U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Amendment No. 2)
[ ] 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.)
2F-1, 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 is not required to file reports pursuant to Section 13
or 15(d) to the Exchange Act. [ ]
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]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The issuer's revenues for the ten months ended December 31, 2004: $15,674,613.
As of January 23, 2006, there were 32,967,183 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 5,071,172 based on
the closing price of $.18 per share on January 23, 2006, as reported by the
American Stock Exchange.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (Check one): Yes [X]; No [ ]
EXPLANATORY NOTE (NEED TO REVISE TO ADD CHANGE TO LEGAL PROCEEDING ITEM)
The purpose of this Amendment No. 2 to Annual Report on Form 10-KSB/A of City
Network, Inc. (the "Company," "we" or "our") for the fiscal period ended
December 31, 2004, filed with the Securities and Exchange Commission ("SEC") on
April 15, 2005 is to provide additional disclosure about the Company's ongoing
legal proceedings. The only Items amended and restated herein are Part 1, Item 3
and Part II, Item 7.
Except as otherwise expressly noted herein, this Amendment No. 2 to the Annual
Report on Form 10-KSB/A does not reflect events occurring after the April 15,
2005 filing of our Annual Report on Form 10-KSB in any way. The remaining Items
contained within this Amendment No. 2 to our Annual Report on Form 10-KSB/A
consist of all other Items originally contained in our Annual Report on Form
10-KSB and Form 10-KSB/A for the fiscal period ended December 31, 2004 in the
form filed with the SEC on April 15, 2005 and July 6, 2005, respectively. These
remaining Items are not amended hereby and are not included herein. In order to
preserve the nature and character of the disclosures set forth in such Items as
originally filed, except as expressly noted herein, this report continues to
speak as of the date of the original filing, and we have not updated the
disclosures in this report to speak as of a later date.
ITEM 3. LEGAL PROCEEDINGS
HWA-CHING CO. AND RELATED LAWSUITS
In April 2004, Hwa-Ching Co. made purchases from City Network Inc.-Taiwan
for products in the aggregate amount of approximately NT$19 million or
US$575,757. In June 2004, Hwa-Ching Co. wrote a check to City Network
Inc.-Taiwan paying for such products and City Network Inc.-Taiwan successfully
cashed this check. Also in June 2004, Hwa-Ching Co. made purchases from City
Network Inc.-Taiwan for additional products in the aggregate amount of
approximately NT$18 million or US$545,454 and paid for such products with a
check that City Network Inc.-Taiwan also successfully cashed.
During June to August 2004, Hwa-Ching Co. requested additional products
from City Network Inc.-Taiwan in the aggregate amount of approximately NT$27
million or US$818,181. City Network Inc.-Taiwan filled these orders with
confidence as Hwa-Ching had paid for the prior orders from April 2004 and June
2004. However, the check, in the amount of approximately NT$27 million or
US$818,181 that Hwa-Ching Co. wrote to City Network, Inc.-Taiwan bounced upon
deposit with the bank. Immediately thereafter, Hwa-Ching Co. closed down with
this remaining account payable balance of approximately NT$27 million or
US$818,181 outstanding and payable to City Network Inc.-Taiwan.
In August 2004, City Network Inc.-Taiwan filed a lawsuit against Yune-Chang
Tsuo, the owner of Hwa-Ching Co., as well as the following eight individuals
including, Yong-Zhang Zhuo, Shu-Tao Lu, Yong-Yi Zhuo, Zhuan-Xuan Dai, Ya-Hui
Qiu, Mei-Zhen Huang, Zong-Ya Wu, Yao-Guo Cen in Taiwan Taipei district court of
Taiwan, in Taipei, Taiwan, alleging fraud for closing down Hwa-Ching Co. without
payment for the delivered merchandise. City Network Inc.-Taiwan sought
approximately NT$27 million or approximately US$900,000 from Yune-Chang Tsuo to
cover the outstanding account payable. To date, the court has not yet reached a
verdict on this case.
RPPI INTERNATIONAL LTD.
On October 10, 2004, Rong-Dian filed a lawsuit against City Network
Inc.-Taiwan in the Taiwan Taipei district court of Taiwan, in Taipei, Taiwan,
alleging breach of contract for two different purchase agreements that City
Network Inc.-Taiwan entered with them and two third-parties. Rong-Dian sought
the aggregate amount of approximately NT$40.2 million or US$1.2 million for the
alleged breaches. One purchase agreement was for an order that City Network
Inc.-Taiwan sold to Hwa-Ching Co. in the amount of approximately NT$27.3 million
or US$900,000 and the other purchase agreement was for an order City Network
Inc.-Taiwan sold to a separate customer of the Company in the amount of
approximately NT$12.9 million or US$390,909. As of the date of this Report, the
Company had not entered into a settlement agreement.
1
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 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-KSB/A.
1. The following financial statements of our company, with the
independent auditor's report, are filed as part of this Form 10-KSB/A:
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 (4) Amended and Restated Bylaws
14.1 (5) Code of Ethics
21.1 (4) 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 April 15, 2005, and incorporated herein by reference.
(5) 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.
(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.
2
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: January 27, 2006 By: /s/ Tiao-Tsan Lai
--------------------------------------
Tiao-Tsan Lai
Chief Executive Officer
Date: January 27, 2006 By: /s/ Yun-Yi Tseng
--------------------------------------
Yun-Yi Tseng
Chief Financial Officer
3
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
LICHTER, YU AND ASSOCIATES
Certified Public Accountants
9191 Towne Centre Drive, Suite 406
San Diego, CA 92122
(858) 320-2808
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of City Network, Inc.
We have audited the accompanying balance sheets of City Network, Inc. (the
"Company") as of December 31, 2004 and February 29, 2004, and the related
statements of income, stockholders' equity, and cash flows for the ten months
ended December 31, 2004 and the 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of City Network, Inc. as of
December 31, 2004 and February 29, 2004, and the results of its operations and
its cash flows for ten months ended December 31, 2004 and the year ended
February 29, 2004 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note O to the financial statements, the Company has restated its
financial statements to include disclosures regarding certain legal proceedings.
There is no effect on net income.
/s/ Lichter, Yu & Associates
March 7, 2005, except for Note O, as to which the date is December 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 - LEGAL PROCEEDINGS
The Company is party to certain litigation that has arisen in the normal
course of its business and that of its subsidiary.
HWA-CHING - In August 2004, a customer closed business and did not pay the
remaining balance due to City Network - Taiwan on outstanding receivables
in the amount of $880,649. City Network - Taiwan has filed criminal and
civil litigation against the customer for fraud. This case is currently
ongoing.
In August 2004, City Network Inc.-Taiwan filed a lawsuit against the owner
of Hwa-Ching Co., as well as eight individuals in Taiwan, alleging fraud
for closing down Hwa-Ching Co. without payment for the delivered
merchandise. City Network Inc.-Taiwan sought approximately NT$27 million or
approximately US$900,000. To date, the court has not yet reached a verdict
on this case.
In December 2004, the Company filed a lawsuit against Tain-Kang Co., a
customer of Hwa-Ching Co. in Taipei District Court claiming damages owed to
Hwa-Ching from Tain-Kang in the amount of approximately NT$5,796,000 or
US$172,963 to cover the outstanding account payable owed by Hwa-Ching to
the Company. To date, the court has not yet reached a verdict on this case.
RPPI INTERNATIONAL LTD. - On October 10, 2004, Rong-Dian filed a lawsuit
against City Network Inc.-Taiwan in the Taiwan Taipei district court of
Taiwan, in Taipei, Taiwan, alleging breach of contract for two different
purchase agreements that City Network Inc.-Taiwan entered with them and two
third-parties. Rong-Dian sought the aggregate amount of approximately
NT$40.2 million or US$1.2 million for the alleged breaches. One purchase
agreement was for an order that City Network Inc.-Taiwan sold to Hwa-Ching
Co. in the amount of approximately NT$27.3 million or US$900,000 and the
other purchase agreement was for an order City Network Inc.-Taiwan sold to
a separate customer of the Company in the amount of approximately NT$12.9
million or US$390,909. As of the date of this Report, the Company had not
entered into a settlement agreement.
SHANGHAI BANK - On January 24, 2005, Shanghai Commercial and Savings Bank
("Shanghai Bank") filed a lawsuit with the Taipei District Court against
the Company claiming approximately NT$12 million or approximately
US$387,000 for the payment of an unpaid purchase price for goods. The
Company purchased such goods from Chin Shin and Chin Shin assigned the
account receivable to Shanghai Bank. As such, Shanghai Bank sued the
Company for the payment of those goods. However, the Company returned the
said goods because they were defective. The Company and Shanghai Bank are
currently in negotiations for a settlement agreement in this matter. The
Company deposited a bond in the amount of approximately NT$3 million or
approximately US$90,000 with the court at the commencement of the lawsuit.
F-20
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND FEBRUARY 29, 2004
NOTE P - 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-21