditional Asset Retirement Obligation" as used in FASB Statement
No. 143, "Accounting for Asset Retirement Obligation," refers to a legal
obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or
may not be within the control of the entity. Accordingly, an entity is
required to recognize a liability for the fair value of a Conditional
Asset Retirement Obligation if the fair value of the liability can be
reasonably estimated. FIN 47 is effective no later than the end of fiscal
years ending after December 15, 2005. Management does not believe the
adoption of FIN 47 will have a material affect on the Company's financial
position, results of operations or cash flows.
In May 2005, the Financial Accounting Standards Board ("FASB") SFAS No.
154, Accounting Changes and Error Corrections ("SFAS No. 154"), which
14
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS (Continued)
replaces Accounting Principles Board Opinion No. 20, Accounting Changes
and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements. SFAS No. 154 changes the requirements for the accounting for
and reporting of a change in accounting principles. It requires
retrospective application to prior periods' financial statements of
changes in accounting principles, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change.
This statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The impact
on the Company's operations will depend on future accounting
pronouncements or changes in accounting principles.
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 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.
NOTE C - CONCENTRATION
The Company had three major customers during the six months ended June 30,
2006. Sales to these customers were approximately $2,705,284. Those
customers comprise 85% of the total sales during the six months ended June
30, 2006. Included in accounts receivable is approximately $1,949,570 from
these customers as of June 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 $30,740. As of June 30, 2006, there was $951,773 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 June 30, 2006,
$1,289,143 of cash is restricted for this purpose (see Note L).
15
NOTE F - FIXED ASSETS
Fixed assets consist of the following:
June 30, 2006 December 31, 2005
------------- -----------------
Land $ 3,306,373 $ 1,909,023
Building and improvements 592,684 --
Other equipment 497,580 525,077
----------- -----------
4,396,637 2,434,100
Accumulated depreciation (223,720) (190,886)
----------- -----------
$ 4,172,917 $ 2,243,214
=========== ===========
NOTE G - INTANGIBLE ASSETS
Intangible assets consist of the following:
June 30, 2006 December 31, 2005
------------- -----------------
Trademarks $ 2,239 $ 2,222
Intangible asset 1,073,450 1,065,400
----------- -----------
1,075,689 1,067,622
Accumulated amortization (179,482) (142,548)
----------- -----------
$ 896,207 $ 925,074
=========== ===========
NOTE H- COMMITMENTS
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 $233,092 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.
16
NOTE H- COMMITMENTS (Continued)
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
June 30, 2006, the Company has paid $61,340 as part of the refundable
security deposit and $864,540 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 June 30,
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 June
30, 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 $24,815 for the six months ended June 30, 2006. The Company
has future minimum lease obligations as follows:
Year Amount
---- ------
2007 $22,082
2008 20,242
-------
Total $42,324
=======
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 June
30, 2006, the Company recognized a gain of $47,961 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 June
30, 2006 vacation liability existed in the amount of $2,472.
17
NOTE K - INCOME TAXES
Total Federal and State income tax expense for the six months ended June
30, 2006 and 2005 both amounted to $0. For the six months ended June 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:
06/30/06 U.S. State International Total
-------- ---- ----- ------------- -----
Current $ 0 $ 0 $ 0 $ 0
Deferred 0 0 0 0
------ ------ ------ ------
Total $ 0 $ 0 $ 0 $ 0
====== ====== ====== ======
06/30/05 U.S. State International Total
-------- ---- ----- ------------- -----
Current $ 0 $ 0 $ 178 $ 178
Deferred 0 0 0 0
------ ------ ------ ------
Total $ 0 $ 0 $ 178 $ 178
====== ====== ====== ======
Reconciliation of the differences between the statutory U.S. Federal
income tax rate and the effective rate is as follows:
06/30/06 06/30/05
-------- --------
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 June 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 83,990 83,990
-------- --------
Balance at June 30, 2006 $450,374 $450,374
======== ========
18
NOTE M - 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) 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 six months ended June 30, 2006, the amortization
of deferred offering cost was $0.
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 exercise price of $0.001 per share. The Company estimated the
fair value of the warrant 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 warrant 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 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 June 30, 2006, $0
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.
19
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 June 30, 2006,
the Company had outstanding warrants to purchase 1,025,000 shares 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:
June 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% --%
A summary of stock warrants for the six months ended June 30, 2006 is
presented as follows:
Weighted-
Weighted- Average
Average Remaining
Exercise Contractual
Stock Warrants Shares Price Term (Months)
-------------- ------ ----- -------------
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 June 30, 2006 1,025,000 0.001 53.00
========= ======= =====
Exercisable at June 30, 2006 1,025,000 $ 0.001 53.00
========= ======= =====
20
NOTE O - DEBT
At June 30, 2006 and December 31, 2005, the Company had notes payable
outstanding in the aggregate amount of $6,786,577 and $4,792,898,
respectively. The notes are secured by the Company real properties and
time deposits, payable as follows:
June 30, 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 $ 490,720 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 920,100 by August 31, 2006 913,200
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.838% per annum, due by interest at 5.906% per annum, due
January 12, 2007 122,680 by September 28, 2006 232,483
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.894% per annum, due by interest at 3.838% per annum, due
April 11, 2006 260,783 by January 27, 2006 45,660
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 1,564,170 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, 2007 422,976 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, 2007 205,000 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
July 13, 2006 63,101 by February 21, 2006 219,739
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.894% per annum, due by interest at 3.838% per annum, due
August 4, 2006 396,005 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 1,534,729 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 484,985 by March 24, 2006 295,919
21
Usance letter of credit payable to a Note payable to a bank in Taiwan,
bank in Taiwan, interest at 6.68% per interest at 3.838% per annum, due
annum, due by September 21, 2006 122,592 by April 1, 2006 279,553
Usance letter of credit payable to a Note payable to a bank in Taiwan,
bank in Taiwan, interest at 6.68% per interest at 3.838% per annum, due
annum, due by September 22, 2006 159,719 by April 21, 2006 435,872
Usance letter of credit payable to a Note payable to a bank in Taiwan,
bank in Taiwan, interest at 6.68% per interest at 3.838% per annum, due
annum, due by September 27, 2006 39,017 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 6,786,577 4,792,898
Current portion $ 4,737,422 $ 4,220,230
----------- -----------
Long-term portion $ 2,049,155 $ 572,668
=========== ===========
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.
Andy Lai - As of June 30, 2006, the Company has a non interest-bearing
loan from Andy Lai, a former shareholder of the Company, in the amount of
$12,716.
Stella Tseng - As of June 30, 2006, the Company has a non interest-bearing
loan from Stella Tseng, a shareholder of the Company, in the amount of
$980,379.
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.
22
NOTE R - 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 is a reportable segment 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:
Broadband
communication
and wireless
Internet access
Six Months Ended June 30, 2006 products Other (1) Consolidated
------------------------------ -------- --------- ------------
Sales to unaffiliated customers $ 3,178,320 $ -0- $ 3,178,820
Intersegment sales -0- -0- -0-
Net sales 3,178,320 -0- 3,178,820
Income (loss) before taxes (14,927) (425,423) (440,350)
Total assets (2) 11,116,041 7,434,532 18,550,573
Property additions (3) 1,697,974 9,309 1,707,283
Interest expense 103,851 18,108 121,959
Interest revenue 1,181 17,470 18,651
Depreciation and amortization (3) 96,521 -0- 96,521
23
NOTE S - SEGMENT REPORTING (Continued)
(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 T - 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
$670,152. 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
individuals not guilty. In connection with 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 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 after Tain-Kang provided proof of payments of NT$2,000,000. To
date, the court has not yet ruled 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
24
NOTE T - LEGAL PROCEEDINGS (Continued)
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. As of June 30,
2006, approximately NT$4 million, or approximately US$168,685, 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.
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, 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
25
NOTE T - LEGAL PROCEEDINGS (Continued)
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 each 2 months, beginning on February 25, 2006. As
of June 30, 2006, NT$4,100,000 or US $125,747 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.
******
26
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.
27
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 settings.
In addition, 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.
The Company has also focused on the sales of LCD panels.
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.
28
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2005
NET SALES. Net sales for the three months ended June 30, 2006 were $597,758
compared to $3,599,366 for the three months ended June 30, 2005. The decrease in
net sales for the three months ended June 30, 2006 was due to a decrease in
demand for our products.
COST OF SALES. Cost of sales for the three months ended June 30, 2006 was
$452,463 or 75.7% of net sales, as compared to $3,377,970 or 93.8% of net sales,
during the three months ended June 30, 2005. The decrease was due to the
decrease of net sales. The decrease in the cost of sales as a percentage of
revenue was due to increased sales of higher-margin products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $534,576 or 89.4% of net sales, for the three months ended June 30, 2006,
as compared to $376,241 or 10.5% of net sales, for the three months ended June
30, 2005. The increase was due to an increase in professional expenses. The
increase in general and administrative expenses as a percentage of net sales is
due to the decrease of sales and fixed overhead that cannot readily be reduced,
including salary, rent, and depreciation.
LOSS FROM OPERATIONS. Loss from operations for the three months ended June
30, 2006 was $(389,281), compared to loss from operations for the three months
ended June 30, 2005 of $(154,845). The increase in loss from operations for the
three months ended June 30, 2006 compared with loss from operations for the
three months ended June 30, 2005 resulted primarily from reasons primarily
described above.
OTHER (INCOME) EXPENSE. Other (income) expense was $(54,459) for the three
months ended June 30, 2006, as compared to $(35,303) for the three months ended
June 30, 2005. This change was the result of the increase of equity in earnings
of investee.
NET LOSS. Net loss for three months ended June 30, 2006 was $(334,822)
compared to net loss of $(119,720) for the three months ended June 30, 2005. The
change in net loss was due to the reasons described above.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2005
NET SALES. Net sales for the six months ended June 30, 2006 were $3,178,820
compared to $4,892,716 for the six months ended June 30, 2005. The decrease in
net sales for the six months ended June 30, 2006 was due to a decrease in demand
for our products.
COST OF SALES. Cost of sales for the six months ended June 30, 2006 was
$2,852,618 or 89.7% of net sales, as compared to $4,633,010 or 94.7% of net
sales, during the six months ended June 30, 2005. The decrease in cost of sales
is associated with the decrease in sales. The decrease in the cost of sales as a
percentage of revenue was due to increased sales of higherer-margin products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $893,469, or 28.1% of net sales, for the six months ended June 30, 2006, as
compared to $699,386, or 14.3% of net sales, for the six months ended June 30,
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2005. The increase was due to an increase in professional expenses. The increase
in general and administrative expenses as a percentage of net sales is due to
the decrease of sales and fixed overhead that cannot readily be reduced,
including salary, rent, and depreciation.
INCOME (LOSS) FROM OPERATIONS. Loss from operations for the six months
ended June 30, 2006 was $(567,267), compared to income from operations for the
six months ended June 30, 2005 of $(439,680). The loss from operations for the
six months ended June 30, 2006 compared with income from operations for the six
months ended June 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 $(126,917) for the six
months ended June 30, 2006, as compared to $703,748 for the six months ended
June 30, 2005. This change was the result of the increase of equity in earnings
of investee, commission income and other income, and the decrease in reserve for
bad debt.
NET LOSS. Net loss for six months ended June 30, 2006 was $(440,350)
compared to income of $(1,143,606) for the six months ended June 30, 2005. The
net loss for the six months ended June 30, 2006 compared with income for the six
months ended June 30, 2005 was due to the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2006 and December 31, 2005, we had cash and cash equivalents of
$30,889 and $856,587, respectively. Our current assets totaled $10,553,083 at
June 30, 2006 as compared to $9,639,735 at December 31, 2005. Our total current
liabilities were $11,415,307 at June 30, 2006 as compared to $10,272,005 at
December 31, 2005. Working capital at June 30, 2006 was $(862,224) and
$(632,270) at December 31, 2005. For the six months ended June 30, 2006, total
cash used in operations was $(150,372) as compared to net cash provided by
operations of $(890,388) during the same period in 2005. Net cash provided by
financing activities was $1,871,544, which consisted of loans, as compared with
net cash used in financing activities of $(678,702) during the six months ended
June 30, 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
30
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 our 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 six months
ended June 30, 2006 were $1,707,283 compared to $194,717 for the six months
ended June 30, 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.
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.
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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.
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 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 after Tain-Kang
provided proof of payments of NT$2,000,000. To date, the court has not yet ruled
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.
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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.
33
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: August 21, 2006 By: /s/ Alice Chen
------------------------------------
Alice Chen
Chief Executive Officer
(Principal Executive Officer)
Dated: August 21, 2006 By: /s/ Yun-Yi Tseng
------------------------------------
Yun-Yi Tseng
Chief Financial Officer
(Principal Financial Officer)
34