U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended _____________
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from March 1, 2004 to December 31, 2004
Commission File Number: 333-61286
CITY NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 88-0467944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6F-3, No. 16, Jian Ba Road, Jhonghe City
Taipei County 235, Taiwan, ROC N/A
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: 011-886-2-8226-5566
Securities Registered Under Section 12(b) of the Act:
$0.001 Common Stock
(Title of Class)
Securities Registered Under Section 12(g) of the Act:
None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part II of this Form 10-K or any amendments to this Form 10-K. [X]
The issuer's revenues for the ten months ended December 31, 2004: $15,674,613.
As of April 14, 2005, there were 27,500,000 shares of the registrant's common
stock, $0.001 par value, outstanding. The aggregate market value of the common
stock held by non-affiliates of the issuer was approximately $7,038,860 based on
the closing price of $.31 per share on April 14, 2005, as reported by the
American Stock Exchange.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (Check one): Yes [X]; No [ ]
TABLE OF CONTENTS
Page
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PART I ....................................................................... 2
Item 1. Description of Business........................................... 2
Item 2. Description of Property...........................................18
Item 3. Legal Proceedings.................................................18
Item 4. Submission of Matters to a Vote of Security Holders...............19
PART II 20
Item 5. Market for Common Equity and Related Stockholder Matter Market
Information and Market Price......................................20
Item 6. Management's Discussion and Analysis or Plan of Operation.........21
Item 7. Financial Statements..............................................24
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................24
Item 8A Controls and Procedures...........................................24
PART III 24
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(A) of the Exchange Act.................24
Item 10. Executive Compensation............................................28
Item 11. Security Ownership of Certain Beneficial Owners and Management....29
Item 12. Certain Relationships and Related Transactions....................30
Item 13. Exhibits and Reports on Form 8-K..................................30
Item 14. Principal Accountant and Fees.....................................31
1
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements in this annual report on Form 10-KSB are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about the plans, objectives, expectations and
intentions of City Network, Inc., a Nevada corporation, and other statements
contained in this annual report that are not historical facts. Forward-looking
statements in this annual report or hereafter included in other publicly
available documents filed with the Securities and Exchange Commission (the
"SEC"), reports to our stockholders and other publicly available statements
issued or released by us involve known and unknown risks, uncertainties and
other factors which could cause our actual results, performance (financial or
operating) or achievements to differ from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Such future results are based upon management's best
estimates based upon current conditions and the most recent results of
operations. When used in this annual report, the words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate" and similar expressions are
generally intended to identify forward-looking statements, because these
forward-looking statements involve risks and uncertainties. There are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including our plans,
objectives, expectations and intentions and other factors discussed under "Risk
Factors."
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OUR COMPANY
City Network, Inc. ("City Network," "we," "our" or "us") was incorporated
in 1996 and develops hardware and software (total solution) for broadband
communication solutions. We provide Internet broadband communication and
wireless infrastructure equipment and services for the rapidly expanding
broadband marketplace. We are dedicated to delivering the most user-friendly,
cost-effective, and customer-tailored, high-speed Internet broadband and
communication access equipment to meet the growing business needs of the
International Telecoms, ISP, SI and to a lesser degree the hospitality,
residential property, telecommunication and Small and Medium Enterprise
marketplace to solve the "last mile" problems worldwide. We also created the
Hotspot solution, NGL (Next Generation Loops) solution, which helps companies
extend their business to the carrier's solution to meet people's communication
inquires.
OUR HISTORY
Our company was incorporated on August 8, 1996 as Investment Agents, Inc.
under the laws of the State of Nevada. City Network Technology, Inc. (formerly
Gelcrest Investments Limited, "CNT") was incorporated under the laws of the
British Virgin Islands on March 1, 2002. On November 14, 2002, CNT became a
wholly owned subsidiary of our company through an Exchange Agreement, dated
November 14, 2002 and amended on December 11, 2002, whereby our company acquired
all of the issued and outstanding capital stock of CNT in exchange for
12,000,000 shares of common stock of our company, which represented 49% of our
issued and outstanding stock at that time. In connection with the exchange and
change in control, the name of our company was changed from Investment Agents,
Inc. to City Network, Inc., the officers and directors of City Network resigned
and new officers and directors were appointed. Upon the effective date of the
exchange and change in control, our company ceased its relationship with the
company for whom we previously acted as referral agent, which was our business
prior the exchange and change in control.
CNT owns all of the issued and outstanding common stock of City Network
Inc. - Taiwan, formerly City Engineering, Inc., which was incorporated under the
laws of the Republic of China on September 6, 1994 ("CNT-Taiwan"). CNT-Taiwan
owns all of the issued and outstanding common stock of company of City
Construction, which was incorporated under the laws of Republic of China on
October 10, 2003.
2
OUR BUSINESS
With the continuous expansion of the Internet worldwide, we intend to
capitalize on what we believe to be vast underdeveloped and overlooked new and
emerging growth Internet markets. Together with a combination of technical,
sales, design and manufacturing experience, we believe that we are poised to tap
the potential of new clients throughout the globe. Our customers have the choice
to source what we believe to be one of the most convenient, low-cost and diverse
product packages combined with the best personal service to make up a
comprehensive business solution.
We design, manufacture and market a comprehensive line of broadband
communication and wireless Internet access solutions. Our product line ranges
from our device for the blooming worldwide residential building and hospitality
market to the simple DSL bridge/modem for the home and small business user. All
of our broadband access equipment includes GUI-based remote management and
routing technology software packages for simplified setup, extensive network
management and global network connectivity capabilities. Currently, our Home PNA
and xDSL broadband access equipment is deployed by major telecommunication
carriers, ISPs, and system integrators worldwide. With the development and
production of our complete series of Internet products, we are able to provide a
"total solution" for any customers needs. Our motto is "Establish the Broadband
Highway, Innovate A Bright New Life."
In November 2004 we obtained a new project with Chunghwa Telecom Co., Ltd,
Taiwan's largest telecommunications company listed as American Depository
Receipts on the New York Stock Exchange. We obtained this important business
contract via an open bid process among competition from several very well
established and highly qualified local market competitors. The contract
represents the largest of a series of orders we have obtained from the local
telecom giant. The total value of this current contract is nearly $1.0 million.
In the contract, the service is provided with shipping our ADSL solution to
China Telecom & China Netcom Corp, and we received approval from the Malaysia TM
NET for shipment of total value at $4.5 million, which we believe will be
shipped in the second quarter of 2005. Also our new ADSL 2+ router passed the
Korea Telecom BMT testing and we believe it will be shipped in the second
quarter of 2005.
From 2003 our research and development center has focused on developing the
games content and mobile platform software designs in connection with Internet
broadband communication ISPs. We intend to expand our business in the future to
include providing software as well as hardware.
PRODUCT AREAS
Our product repertoire contains items compatible with all major
distribution platforms. We believe that our product packages and selections give
clients a one-stop shop for all their broadband Internet needs.
VOIP
In September 2004 we launched a wireless voice over Internet protocol, or
VoIP, product. There are two models available for the market. One provides one
VoIP and one public switched telephone network, or PSTN port, and the other
model provides two VoIP and two PSTN ports. Both of them have two DECT (digital
enhanced cordless telecommunications) Base Stations, and can be registered up to
sixteen DECT phones set. User could choose H.323 or SIP mode, which is easy to
add on to the environment where co-existence with old VoIP equipments is needed.
Despite building up a value-added network environment, we aligned with
Easy-Up Corporation, who created the Hotspot service in Taiwan with our company
from 2002 and is one of Taiwan's largest IP phone service provider, to provide
low cost VoIP service to end users. By connecting to the partner's network, a
user is able to save on its phone bill on GSM cellular phone calls and
international calls to China, the United States, Canada and Asia, by up to 50%.
Our VoIP products were tested at both the VoIP service provider's site, and we
believe we are in a position to sell the IP phone ISP total solution to the
Malaysia, Indonesia and Philippines markets.
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ADSL/VDSL ACCESS DEVICES
Our ADSL/VDSL devices provide broadband access based on leading Internet
technologies. The ADSL 2+ and 20Mbps VDSL over Ethernet equipment allows both
developing businesses as well as home users to meet their media and
communication needs quickly and in a cost-effective manner. It can also provide
high speed Internet without influencing quality over a larger distance for a
cost-effective and efficient method of broadband access. We believe that the low
level of maintenance required and high level of connectivity should be able to
meet market demand for many years into the future.
HPNA ACCESS DEVICES
HPNA is a broadband network access system based on the HomePNA technology
originally invented in the United States. This system can provide 1M/10Mbps
broadband data access through existing telephone lines. This technology allows
both voice and data to be shared by the same telephone line. Furthermore, our
HPNA technology extends Internet transmission distance, allows for multiple
single-line users (up to 25), and is compatible with cable, fiber, wireless and
xDSL. Combined with our ADSL and VDSL access devices, HomePNA is a great
solution to "the last mile problem." We believe that the quality and
affordability makes the product ideal for residences, schools, cafes and hotel
resorts.
WIRELESS COMMUNICATION PRODUCTS
Our wireless networking products allow computers and appliances to
communicate through radio signals, providing added mobility and convenience.
With the development of our IEEE802.11 and IEEE802.lx wireless solutions, both
individual and corporate clients can enjoy work environments free of cords and
wires. Furthermore, customers can enjoy the stability and security of our LAN
products. All wireless solutions are equipped with a user verification function
to maximize security and reduce outside interference.
We were one of the first companies in Taiwan to develop wireless products
with IEEE902.1x in May 2002. Together with Easy-Up Corporation, one of Taiwan's
leading wireless ISP companies, we have provided solutions to Korea Life
Insurance in connection with their 1600 Enterprise Hotspot Project. Easy-Up
Corporation established Taiwan McDonald's 365 stores Hotspot solution and the
Mobile Taiwan project. We also extended our Wireless Hotspot solution business
with China Putian. Also, as a result of our relationship with International
Telecoms, we expanded our business to mobile handsets, including GSM/GPRS,
CEDMA/CDMA 2000 1x mobile handsets. We also cooperated with Korean and Taiwan
partners to develop and expand our business into Africa and other Asian
countries.
In June 2004, we received a purchase order of 10,000 units of ODM mobile
phones from South Africa. More than half of the order came from Edcon Group,
which owns over 660 stores throughout South Africa and is also a stock listing
company in the Johannesburg Stock Exchange. The remainder of the order came from
MTN, which is the second-largest cellular network operator in South Africa.
FIBER AND OTHER IMPORTANT ACCESS EQUIPMENT
FTTB (Fiber to the Building) and FTTH (Fiber to the Home), optical fiber
installed directly into a home or enterprise, was a new growth market for us. To
meet our customer's needs we began outsourcing the Fiber solutions in 2003, and
have created our own Fiber products since 2004. We have already shipped these
solutions to customers in Korea, Malaysia and Indonesia.
With our access equipment, bandwidth can be distributed efficiently to
multiple end users. For developing countries such as China, our solution of
integrating wireless with existing telephone lines or cable is often much more
attractive than building new infrastructure. From routers and hubs, to PCMCIA
cards and USB adapters, we provide customers with a wide range of networking
products to meet all customer needs.
4
GPS MODULE
The Global Positioning System, or GPS, solution is another new market for
us. We began outsourcing our GPS solution in 2003 and have shipped this solution
to Korea. From 2004 we cooperated with JuYoung Electronics Co. in Korea to
design the GPS total mobile data terminal solution. To accompany the growth in
perceived GPS demand, we have aggressively concentrated on the marketing and
distribution of electronic appliances related to this trend. We intend to target
markets in China, Japan and other Asian countries.
In the summer of 2004, we received an official purchase order of GPS
modules, amounting to around 50,000 units, from JuYoung Electronics, a customer
who had previously placed the order in March 2004. In December 2004, we shipped,
for a separate order, 65,000 advanced, high performance GPS modules and wireless
blue tooth receiver units to JuYoung Electronics. The ongoing development of the
cooperative venture between our company and JuYoung Electronics over the past
two years has primarily involved a host of GPS products and accessories which
are subsequently marketed and sold to numerous large manufacturers and IT
companies across Korea.
CORPORATE PROFILE
We believe that we deliver a very comprehensive solution for Taiwan's
broadband market for broadband qualification, installation and support. It is
our goal to simplify how people access the Internet through easy-to-use
broadband connectivity products and solutions. Our product offerings and
development efforts are focused on increasing the speed and efficiency of the
"last mile" portion of communications networks. Through a combination of
fixed-wire and wireless products, our network equipment connects Internet
service providers to their end users.
We are growing fast and are one of the leading technology developers of
broadband and wireless networking products in Taiwan. We have gained industry
recognition for developing high performance broadband access solutions. City
Network's range of products provide a complete solution for providing high speed
broadband Internet access in homes, airports, convention centers, hotels and
other public establishments. Simplicity of use, ease of implementation and
cost-effectiveness are the cornerstones of our solution. We are quickly evolving
into a global company with rapid expansion of our distribution network and
marketing offices in North and South America, Europe, Japan and the entire Asia
Pacific region.
PRODUCTS
We believe that the core technology of current communications networks is
enhancing the speed, bandwidth and quality of Internet/data, video and voice
transmissions. Our fiber, copper, and wireless connectivity components serve as
the critical junction and connection points that link one network to another. We
believe that we have both the agility and depth to deliver tailored and exact
solutions to meet customers' needs. We offer products for several technology
platforms. We believe we have the capability of delivering high speed broadband
access to the end user whether they are at home, in the office or on the road.
CABLE/OPTICAL NETWORKING PRODUCTS
* Our cable and optical products multiply bandwidth among all users over
tree-based topology coax or optical cables.
* We are able to custom design this product to meet large systems
integrators and telecommunications companies' needs.
* Our products are designed to be easily set-up, integrated and
maintained to meet the needs of multi-dwelling unit buildings and
large office complexes.
5
XDSL PRODUCTS
* xDSL is an alternate and lower cost technology to connect to the
Internet. xDSL is substantially cheaper than other broadband
solutions, especially with the ADSL solution is becoming more popular
throughout the world.
* xDSL does not require a high-level technical support structure. Per
port ADSL can often cost under $50 to install and implement, making it
most suitable to home users, and the VDSL (at 13-54 Mbs) can often
cost under $100 to install and implement, making it most suitable to
small businesses and telecommuters who cannot afford a T1 line.
* Our xDSL standard can achieve 13-54 Mbps and higher rates of data
transfer. We are able to provide the QAM or DMT solution with what we
believe is high quality at low cost.
* Our ADSL solution has received certification by China Telecom and
China Network Communication Corp., Korea Telecom, Malaysia Telecom and
Turkey Telecom.
HOME PHONE LINE WIRING (HPNA)
* Our HPNA products allow for networking a home using the existing phone
wiring.
* Our HPNA 2.0 standard can achieve 10-16Mbps and higher rates of data
transfer.
* HPNA technology allows up to twenty-five computers to connect
simultaneously using the same Internet source.
* Compatible with POTS telephony and ADSL signaling on the same wire.
WIRELESS
* Wireless broadband eliminates the need for phone lines, cables and
electrical outlets.
* Supports bandwidth-intensive applications such as graphic rich media,
animation, Internet phone calls and video conferencing (without
breaking up), sending and receiving of large email messages or files,
online banking, investing or online shopping. Our total solution of
wireless access devices allow users to access their LAN or VPN, as if
the remote office was connected directly to our backbone network. It
also lets business customers raise the level of worker productivity
and allow companies to offer highly efficient work-at-home programs to
their employees.
* Using authentication and verification technology, we are able to
ensure the security of a wireless network.
* Our Public Hotspot Wireless Solution (PWLAN) has what we believe to be
a good security function. We have already established successful
projects in Korea and Taiwan.
* Our wireless products are not only for indoor use, but also for
outdoor use, to establish Hot-Zone services, a technology for wireless
Internet access. They feature special functions needed for such
products, such as security protections, load balance for avoiding
network bottlenecks and repeat functions for transmit data without
missing parts.
GPS
* We have GPS Modules come in two types. GPS 9543 has potential
applications in car navigation, marine navigation, fleet management,
automatic vehicle location (AVL) and other location-based services,
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auto pilot systems, personal navigation or touring devices, tracking
devices and mapping devices. GPS 9547 has possible applications in
PDA, pocket PC and other computing devices, car navigation, marine
navigation, fleet management, AVL and other location-based services,
and hand-held devices for personal positioning and navigation.
* We have end user accessories for GPS products, including compact flash
cards, smart antennae, and Bluetooth accessories for PDA, cars and
notebooks. Our GPS 9532 smart antenna & 9534 compact flash cards have
potential applications in car navigation, marine navigation, fleet
management, AVL and other location-based services, auto pilot,
personal navigation or touring devices, tracking devices, mapping
devices and land management systems. Bluetooth GPS receivers have
potential applications in vehicle tracking and other location-based
services, personal/portable navigation, car navigation and marine
navigation.
* We are also a system provider, including for telematics that combine
wireless telecommunication and information technology networks, and
for mobile data terminals.
VOIP
* For the IP phone service provider, our IP phone carrier solution
already meets the standard H.323 & Sip modes.
* For the enterprise our VoIP can choice the H.323 or Sip mode, and also
provide PSTN ports. Those VoIP products have digital enhanced cordless
telecommunications, or DECT, base stations.
* For customer premises equipment, our products include a USB IP phone,
a wireless fidelity IP phone, and an Integrated Access Device (IAD).
RECENT DEVELOPMENTS
Our subsidiary, City Construction, has been planning a new construction
project in Keelong City, Taiwan since the end of 2004. We entered into a
contract in the first quarter of 2005 for construction of a 581 square meter
residential building and expect work to begin in the second quarter of 2005 for
a period of one to two years. Upon completion, we will split the building with
the property owner, who will take 40% of the building. We anticipate that this
project will generate sales of $3 to $4 million once completed. This project is
subject to risks involving the cost of construction materials over the course of
its construction and our ability to sell this project to customers, as well as
changes in the political and overall economic conditions of Taiwan, which are
outside the control of management. We cannot assure you that adverse changes in
these factors will not occur or, if they occur, that they will not have a
material adverse effect on our business, operating results and financial
condition.
MARKET OVERVIEW
Information is proliferating worldwide, and demand for that information, by
businesses, governments, universities and individuals is exploding, driven
primarily by the exponential increase in use of the Internet for communications,
information gathering and electronic commerce.
As business becomes more complex and geographically diverse, the demand for
information, delivered to the "transaction point," wherever in the world that
point might be, has fueled the increase in networks and computer connectivity
systems. These trends have created an ever-increasing demand for bandwidth to
accommodate both Internet and network traffic. However, we do not believe that
the growth and technological advancement of the hardware backbone for networking
and computer connectivity has kept pace with that demand. We believe that the
worldwide struggle to bring networking and computer connectivity hardware up to
the level of demand represents a business opportunity for us. Our strategic
objective is to become a leading designer and manufacturer in the networking and
computer connectivity equipment industry.
7
BUSINESS STRATEGY
The networking and computer connectivity industry is characterized by rapid
technological change. To maintain and enhance our competitive position, we
constantly adapt to technological changes by upgrading and expanding our product
line, and eliminating obsolete products within that line.
We believe that the networking and computer connectivity industry is also
characterized by inevitable price erosion across the life cycle of products and
technologies. To maintain profitability in the face of constantly shrinking
gross margins, our strategy is to seek out low cost producers without
sacrificing quality and to develop and maintain efficient internal operations
which would allow us to control our expenses.
We are constantly expanding and changing product lines to increase the
total number of products offered to attract new customers, to penetrate new
geographic and vertical markets and to increase gross sales. By expanding our
product line to include products for different technologies, frequencies and
connection configuration, we have been able to expand sales activities into a
number of new markets.
Eight years ago CNT-Taiwan developed and expanded the Home PNA business. In
order to establish good business relationships with telecommunication companies
we prepared a variety of solutions for them, including project proposals. We
believe that because of our willingness to assist these companies in the past,
we will be successful in expanding our business relationships with these
companies.
INDUSTRY GROWTH DRIVERS
GROWING NEED FOR ADDITIONAL BANDWIDTH
We believe that the computer networking industry is witnessing a growing
demand for additional bandwidth as a result of the popularity of the Internet
and global need for rapid, current information. We believe that many people who
use the Internet cannot access information/download pages quickly because their
ISP's hardware is out-dated or low-quality and therefore unable to process
hundreds of thousands of requests simultaneously. This is a particularly acute
problem during peak hours and in markets with little infrastructure. Therefore,
we are is focused on improving the quality of Internet connectivity in systems
worldwide.
IN-HOME NETWORKING SYSTEMS
We believe that an emerging market opportunity exists in connecting
household appliances and computers in homes. With our HPNA networking products,
we believe numerous applications can be developed to program, control and
interact with home heating, lighting, security, and appliances. We believe
advances such as these will spur growth and encourage innovation worldwide and
we believe that we are in a position to help make these technologies accessible.
PROLIFERATION OF HANDHELD/COMMUNICATION DEVICES
We believe that the cornerstone on which the new economy is built is the
timely delivery and access to information at any location. We believe that the
growth and productivity of today's business economy is reliant upon the
accuracy, efficiency and accessibility to data and communication. With the
growth in popularity of handheld/communication devices and their great
functional complexity, consumers will be able to access a wide array of
multimedia content wherever they may be located. We believe that in the future,
mobile phones and PDA's will enjoy unhindered access to rich multimedia content
via the Internet and it is our intention to play a role in this type of
transaction.
EXPANSION OF PC'S INTO DEVELOPING COUNTRIES
As PC's become ubiquitous throughout the world's emerging economies, we
believe the number of high capacity PC's with added features and better
voice/image quality will increase exponentially. We believe that the spread of
8
the information economy will continue to drive and enable developing countries
to utilize Internet technology.
GROWTH OF THE INTERNET
The growth of the Internet has forced many telecommunication service
providers to replace their voice networks with more efficient, data-oriented
packet networks. We believe that the increased demand for services and data over
the Internet will require companies to upgrade their infrastructure to meet
demand. We are partnering with local telecommunications companies to develop
new, cost effective and complete solutions for broadband Internet access in new
markets.
GROWTH/EXPANSION STRATEGY
It is our strategic objective to become a leader in the computer and
network connectivity equipment market, and to make our name synonymous with
excellence and state-of-the-art hardware in this segment.
PROVIDING INTEGRATED SOLUTIONS
We provide voice, data and Internet solutions which are capable of being
integrated into one seamless IP-based communications network. We believe that an
integrated solution will cost effectively connect an unlimited variety of
applications and services, enabling broader choice of devices for customer
services provided over a common platform.
EXPLORE ADDITIONAL REVENUE GENERATING SERVICES
We believe that unlocking content (voice, data, video, text, commerce,
etc.) so it can flow unfettered among applications will have the potential to
provide a future revenue source. We believe that the creation of content and the
precision delivery to targeted clients and markets will also become increasingly
important. Some examples include news, online shopping, gaming, video, security
and other relevant content.
BUILDING INTERNATIONAL PRESENCE
We believe that the low penetration rate of broadband Internet in
developing countries has created an enormous opportunity for us. The demand for
Internet throughout the world creates opportunity in otherwise unexpected
venues. Particularly in new and emerging growth markets, we intend to continue
partnering with individuals, companies and governments in these areas as part of
our growth strategy.
PARTNERING, ACQUIRING AND COOPERATING WITH THIRD PARTIES
We believe that our success has been largely due to the fact that we have
established long term relationships with system integrators, electronics
manufacturers and telecommunication companies. Joint ventures and cooperative
efforts have been the hallmark of our development into new areas. In the future,
we intend to continue expanding through mergers and other cooperative synergies.
We believe that the blending of manufacturing expertise, market savvy and local
know-how will contribute to our growth in the future.
CUSTOMERS
We develop market and focus our sales efforts to broadband and wireless
Internet services providers that provide wireless solutions such as Phoneline
solution, HomePNA, xDSL, Ethernet solution, fiber solution and wireless
solutions. We also focus our sales efforts on the service provider and systems
integrator for WLAN systems and to system integrators for private broadband
systems.
We also focus our sales efforts in service providers and systems
integrators for WLAN systems and private broadband systems. We have also
expanded our sales efforts to the mobile handset market and the 3G market. We
believe that we provide the best service to our existing customers and partners
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such as Korea Telecom, China Telecom, Malaysia Telecom, and those located in
Finland, Japan, Asia and Africa. We do our best to expand our business with our
existing customers and to develop new partners and customers through the quality
of our product solutions and service and cost.
SERVICE PROVIDERS
Over 120 independent operating companies in over 24 countries now use our
products to deliver Internet service over HomePNA, xDSL and other broadband
networks. Our customers include a cross-section of small, medium and large
telecommunications companies in the United States, Asia, Europe and Africa. We
have established business relationships with companies such as Korea Telecom,
OCC Communications in Japan and nSTREAMS in the United States as well as with
other companies in Mainland China, Finland, Malaysia, Singapore, South Africa,
Indonesia and the Philippines, of which Singapore uses our HomePNA solution and
launched HomePNA Internet services on its network. Korea Life Insurance ("KLI")
has contracted with us to establish over 1,600 branches of WLAN Internet service
for KLI in Korea. In addition, we were also appointed by McDonald's to set up
WLAN services in approximately 360 McDonald's stores in Taiwan.
SYSTEM INTEGRATORS
We market our private broadband data systems to domestic and international
system integrators who in turn market and sell our products to educational and
government institutions, small to large commercial enterprises, and to regional
competitive service providers and national carriers. Our system integrators
range from small local companies to volume distributors such as Easy-Up
Corporation, to country-specific integrators such as Terton Communications in
Finland, and to international integrators such as KWON C&C Ltd. in Korea and
China Telecom in China.
MARKETING, SALES AND CUSTOMER SUPPORT
MARKETING
We seek to increase demand for our products and to expand both the
visibility of our company and our products in the market. In addition to
customer-specific sales efforts, our marketing activities include attendance at
major industry tradeshows and conferences, the distribution of sales and product
literature, operation of a web site, direct marketing and ongoing communications
with our customers, the press, and industry analysts. As appropriate, we enter
into cooperative marketing and/or development agreements with strategic partners
that may include key customers, application manufacturers, fiber, or video
equipment manufacturers, set-top box manufacturers, and others.
SALES
We sell our products through multiple sales channels in overseas markets,
including a select group of regional value added resellers, system integrators
and distributors, data networking catalogs and directly to service providers.
Internationally, we sell and market our products through sales agents, systems
integrators and distributors. In 1999, we opened a sales office in Shanghai and
partnered with Shanghai Telecom to establish their HomePNA + xDSL Internet
service project. We now have a sales presence in China. For the ten months ended
December 31, 2004, we derived approximately 90% of our revenue from customers
outside of the United States. We believe that our products can serve a
substantial market for digital and high-speed data access products outside of
the United States.
CUSTOMER SUPPORT
We believe that consistent high-quality service and support is a key factor
in attracting and retaining customers. Service and technical support of our
products is coordinated by our customer support organization. Our Systems
Application Engineers, located in each of our sales regions, support pre-sales
and post-sales activities. Customers can also access technical information and
receive technical support via our web site. We train our sales support to solve
the problem at the customer's first call.
10
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on enhancing our existing
products and developing new products through our emphasis on early stage system
engineering. The product development process begins with a comprehensive
functional product specification based on input from the sales and marketing
organizations. We incorporate feedback from end users and distribution channels,
and through participation in industry events, industry organizations and
standards development bodies, such as the FS-VDSL Committee and MPEG-4 Industry
Forum. Key elements of our research and development strategy include:
* CORE DESIGNS. We seek to develop and/or acquire core designs that
allow for cost-effective deployment and flexible upgrades that meet
the needs of multiple markets and applications. These designs place
emphasis on the following characteristics of our products: user
friendly, high performance, robustness, standardization, and value
adding.
* PRODUCT LINE EXTENSIONS. We seek to extend our existing product lines
through product modifications and updating chipsets to provide for
greater bandwidth in order to meet the needs of particular customers
and markets. Products resulting from our product line extension
efforts include the Phoneline solution, HomeHPNA, xDSL and Fiber
solution. We also focus on updating the Wireless solution to the new
generation including WIRELESS IEEE802.11G, a worldwide
specification/standard.
* MINIMIZE COST OF GOODS. Our design philosophy emphasizes the use of
industry standard hardware and software components whenever possible
to reduce time to market, decrease the cost of goods and reduce the
risks inherent in new design. In order to maintain low costs of our
services, we established a Components Sales Department whose main
goals are to process our current customer's business and to seek out
secondary sources of components and spare product parts in order to
continually lower the cost of manufacturing and assembly.
* NEW TECHNOLOGIES. We seek to enhance our product lines by
incorporating emerging technologies, such as IEEE802.1x Security,
higher speed interfaces and new network management software features.
Our wireless solution with IEEE802.1x Security was the first ever such
solution used in the wireless channel in Taiwan. We are now in the
process of developing the 54M , 4-Band VDSL systems.
* EXTEND PRODUCT LINE BY PARTNERING WITH OTHER COMPANIES. Due to the
expanding mobile phone market, we extended our product line in 2003.
First, we are cooperating with Korea Startel to develop a new model of
the GPRS mobile phone. The planned release date is in 2003 where mass
production will likely begin in June 2003. Furthermore, we have plans
to develop the CDMA 2001.1x GSM public phone to meet the high demand
of such phone in the Mainland China market. In addition, we have
extended our product line by cooperating with our main Korean partner
K-WON, a company which recently developed a Bluetooth Headset and has
granted us distribution and sales rights to this product for any
country outside of Korea.
* EXTEND PRODUCT LINE BY PARTNERING WITH OTHER COMPANIES. Due to the
expanding mobile phone market, we extended our mobile product line in
2003. First, we cooperated with Korea Startel to develop a new model
of the GPRS mobile phone, and began mass production in June 2003.
Furthermore, we have plans to develop the CDMA 2001.1x in 2004, and
have already had it approved with China Unicom. For the increasing 3G
market, CDMA 2000.1x public phones meets the high demands for such
phones in mainland China and the US markets. We have developed the
CDMA 2000.1x Internet PCMCIA card and USB adapter and have begun
selling them in 2004.
We have plans to join forces with a local Taiwanese university in an effort
to encourage rapid product growth and to facilitate the continuous training of
future technical personnel. We have formally established an educational and
development center at Tamkang University in Taiwan, the primary focus of which
is on the technology and information industry. We believe that the establishment
of this type of partnership will have a profound effect on our product
competitiveness and marketing ability in the long term. In 2004 our educational
11
and development center at Tamkang University in Taiwan developed mobile and
online games, and entered into an agreement with Chung Hwa Telecom on their
online games ASP (Active Server Pages, a program code for online games).
In fiscal year 2002, we spent approximately $1,000,000 to buy the
exclusive rights to A Best Home PNA Technology, which allowed us to expand our
broadband business quickly, including into the Korean market. In 2004 we had
over $3 million in revenues from Korea. We also had the opportunity to cooperate
with China Putian to establish a joint venture company, Beijing Putian Hexin,
which was named one of the top ten ADSL best vendors of China Telecom in 2003
and one of the top five ADSL best venders in 2004, named by Beijing CCID, Media
Investments Co. (China Netcom Group).
We are responsible for providing funding for expenses such as salary and
stipends for the center's staff, as well as other general expenditures.
Expenditures for research and development in the ten months ended December 31,
2004 totaled $12,000 compared to $1,500,000 in the same period for 2003. The
reason for the reduction in these expenditures is due to the fact that some
third party development corporation projects were not finished in 2003, and
needed to be modified in 2004. However, the new project has not started yet.
MANUFACTURING
We do not manufacture any of our own products. We rely on contract
manufacturers to assemble, test and package our products. We require
International Organization for Standardization (ISO) 9002 registration for these
contract manufacturers as a condition of qualification. We monitor each
contractor's manufacturing process performance through audits, testing and
inspections. Each contractor's quality is also rigorously assessed through
incoming testing and inspection of packaged products received from each
contractor. In addition, we monitor the reliability of our products through
in-house repair, reliability audit testing and field data analysis.
The manufacturers' warranty for each of our products is two years.
Typically we offer the same warranty on these products to our customers but for
a shorter time period, generally 12 to 18 months. We have implemented this
practice to protect ourselves against risk and financial loss on products
shipped to customers which break, need repair or are defective. Depending on the
situation, we can extend the warranty period enhancing the quality of service
and strengthening relationships with our customers. In order to decrease costs,
we have established joint venture projects with product manufacturers in China.
This allows us to save transport costs and forwarding charges when distributing
products to customers in China. We have established a rigid system of quality
control with these manufacturing partners.
We currently purchase a substantially portion of the raw materials and
components used in our products through contract manufacturers. We forecast our
product requirements to maintain sufficient product inventory to ensure that we
can meet the required delivery times demanded by our customers. Our future
success will depend in significant part on our ability to obtain manufacturing
on time, at low costs and in sufficient quantities to meet demand.
INTELLECTUAL PROPERTY
Our trademarks, service marks, trade secrets, proprietary technology and
other intellectual property rights distinguish our products and services from
those of our competitors, and contribute to our competitive advantage in its
target markets. To protect the our brand, products and services and the systems
that deliver those products and services to our customers we rely on a
combination of trademark and trade secret laws as well as confidentiality
agreements and licensing arrangements with its employees, customers, independent
contractors, sponsors and others.
We strategically pursue the registration of our intellectual property
rights. However, effective patent, trademark, service mark, copyright and trade
secret protection may not always be available. Existing laws do not provide
complete protection, and monitoring the unauthorized use of our intellectual
property requires significant resources. We cannot be sure that our efforts to
protect our intellectual property rights will be adequate or that third parties
will not infringe or misappropriate these rights. In addition, there can be no
assurance that competitors will not independently develop similar intellectual
property. If others are able to copy and use our products and delivery systems,
12
we may not be able to maintain our competitive position. If litigation is
necessary to enforce our intellectual property rights or determine the scope of
the proprietary rights of others, we may have to incur substantial costs or
divert other resources, which could harm our business, operating results and
financial condition. We presently have no patents or patent applications granted
or pending in the United States.
In order to develop, improve, market and deliver new products and services,
we may be required to obtain licenses from others. There can be no assurance
that we will be able to obtain licenses on commercially reasonable terms or at
all or that rights granted under any licenses will be valid and enforceable.
EMPLOYEES
As of December 31, 2004, we had a total of 70 employees. Of these, 13 are
in administration, eight are in finance, 13 are in research and development, six
are in software research and development, ten are in international partner
cooperation and 20 are in sales and marketing. None of our employees are covered
by any collective bargaining agreement. We generally consider our relationship
with our employees to be satisfactory and have never experienced a work
stoppage.
REGULATIONS
We have not been materially impacted by existing government regulation and
are not aware of any potential government regulation that would materially
affect our operations.
RISK FACTORS
In addition to the other information in this annual report, our business is
subject to numerous risks which should be considered carefully in evaluating our
business, operating results, financial condition and prospects. The following
matters, among others, may have a material adverse effect on our business,
operating results, financial condition, liquidity, results or operations or
prospects, financial or otherwise. Reference to this cautionary statement in the
context of a forward-looking statement or statements shall be deemed to be a
statement that any one or more of the following factors may cause actual results
to differ materially from those in such forward-looking statement or statements.
RISKS ASSOCIATED WITH OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY
We have a limited operating history upon which potential investors may base
an evaluation of its prospects and there can be no assurance that we will
achieve our objectives. Our prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in a rapidly evolving market such
as the market for Internet broadband and wireless infrastructure equipment and
services. Such risks include, but are not limited to: our ability to obtain and
retain customers and attract a significant number of new customers, the growth
of the satellite, wireless, broadband and Internet markets, our ability to
implement our growth strategy, especially the sales and marketing efforts,
intense competition from providers of broadband products, services and the
telecommunication industry in general, and other risks associated with
financing, liquidity requirements, rapidly changing customer requirements and
the volatility of the public markets.
OUR GROWTH AND ABILITY TO GENERATE REVENUE COULD BE CURTAILED IF WE ARE UNABLE
TO OBTAIN REQUIRED ADDITIONAL FINANCING.
We currently anticipate that our available funds and resources, including
product sales will be sufficient to meet our anticipated needs for working
capital and capital expenditures for the next 12 months. We will need to raise
additional funds in the future in order to fund more aggressive brand promotion
and more rapid expansion, to develop new or enhanced products, to respond to
competitive pressures or to acquire complementary businesses or technologies. If
additional funds are raised through the issuance of equity or convertible debt
13
securities, the current stockholders may experience dilution and any such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock. There can be no assurance that additional financing
will be available on terms favorable to us, or at all. If adequate funds are not
available or not available on acceptable terms, we may not be able to fund our
expansion, promote our brand name as we desire, take advantage of unanticipated
acquisition opportunities, develop or enhance products or respond to competitive
pressures. Any such inability could have a material adverse effect on our
business, results of operations and financial condition.
We will need to raise additional funds in the future through public or
private financing, which may include the sale of equity securities. The issuance
of these equity securities could result in dilution to our stockholders. If we
are unable to raise capital when needed, our business strategy will be affected,
which could severely limit our ability to grow the company and our ability to
generate revenue.
WE MAY INCREASE OUR INDEBTEDNESS TO FUND OUR OPERATIONS AND INVESTMENT
OBJECTIVES, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
To fund our operations, we may need to raise additional funds through
public or private financing, including taking on additional indebtedness. We
cannot assure you that we will incur indebtedness on commercially reasonable
terms or at all. Additional indebtedness we take on may make us more vulnerable
to general adverse economic and industry conditions; require us to dedicate a
substantial portion of our cash flow from operations to payments on our
indebtedness, thereby reducing the availability of our cash flow to fund working
capital, future investments, capital expenditures and other general corporate
purposes; limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; place us at a competitive
disadvantage compared to our competitors that have less debt; and limit our
ability to borrow additional funds. Additionally, the instruments or agreements
for indebtedness that we may incur may limit our ability to operate, change or
expand our business, make future investments and make dividends and
distributions to our stockholders.
OUR QUARTERLY OPERATING RESULTS HAVE IN THE PAST AND MAY CONTINUE TO FLUCTUATE
We may experience significant fluctuations in future quarterly operating
results that may be caused by many factors, including, among others: delays in
our introduction of products or product enhancements; costs associated with
product or technology acquisitions; the size and timing of individual orders;
competition and pricing in the broadband Internet access industry; seasonality
of revenues; customer order deferrals in anticipation of new products; market
acceptance of new products; reductions in demand for existing products and
shortening of product life cycles as a result of new product introductions;
changes in operating expenses; changes in our personnel; changes in regulatory
requirements; mix of products sold; and general economic conditions. As a
result, we believe that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
Certain conditions may exist as of the date the financial statements are
issued, which may result in a loss to us but which will only be resolved when
one or more future events occur or fail to occur. Our 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 us or unasserted claims that may
result in such proceedings, our 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 our 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.
14
OUR FAILURE TO MANAGE GROWTH WILL ADVERSELY AFFECT OPERATIONS
We plan to significantly expand our sales, marketing, research and
development activities, hire a number of additional employees, expand internal
information, accounting and billing systems and establish additional
distribution outlets throughout the world. In addition, we plan to expand our
infrastructure by investing in additional research and development talent. In
order to successfully manage growth, management must identify, attract,
motivate, train and retain highly skilled managerial, financial, engineering,
business development, sales and marketing and other personnel. Competition for
this type of personnel is intense. If management fails to effectively manage our
growth, our business and viability will be materially and adversely impacted.
WE MAY FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES
The market segments we are targeting are characterized by rapidly changing
technology, evolving industry standards and frequent new product and service
introductions. These factors require management to continually improve the
performance, features and reliability of the array of our products. Management
may not successfully respond quickly enough or on a cost-effective basis to
these developments. We may not achieve widespread acceptance of our services
before our competitors offer products and services with speed, performance,
features and quality similar to or better than our products or that are more
cost-effective than our services.
IF OUR CUSTOMERS DO NOT ACCEPT OUR PROPOSED DESIGNS, OUR REVENUE WILL BE
ADVERSELY AFFECTED.
We dedicate personnel, management and financial resources to developing and
designing new products for our customers. We have modified new products such as
VoIP and upgraded software for GPS products. It takes about one year to modify
the software, and the salaries for our research and development staff is about
$35,000 annually. If our customers do not accept our proposed designs, we will
fail to capitalize on the invested resources, time and effort that we expended
on a project and our revenue would be adversely affected.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY
The market for Internet broadband and wireless infrastructure equipment and
services is rapidly evolving and highly competitive. Many of our competitors and
potential competitors have substantially greater financial, technical, and
managerial and marketing resources, longer operating histories, greater name
recognition and more established relationships than us. Since our business is
partially dependent on the overall success of the Internet as a communication
medium, it also competes with traditional hardware based access and equipment
providers. Management expects competition from these and other types of
competitors to increase significantly.
WE MAY EXPERIENCE DIFFICULTIES IN INTEGRATING THE BUSINESSES, PRODUCTS AND
TECHNOLOGIES WE MAY ACQUIRE INTO OUR BUSINESS
We may acquire businesses, products and technologies and enter into joint
ventures and strategic relationships with other companies. Any of these
transactions exposes us to additional risks, including: the difficulty of
assimilating and integrating the operations of the combined companies; retaining
key personnel; the potential disruption of our core business; and the potential
additional expenses associated with amortization of acquired intangible assets,
integration costs and unanticipated liabilities or contingencies.
LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS
Given the early stage of development of our business, we depend highly on
the performance and efforts of our Chief Executive Officer and Chairman, Mr.
Tiao-Tsan "Andy" Lai, staff and our board of directors. If we should lose the
service of any members of our management team or other key personnel, our
business, operating results and financial condition may be materially impacted.
15
ENACTMENT OF NEW LAWS OR CHANGES IN GOVERNMENT REGULATIONS COULD ADVERSELY
AFFECT OUR BUSINESS
We are not currently required to comply with direct regulation by any
domestic or foreign governmental agency, other than regulations applicable to
businesses generally and laws or regulations directly applicable to the
Internet. However, due to the increasing popularity of the Internet, it is
possible that additional laws may be adopted regarding the Internet, any of
which could materially harm our business, operating results and financial
condition. The adoption of any additional laws may decrease the growth of
Internet use, which could lead to a decrease in the demand for our services or
increase the cost of doing business.
OUR INABILITY TO OBTAIN PATENT AND COPYRIGHT PROTECTION FOR OUR TECHNOLOGY OR
MISAPPROPRIATION OF OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR
COMPETITIVE POSITION
Our success depends on internally developed technologies, know-how,
trademarks and related intellectual properties. Management regards the
technology as proprietary and will attempt to protect it by seeking patents,
copyrights or trademarks, and by invoking trade secret laws and confidentiality
and nondisclosure agreements. Despite these precautions, it may be possible for
a third party to obtain and use our services or technology without
authorization.
We intend to apply for registration of certain copyrights and a number of
key trademarks and service marks and intends to introduce new trademarks and
service marks. Management may not be successful in obtaining registration for
one or more of these trademarks. Management may need to resort to litigation in
the future to enforce or to protect intellectual property rights, including
patent and trademark rights. In addition, our technologies and trademarks may be
claimed to conflict with or infringe upon the patent, trademark or other
proprietary rights of third parties. If this occurred, we would have to defend
ourselves against such challenges, which could result in substantial costs and
the diversion of resources. Any of these events could have a material adverse
effect on our business, operating results and financial condition.
RISKS ASSOCIATED WITH DOING BUSINESS IN ASIA
There are substantial risks associated with our Asian operations. The
establishment and expansion of international operations requires significant
management attention and resources. All of our current and anticipated future
revenues are or are expected to be derived from Asia. Our international
operations are subject to additional risks, including the following, which, if
not planned and managed properly, could have a material adverse effect on our
business, financial condition and operating results, language barriers and other
difficulties in staffing and managing foreign operations:
* legal uncertainties or unanticipated changes regarding regulatory
requirements, liability, export and import restrictions, tariffs and
other trade barriers;
* longer customer payment cycles and greater difficulties in collecting
accounts receivable;
* uncertainties of laws and enforcement relating to the protection of
intellectual property;
* seasonal reductions in business activity; and
* potentially uncertain or adverse tax consequences.
In addition, changes in the political and overall economic conditions of
the Asian region, which are outside the control of management, could have a
material adverse effect on our business, operating results and financial
condition.
FLUCTUATIONS IN THE VALUE OF THE TAIWANESE CURRENCY RELATIVE TO FOREIGN
CURRENCIES COULD AFFECT OUR OPERATING RESULTS.
We have historically conducted transactions with customers, paid payroll
and other costs of operations in the Taiwanese national currency, the New Taiwan
Dollar. To the extent our future revenue may be denominated in foreign
16
currencies, we would be subject to increased risks relating to foreign currency
exchange rate fluctuations which could have a material adverse affect on our
financial condition and operating results. To date, we have not engaged in any
hedging transactions in connection with our international operations.
FAILURE TO COMPLY WITH THE UNITED STATES FOREIGN CORRUPT PRACTICES ACT COULD
ADVERSELY IMPACT OUR COMPETITIVE POSITION AND SUBJECT US TO PENALTIES AND OTHER
ADVERSE CONSEQUENCES.
We are subject to the United States Foreign Corrupt Practices Act, which
generally prohibits United States companies from engaging in bribery or other
prohibited payments to foreign officials for the purpose of obtaining or
retaining business. Foreign companies, including some that may compete with us,
are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs,
theft and other fraudulent practices occur from time-to-time in the non-U.S.
countries in which we conduct business. We have attempted to implement
safeguards to prevent and discourage such practices by our employees and agents.
We can make no assurance, however, that our employees or other agents will not
engage in such conduct for which we might be held responsible. If our employees
or other agents are found to have engaged in such practices, we could suffer
severe penalties and other consequences that may have a material adverse effect
on our business, financial condition and results of operations.
RISKS ASSOCIATED WITH INVESTING IN OUR COMMON STOCK
EFFORTS TO COMPLY WITH RECENTLY ENACTED CHANGES IN SECURITIES LAWS AND
REGULATIONS WILL INCREASE OUR COSTS AND REQUIRE ADDITIONAL MANAGEMENT RESOURCES,
AND WE STILL MAY FAIL TO COMPLY.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC
adopted rules requiring public companies to include a report of management on
the company's internal controls over financial reporting in their annual reports
on Form 10-K. In addition, the public accounting firm auditing the company's
financial statements must attest to and report on management's assessment of the
effectiveness of the company's internal controls over financial reporting. This
requirement will first apply to our annual report on Form 10-KSB for our fiscal
year ending December 31, 2006. If we are unable to conclude that we have
effective internal controls over financial reporting or if our independent
auditors are unable to provide us with an unqualified report as to the
effectiveness of our internal controls over financial reporting as of December
31, 2006 and future year ends as required by Section 404 of the Sarbanes-Oxley
Act of 2002, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the value of our securities. We
have not yet begun a formal process to evaluate our internal controls over
financial reporting. Given the status of our efforts, coupled with the fact that
guidance from regulatory authorities in the area of internal controls continues
to evolve, substantial uncertainty exists regarding our ability to comply by
applicable deadlines.
OUR STOCK PRICE IS HIGHLY VOLATILE.
Our stock price has fluctuated dramatically. There is a significant risk
that the market price of our common stock will decrease in the future in
response to any of the following factors, some of which are beyond our control:
* variations in our quarterly operating results;
* announcements that our revenue or income are below analysts'
expectations;
* general economic slowdowns;
* changes in market valuations of similar companies;
* sales of large blocks of our common stock;
* announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
* fluctuations in stock market prices and volumes, which are
particularly common among highly volatile securities of
internationally-based companies.
17
THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK.
There is currently a limited public market for our common stock. Holders of
our common stock may, therefore, have difficulty selling their common stock,
should they decide to do so. In addition, there can be no assurances that such
markets will continue or that any shares of common stock, which may be purchased
may be sold without incurring a loss. Any such market price of the common stock
may not necessarily bear any relationship to our book value, assets, past
operating results, financial condition or any other established criteria of
value, and may not be indicative of the market price for the common stock in the
future. Further, the market price for the common stock may be volatile depending
on a number of factors, including business performance, industry dynamics, news
announcements or changes in general economic conditions.
OUR COMMON STOCK IS SUBJECT TO REGULATIONS PRESCRIBED BY THE SEC RELATING TO
"PENNY STOCKS".
The SEC has adopted regulations that generally define a penny stock to be
any equity security that has a market price (as defined in such regulations) of
less than $5.00 per share, subject to certain exceptions. Our common stock meets
the definition of a penny stock and is subject to these regulations, which
impose additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investor,
generally institutions with assets in excess of $5,000,000 and individuals with
a net worth in excess of $1,000,000 or annual income exceeding $200,000
(individually) or $300,000 (jointly with their spouse).
WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never declared or paid any cash dividends or distributions on our
common stock. We currently intend to retain our future earnings to support
operations and to finance expansion and therefore do not anticipate paying any
cash dividends on our common stock in the foreseeable future. ITEM 2.
DESCRIPTION OF PROPERTY.
Our main office is located at 6F-3, NO. 16, Jian Ba Road, Jhongue City,
Taipei County, Taiwan, consisting of approximately 557.72 square meters. The
landlord is Goang Dyi Shing Industrial Co. Ltd. The rent is NTD$135,000 per
month and the lease expires on May 31, 2005.
We own a property at 13F, No. 77, Hsin Tai Wu Road, Sec. J, Hsi-Chih,
Taipei County, Taiwan, R.O.C., consisting of approximately 370.68 square meters.
We purchased this facility in April 2001. We entered into a loan agreement with
the Fubon Bank in the amount of NTD$10,500,000 for the purchase of this
facility. The term of the loan is 15 years that began on May 29, 2001 and is
schedule to terminate on May 29, 2016. The monthly principal payments are
NTD$187,500 every three months. The monthly interest payment on the loan is
approximately NTD$26,293. The annual interest rate is 3.175%. Our office were
formerly at the Hsin Tai Wu Road space, but we have moved to the larger space at
Jian Ba Road and now rent the Hsin Tai Wu Road property to another company.
ITEM 3. LEGAL PROCEEDINGS.
We are not presently involved in litigation that we expect individually or
in the aggregate to have a material adverse effect on our financial condition,
results of operation or liquidity.
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 31, 2004, an annual meeting of our stockholders was held at our
main corporate offices in Taipei, Taiwan. There were 27,500,000 shares of common
stock outstanding on the record date and entitled to vote at the annual meeting.
The following directors were elected:
Name of Director Vote For Votes Withheld
---------------- -------- --------------
Tiao-Tsan "Andy" Lai 10,425,717 1,000
Yun-Yi "Stella" Tseng 10,425,717 1,000
Alice Chen 10,425,717 1,000
I-Min Ou 10,425,717 1,000
Chin-Yuan Liao 10,425,717 1,000
Mei-Chu Lai 10,425,717 1,000
Kao-Yu Hung 10,425,717 1,000
Chung-Chieh "Kevin" Lin 10,425,717 1,000
Yong Su 10,425,717 1,000
Pi-Liang Liu 10,425,717 1,000
The amendment and restatement of our bylaws to provide for terms we believe
are more appropriate to our current and future needs was ratified with
10,426,717 votes for, zero votes against and 17,074,283 abstentions. Our prior
bylaws were a legacy of our predecessor company, Investment Agents, Inc. Certain
provisions in our prior bylaws may have been tailored to specific needs of
Investment Agents, Inc. and were not necessarily useful or desirable for our
future needs.
The appointment of Lichter, Yu & Associates (formerly Lichter, Weil &
Associates) as our Independent Public Accountants for the ten months ending
December 31, 2004 was ratified with 10,426,717 votes for, zero votes against and
17,074,283 abstentions.
19
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTER MARKET
INFORMATION AND MARKET PRICE
Our common stock began trading on the American Stock Exchange on January
14, 2004 under the symbol "CSN". Previously, on June 25, 2002, our common stock
was initially traded on the OTC Bulletin Board under the symbol "IVAG", and on
January 17, 2003 our symbol changed to "CYNW". Prior to June 25, 2002, there was
no public market for our stock. The following table sets forth, (i) the high and
low bids as reported on the OTC BB during the fiscal year ended February 28,
2003 and the quarters ended through January 13, 2004, and (ii) the high and low
sales quotations for the partial period in the fiscal year ended February 29,
2004 from January 14, 2004 through February 29, 2004, the ten months ended
December 31, 2004 (including partial period) and the partial period in the first
quarter of the current fiscal year, based upon information supplied by the
American Stock Exchange.
Price Range of Common Stock
---------------------------
High Low
---- ---
2003
March 1, 2003 - May 30, 2003 $3.95 $2.00
June 1, 2003 - August 31, 2003 $3.00 $2.00
September 1, 2003 - November 30, 2003 $2.90 $2.40
December 1, 2003 - January 13, 2004 $3.00 $2.30
2004
January 14, 2004 - February 29, 2004 $2.74 $2.10
March 1, 2004 - May 30, 2004 $2.38 $0.73
June 1, 2004 - August 31, 2004 $0.99 $0.42
September 1 - November 30, 2004 $1.00 $0.46
December 1, 2004 - December 31, 2004 $1.23 $0.64
2005
January 1, 2005 - March 31, 2005 $0.86 $0.30
As of March 31, 2005, there were approximately 2,600 shareholders of record
of our common stock.
DIVIDEND POLICY
All shares of common stock are entitled to participate proportionally in
dividends if our board of directors declares them out of the funds legally
available. These dividends may be paid in cash, property or additional shares of
common stock. We have not paid any dividends since our inception and presently
20
anticipate that all earnings, if any, will be retained for development of our
business. Any future dividends will be at the discretion of our board of
directors and will depend upon, among other things, our future earnings,
operating and financial condition, capital requirements, and other factors. We
currently intend to retain our future earnings to support operations and to
finance expansion and therefore do not anticipate paying any cash dividends on
our common stock in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On January 15, 2004, we issued 500,000 shares of our common stock at $1.44
per share pursuant to a private placement exempt from registration pursuant to
Regulation S of the Securities Act. We received proceeds of $720,000 for this
private placement. The shares are restricted and do not have registration
rights. The offering price was negotiated with the shareholders at the time of
the offering. Of the shareholders in this offering, Yun-Yi Tseng was
subsequently appointed CFO and a director of our company.
On June 14, 1004, we issued 2,500,000 shares of our common stock in
exchange for the conversion in full of a note and short term debt payables to
third parties in the aggregate of $1,680,329. The note and short term debt
payables were converted into shares of common stock at a price of approximately
$0.672 per share. The shares are restricted and do not have registration rights.
The conversion rate was fixed in the agreements governing the note and short
term debt payables. Of the shareholders in this exchange, Yi-Min Ou, Mei-Ling
Chen, and Ching-Yuan Liao were directors of the Company at the time of such
exchange, and Yun-Yi Tseng was subsequently appointed CFO and a director of our
company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Our company was incorporated on August 8, 1996 as Investment Agents, Inc.
under the laws of the State of Nevada. CNT was incorporated under the laws of
the British Virgin Islands on March 1, 2002. On November 14, 2002, CNT became a
wholly owned subsidiary of our company through an Exchange Agreement, dated
November 14, 2002 and amended on December 11, 2002, whereby our company acquired
all of the issued and outstanding capital stock of CNT in exchange for
12,000,000 shares of common stock of our company, which represented 49% of our
issued and outstanding stock at that time. In connection with the exchange and
change in control, the name of our company was changed from Investment Agents,
Inc. to City Network, Inc. the officers and directors of City Network resigned
and new officers and directors were appointed. Upon the effective date of the
exchange and change in control, our company ceased its relationship with the
company for whom it previously acted as referral agent for.
CNT owns all of the issued and outstanding common stock of CNT-Taiwan,
which was incorporated under the laws of the Republic of China on September 6,
1994. CNT-Taiwan owns all of the issued and outstanding common stock of company
of City Construction, which was incorporated under the laws of Republic of China
on October, 10, 2003.
On December 16, 2004, our board of directors determined to change our
fiscal year end from February 28 to December 31.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Form 10-KSB. The following discussion contains forward-looking statements. Our
actual results may differ significantly from those projected in the
forward-looking statements. Factors that may cause future results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, those discussed in "Risk Factors" and elsewhere in this Form
10-KSB.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial conditions and results of
operations is based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("GAAP"). The preparation of these financial statements requires us to
21
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.
REVENUE RECOGNITION
Revenue generated from sales of products is recognized upon shipment or
when title passes to customers based on terms of sales, and is recorded net of
returns, discounts and allowances. Service income is recognized as the related
services are provided per terms of the service agreement.
ACCOUNTS RECEIVABLE
Accounts receivables are reported as the outstanding unpaid balances
reduced by an allowance for doubtful accounts. We estimate doubtful accounts
based on historical bad debts, factors related to specific customer's ability to
pay, and current economic trends. We write off accounts receivable against the
allowance when a balance is determined to be uncollectible.
NOTES RECEIVABLE
Our subsidiary, CNT-Taiwan usually receives post-dated checks as permitted
by Taiwanese law. CNT-Taiwan will typically send an invoice to the customer
after which the customer will issue a check dated two to three months, sometimes
longer, from the date of the invoice. On CNT-Taiwan's books, the post dated
checks are categorized as notes receivables and the invoice is then taken off on
the accounts receivables side.
OVERVIEW - RESULTS OF OPERATIONS
AUDITED TEN MONTHS ENDED DECEMBER 31, 2004 COMPARED TO UNAUDITED TEN MONTHS
ENDED DECEMBER 31, 2003
NET REVENUE. Net sales for ten months ended December 31, 2004 totaled
$15,674,613, compared to $16,119,649 for ten months ended December 31, 2003. The
decrease in revenues for ten months ended December 31, 2004 was due to timing
issues as a result of a decrease in demand and market price for our old products
while our new products were beginning to be introduced.
COST OF SALES. Cost of revenue for ten months ended December 31, 2004
totaled $14,924,938, compared to $14,798,578 for the ten months ended December
31, 2003. The increase in cost of revenues was due to the higher cost for our
old products. Also, our gross profit decreased due to the higher cost of
revenues for the ten months ended December 31, 2004.
GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses
for ten months ended December 31, 2004 totaled $1,395,388, compared to $758,032
for ten months ended December 31, 2003. The increase was due to our number of
employees increasing and for the introduction of out new product line.
INTEREST EXPENSE. Interest expense for ten months ended December 31, 2004
totaled $112,922, compared to $55,655 for ten months ended December 31, 2003.
The increase in interest expense was due to the increase of financing sources
for funds.
As a result of the foregoing, Income (loss) Before Income Taxes totaled
$(854,770) for ten months ended December 31, 2004 and $160,023 for ten months
ended December 31, 2003. Provision for income taxes expenses is $109,890 for ten
months ended December 31, 2004 and $137,095 for ten months ended December 31,
2003. The result of the above tax calculations resulted in that net loss is
$(964,660) and net income $22,928, respectively, for ten months ended December
31, 2004 and 2003.
22
INCOME TAXES
Provisions of $109,890 for taxes have been recorded for the ten months
ended December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $2,010,644 at December 31, 2004 and
$2,723,573 at December 31, 2003. The Company's current assets totaled $6,186,420
at December 31, 2004 as compared to $11,491,307 at December 31, 2003. The
Company's total current liabilities were $6,656,116 at December 31, 2004 as
compared to $11,435,319 at December 31, 2003. Working capital at December 31,
2004 was $(469,696) and $55,988 at December 31, 2003. During the year ended
December 31, 2004, net cash (used in) operating activities was $(1,293,162) as
compared to net cash provided by operating activities of $125,703 during the
same period in 2003. Net cash provided by financing activities was $627,153 and
$3,208,675 for the year ended December 31, 2004 and 2003, respectively. The net
change in cash and cash equivalents was $(712,929) and $2,103,309 for the year
ended 2004 and 2003, respectively.
CAPITAL EXPENDITURES
Total capital expenditures during the ten months ended December 31, 2004
was $5,008 for purchase of fixed assets.
WORKING CAPITAL REQUIREMENTS
Our operations and short term financing does not currently meet our cash
needs. We believe we will be able to generate revenues from sales and raise
capital through private placement offerings of its equity securities to provide
the necessary cash flow to meet anticipated working capital requirements. Our
actual working capital needs for the long and short term will depend upon
numerous factors, including our operating results, competition, and the
availability of credit facilities, none of which can be predicted with
certainty. Our future expansion will depend on operating results and will be
limited by its ability to enter into financings and raise capital.
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. As of May 2003, the amount of
committed funds was $2,400,000. An additional $1,800,000 is still required.
FACTORS THAT INTERRUPT OUR OPERATIONS
Our major risk is incurring a large amount of bad debt. Our short-term and
long-term liquidity may be influenced by uncollected account receivables. If the
amount of bad debt is high, it will severely affect our ability to continue
operations. Therefore, we are taking precautions to manage this risk. We will
try to diversify our customer base and control credit risk related to accounts
receivable through credit approvals, credit limits and monitoring procedures.
Although we have already taken these measures, it is still possible to incur a
large amount of bad debt.
Financial instruments that potentially subject us to concentrations of
credit risk are cash, accounts receivable and other receivables arising from its
normal business activities. We place our cash in what we believe to be
credit-worthy financial institutions. However, cash balances have exceeded the
FDIC insured levels at various times during the year and at year-end. 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.
23
OFF-BALANCE SHEET TRANSACTIONS
We do not have any off-balance sheet transactions.
ITEM 7. FINANCIAL STATEMENTS
Our Financial Statements together with the independent auditor's report
thereon are included on pages F-1 through F-20 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes nor any disagreements with the accountants or
the accountant's findings.
ITEM 8A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our chief executive officer and the chief financial officer, we
conducted an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as of the end of the period covered
by this report (the "Evaluation Date"). Based on this evaluation, our chief
executive officer and chief financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective such that the
material information required to be included in our SEC reports is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms relating to our company, including our consolidating
subsidiaries, and was made known to them by others within those entities,
particularly during the period when this report was being prepared.
Additionally, there were no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the Evaluation Date. We have not identified any significant deficiencies or
material weaknesses in our internal controls, and therefore there were no
corrective actions taken.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS.
Set forth below are the names of our directors, executive officers and key
employees of as of December 31, 2004.
Name Age Title
---- --- -----
Tiao-Tsan "Andy" Lai 42 Chairman, Director, President and Chief
Executive Officer
Yun-Yi "Stella" Tseng 44 Chief Financial Officer and Director
Alice Chen 41 Vice President and Director
I-Min Ou 35 Director, Manager - Technology Department
Chin-Yuan Liao 32 Director, Manager - Engineering Department
Mei-Chu Lai 37 Independent Director
Kao-Yu Hung 46 Independent Director
Chung-Chieh "Kevin" Lin 44 Independent Director
Yong Su 49 Independent Director
Pi-Liang Liu 49 Independent Director
24
Set forth below is certain information with respect to each director,
executive officer, key employee and director nominees.
TIAO-TSAN "ANDY" LAI has been Chairman, President and Director of our
company (and its predecessors) since 1994. As a pioneer in the network equipment
market he was the first entrepreneur to bring the Home PNA solution to Taiwan,
China and Asia. With Mr. Lai's guidance, we implemented Home PNA in a winning
design for an Internet Service Model for the Taipei city government in 1998. In
1999, Mr. Lai also procured an open tender for a Home PNA project with Korea
Telecom. From 1999 to the present, we have had our products approved for
purchase and sale by China Telecom, Taiwan's HiNet, Japan OCC and Finland
Telecom. In addition, Mr. Lai established business projects with Shanghai
Telecom, Fujian Telecom and Guang Dong Telecom. In October, 2000, Mr. Lai was
presented the "Excellent Manager" industry award in Taiwan for outstanding
service as Chairman of our company. In June 2002, Mr. Lai was also awarded the
"The Excellent Alumnus" award for his success in business beyond graduation from
the Taiwan National Military Academy. Mr. Lai holds an MBA degree from the
University of St. Thomas in Minnesota, USA, and a bachelor's degree in business
from Metropolitan University in Minnesota, USA.
YUN-YI "STELLA" TSENG has been the Chief Financial Officer and a Director
of the Board of our company since November 2004. In 1998, Ms. Tseng established
the asset management and financial consulting group called Chief Securities
Investment Inc., where she was the chairman until December 2003. Over the course
of five years, Ms. Tseng gradually developed Chief Securities Investment Inc.
into a Taiwanese nation-wide operation with more than ten branch offices and
over 400 employees. Furthermore, Ms. Tseng has participated in the financing of
numerous private and public companies both in Taiwan and abroad. She is an
experienced financial planner and experienced in company finance, accounting and
auditing. In 2003, Ms. Tseng helped found Hyo-On Biotechnology Corp., where she
is a company director and is primarily responsible for strategic growth and
financial development. Ms. Tseng graduated from Shih-Hsin University in Taipei,
Taiwan with a degree in Communications and Journalism.
ALICE CHEN has been Vice President and a Director of our company since
October 2002. Ms. Chen has been Vice General Manager of Sales and Marketing and
a Director of CNT-Taiwan since January 1999. Ms. Chen's duty is to implement and
develop our worldwide sales and marketing plan. Before joining our company, Ms.
Chen had ten years experience working for the Taiwanese National Security Agency
as a national policy analyst. Additionally, Ms. Chen spent three years working
as head of sales and marketing for a Taiwanese public company. Ms. Chen
possesses a degree in Legal Policy from a government university in the Republic
of China.
I-MIN OU has been Manager of the Technology Department and a Director of
our company since October 2002. From February 2001 to October 2002, Mr. Ou
served as a Manager of the Tongnan Technology Company. From June 1999 to January
2001, he served as a Manager of the Gulite Technology Company. From February
1998 to May 1999, Mr. Ou was a Manager for the Hueng Kwuo Technology Company.
From 1991 to 1997, he served as a Manager of the Ikuani Technology Company.
Since graduating with a bachelor's degree in Electrical Engineering from the
Tung Nan Institute of Technology in July 1991, I-Min Ou has been primarily
engaged in electronics engineering and computer automation industry.
CHIN-YUAN LIAO has been a Director and Manager of the Engineering
Department since October 2002. From January 2000 to October 2002, Mr. Liao
served as Manager of the Engineering Department for CNT-Taiwan. Previously, he
was a Manager with A Best Information Technology, Inc., a network technology
company, from 1998 to 2000. Mr. Liao received a bachelor's degree in electrical
engineering from the Oriental Institute of Technology in 1996.
MEI-CHU LAI has been a Director of our company since October 2002. In 1992,
Ms. Lai began her career serving four years as an accountant and finance
department chief for New Land Developers Co. Ltd. Ms. Lai has been working for
ING Antai since 1996 and is currently a financial safety planner responsible for
25
the asset management, financial advisory, inheritance taxation and tax planning
of major company clients. She was promoted at ING Antai to the position of
Division Supervisor in 1997 and then took the post of Assistant General Manager
in 2001. Ms. Lai graduated from the Department of International Trading at Ming
Chuan University in 1991. Ms. Lai currently serves on our board of directors'
audit committee.
YU-HUNG KAO has been a Director of our company since October 2002. Ms. Hung
specializes in import and export customs and regulations of many countries
around the world as well as corporate financial reporting, accounting and
auditing. In 1983, Ms. Hung personally founded her own trading, customs and
product transport company called Ce Young Customs Brokerage Co., Ltd. For the
past 20 years, Ms. Hung has managed and directed the development of Ce Young
Customs Brokerage Co, Ltd., developing the business into a profitable and
well-known brand name in Taiwan and throughout Asia. From 1980 to 1983, she was
previously employed by Min Hwa Inc., working as the company's General Manager
supervising the handling of customs brokerage-related sales finance, taxation
and accounting. She graduated from Hsing Wu College in 1978 with majors in
international trading and business administration. Ms. Kao currently serves on
our board of directors' audit committee.
CHUNG-CHIEH "KEVIN" LIN has been a Director of our company since November
2004. Since 1996, Mr. Lin has been the chairman of Chun-Yang Investment Co.,
Ltd., an investment company involved in corporate finance and securities
consulting, since April 1997 and chairman of Sino-Freeze Biotechnology Co., Ltd.
since February 2003. Mr. Lin has also been involved in venture capital and
strategic investments and has invested in, developed and managed more than
fifteen public and private companies in Taiwan and China. Mr. Lin's investment
experience has been particularly in the biotech and electronics industries. Mr.
Lin has a degree in Civil Engineering from Tamkang University.
YONG SU has been a Director of our company since November 2004. Mr. Su is
currently a professor at the Business Administration Department at Fudan
University and director of the Business Administration Department of the
university's advanced studies and post-graduate program. He has worked for many
companies as a corporate consultant, utilizing his expertise in corporate
strategies planning, corporate culture management, company organization and
marketing to provide operational guidelines and strategies. Mr. Su graduated
from Fudan University in 1986 with a master's degree in Cultural History and
acquired a doctorate degree in Economics from Fudan University in 1994,
whereupon he took a teaching position at the university immediately following
his graduation. He is the author of over fifty journal articles and industry
essays.
PI-LIANG LIU has been a Director of our company since November 2004. He is
currently a director of Mega Financial Holding Company and Resident Supervisor
at Chiao Tung Bank. He was the CEO of the Southern Taiwan Joint Services Center
of the Executive Yuan of Taiwan from 1999 to 2001. From 1997 to 1999, he held
the position of Secretary General at the Legislative Yuan of Taiwan's
parliament. From 1991 to 1997, Mr. Liu was an Advisor and Director of the
Liaison Office with the governing administration's cabinet for the Executive
Yuan of Taiwan. He has also served at the post of Chairman of the Budget
Committee for the Legislative Yuan of Taiwan. Mr. Liu obtained his master's
degree in Arts from the School of Industrial Education at Northeastern Missouri
State University in 1988. He was an Invited Researcher at the School of Public
Administration of the University of Southern California in 1986. He obtained a
bachelor's degree in law from the School of Law at the National Taiwan
University in 1984. Also, he is an author of books such as Research on
Developing Countries' Government Budgeting System and Research on Modern
Democratic Governments' Budgeting Systems. Mr. Liu currently serves on our board
of directors' audit committee.
The directors named above will serve until the next annual meeting of our
stockholders or until their successors are duly elected and have qualified.
Directors will be elected for one-year terms at the annual stockholders meeting.
Officers will hold their positions at the pleasure of the board of directors,
absent any employment agreement, of which none currently exists. There is no
arrangement or understanding between any of the directors or officers of our
company and any other person pursuant to which any director or officer was or is
to be selected as a director or officer, and there is no arrangement, plan or
understanding as to whether non-management shareholders will exercise their
voting rights to continue to elect the current directors to our board of
directors. There are also no arrangements, agreements or understandings between
non-management shareholders that may directly or indirectly participate in or
influence the management of our company's affairs. There are no agreements or
understandings for any of our officers or directors to resign at the request of
another person and none of the officers or directors are acting on behalf of or
will act at the direction of any other person.
26
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Our board of directors adopted a written charter for its audit committee, a
copy of which was attached as an exhibit to our definitive proxy statement, as
filed with the SEC December 10, 2004, and is incorporated by reference herein.
The audit committee's charter states that the responsibilities of the audit
committee shall include:
* reviewing our charter, annual report to stockholders and reports
submitted to the SEC;
* recommending our independent auditors, confirming and reviewing their
independence, and approving their fees;
* reviewing the independent auditors' performance;
* considering the independent auditors' judgments about our accounting
principals;
* considering and approving major changes to our auditing and accounting
principals;
* establishing reporting systems to the committee by management and the
independent auditors regarding management's significant judgments in
preparing financial statements;
* following an audit, reviewing significant difficulties encountered
during the audit;
* reviewing significant disagreements among management and the
independent auditors in the preparation of our financial statements;
* reviewing the extent to which improvements in financial or accounting
practices approved by the committee have been implemented; and
* Review with counsel any legal matters that could have a significant
impact on our financial statements.
The audit committee met one time during the ten months ended December 31,
2005.
The audit committee members during the ten months ended December 31, 2004
consisted of Mei-Chu Lai, Yu-Hung Kao and Chien-Hui Lin (later replaced by
Pi-Liang Liu). Chien-Hui Lin resigned from the board of directors in August
2004. Our board of directors appointed Pi-Liang Liu to serve on the audit
committee upon his appointment as director in November 2004. All of the
above-listed audit committee members were or are considered "independent" under
Section 121(A) (as currently applicable to us) of the listing standards of The
American Stock Exchange, as determined by our board of directors. The audit
committee recommends to the board of directors the annual engagement of a firm
of independent accountants and reviews with the independent accountants the
scope and results of audits, our internal accounting controls and audit
practices and professional services rendered to us by our independent
accountants.
Our board of directors has determined that we have at least one audit
committee financial expert, as defined in the Exchange Act, serving on our audit
committee. Pi-Liang Liu is the "audit committee financial expert" and is an
independent member of our board of directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, as amended, requires the executive
officers and directors of our company and every person who is directly or
indirectly the beneficial owner of more than 10% of any class of security of our
company to file reports of ownership and changes in ownership with the SEC. Such
persons also are required to furnish our company with copies of all Section
16(a) forms they file. Based solely on its review of copies of such forms
received by it, we believe that all other Section 16(a) filing requirements
applicable to the reporting persons were complied with by such persons during
2004 except that each of Yun-Yi Cheng, Chung-Chieh Lin, Yong Su and Pi-Lian Liu
did not file a Form 3 in connection with his or her appointment as an executive
officer or director of our company in 2004, and Hsin-Nan Lin did not file a Form
4 in connection with his resignation as an executive officer and director of our
company in 2004.
27
CODE OF ETHICS
We adopted a code of ethics that applies to our Chief Executive Officer and
Chief Financial Officer, and other persons who perform similar functions. A copy
of our Code of Ethics was filed as an exhibit to our Annual Report on Form
10-KSB for the fiscal year ended February 29, 2004. Our Code of Ethics is
intended to be a codification of the business and ethical principles which guide
us, and to deter wrongdoing, to promote honest and ethical conduct, to avoid
conflicts of interest, and to foster full, fair, accurate, timely and
understandable disclosures, compliance with applicable governmental laws, rules
and regulations, the prompt internal reporting of violations and accountability
for adherence to this Code.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the fiscal year indicated the compensation
paid by our company to the Chief Executive Officer. No other executive officer
received a total annual salary and bonus exceeding $100,000.
Name and Principal Position Year Salary (US$) Bonus (US$)
--------------------------- ---- ------------ -----------
Tiao-Tsan "Andy" Lai 2004(1) $26,000 $2,600
2003 $31,200 $2,600
2002 $31,200 $2,600
----------
(1) For the ten month period ended December 31, 2004.
Our directors do not receive any compensation for serving on the board of
directors.
REPORT OF THE AUDIT COMMITTEE
The role of the Audit Committee is to assist the Board of Directors in its
oversight of City Network, Inc.'s (the "Company") financial reporting process.
The Board of Directors, in its business judgment, has determined that all
members of the committee are "independent" as required by applicable listing
standards of the American Stock Exchange. The Committee operates pursuant to a
Charter that was approved by the Board. As set forth in the Charter, management
of the Company is responsible for the preparation, presentation and integrity of
the Company's financial statements, accounting and financial reporting
principles and internal controls and procedures designed to assure compliance
with accounting standards and applicable laws and regulations. The independent
auditors are responsible for auditing the Company's financial statements and
expressing an opinion as to their conformity with generally accepted accounting
principles.
In the performance of this oversight function, the Committee has reviewed
and discussed the audited financial statements with management and the
independent auditors. The Committee has discussed with the independent auditors
the matters required to be discussed by Statement of Auditing Standards No. 61,
Communication with Audit Committee, as currently in effect. Finally, the
Committee has received written disclosures and the letter from the independent
auditors required by Independence Standard Board Standard No. 1, Independence
Discussions with Audit Committees, as currently in effect, and has considered
whether the provision of non-audit services by the independent auditors to the
Company is compatible with maintaining the auditor's independence and has
discussed with the auditors the auditors' independence.
The members of the Audit Committee are not professionally engaged in the
practice of auditing or accounting, are not experts in the fields of accounting
or auditing, including in respect of auditor independence. Members of the
Committee rely without independent verification on the information provided to
them and on the representations made by management and the independent
accountants. Accordingly, the Audit Committee's oversight does not provide an
independent basis to determine that management has maintained appropriate
accounting and financial reporting principles or appropriate internal control
and procedures designed to assure compliance with accounting standards and
applicable laws and regulations. Furthermore, the Audit Committee's
consideration and discussions referred to above do not assure that the audit of
28
the Company's financial statements has been carried out in accordance with
generally accepted accounting principles or that the Company's auditors are in
fact "independent".
Based upon the reports, review and discussions described in this report,
and subject to the limitations on the role and responsibilities of the Committee
referred to above and in the Charter, the Committee recommended to the Board
that the audited financial statements be included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2004, as filed with the
Securities and Exchange Commission.
The Audit Committee
Kao-Yu Hung
Mei-Chu Lai
Pi-Liang Liu
Independent Directors, City Network, Inc.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth as of December 31, 2004, the number and
percentage of our outstanding shares of common stock that were beneficially
owned by (i) each person who is currently a director, (ii) each executive
officer, (iii) all current directors and executive officers as a group and (iv)
each person who, to our knowledge is the beneficial owner of more than 5% of the
outstanding common stock.
Number of Shares Percent of Common Stock
Name and Address (1) Beneficially Owned (2) Beneficially Owned
-------------------- ---------------------- ------------------
Tiao-Tsan "Andy" Lai 2,000,000 7.3%
Yun-Yi "Stella" Tseng 844,000 3.1%
Alice Chen 66,000 *
I-Min Ou 25,000 *
Chin-Yuan Liao 50,000 *
Mei-Chu Lai 648,000 2.4%
Yu-Hung Kao 1,161,000 4.2%
Chung-Chieh "Kevin" Lin 0 *
Yong Su 0 *
Pi-Liang Liu 0 *
All officers and directors
as a group (10 persons) 4,794,000 17.4%
----------
* Indicates less than one percent.
(1) The address of each holder is c/o City Network, Inc., 6F-3, No. 16, Jian Ba
Road, Jhonghe City, Taipei County 235, Taiwan, ROC.
(2) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to the
shares shown. Except as indicated by footnote and subject to community
property laws where applicable, to our knowledge, the stockholders named in
the table have sole voting and investment power with respect to all common
stock shares shown as beneficially owned by them. A person is deemed to be
the beneficial owner of securities that can be acquired by such person
within 60 days upon the exercise of options, warrants or convertible
securities (in any case, the "Currently Exercisable Options"). Each
beneficial owner's percentage ownership is determined by assuming that the
Currently Exercisable Options that are held by such person (but not those
held by any other person) have been exercised and converted.
CHANGE IN CONTROL
There are currently no arrangements which would result in a
change in control of our company.
29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Throughout the history of our company, certain members of our board of
directors and general management have made loans to our company to cover
operating expenses or operating deficiencies.
As of December 31, 2004, we had a non interest-bearing loan from Tiao-Tsan
Lai, our Chairman, President and Chief Executive Officer, in the amount of
$73,827.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-KSB.
1. The following financial statements of our company, with the
independent auditor's report, are filed as part of this Form 10-KSB:
Independent Auditor's Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flow F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Notes to Consolidated Financial Statements F-7
2. The following exhibits are filed with this report and incorporated by
reference as set forth below:
Exhibit Description
------- -----------
2.1 (1) Exchange Agreement dated December 4, 2002 by and among
City Network, Inc., the shareholders of City Network, Inc.,
Investment Agents, Inc., Pamela Ray Stinson, Raymond Robert
Acha, and Joseph H. Panganiban
3.1 (2) Articles of Incorporation
3.2 (2) Certificate of Amendment to Articles of Incorporation
3.3 (3) Certificate of Amendment of the Articles of Incorporation
3.4 Amended and Restated Bylaws
14.1 (4) Code of Ethics
21.1 Subsidiaries
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
----------
(1) Previously filed with the SEC as an Exhibit to City Network's Form 8-K
filed March 5, 2003, and incorporated herein by reference.
(2) Previously filed with the SEC as an Exhibit to City Network's Form SB-2
filed May 18, 2001, and incorporated herein by reference.
(3) Previously filed with the SEC as an Exhibit to City Network's Proxy
Statement filed March 21, 2003, and incorporated herein by reference.
(4) Previously filed with the SEC as an Exhibit to City Network's Annual Report
on Form 10-KSB filed June 16, 2003, and incorporated herein by reference.
30
(b) Current Reports on Form 8-K.
Report on Form 8-K filed December 20, 2004 announcing the appointment of
Yung-Yi Tseng as CFO and director of our company and Chung-Chieh "Kevin" Lin,
Yong Su, and Pi-Liang Liu as directors of our company.
ITEM 14. PRINCIPAL ACCOUNTANT AND FEES
During ten months ended December 31, 2004 and the fiscal year ended
February 29, 2004, our principal independent auditor was Lichter, Yu &
Associates. The following are the services provided and the amount billed.
AUDIT FEES
The aggregate fees billed by Lichter, Yu & Associates for professional
services rendered for the audit of our annual financial statements for the ten
months ended December 31, 2004 and the fiscal year ended February 29, 2004, and
for the review of the financial statements included in our Quarterly Reports on
Form 10-QSB for such periods, were $58,500 and $66,530, respectively.
AUDIT RELATED FEES
Other than the fees described under the caption "Audit Fees" above,
Lichter, Yu & Associates did not bill any fees for services rendered to us
during ten months ended December 31, 2004 and the fiscal year ended February 29,
2004 for assurance and related services in connection with the audit or review
of our consolidated financial statements.
TAX FEES
The aggregate fees billed by Lichter, Yu & Associates for tax services
during the ten months ended December 31, 2004 and the fiscal year ended February
29, 2004 were $3,510 and $3,920.
ALL OTHER FEES
There were no fees billed by Lichter, Yu & Associates for other
professional services rendered during the ten months ended December 31, 2004 and
the fiscal year ended February 29, 2004.
PRE-APPROVAL OF SERVICES
The Audit Committee pre-approves all services, including both audit and
non-audit services, provided by our independent accountants. For audit services,
each year the independent auditor provides the Audit Committee with an
engagement letter outlining the scope of the audit services proposed to be
performed during the year, which must be formally accepted by the Committee
before the audit commences. The independent auditor also submits an. audit
services fee proposal, which also must be approved by the Committee before the
audit commences.
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CITY NETWORK, INC.
Date: April 14, 2004 By: /s/ Tiao-Tsan Lai
--------------------------------------
Tiao-Tsan Lai
Chief Executive Officer
Date: April 14, 2004 By: /s/ Yun-Yi Tseng
--------------------------------------
Yun-Yi Tseng
Chief Financial Officer
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Tiao-Tsan Lai Director, Chairman and Chief April 14, 2004
-------------------------- Executive Officer (Principal
Tiao-Tsan Lai Executive Officer)
/s/ Yun-Yi Tseng Director and Chief Financial April 14, 2004
-------------------------- Officer (Principal Accounting
Yun-Yi Tseng Officer)
/s/ Alice Chen Director April 14, 2004
--------------------------
Alice Chen
/s/ Chin Yuan Liao Director April 14, 2004
--------------------------
Chin-Yuan Liao
/s/ I-Min Oun Director April 14, 2004
--------------------------
I-Min Oun
/s/ Mei-Chu Lai Director April 14, 2004
--------------------------
Mei-Chu Lai
/s/ Kao-Yu Hung Director April 14, 2004
--------------------------
Kao-Yu Hung
/s/ Chung Chich Lin Director April 14, 2004
--------------------------
Chung Chich Lin
/s/ Yang Su Director April 14, 2004
--------------------------
Yang Su
/s/ Pi-Liang Lu Director April 14, 2004
--------------------------
Pi-Liang Lu
32
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
TABLE OF CONTENTS
Independent Auditor's Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flow F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Notes to Consolidated Financial Statements F-7
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
City Network, Inc. and Subsidiaries
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of City Network,
Inc. and its subsidiaries ("the Company") as of December 31, 2004 and February
29, 2004 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the ten months ended December 31, 2004
and fiscal year ended February 29, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of City
Network, Inc. and Subsidiaries as of December 31, 2004 and February 29, 2004 and
the consolidated results of its operations and cash flows for the ten months
ended December 31, 2004 and fiscal year ended February 29, 2004, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Lichter, Yu & Associates
March 7, 2005
San Diego, California
F-2
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
December 31, 2004 February 29, 2004
----------------- -----------------
ASSETS
Current Assets
Cash and cash equivalents $ 2,010,644 $ 2,723,573
Accounts receivable, net 3,333,990 7,173,149
Inventory 732,027 910,190
Other receivables 6,863 126,492
Prepaid expenses 102,896 557,903
------------ ------------
Total Current Assets 6,186,420 11,491,307
------------ ------------
Fixed Assets, net 2,586,872 2,745,664
------------ ------------
Total Fixed Assets 2,586,872 2,745,664
------------ ------------
Other Assets
Deposits 1,724,542 255,706
Trademarks 1,812 1,966
Equity in net assets of affiliated company 829,008 770,678
Intangible assets 961,053 1,000,000
Other current assets 8,255 96
------------ ------------
Total Other Assets 3,524,670 2,028,446
------------ ------------
Total Assets $ 12,297,962 $ 16,265,417
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 3,335,286 $ 6,838,620
Due to related party 80,083 334,812
Loan payable 0 1,680,329
Deferred revenue 14,566 260,498
Deposits payable 0 4,371
Current portion, long-term debt 3,226,181 2,316,689
------------ ------------
Total Current Liabilities 6,656,116 11,435,319
Long-term debt, net of current portion 246,330 263,041
------------ ------------
Total Liabilities 6,902,446 11,698,360
------------ ------------
Stockholders' Equity
Common stock, $.001 par value, 100,000,000
shares authorized, 27,500,000 and 25,000,000
issued and outstanding, respectively 27,500 25,000
Additional paid in capital 5,937,946 4,260,117
Cumulative foreign-exchange translation adjustment 142,453 29,663
Retained earnings (712,383) 252,277
------------ ------------
Total Stockholders' Equity 5,395,516 4,567,057
------------ ------------
Total Liabilities and Stockholders' Equity $ 12,297,962 $ 16,265,417
============ ============
See Accompanying Notes and Auditor's Report
F-3
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
TEN MONTHS ENDED DECEMBER 31, 2004 AND FISCAL YEAR ENDED FEBRUARY 29, 2004
December 31, 2004 February 29, 2004
----------------- -----------------
Sales, net $ 15,674,613 $ 19,647,749
Cost of sales 14,924,938 17,827,486
------------ ------------
Gross profit 749,675 1,820,263
General and administrative expenses 1,395,388 1,391,658
------------ ------------
Income (loss) from operations (645,713) 428,605
------------ ------------
Other (Income) Expense
Interest income (3,785) (20,202)
Rental income (17,858) (3,085)
Commission income (281) (15,517)
(Gain) loss on currency exchange (10,720) (13,815)
Other income (32,120) (11,263)
Equity in earnings of investee (58,330) 1,674
Miscellaneous 1,303 2,499
Bad debt expense 185,858 159,238
Loss on sale of fixed assets 32,068 0
Interest expense 112,922 67,691
------------ ------------
Total Other (Income) Expense 209,057 167,220
------------ ------------
Income (loss) before income taxes (854,770) 261,385
Provison for income taxes 109,890 85,190
------------ ------------
Net income (loss) $ (964,660) $ 176,195
============ ============
Net income (loss) per share (basic and diluted)
Basic $ (0.036) $ 0.007
Diluted $ (0.036) $ 0.007
Weighted average number of shares
Basic 27,000,000 24,958,333
Diluted 27,000,000 24,958,333
See Accompanying Notes and Auditor's Report
F-4
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEN MONTHS ENDED DECEMBER 31, 2004 AND FISCAL YEAR ENDED FEBRUARY 29, 2004
December 31, 2004 February 29, 2004
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ (964,660) $ 176,195
Adjustments to reconcile net income (loss) to net
cash provided by (used) in operating activities:
Depreciation and amortization 161,296 44,057
Equity in earning of investee (58,330) 1,674
Loss on disposal of assets 32,068 0
Bad debt 185,858 159,238
(Gain) loss on foreign currency exchange (10,720) (13,815)
Decrease (Increase) in receivables 3,839,159 (5,652,808)
Decrease (Increase) in inventory 178,163 (543,184)
Decrease (Increase) in other receivables 119,629 (115,032)
Decrease (Increase) in prepaid expenses 455,007 (347,946)
Decrease (Increase) in deposit (1,468,836) (254,737)
Decrease (Increase) in deferred charges 0 36,836
Decrease (Increase) in other current assets (8,159) 72,662
(Decrease) Increase in accounts payable
and accrued expenses (3,503,334) 6,297,694
(Decrease) Increase in deferred revenue (245,932) 260,498
(Decrease) Increase in deposits payable (4,371) 4,371
----------- -----------
Total Adjustments (328,502) (50,492)
----------- -----------
Net cash provided by (used in) operations (1,293,162) 125,703
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments 0 108,594
Proceeds from sale of fixed assets 35,462 0
Purchase of intangibles 0 (838)
Purchase of investments 0 (772,352)
Purchase of furniture and equipment (5,008) (462,722)
----------- -----------
Net cash used in investing activities 30,454 (1,235,912)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on notes payable (5,217,702) (2,229,705)
Payment of loan from related party (455,227) 0
Loan from related party 200,498 743,386
Issuance of notes payable 477,953 3,974,994
Issuance of short-term debt 5,621,631 0
Issuance of common stock 0 720,000
----------- -----------
Net cash provided by financing activities 627,153 3,208,675
----------- -----------
Effect of exchange rate change on cash (77,374) 4,843
Net change in cash and cash equivalents (712,929) 2,103,309
----------- -----------
Cash and cash equivalents at beginning of year 2,723,573 620,264
----------- -----------
Cash and cash equivalents at end of year $ 2,010,644 $ 2,723,573
=========== ===========
Supplemental cash flows disclosures:
Income tax payments $ 35,750 $ 9,235
----------- -----------
Interest payments $ 112,922 $ 67,691
----------- -----------
Non cash transaction:
Conversion of debt to equity $ 1,680,329 $ 0
----------- -----------
See Accompanying Notes and Auditor's Report
F-5
CITY NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
TEN MONTHS ENDED DECEMBER 31, 2004 AND FISCAL YEAR ENDED FEBRUARY 29, 2004
December 31, 2004 February 29, 2004
----------------- -----------------
Common stock, number of shares outstanding
Balance at beginning of period 25,000,000 24,500,000
Stock cancellation 0 0
Stock split 0 0
Common stock issued 2,500,000 500,000
------------ ------------
Balance at end of period 27,500,000 25,000,000
============ ============
Common stock, par value $.001 (thousands of shares)
Balance at beginning of year $ 25,000 $ 24,500
Stock cancellation 0 0
Stock split 0 0
Common stock issued 2,500 500
------------ ------------
Balance at end of year 27,500 25,000
------------ ------------
Additional paid in capital
Balance at beginning of year 4,260,117 3,540,617
Issuance of stock 1,677,829 719,500
------------ ------------
Balance at end of year 5,937,946 4,260,117
------------ ------------
Cumulative foreign-exchange translation adjustment
Balance at beginning of year 29,663 0
Foreign currency translation 123,689 29,663
------------ ------------
Balance at end of year 153,352 29,663
------------ ------------
Retained (deficits)
Balance at beginning of year 252,277 76,082
Issuance of stock dividend 0 0
Net income (loss) (964,660) 176,195
------------ ------------
Balance at end of year (712,383) 252,277
------------ ------------
Total stockholders' equity at end of year $ 5,406,415 $ 4,567,057
============ ============
See Accompanying Notes and Auditor's Report
F-6
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
Note A - ORGANIZATION
City Network, Inc., formerly Investment Agents, Inc., was incorporated on
August 8, 1996 under the laws of the State of Nevada. City Network
Technology, Inc., formerly Gelcrest Investments Limited, was incorporated
under the laws of the British Virgin Islands on March 1, 2002. City
Network, Inc. -Taiwan, formerly City Engineering, Inc., was incorporated
under the laws of Republic of China on September 6, 1994. City Construction
was incorporated under the laws of Republic of China on October, 10, 2003.
City Network, Inc. owns 100% of the capital stock of City Network
Technology, Inc., and City Network Technology, Inc. owns 100% of the
capital stock of City Network, Inc. - Taiwan, and City Construction.
Collectively the four corporations are referred to herein as the "Company".
On November 14, 2002, City Network Technology, Inc. became a wholly owned
subsidiary of City Network, Inc. through an Exchange Agreement, which was
amended on December 4, 2002 whereby City Network, Inc. acquired all of the
issued and outstanding capital stock of City Network Technology, Inc. in
exchange for 12,000,000 shares of City Network, Inc.
The Company is a provider of internet broadband and wireless infrastructure
equipment and service for the rapidly expanding broadband marketplace. The
Company intends to be an important provider of these services predicated
upon its dedication to delivering user friendly, cost effective, and
customer tailored high speed internet access equipment to meet the business
needs of the hospitality, residential property and telecommunication
industry worldwide.
On December 16, 2004, the Company changed its fiscal year end from February
28 to December 31.
F-7
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from sales of products to customers is recognized upon shipment or
when title passes to customers based on the terms of the sales, and is
recorded net of returns, discounts and allowances. Service income is
recognized as the related services are provided pursuant to the terms of
the service agreement.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of City Network,
Inc., and its wholly owned subsidiaries City Network Technology, Inc. and
its wholly owned subsidiaries, City Network, Inc. - Taiwan and City
Construction, collectively referred to within as the Company. All material
intercompany accounts, transactions and profits have been eliminated in
consolidation.
RISKS AND UNCERTAINTIES
The Company is subject to substantial risks from, among other things,
intense competition from the providers of broadband products, services and
the telecommunication industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, and the volatility of public markets.
CONTINGENCIES
Certain conditions may exist as of the date the financial statements are
issued, which may result in a loss to the Company but which will only be
resolved when one or more future events occur or fail to occur. The
Company's management and legal counsel assess such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending
against the Company or unasserted claims that may result in such
proceedings, the Company's legal counsel evaluates the perceived merits of
any legal proceedings or unasserted claims as well as the perceived merits
of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a
material loss has been incurred and the amount of the liability can be
estimated, then the estimated liability would be accrued in the Company's
financial statements. If the assessment indicates that a potential material
loss contingency is not probable but is reasonably possible, or is probable
but cannot be estimated, then the nature of the contingent liability,
together with an estimate of the range of possible loss if determinable and
material would be disclosed.
Loss contingencies considered to be remote by management are generally not
disclosed unless they involve guarantees, in which case the guarantee would
be disclosed.
F-8
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
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 years ended December 31, 2004 and February 29, 2004.
Trademarks and other intangible assets determined to have indefinite useful
lives are not amortized. The Company tests such trademarks and other
intangible assets with indefinite useful lives for impairment annually, or
more frequently if events or circumstances indicate that an asset might be
impaired. Trademarks and other intangible assets determined to have
definite lives are amortized over their useful lives or the life of the
trademark and other intangible asset, whichever is less.
EXCHANGE GAIN (LOSS)
During year ended December 31, 2004 and February 29, 2004, the transactions
of City Network, Inc. - Taiwan and City Construction were denominated in a
foreign currency and are recorded in New Taiwan dollars at the rates of
exchange in effect when the transactions occur. Exchange gains and losses
are recognized for the different foreign exchange rates applied when the
foreign currency assets and liabilities are settled.
F-9
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION ADJUSTMENT
As of December 31, 2004 and February 29, 2004, the accounts of City
Network, Inc. - Taiwan and City Construction were maintained, and their
financial statements were expressed, in New Taiwan Dollars (NTD). Such
financial statements were translated into U.S. Dollars (USD) in accordance
SFAS No. 52, "Foreign Currency Translation", with the NTD as the functional
currency. According to the Statement, all assets and liabilities were
translated at the current exchange rate, stockholder's equity are
translated at the historical rates and income statement items are
translated at the weighted average exchange rate for the period. The
resulting translation adjustments are reported under other comprehensive
income in accordance with SFAS No. 130, "Reporting Comprehensive Income".
As of December 31, 2004 and February 29, 2004 the exchange rates between
NTD and the USD was NTD$1=USD$0.03128 and NTD$1=USD$0.02994, respectively.
The weighted-average rate of exchange between NTD and USD was
NTD$1=USD$0.02998 and NTD$1=USD$0.02617, respectively. Total translation
adjustment recognized for the year ended December 31, 2004 and February 29,
2004 is $153,352 and $29,663, 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.
F-10
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory is valued at the lower of cost or market. Cost is determined on
the weighted average method. As of December 31, 2004 and February 29, 2004,
inventory consisted only of finished goods.
PRODUCT WARRANTIES
The Company estimates its warranty costs based on historical warranty claim
experience and applies this estimate to the revenue stream for products
under warranty. Future costs for warranties applicable to revenue
recognized in the current period are charged to cost of revenue. The
warranty accrual is reviewed quarterly to verify that it properly reflects
the remaining obligation based on anticipated expenditures over the balance
of the obligation period. Adjustments are made when accrual warranty claim
experience differs from estimate.
LONG-TERM EQUITY INVESTMENTS
Long-term equity investments are accounted for by the equity method when
the Company and its subsidiaries owns 20% or more of the investee's voting
shares, or less than 20% of investee's voting shares but is able to
exercise significant influence over the investee's operation and financial
polices, but not more then 50%. All other long-term equity investments are
accounted for by either the lower-of-cost-or-market method or cost method.
For long-term equity investments accounted for under the equity method
related to investee's that are publicly listed companies, unrealized losses
resulting from declines in the market value below cost are recorded as a
separate component of stockholders' equity.
For long-term equity investments in non-listed companies accounted for
under the cost method, investments are stated at original cost. A
write-down of the investment balance to earnings is taken only if it is
determined that there is a permanent decline in the investment's value.
Stock dividends do not result in the recognition of investment income.
For long-term equity investments accounted for by the equity method, the
investment is initially recorded at cost, then reduced by dividends and
increased or decreased by investor's proportionate share of the investee's
net earnings or loss.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with initial
maturities of three months or less to be cash equivalents.
ADVERTISING
Advertising costs are expensed in the year incurred.
F-11
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for
the current year and deferred taxes on temporary differences between the
amount of taxable income and pretax financial income and between the tax
bases of assets and liabilities and their reported amounts in the financial
statements.
Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period
in which the deferred tax assets and liabilities are expected to be
realized or settled as prescribed in SFAS No. 109, "Accounting for Income
Taxes". As changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income taxes.
EARNINGS PER SHARE
The Company uses SFAS No. 128, "Earnings Per Share", for calculating the
basic and diluted earnings (loss) per share. Basic earnings (loss) per
share are computed by dividing net income (loss) attributable to common
stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share are computed similar to basic earnings per share
except that the denominator is increased to include common stock
equivalents, if any, as if the potential common shares had been issued.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provision of The Financial Accounting Standards
Board ("FASB") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of". This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amounts of the
assets exceed the fair values of the assets. In assessing the impairment of
these identifiable intangible assets, identifiable goodwill will be
allocated on a pro rata basis using fair values of the assets at the
original acquisition date. In estimating expected future cash flows for
determining whether an asset is impaired and if expected future cash flows
are used in measuring assets that are impaired, assets will be grouped at
the lowest level (entity level) for which there are identifiable cash flows
that are largely independent of the cash flows of other groups of assets.
Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell. In recording an impairment loss, any
related goodwill would be reduced to zero before reducing the carrying
amount of any identified impaired asset.
For goodwill not identifiable with an impaired asset, the Company will
establish benchmarks at the lowest lever (entity level) as its method of
assessing impairment. In measuring impairment, unidentifiable goodwill will
be considered impaired if the fair value at the lowest level is less than
its carrying amount. The fair value of unidentifiable goodwill will be
determined by subtracting the fair value of the recognized net asset at the
lowest level (excluding goodwill) from the value at the lowest level. The
amount of the impairment loss should be equal to the difference between the
carrying amount of goodwill and the fair value of goodwill. In the event
that impairment is recognized, appropriate disclosures would be made.
F-12
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN46"). This interpretation of Accounting
Research Bulletin No. 51, requires companies to consolidate the operations
of all variable interest entities ("VIE's") for which they are the primary
beneficiary. The term "primary beneficiary" is defined as the entity that
will absorb a majority of expected losses, receive a majority of the
expected residual returns, or both. This interpretation was later revised
by the issuance of Interpretation No. 46R ("FIN 46R"). The revision was
issued to address certain implementation issues that had arisen since the
issuance of the original interpretation and to provide companies with the
ability to defer the adoption of FIN46 to period after March 15, 2004. The
implementation of FIN46 and FIN 46R, had no material impact on the
Company's financial statements.
On July 16, 2004 the FASB ratified the Emerging Issues Task Force ("EITF")
consensus of Issue 02-14, "Whether the Equity Method of Accounting Applies
when an Investor Does Not Have an Investment in Voting Stock of an Investee
but Exercises Significant Influence through Other Means" ("EITF 02-14").
The consensus concluded that an investor should apply the equity method of
accounting when it can exercise significant influence over an entity
through a means other than holding voting rights. The consensus is
effective for reporting periods beginning after September 2004. The
adoption of EITF 02-14 did not have a material impact on the Company's
financial statements.
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R
requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based
on their fair values, beginning with the first interim or annual period
after June 15, 2005. The pro forma disclosures previously permitted under
SFAS 123 no longer will be an alternative to financial statement
recognition. The Company is required to adopt SFAS 123R in its three months
ending September 30, 2005. Under SFAS 123R, The Company must determine the
appropriate fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition method to
be used at date of adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive options, prior periods
may be restated either as of the beginning of the year of adoption or for
all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and restricted stock at
the beginning of the first quarter of adoption of SFAS 123R, while the
retroactive methods would record compensation expense for all unvested
stock options and restricted stock beginning with the first period
restated. The Company is evaluating the requirements of SFAS 123, and it
expects that the adoption of SFAS 123R will have no material impact on the
Company's financial statements.
In September 2004, the EITF Issue No. 04-08, "The Effect of Contingently
Convertible Debt on Diluted Earnings per Share" ("EITF 04-08") was issued
stating that contingently convertible debt should be included in diluted
earnings per share computations regardless of whether the market price
trigger has been met. EIFT 04-08 is effective for reporting periods ending
after December 15, 2004. EITF 04-08 will have no material impact on the
Company's financial statements.
F-13
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
Note D -CASH
The Company maintains its cash balances at various banks in Taiwan and Hong
Kong. All balances are insured by the Central Deposit Insurance Corporation
(CDIC). As of December 31, 2004 and February 29, 2004, there were no
uninsured portions of the balances held at the bank.
Note E - FIXED ASSETS
Fixed assets consist of the following:
December 31, 2004 February 29, 2004
----------------- -----------------
Land $ 1,916,328 $ 1,966,694
Building 283,977 305,429
Machinery and equipment 430,880 427,126
Furniture and fixtures 143,655 142,402
----------- -----------
$ 2,774,840 $ 2,841,651
Accumulated depreciation (187,968) (95,987)
----------- -----------
$ 2,586,872 $ 2,745,664
=========== ===========
Note F - INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31, 2004 February 29, 2004
----------------- -----------------
Trademarks $ 2,150 $ 2,150
Intangible asset 1,000,000 1,000,000
----------- -----------
$ 1,002,150 $ 1,002,150
Accumulated depreciation (39,285) (184)
----------- -----------
$ 962,865 $ 1,001,966
=========== ===========
F-14
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
Note G- COMMITTMENTS
A BEST INFORMATION
City Network, Inc. - Taiwan, signed an agreement with A Best Information in
2003 for the exclusive right to sell A Best Information's products. There
is no expiration date in the agreement, and the Company has the rights to
transfer the agreement to any third party with a negotiable price. The
Company paid $1,000,000 for these rights.
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 AGREEMENT
In April 2004, City Construction Co., Ltd. Entered into a Co-Construction
Agreement with another company in Taipei, Taiwan. Under the Agreement, the
Company will finance, construct and own 50% of the building project. The
Company has not yet begun construction on the building.
OPERATING LEASES
The Company leases various office facilities under operating leases that
terminate on various dates. Rental expense for these leases consisted of
$50,029 for the ten months ended December 31, 2004 and $13,482 for the year
ended February 29, 2004. The Company has future minimum lease obligations
as follows:
2005 $20,122
Note H - LONG-TERM INVESTMENT
BEIJING PUTAIN HEXIN NETWORK TECHNOLOGY CO., LTD
On August 31, 2003 the Company purchased approximately twenty-five percent
(25%) of Beijing Putain Hexin Network Technology Co., Ltd for $325,000. On
December 4, 2003 the Company purchased an additional fifteen percent (15%)
for $398,500. Beijing Putain Hexin Network Technology Co., Ltd is not
publicly traded or listed. The Company is using the complete equity method
to record its share of the subsidiary's net income and loss. As of December
31, 2004 and February 29, 2004 the Company recognized an income of $58,330
and a loss $1,674 from their acquisition.
F-15
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
Note I - COMPENSATED ABSENSES
Employees earn annual vacation leave at the rate of seven (7) days per year
for the first three years. Upon completion of the third year of employment,
employees earn annual vacation leave at the rate of ten (10) days per year
for years four through five. Upon completion of the fifth year of
employment, employees earn annual vacation leave at the rate of fourteen
(14) days per year for years six through ten. Upon completion of the tenth
year of employment, one (1) additional day for each additional year, until
it reaches thirty (30) days per year. At termination, employees are paid
for any accumulated annual vacation leave. As of December 31, 2004 and
February 29, 2004 vacation liability existed in the amount of $1,892 and $0
respectively.
Note J - INCOME TAXES
Total Federal and State income tax expense for the years ended December 31,
2004 and February 29, 2004 amounted to $109,890 and $85,190, respectively.
For the years ended December 31, 2004 and February 29, 2004, there is no
difference between the federal statutory tax rate and the effective tax
rate.
The following is a reconciliation of income tax expense:
12/31/04 U.S. State International Total
-------- -------- ------------- --------
Current $ 0 $ 0 $109,890 $109,890
Deferred 0 0 0 0
-------- -------- -------- --------
Total $ 0 $ 0 $109,890 $109,890
======== ======== ======== ========
02/29/04 U.S. State International Total
-------- -------- ------------- --------
Current $ 3,321 $ 0 $ 44,180 $ 47,501
Deferred 0 0 0 0
-------- -------- -------- --------
Total $ 3,321 $ 0 $ 44,180 $ 47,501
======== ======== ======== ========
Reconciliation of the differences between the statutory U.S. Federal income
tax rate and the effective rate is as follows:
12/31/2004 2/29/2004
---------- ---------
Federal statutory tax rate 33% 33%
State, net of federal benefit 0% 0%
---- ----
Effective tax rate 33% 33%
==== ====
F-16
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
NOTE K - DEBT
At December 31, 2004 and February 29, 2004, the Company had notes payable
outstanding in the aggregate amount of $3,461,162 and $2,579,730,
respectively. Payable as follows:
December 31, 2004 February 29, 2004
----------------- -----------------
Secured note payable to a bank in Secured note payable to a bank in
Taiwan, interest at 3.175% per annum, Taiwan, interest at 3.175% per annum,
due by May 29, 2016 $280,689 due by May 29, 2016 $ 280,689
Note payable to a bank in Taiwan, Secured note payable to a bank in
interest at 3.616% per annum, due by Taiwan, interest at 7.425% per annum,
October 8, 2005 500,480 due by May 9, 2004 30,972
Note payable to a bank in Taiwan, Secured note payable to a bank in
interest at 3.828% per annum, due by Taiwan, interest at 4.25% per annum,
February 13, 2005 125,120 due by June 6, 2005 13,011
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 4.42% per annum, due by interest at 4.25% per annum, due by
March 29, 2005 246,921 June 12, 2005 1,497
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 4.42% per annum, due by interest at 7.5% per annum, due by June
March 15, 2005 68,004 16, 2004 179,641
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 4.42% per annum, due by interest at 3.77% per annum, due by
April 11, 2005 76,548 December 31, 2004 269,462
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 4.42% per annum, due by interest at 3.77% per annum, due by
April 10, 2005 54,995 March 13, 2004 119,760
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 4.42% per annum, due by May interest at 3.77% per annum, due by
29, 2005 233,493 March 26, 2004 188,623
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.616% per annum, due by interest at 3.77% per annum, due by May
March 10, 2005 196,563 4, 2004 572,405
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.616% per annum, due by interest at 3.77% per annum, due by
February 15, 2005 60,761 March 5, 2004 78,635
F-17
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
NOTE K - DEBT (CONTINUED)
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.616% per annum, due by interest at 3.77% per annum, due by
March 8, 2005 141,511 April 8, 2004 225,573
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.616% per annum, due by interest at 3.77% per annum, due by
March 2, 2005 35,121 April 23, 2004 8,994
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.616% per annum, due by interest at 3.77% per annum, due by
March 15, 2005 43,498 April 8, 2004 19,805
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.616% per annum, due by interest at 3.77% per annum, due by
March 11, 2005 13,085 April 8, 2004 261,871
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.616% per annum, due by interest at 4.269% per annum, due by
April 9, 2005 591,192 August 25, 2004 328,792
Note payable to a bank in Taiwan,
interest at 3.616% per annum, due by
April 9, 2005 53,895
Note payable to a bank in Taiwan,
interest at 3.616% per annum, due by
April 9, 2005 59,521
Note payable to a bank in Taiwan,
interest at 3.26% per annum, due by
March 11, 2005 312,752
Note payable to a bank in Taiwan,
interest at 3.26% per annum, due by
April 22, 2005 121,866
Note payable to a corporation in
Taiwan, interest at 6.265% per annum,
due by November 20, 2005, personally
guaranteed by an office of the Company 256,496
----------
Total 3,461,612 2,579,730
Current portion $3,215,282 $2,316,689
---------- ----------
Long-term portion $ 246,330
========== $ 263,041
==========
F-18
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
NOTE L - RELATED PARTY TRANSACTIONS
Throughout the history of the Company, certain members of the Board of
Directors and general management have made loans to the Company to cover
operating expenses or operating deficiencies.
Andy Lai - As of December 31, 2004 and February 29, 2004, the Company has a
non interest-bearing loan from Andy Lai, the Company's President, in the
amount of $73,827 and $334,812, respectively. Mr. Lai has also personally
guaranteed a note payable of the Company in the amount of $477,953. As of
December 31, 2004, the balance for the note was $256,496.
Huang Hui Maio - As of December 31, 2004, the Company has a non
interest-bearing loan from Huang Hui Maio, a shareholder of the Company, in
the amount of $6,256.
NOTE M - 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 N - STOCK
On February 14, 2003 the Board of Directors of the Company approved and
recommended that Company's Articles of Incorporation be amended to increase
the number of authorized shares of common stock, par value $0.001 of the
Company, from 25,000,000 shares to 100,000,000; and to authorize 50,000,000
shares of preferred stock, par value $0.001.
On February 17, 2003, the holders of approximately 52% of the outstanding
shares of common stock of City Network executed a written consent adopting
and approving the Charter Amendment. The Charter Amendment was filed with
the Secretary of State of the State of Nevada in March 2003.
In May 2004, the Company issued 2,500,000 shares of its common stock as
consideration for the conversion in full of a note and short term debt
payable to third parties in the aggregate of $1,680,329. The note and short
term debt payable were converted into shares of common stock at a price of
approximately $0.672 per share.
F-19
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
NOTE O - TRANSITION REPORTS
In accordance to Regulation 13A-10, the following table present the
statements of income for the ten months ended December 31, 2004 and 2003
for the Company, due to the change in the fiscal year ended from February
28 to December 31.
Ten months ended Ten months ended
December 31, 2004 December 31, 2003
----------------- -----------------
(Audited) (Unaudited)
Sales, net $ 15,674,613 $ 16,119,649
Cost of sales 14,924,938 14,798,578
------------ ------------
Gross profit 749,675.00 1,321,071
General and administrative expenses 1,395,388 758,032
------------ ------------
Income (loss) from operations (645,713) 563,039
------------ ------------
Other (Income) Expense
Interest income (3,785) (21,137)
Rental income (17,858) (2,093)
Commission income (281) (14,767)
(Gain) loss on currency exchange (10,720) (5,100)
Other income (32,120) (36,067)
Equity in earnings of investee (58,330) 2,676
Miscellaneous 1,303 61,774
Bad debt expense 185,858 362,075
Loss on sale of fixed assets 32,068 0
Interest expense 112,922 55,655
------------ ------------
Total Other (Income) Expense 209,057 403,016
------------ ------------
Income (loss) before income taxes (854,770) 160,023
Provison for income taxes 109,890 137,095
------------ ------------
Net income (loss) ($ 964,660) $ 22,928
============ ============
Net income (loss) per share (basic and diluted)
Basic $ (0.036) $ 0.001
Diluted $ (0.036) $ 0.001
Weighted average number of shares
Basic 27,000,000 24,777,778
Diluted 27,000,000 24,777,778
F-20