U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number: 001-31954
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 Identification No)
incorporation or organization)
6F-3, No. 16, Jian Ba Road, Jhonghe City
Taipei County 235, Taiwan, ROC
(Address of principal executive offices)
011-886-2-8226-5566
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period) that the issuer was required to file such reports, and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, $0.001 par
value, as of the close of business on August 19, 2005 was 32,967,183.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION............................................. 2
Item 1. Financial Statements......................................... 2
Item 2. Management's Discussion and Analysis......................... 17
Item 3. Controls And Procedures...................................... 21
PART II. OTHER INFORMATION................................................ 22
Item 1. Legal Proceedings............................................ 22
Item 2. Changes in Securities and Use of Proceeds.................... 22
Item 3. Defaults Upon Senior Securities.............................. 22
Item 4. Submission of Matters to a Vote of Security Holders.......... 22
Item 5. Other Information............................................ 22
Item 6. Exhibits and Reports on Form 8-K............................. 22
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2005 December 31, 2004
------------- -----------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 696,789 $ 2,010,644
Investment 72,931 0
Accounts receivable, net 2,622,809 3,333,990
Inventory 783,129 732,027
Other receivables 22,816 6,863
Prepaid expenses 511,715 102,896
------------ ------------
Total Current Assets 4,710,189 6,186,420
------------ ------------
Fixed Assets, net 2,265,830 2,586,872
------------ ------------
Total Fixed Assets 2,265,830 2,586,872
------------ ------------
Other Assets
Deposits 1,791,459 1,724,542
Construction in progress 30,316 0
Trademarks 1,740 1,812
Equity in net assets of affiliated company 818,885 829,008
Intangible assets 926,730 961,053
Other assets 20,459 8,255
------------ ------------
Total Other Assets 3,589,589 3,524,670
------------ ------------
Total Assets $ 10,565,608 $ 12,297,962
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 3,170,847 $ 3,335,286
Due to related party 100,344 80,083
Deferred revenue 48,368 14,566
Current portion, long-term debt 2,773,548 3,226,181
------------ ------------
Total Current Liabilities 6,093,107 6,656,116
Long-term debt, net of current portion 0 246,330
------------ ------------
Total Liabilities 6,093,107 6,902,446
------------ ------------
Stockholders' Equity
Common stock, $.001 par value, 100,000,000 shares
authorized, 27,500,000 issued and outstanding 27,500 27,500
Additional paid in capital 5,937,946 5,937,946
Cumulative foreign-exchange translation adjustment 363,044 142,453
Retained earnings (1,855,989) (712,383)
------------ ------------
Total Stockholders' Equity 4,472,501 5,395,516
------------ ------------
Total Liabilities and Stockholders' Equity $ 10,565,608 $ 12,297,962
============ ============
2
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Sales, net $ 3,599,366 $ 5,943,514 $ 4,892,716 $ 12,230,607
Cost of sales 3,377,970 5,599,690 4,633,010 11,297,569
------------ ------------ ------------ ------------
Gross profit 221,396 343,824 259,706 933,038
General and administrative expenses 376,241 467,480 699,386 849,920
------------ ------------ ------------ ------------
Income (loss) from operations (154,845) (123,656) (439,680) 83,118
------------ ------------ ------------ ------------
Other (Income) Expense
Interest income (1,688) (890) (2,087) (1,018)
Rental income (47,910) (7,900) (95,580) (11,054)
Commission income (31,870) (2) (35,791) (1,181)
(Gain) loss on currency exchange 4,977 (3,029) 13,235 (206)
Other income (20,371) (53,710) (56,239) (54,965)
Reserve for bad debt 11,154 49,688 696,154 49,688
Equity in earnings of investee (531) 0 10,123 0
Miscellaneous 10,318 51,553 12,657 51,553
Loss on sale of fixed assets (2,280) 0 79,980 0
Interest expense 42,898 23,312 81,296 40,402
------------ ------------ ------------ ------------
Total Other (Income) Expense (35,303) 59,022 703,748 73,219
------------ ------------ ------------ ------------
Income (loss) before income taxes (119,542) (182,678) (1,143,428) 9,899
Provison for income taxes 178 19,516 178 19,516
------------ ------------ ------------ ------------
Net income (loss) $ (119,720) $ (202,194) $ (1,143,606) $ (9,617)
============ ============ ============ ============
Net income (loss) per share (basic and diluted)
Basic $ (0.004) $ (0.008) $ (0.042) $ (0.0004)
Diluted $ (0.004) $ (0.008) $ (0.042) $ (0.0004)
Weighted average number of shares
Basic 27,500,000 26,666,667 27,500,000 25,833,333
Diluted 27,500,000 26,666,667 27,500,000 25,833,333
3
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
-------------------------------
June 30, June 30,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $(1,143,606) $ (9,617)
Adjustments to reconcile net income (loss) to net cash
provided by (used) in operating activities:
Depreciation and amortization 87,730 82,449
Equity in earning of investee 10,123 0
Loss on disposal of assets 79,980 0
(Gain) loss on foreign currency exchange 13,235 (206)
Translation adjustment 192,578 (13,359)
Decrease (Increase) in receivables 711,181 (739,909)
Decrease (Increase) in inventory (51,102) (839,993)
Decrease (Increase) in other receivables (15,953) 1,035,968
Decrease (Increase) in prepaid expenses (408,819) (246,822)
Decrease (Increase) in deposit (66,917) 445,826
Decrease (Increase) in other current assets (12,204) 183,462
(Decrease) Increase in accounts payable
and accrued expenses (164,439) 1,232,347
(Decrease) Increase in deferred revenue 33,802 (425,749)
(Decrease) Increase in deposits payable 0 0
----------- -----------
Total Adjustments 409,195 714,014
----------- -----------
Net cash (used in) provided by operations (734,411) 704,397
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of fixed assets 397,222 0
Purchase on investment (72,931) 0
Construction in progress (30,316) 0
Purchase of fixed assets (194,717) (24,259)
----------- -----------
Net cash (used in) provided by investing activities 99,258 (24,259)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on notes payable (4,249,488) (2,554,801)
Payment of loan from related party (6,293) (1,524,926)
Loan from related party 26,554 248,127
Issuance of short-term debt 3,550,525 2,970,242
----------- -----------
Net cash (used in) financing activities (678,702) (861,358)
----------- -----------
Net change in cash and cash equivalents (1,313,855) (181,220)
----------- -----------
Cash and cash equivalents at beginning of period 2,010,644 1,148,457
----------- -----------
Cash and cash equivalents at end of period $ 696,789 $ 967,237
=========== ===========
Supplemental cash flows disclosures:
Income tax payments $ 178 $ 21,757
----------- -----------
Interest payments $ 81,296 $ 40,402
----------- -----------
Non cash transaction:
Conversion of debt to equity $ 0 $ 1,680,329
----------- -----------
4
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
June 30, 2005 December 31, 2004
------------- -----------------
(Unaudited)
Common stock, number of shares outstanding
Balance at beginning of period 27,500,000 25,000,000
Common stock issued 0 2,500,000
------------ ------------
Balance at end of period 27,500,000 27,500,000
------------ ------------
Common stock, par value $.001
Balance at beginning of period $ 27,500 $ 25,000
Common stock issued 0 2,500
------------ ------------
Balance at end of period 27,500 27,500
------------ ------------
Additional paid in capital
Balance at beginning of period 5,937,946 4,260,117
Issuance of stock 0 1,677,829
------------ ------------
Balance at end of period 5,937,946 5,937,946
------------ ------------
Cumulative foreign-exchange translation adjustment
Balance at beginning of period 142,453 29,663
Foreign currency translation 220,591 112,790
------------ ------------
Balance at end of period 363,044 142,453
------------ ------------
Retained (deficits)
Balance at beginning of period (712,383) 252,277
Net income (loss) (1,143,606) (964,660)
------------ ------------
Balance at end of period (1,855,989) (712,383)
------------ ------------
Total stockholders' equity at end of period $ 4,472,501 $ 5,395,516
============ ============
5
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 1 - NATURE OF OPERATIONS
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, dated
November 14, 2002 and 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 to the shareholders of City Network Technology, Inc.
The Company designs, manufactures and markets a comprehensive line of
broadband communication and wireless Internet access product and solutions.
The Company's product lines are used in residential building and
hospitality markets and include the simple DSL bridge/ modem for the home
and small business user.
On December 16, 2004, the Company changed its fiscal year end from February
28 to December 31.
6
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION - The accompanying financial
statements have been prepared by City Network, Inc. pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC") for
Form 10-QSB and Item 310 of Regulation S-B and generally accepted
accounting principles for interim financial reporting. These financial
statements are unaudited and, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments and accruals)
necessary for a fair presentation of the statement of financial position,
operations, and cash flows for the periods presented. Operating results for
the six months ended June 30, 2005 and 2004 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2005,
or any future period, due to seasonal and other factors. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
policies have been omitted in accordance with the rules and regulations of
the SEC. These financial statements should be read in conjunction with the
audited consolidated financial statements and accompanying notes, included
in the Company's Annual Report on Form 10-KSB for the ten months ended
December 31, 2004.
BASIS OF CONSOLIDATION - The consolidated financial statements for 2005 and
2004 include the accounts of City Network, Inc. and its wholly owned
subsidiaries City Network Technology, Inc., City Network, Inc. - Taiwan and
City Construction Co., Ltd. All material intercompany accounts,
transactions and profits have been eliminated in consolidation.
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.
CASH AND CASH EQUIVALENTS - Cash equivalents are stated at cost. Cash
equivalents are highly liquid investments readily convertible into cash
with an original maturity of three months or less and consist of time
deposits with commercial banks.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company establishes an allowance for
doubtful accounts on a case-by-case basis when it believes the required
payment of specific amounts owed is unlikely to occur after a review of
historical collection experience, subsequent collections, and management's
evaluation of existing economic conditions.
7
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FIXED ASSETS - Property and equipment are stated at cost less accumulated
depreciation. Expenditures for major additions and improvements are
capitalized and minor replacements; maintenance and repairs are expensed as
incurred. Whenever an asset is retired or disposed of, its cost and
accumulated depreciation or amortization are removed from the respective
accounts and the resulting gain or loss is credited or charged to income.
Depreciation is computed using the straight-line and declining-balance
methods over the following estimated useful lives:
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 period ended June 30, 2005.
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.
INVENTORY - Inventory is valued at the lower of cost or market; cost is
determined on the weighted average method. As of June 30, 2005, inventory
consisted only of finished goods.
8
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. As of June 30, 2005, there are no matters that warrant
disclosure in the financial statements.
ADVERTISING - Advertising costs are expensed in the period incurred.
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.
CONCENTRATION OF CREDIT RISK - Financial instruments, which subject the
Company to credit risk, consist primarily of cash equivalents and trade
accounts receivable arising from its normal business activities. The
Company places its cash in what it believes to be credit-worthy financial
institutions. Concentration of credit risk with respect to trade accounts
receivable is primarily from customers located in Asia. The Company
actively evaluates the creditworthiness of the customers with which it
conducts business through credit approvals, credit limits and monitoring
procedures.
9
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
IMPAIRMENT OF LONG-LIVED ASSETS - On January 1, 2002 the Company adopted
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets". The Company evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. If the estimated future cash flows
(undiscounted and without interest charges) from the use of an asset are
less than the carrying value, a write-down would be recorded to reduce the
related asset to its estimated fair value. There have been no such
impairments to date.
EARNINGS PER SHARE - Earnings per share are based on the weighted average
number of shares of common stock and common stock equivalents outstanding
during each period. Earnings per share are computed using the treasury
stock method. The options to purchase common shares are considered to be
outstanding for all periods presented, but are not calculated as part of
the earnings per share.
INCOME TAXES - Income taxes have been provided based upon the tax laws and
rates in the countries in which operations are conducted and income is
earned. The income tax rates imposed by the taxing authorities vary.
Taxable income may vary from pre-tax income for financial accounting
purposes. There is no expected relationship between the provision for
income taxes and income before income taxes, because the countries have
different taxation rules, which vary not only to nominal rates but also in
terms of available deductions, credits and other benefits. Deferred tax
assets and liabilities are recognized for the anticipated future tax
effects of temporary differences between the financial statement basis and
the tax basis of the Company's assets and liabilities using the applicable
tax rates in effect at year end as prescribed by SFAS No. 109 "Accounting
for Income Taxes".
EXCHANGE GAIN (LOSS) - As of June 30, 2005 and 2004, the transactions of
City Network, Inc. - Taiwan and City Construction Co., Ltd. were
denominated in a foreign currency and are recorded in New Taiwan Dollars
("NTD") at the rates of exchange in effect when the transactions occur.
Exchange gains and losses are recognized for the different foreign exchange
rates applied when the foreign currency assets and liabilities are settled.
10
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
TRANSLATION ADJUSTMENT - As of June 30, 2005 and 2004, the accounts of City
Network, Inc. - Taiwan and City Construction Co., Ltd. were maintained, and
their financial statements were expressed, in NTD. Such financial
statements were translated into U.S. Dollars (USD) in accordance with SFAS
No. 52, "Foreign Currency Translation", with the NTD as the functional
currency. According to SFAS No. 52, 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 June 30, 2005 and 2004 the exchange rates between NTD and the USD was
NTD $1 = USD $0.03182 and NTD $1 = USD $0.02995, respectively. The
weighted-average rate of exchange between NTD and USD was NTD$1 = USD
$0.03186 and NTD $1 = USD $0.02967, respectively. Total translation
adjustment recognized for the period ended June 30, 2005 is $363,044.
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.
11
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 3 - CONCENTRATION
The Company had ten major customers during the six months ended June 30,
2005. Those customers comprise 91% of the total sales during the six months
ended June 30, 2005. Sales to these customers were approximately
$4,449,227. Included in accounts receivable is $1,863,874 from these
customers as of June 30, 2005.
NOTE 4 - 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 June 30, 2005 and 2004, there were no uninsured portions of
the balances held at the bank.
NOTE 5 - FIXED ASSETS
Fixed assets consist of the following:
June 30, 2005 December 31, 2004
------------- -----------------
Land $ 1,774,623 $ 1,916,328
Building -- 283,977
Machinery and equipment 464,943 430,880
Furniture and fixtures 198,182 143,655
----------- -----------
$ 2,437,748 $ 2,774,840
Accumulated depreciation (171,918) (187,968)
----------- -----------
$ 2,265,830 $ 2,586,872
=========== ===========
NOTE 6 - INTANGIBLE ASSETS
Intangible assets consist of the following:
June 30, 2005 December 31, 2004
------------- -----------------
Trademarks $ 2,150 $ 2,150
Intangible asset 1,000,000 1,000,000
----------- -----------
$ 1,002,150 $ 1,002,150
Accumulated depreciation (73,679) (39,285)
----------- -----------
$ 928,471 $ 962,865
=========== ===========
12
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 7 - COMPENSATED ABSENCES
Employees earn annual vacation leave at the rate of seven (7) days per year
for the first three years of employment with the Company. Upon completion
of the third year of employment, employees earn annual vacation leave at
the rate of ten (10) days per year. At termination, employees are paid for
any accumulated annual vacation leave. As of June 30, 2005 vacation
liability exists in the amount of $1,498.
NOTE 8 - COMMITMENTS
A BEST INFORMATION TECHNOLOGY, INC. - City Network, Inc. - Taiwan, signed
an agreement with A Best Information Technology, Inc. in 2002 for the
exclusive right to sell A Best Information's products. The rights are
perpetual and transferable. 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
60% of the building project. The Company has begun construction on the
building.
OPERATING LEASES - The Company leases office facilities under operating
leases that terminate on various dates. Rental expense for these leases
consisted of $12,116 for the three months ended June 31, 2005. The Company
has future minimum lease obligations as follows:
2005 $22,910
2006 45,821
-------
Total $68,731
=======
NOTE 9 - LONG-TERM INVESTMENT
On August 31, 2003 the Company purchased approximately twenty-five percent
(25%) of Beijing Putain Hexin Network Technology Co., Ltd for $325,000. On
December 4, 2003 the Company purchased an additional fifteen percent (15%)
for $398,500. Beijing Putain Hexin Network Technology Co., Ltd is not
publicly traded or listed. The Company is using the complete equity method
to record its share of the subsidiary's net income and loss. As of June 30,
2005 the Company recognized a $10,123 loss from their acquisition.
13
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 10 - DEBT
At June 30, 2005 and 2004, the Company had notes payable outstanding in the
aggregate amount of $2,773,548 and $3,472,511, respectively. Payable as
follows:
June 30, 2005 December 31, 2004
------------- -----------------
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.773% per annum, due interest at 3.828% per annum, due
by July 31, 2005 $ 25,456 by February 13, 2005 $ 125,120
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.773% per annum, due interest at 3.616% per annum, due
by August 26, 2005 60,458 by February 15, 2005 60,761
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.773% per annum, due interest at 3.616% per annum, due
by September 8, 2005 41,495 by March 2, 2005 35,121
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.35% per annum, due interest at 3.616% per annum, due
by September 15, 2005 409,670 by March 8, 2005 141,511
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.35% per annum, due interest at 3.616% per annum, due
by September 15, 2005 69,049 by March 10, 2005 196,563
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.773% per annum, due interest at 3.616% per annum, due
by September 23, 2005 56,651 by March 11, 2005 13,085
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.773% per annum, due interest at 3.26% per annum, due
by September 23, 2005 352,553 by March 11, 2005 312,752
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.773% per annum, due interest at 3.616% per annum, due
by September 30, 2005 309,782 by March 15, 2005 43,498
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.773% per annum, due interest at 4.42% per annum, due
by October 12, 2005 260,606 by March 15, 2005 68,004
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.773% per annum, due interest at 4.42% per annum, due
by October 25, 2005 418,155 by March 29, 2005 246,921
14
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 10 - DEBT (continued)
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.773% per annum, due interest at 3.616% per annum, due
by October 26, 2005 28,363 by April 9, 2005 591,192
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.773% per annum, due interest at 3.616% per annum, due
by October 5, 2005 503,840 by April 9, 2005 53,895
Note payable to a bank in Taiwan, Note payable to a bank in Taiwan,
interest at 3.773% per annum, due 125,960 interest at 3.616% per annum, due
by February 13, 2006 by April 9, 2005 59,521
Note payable to a corporation in Note payable to a bank in Taiwan,
Taiwan, interest at 6.265% per 111,510 interest at 4.42% per annum, due
annum, due by November 20, 2005, by April 10, 2005 54,995
personally guaranteed by an
officer of the Company Note payable to a bank in Taiwan,
interest at 4.42% per annum, due
by April 11, 2005 76,548
Note payable to a bank in Taiwan,
interest at 3.26% per annum, due
by April 22, 2005
Note payable to a bank in Taiwan,
interest at 4.42% per annum, due
by May 29, 2005
Note payable to a bank in Taiwan,
interest at 3.616% per annum, due
by October 8, 2005
Note payable to a corporation in
Taiwan, interest at 6.265% per
annum, due by November 20, 2005,
personally guaranteed by an
officer of the Company 256,496
Note payable to a bank in Taiwan,
interest at 3.175% per annum, due
by May 29, 2016 280,689
----------- -----------
Total 2,773,548 Total 3,472,511
Current portion $ 2,773,548 Current portion $ 3,226,181
----------- -----------
Long-term portion $ -- Long-term portion $ 246,330
=========== ===========
15
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 11 - 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.
As of June 30, 2005, the Company has a non interest-bearing loan from
Tiao-Tsan Lai, the Company's Chief Executive Officer and Chairman, in the
amount of $100,344. Mr. Lai has also personally guaranteed a note payable
of the Company in the amount of $477,953. As of June 30, 2005, the balance
for the note was approximately $111,510.
NOTE 12 - LITIGATION
As of June 30, 2005, City Network - Taiwan was involved in two separate
litigations related to a sales agreement that involved a vendor and a
customer. The sales agreement provided that City Network - Taiwan would not
pay the vendor until such time City Network - Taiwan received payment from
the customer. The customer in August 2004 closed business and did not pay
the remaining balance due to City Network - Taiwan. City Network - Taiwan
has filed litigation against the customer for fraud. The vendor has filed a
lawsuit against City Network - Taiwan requesting payment. Both cases are
pending court proceedings. City Network - Taiwan was ordered by the court
to put up a guarantee bond temporarily to fight against the vendor. As of
July 5, 2005, the Company has settled both cases.
NOTE 13 - GOING CONCERN
The Company has suffered recurring losses from operations, cash
deficiencies and the ability to meets its maturing obligations without
selling operating assets or restructuring debts. These issues may raise
substantial concern about its ability to continue as a going concern.
Management has prepared the following statement to address these and other
concerns:
The Company is currently engaged in discussions with a number of companies
regarding strategic acquisitions or investments. Although these discussions
are ongoing, there can be no assurance that any of these discussions will
result in actual acquisitions or investment. See note 14 to the financial
statements.
NOTE 14 - SUBSEQUENT EVENTS
On August 10, 2005, the Company entered into a Securities Purchase
Agreement (the "Securities Purchase Agreement") with Highgate House Funds,
Ltd. ("Highgate House"), a Securities Equity Distribution Agreement with
Cornell Capital Partners, L.P. ("Cornell Capital"), an affiliate of
Highgate House, and related agreements.
Under the terms of the Securities Purchase Agreement, the Company will
issue secured convertible debentures (the "Notes") in the aggregate
principal amount of $250,000 to Highgate House. $125,000 in principal
amount of the Notes were issued on August 17, 2005 (the "First Closing
Date"). $125,000 in principal amount of the Notes will be issued at a later
closing date.
Simultaneously with the Company's entry into the Securities Purchase
Agreement, the Company entered into the Securities Equity Distribution
Agreement (the "SEDA") whereby the Company may, over twenty-four months
after the date of the agreement, issue and sell its common stock to Cornell
Capital in $300,000 installments (each an "Advance") totaling up to
$15,000,000, subject to the terms of the SEDA. The Company's ability to
issue and sell common stock pursuant to the SEDA remains subject to, and
the Company intend to obtain, (1) the effectiveness of a registration
statement covering such shares of common stock, (2) stockholder approval of
the issuance of such shares of common stock, and (3) approval by the
American Stock Exchange for the additional listing of such shares of common
stock. Additionally, any availability under the SEDA will be subject to the
Company's continued compliance with the terms of the SEDA.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Form 10-QSB. The information in this discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements involve risks and uncertainties, including
statements regarding our capital needs, business strategy and expectations,
including but not limited to the following:
* our ability to raise funds in the future through public or private
financings;
* the timing of our introduction of products or product enhancements;
* our ability to manage costs associated with our product or technology
acquisitions;
* our ability to keep pace with rapidly changing technology, evolving
industry standards and new product and services in our industry;
* customers' acceptance of our product designs;
* our ability to integrate businesses, products and technologies and in
joint ventures and strategic relationships with other companies;
* our business expenses being greater than anticipated due to
competitive factors or unanticipated developments;
* changes in political and economic conditions in the Asian and European
countries where we do business;
* our ability to retain management and key personnel;
* our ability to protect our developed technologies, know-how,
trademarks and related intellectual properties; and
* our ability to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002.
Any statements contained herein that are not statements of historical facts may
be deemed to be forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may", "will", "should",
"expect", "plan", "intend", "anticipate", "believe", estimate", "predict",
"potential" or "continue", the negative of such terms or other comparable
terminology. Actual events or results may differ materially. We disclaim any
obligation to publicly update these statements, or disclose any difference
between its actual results and those reflected in these statements. The
information constitutes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
BACKGROUND OF THE COMPANY
City Network, Inc. ("City Network," "we," "our" or "us") was incorporated
on August 8, 1996 as Investment Agents, Inc. under the laws of the State of
Nevada. City Network Technology, Inc. ("CNT") was incorporated under the laws of
17
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, we ceased our relationship with the company for
whom we previously acted as referral agent.
CNT owns all of the issued and outstanding common stock of City Network,
Inc.-Taiwan, which was incorporated under the laws of the Republic of China on
September 6, 1994, and all of the issued and outstanding common stock of company
of City Construction Co., Ltd., 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.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial conditions and results of
operations is based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("GAAP"). The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. See "Summary of Significant Accounting Policies" in the Notes
to Consolidated Financial Statements in Item to this Report for our critical
accounting policies. No significant changes in our critical accounting policies
have occurred since December 31, 2004.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2004
NET SALES. Net sales for the three months ended June 30, 2005 were
$3,599,366 compared to $5,943,514 for the three months ended June 30, 2004. The
decrease in net sales for the three months ended June 30, 2005 was due to a
decrease in demand for our old products. Our new products, introduced in 2004,
are in the early stages of selling. During the three months ended June 30, 2005,
the sales volume for our new products was low compared to the sales volume for
our old products. We have, however, increased net sales in the second quarter of
2005 over net sales in the first quarter of 2005, primarily due to an increase
in sales of our new products.
We design, manufacture and market a comprehensive line of broadband
communication and wireless Internet access solutions, including home PNA and
xDSL broadband access equipment and related accessories, which comprise our
older, established products. In 2004 we introduced new products such as VoIP,
GSP and wireless Internet access products.
We believe that an increase in competition over the market for our older
products has contributed to a decline in the unit price of those products.
Additionally, we believe that the introduction of more technologically advanced
products to the marketplace have diminished consumer demand for our older
products. We intend to continue upgrading our older products to meet customer
expectations.
18
We believe that sales for our new products, such as VoIP and GSP products,
can increase with improved brand name recognition and increased sales channels.
We had higher sales of the new products in the second quarter of 2005 compared
to the first quarter of 2005, but we have not reached our goals in sales volume
for the new products. We intend to continue promoting and marketing our new
products to improve brand name recognition as well as work on increasing sales
channels.
COST OF SALES. Cost of sales for the three months ended June 30, 2005 was
$3,377,970 or 93.8% of net sales, as compared to $5,599,690 or 94.2% of net
sales, during the three months ended June 30, 2004. The decrease in cost of
sales is associated with the decrease in sales. The decrease in the cost of
sales as a percentage of revenue is due to the higher gross margin of new
products, as compared to the gross margin on our old products sold in 2004.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $376,241, or 10.5% of net sales, for the three months ended June 30, 2005,
as compared to $467,480 or 7.9% of net sales, for the three months ended June
30, 2004. The decrease was due to the decrease in sales and an associated
decrease in related expenses. The increase in general and administrative
expenses as a percentage of net sales is attributable to fixed overhead costs
which remain constant for all levels of sales.
LOSS FROM OPERATIONS. Loss from operations for the three months ended June
30, 2005 was $(154,845), compared to loss from operations for the three months
ended June 30, 2004 of $(123,656). The increase in loss from operations for the
three months ended June 30, 2005 compared with loss from operations for the
three months ended June 30, 2004 was due to a decrease in sales without a
proportionate decrease in the cost of sales and general and administrative
expenses.
OTHER (INCOME) EXPENSE. Other (income) expense was $(35,303) for the three
months ended June 30, 2005, as compared to $59,022 for the three months ended
June 30, 2004. This change was the result of additional income recognized on
rent and export sales commissions received in the three months ended June 30,
2005.
NET LOSS. Net loss for three months ended June 30, 2005 was $(119,542)
compared to net loss of $(182,678) for the three months ended June 30, 2004. The
decrease in net loss was due to the reasons described above.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2004
NET SALES. Net sales for the six months ended June 30, 2005 were $4,892,716
compared to $12,230,607 for the six months ended June 30, 2004. The decrease in
net sales for the six months ended June 30, 2005 was due to a decrease in demand
for our old products. Our new products, introduced in 2004, are in the early
stages of selling.
COST OF SALES. Cost of sales for the six months ended June 30, 2005 was
$4,633,010 or 94.7% of net sales, as compared to $11,297,569 or 92.4% of net
sales, during the six months ended June 30, 2004. The decrease in cost of sales
is associated with the decrease in sales. The decrease in our cost of sales as a
percentage of net sales is attributable to a decrease in the sale price of our
old products, which is due to increased competition in the market for our old
products, while the cost of producing such products has remained constant.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $699,386, or 14.3% of net sales, for the six months ended June 30, 2005, as
compared to $849,920 or 6.9% of net sales, for the six months ended June 30,
2004. The decrease was due to the decrease in sales and an associated decrease
in related expenses. The increase in general and administrative expenses as a
19
percentage of net sales is attributable to fixed overhead costs which remain
constant for all levels of sales.
INCOME (LOSS) FROM OPERATIONS. Loss from operations for the six months
ended June 30, 2005 was $(439,680), compared to income from operations for the
six months ended June 30, 2004 of $83,118. The loss from operations for the six
months ended June 30, 2005 compared with income from operations for the six
months ended June 30, 2004 was due to a decrease in sales without a
proportionate decrease in the cost of sales and general and administrative
expenses.
OTHER EXPENSE. Other expense was $703,748 for the six months ended June 30,
2005, as compared to $73,219 for the six months ended June 30, 2004. This
increase in other expense was the result of additional reserves made on accounts
receivable and losses we incurred on the sale of fixed assets, offset by
additional income recognized on rent and export sales commissions.
NET LOSS. Net loss for six months ended June 30, 2005 was $(1,143,606)
compared to income of $(9,617) for the six months ended June 30, 2004. The net
loss for the three months ended June 30, 2005 compared with income for the three
months ended June 30, 2004 was due to the reasons described above, including the
additional reserves made on accounts receivable.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005 and December 31, 2004, we had cash and cash equivalents of
$696,789 and $2,010,644, respectively. Our current assets totaled $4,710,189 at
June 30, 2005 as compared to $6,186,420 at December 31, 2004. Our total current
liabilities were $6,093,107 at June 30, 2005 as compared to $6,656,116 at
December 31, 2004. Working capital at June 30, 2005 was $(1,382,918) and
$(469,696) at December 31, 2004. For the six months ended June 30, 2005, total
cash used in operations was $(734,411) as compared to net cash provided by
operations of $704,397 during the same period in 2004. Net cash used in
financing activities was $(678,702), which consisted of the payment on notes
payable and issuance of short-term debt, as compared with net cash used in
financing activities of $(861,348) during the six months ended June 30, 2004.
We deployed a large amount of cash in the six months ended June 30, 2005
for developing new products. Therefore there is a deficiency in working capital
at the end of such period. We have, however, increased the sales of our new
products in the second quarter of 2005 as compared to the first quarter of 2005.
Our operations and short term financing do not currently meet our cash
needs. We believe we will be able to generate revenues from sales and raise
capital through offerings of our 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.
Our liquidity is currently dependent on our ability to strengthen our
accounts receivable collection time period and our ability to continue to raise
cash from financing sources to fund our expansion. Our short-term and long-term
liquidity may be influenced by uncollected accounts 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, including diversifying
its customer base and controlling credit risk through credit approvals, credit
limits and monitoring procedures. There can be no assurance that these measures
will prove successful. Our inability to manage this risk will have a material
adverse effect upon its business, financial condition and results of operations.
20
CAPITAL EXPENDITURES. Total capital expenditures during the six months
ended June 30, 2005 were $194,717 compared to $24,259 for the six months ended
June 30, 2004. We currently have no plans or commitments for significant
equipment acquisitions or capital expenditures.
RECENT DEVELOPMENTS
On August 10, 2005, we entered into a Securities Purchase Agreement (the
"Securities Purchase Agreement") with Highgate House Funds, Ltd. ("Highgate
House"), a Securities Equity Distribution Agreement with Cornell Capital
Partners, L.P. ("Cornell Capital"), an affiliate of Highgate House, and related
agreements.
Under the terms of the Securities Purchase Agreement, we will issue secured
convertible debentures (the "Notes") in the aggregate principal amount of
$250,000 to Highgate House. $125,000 in principal amount of the Notes were
issued on August 17, 2005 (the "First Closing Date"). $125,000 in principal
amount of the Notes will be issued at a later closing date.
Simultaneously with our entry into the Securities Purchase Agreement, we
entered into the Securities Equity Distribution Agreement (the "SEDA") whereby
we may, over twenty-four months after the date of the agreement, issue and sell
our common stock to Cornell Capital in $300,000 installments (each an "Advance")
totaling up to $15,000,000, subject to the terms of the SEDA. Our ability to
issue and sell common stock pursuant to the SEDA remains subject to, and we
intend to obtain, (1) the effectiveness of a registration statement covering
such shares of common stock, (2) stockholder approval of the issuance of such
shares of common stock, and (3) approval by the American Stock Exchange for the
additional listing of such shares of common stock. Additionally, any
availability under the SEDA will be subject to our continued compliance with the
terms of the SEDA.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
ITEM 3. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as such term is defined
under Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We have carried out an
evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2005. Based upon their evaluation and subject to the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that as of June 30, 2005 our disclosure controls and procedures were effective
at the reasonable assurance level in ensuring that material information relating
to us, is made known to the Chief Executive Officer and Chief Financial Officer
by others within our company during the period in which this report was being
prepared.
There were no changes in our internal controls or in other factors
during the most recent quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of July 5, 2005, we settled two litigation cases with two Taiwanese
companies, Rong-Dian Co., a vendor, and Hwa-Ching Co., a customer. We entered
into a purchase agreement, dated June 4, 2004, with Rong-Dian Co. and Hwa-Ching
Co. The purchase agreement provided that we would not pay Rong-Dian Co. unless
Hwa-Ching Co. paid us. In August 2004, Hwa-Ching Co. closed down suddenly, with
a remaining accounts payable balance outstanding to us.
In August 2004, we filed a lawsuit against Yune-Chang Tsuo, the owner of
Hwa-Ching Co. in the Taiwan Taipei district court of Taiwan, in Taipei, Taiwan,
alleging fraud for closing down Hwa-Ching Co. without payment for the delivered
merchandise. We sought the amount of New Taiwan Dollars ("NTD") 27.0 million, or
approximately $900,000.
In October 2004 Rong-Dian Co. filed a lawsuit against us in the Taiwan
Taipei district court of Taiwan, in Taipei, Taiwan, alleging breach of contract
for the purchase agreement. Rong-Dian Co. sought the amount of NTD 40.0 million,
or approximately $1.2 million.
In the settlements, the owner of Hwa-Ching Co. has agreed to pay us the
$900,000 owed by Hwa-Ching Co., and we have agreed to pay Rong-Dian Co. for the
$1.2 million owed to them.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Securities Purchase Agreement, dated as of August 10, 2005, by
and between the Company and Highgate House Funds, Ltd. (the
"Investor").
10.2 Standby Equity Distribution Agreement, dated as of August 10,
2005, by and between the Company and Cornell Capital Partners,
L.P. ("Cornell Capital").
10.3 Investor Registration Rights Agreement, dated as of August 10,
2005, by and between the Company and the Investor.
10.4 Security Agreement, dated as of August 10, 2005, by and
between the Company and the Investor.
22
10.5 Security Agreement, dated as of August 10, 2005, by and
between City Technology, Inc. ("CTI") and the Investor.
10.6 Security Agreement, dated as of August 10, 2005, by and
between City Network, Inc. - Taiwan and the Investor.
10.7 Security Agreement, dated as of August 10, 2005, by and
between City Construction Co. Ltd. and the Investor.
10.8 Pledge and Escrow Agreement, dated as of August 10, 2005, by
and among the Company, the Investor and David Gonzalez, Esq.,
as escrow agent.
10.9 Secured Convertible Debentures, dated as of August 17, 2005,
executed by the Company in favor of the Investor.
10.10 Warrant, dated as of August 17, 2005, to purchase up to 25,000
shares of Common Stock, executed by the Company in favor of
the Investor.
10.11 Registration Rights Agreement, dated as of August 10, 2005, by
and between the Company and Cornell Capital.
10.12 Placement Agent Agreement, dated as of August 10, 2005 by and
between the Company and Monitor Capital, Inc.
31.1 Certifications of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NETWORK, INC.
Dated: August 22, 2005 By: /s/ Tiao-Tsan Lai
----------------------------------
Tiao-Tsan Lai
Chief Executive Officer
(Principal Executive Officer)
Dated: August 22, 2005 By: /s/ Yun-Yi Tseng
----------------------------------
Yun-Yi Tseng
Chief Financial Officer
(Principal Financial Officer)
24