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: March 31, 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)
N/A
(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 May 20, 2005 was 27,500,000.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION............................................... 1
Item 1. Financial Statements........................................... 1
Item 2. Management's Discussion and Analysis........................... 16
Item 3. Controls And Procedures........................................ 19
PART II. OTHER INFORMATION.................................................. 20
Item 1. Legal Proceedings.............................................. 20
Item 2. Changes in Securities and Use of Proceeds...................... 20
Item 3. Defaults Upon Senior Securities................................ 20
Item 4. Submission of Matters to a Vote of Security Holders............ 20
Item 5. Other Information.............................................. 20
Item 6. Exhibits and Reports on Form 8-K............................... 20
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2005 December 31, 2004
-------------- -----------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 1,319,326 $ 2,010,644
Accounts receivable, net 2,973,167 3,333,990
Inventory 702,514 732,027
Other receivables 61,361 6,863
Prepaid expenses 333,938 102,896
------------ ------------
Total Current Assets 5,390,306 6,186,420
------------ ------------
Fixed Assets, net 2,127,769 2,586,872
------------ ------------
Total Fixed Assets 2,127,769 2,586,872
------------ ------------
Other Assets
Deposits 1,755,754 1,724,542
Trademarks 1,776 1,812
Equity in net assets of affiliated company 818,354 829,008
Intangible assets 943,892 961,053
Other assets 19,084 8,255
------------ ------------
Total Other Assets 3,538,860 3,524,670
------------ ------------
Total Assets $ 11,056,935 $ 12,297,962
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 3,166,324 $ 3,335,286
Due to related party 73,790 80,083
Deferred revenue 8,873 14,566
Current portion, long-term debt 3,388,219 3,226,181
------------ ------------
Total Current Liabilities 6,637,206 6,656,116
Long-term debt, net of current portion 0 246,330
------------ ------------
Total Liabilities 6,637,206 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 190,552 142,453
Retained earnings (1,736,269) (712,383)
------------ ------------
Total Stockholders' Equity 4,419,729 5,395,516
------------ ------------
Total Liabilities and Stockholders' Equity $ 11,056,935 $ 12,297,962
============ ============
1
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
-----------------------------------
March 31, March 31,
2005 2004
------------ ------------
Sales, net $ 1,293,350 $ 6,287,093
Cost of sales 1,255,040 5,697,879
------------ ------------
Gross profit 38,310 589,214
General and administrative expenses 323,145 382,440
------------ ------------
Income (loss) from operations (284,835) 206,774
------------ ------------
Other (Income) Expense
Interest income (399) (128)
Rental income (47,670) (3,154)
Commission income (3,921) (1,179)
(Gain) loss on currency exchange 8,258 2,823
Other income (35,868) (1,255)
Reserve for bad debt 685,000 0
Equity in earnings of investee 10,654 0
Miscellaneous 2,339 0
Loss on sale of fixed assets 82,260 0
Interest expense 38,398 17,090
------------ ------------
Total Other (Income) Expense 739,051 14,197
------------ ------------
Income (loss) before income taxes (1,023,886) 192,577
Provison for income taxes 0 0
------------ ------------
Net income (loss) $ (1,023,886) $ 192,577
============ ============
Net income (loss) per share (basic and diluted)
Basic $ (0.037) $ 0.008
Diluted $ (0.037) $ 0.008
Weighted average number of shares
Basic 27,500,000 25,000,000
Diluted 27,500,000 25,000,000
2
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
---------------------------------
March 31, March 31,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $(1,023,886) $ 192,577
Adjustments to reconcile net income (loss) to net cash
provided by (used) in operating activities:
Depreciation and amortization 43,113 9,403
Equity in earning of investee 10,654 0
Loss on disposal of assets 82,260 0
(Gain) loss on foreign currency exchange 8,258 2,823
Translation adjustment 21,726 (73,968)
Decrease (Increase) in receivables 360,823 (2,315,935)
Decrease (Increase) in inventory 29,513 (278,618)
Decrease (Increase) in other receivables (54,498) (360,089)
Decrease (Increase) in prepaid expenses (231,042) (654,266)
Decrease (Increase) in deposit (31,212) 174,380
Decrease (Increase) in other current assets (10,829) 705,647
(Decrease) Increase in accounts payable
and accrued expenses (168,962) 3,191,123
(Decrease) Increase in deferred revenue (5,693) (292,538)
(Decrease) Increase in deposits payable 0 (105)
----------- -----------
Total Adjustments 54,111 107,857
----------- -----------
Net cash (used in) provided by operations (969,775) 300,434
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of fixed assets 369,042 0
Purchase of furniture and equipment 0 (22,093)
----------- -----------
Net cash (used in) provided by investing activities 369,042 (22,093)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on notes payable (1,579,160) (1,196,547)
Payment of loan from related party (6,293) (5,824)
Loan from related party 0 20,600
Issuance of short-term debt 1,494,868 899,282
----------- -----------
Net cash (used in) financing activities (90,585) (282,489)
----------- -----------
Net change in cash and cash equivalents (691,318) (4,148)
----------- -----------
Cash and cash equivalents at beginning of period 2,010,644 1,148,457
----------- -----------
Cash and cash equivalents at end of period $ 1,319,326 $ 1,144,309
=========== ===========
Supplemental cash flows disclosures:
Income tax payments $ 0 $ 0
----------- -----------
Interest payments $ 38,398 $ 17,090
----------- -----------
Non cash transaction:
Conversion of debt to equity $ 0 $ 1,680,329
----------- -----------
3
CITY NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
March 31, 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 year $ 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 year 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 year 142,453 29,663
Foreign currency translation 48,099 112,790
------------ ------------
Balance at end of period 190,552 142,453
------------ ------------
Retained (deficits)
Balance at beginning of year (712,383) 252,277
Net income (loss) (1,023,886) (964,660)
------------ ------------
Balance at end of period (1,736,269) (712,383)
------------ ------------
Total stockholders' equity at end of period $ 4,419,729 $ 5,395,516
============ ============
4
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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, 2004 and 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 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.
5
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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") Form 10-QSB and Item 310
of Regulation S-B and generally accepted accounting principles for interim
financial reporting. These financial statements are unaudited and, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments and accruals) necessary for a fair presentation of the statement of
financial position, operations, and cash flows for the periods presented.
Operating results for the three months ended March 31, 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 year ended December 31, 2004.
Basis of Consolidation - The consolidated financial statements for 2004 include
the accounts of City Network, Inc., it's wholly owned subsidiary City Network
Technology, Inc. and its wholly owned subsidiaries, 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.
6
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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 March 31, 2005, inventory
consisted only of finished goods.
7
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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.
8
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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.
9
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Translation Adjustment - As of March 31, 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 March 31, 2005 and 2004 the exchange rates between NTD and the USD was
NTD$1=USD$0.03149 and NTD$1=USD$0.03149, respectively. The weighted-average rate
of exchange between NTD and USD was NTD$1 = USD$0.02979 and NTD$1=USD$0.03149,
respectively. Total translation adjustment recognized for the period ended March
31, 2005 is $194,658.
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.
10
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 3 - CONCENTRATION
The Company had ten major customers during the three months ended March 31,
2005. Those customers comprise 85.3% of the total sales during the three months
ended March 31, 2005. Sales to these customers were approximately $1,033,596.
Included in accounts receivable is $395,939 from these customers as of March 31,
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 March 31, 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:
March 31, 2005 December 31, 2004
-------------- -----------------
Land $ 1,774,623 $ 1,916,328
Building -- 283,977
Machinery and equipment 372,189 430,880
Furniture and fixtures 143,655 143,655
----------- -----------
$ 2,290,467 $ 2,774,840
Accumulated depreciation (162,698) (187,968)
----------- -----------
$ 2,127,769 $ 2,586,872
=========== ===========
Note 6 - INTANGIBLE ASSETS
Intangible assets consist of the following:
March 31, 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 (56,482) (39,285)
----------- -----------
$ 945,668 $ 962,865
=========== ===========
11
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. 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
March 31, 2005 vacation liability exists in the amount of $3,293.
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 not yet begun construction on the building.
Operating Leases - The Company leases s office facilities under operating leases
that terminate on various dates. Rental expense for these leases consisted of
$12,116 for the three months ended March 31, 2005. The Company has future
minimum lease obligations as follows:
2005 $21,452
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 March 31, 2005 the Company
recognized a $10,654 loss from their acquisition.
12
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
Note 10 - DEBT
At March 31, 2005, the Company had notes payable outstanding in the aggregate
amount of $3,388,219. Payable as follows:
Note payable to a bank in Taiwan,
interest at 3.708% per annum, due by
April 9, 2005 $ 595,161
Note payable to a bank in Taiwan,
interest at 3.708% per annum, due by
April 9, 2005 59,920
Note payable to a bank in Taiwan,
interest at 4.48% per annum, due by
April 10, 2005 55,364
Note payable to a bank in Taiwan,
interest at 4.48% per annum, due by
April 11, 2005 77,061
Note payable to a bank in Taiwan,
interest at 3.35% per annum, due by
April 22, 2005 122,684
Note payable to a bank in Taiwan,
interest at 3.708% per annum, due by May
3, 2005 13,736
Note payable to a bank in Taiwan,
interest at 4.48% per annum, due by May
29, 2005 235,060
Note payable to a bank in Taiwan,
interest at 3.35% per annum, due by June
22, 2005 80,056
Note payable to a bank in Taiwan,
interest at 3.35% per annum, due by June
24, 2005 39,687
Note payable to a bank in Taiwan,
interest at 3.35% per annum, due by June
24, 2005 264,649
13
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
Note 10 - DEBT (CONTINUED)
Note payable to a bank in Taiwan,
interest at 3.708% per annum, due by
June 29, 2005 859,677
Note payable to a bank in Taiwan,
interest at 3.35% per annum, due by July
11, 2005 96,912
Note payable to a bank in Taiwan,
interest at 3.708% per annum, due by
July 15, 2005 44,783
Note payable to a bank in Taiwan,
interest at 3.708% per annum, due by
July 27, 2005 31,027
Note payable to a bank in Taiwan,
interest at 3.708% per annum, due by
October 5, 2005 503,840
Note payable to a bank in Taiwan,
interest at 3.708% per annum, due by
February 13, 2006 125,960
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 182,642
Total 3,388,219
Current portion $3,388,219
----------
Long-term portion $ --
==========
14
CITY NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
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 March 31, 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
$73,790. Mr. Lai has also personally guaranteed a note payable of the Company in
the amount of $477,953. As of March 31, 2005, the balance for the note was
approximately $182,642.
Note 12 - LITIGATION
As of March 31, 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 May 19, 2005, no decision has been made on
either case.
15
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
16
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 MARCH 31, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2004
NET SALES. Net sales for the three months ended March 31, 2005 were
$1,293,350 compared to $6,287,093 for the three months ended March 31, 2004. The
decrease in net sales for the three months ended March 31, 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.
We design, manufacture and market a comprehensive line of broadband
communication and wireless Internet access solutions, including home PNA and
xDSL broadband access equipment and related accessories, which comprise our
older, established products. In 2004 we introduced new products such as VoIP,
GSP and wireless Internet access products.
We believe that an increase in competition over the market for our older
products has contributed to a decline in the unit price of those products.
Additionally, we believe that the introduction of more technologically advanced
products to the marketplace have diminished consumer demand for our older
products. We intend to continue upgrading our older products to meet customer
expectations.
We believe that sales for our new products, such as VoIP and GSP products,
can increase with improved brand name recognition and increased sales channels.
We intend to promote and market our new products to improve brand name
recognition as well as work on increasing sales channels.
17
COST OF SALES. Cost of sales for the three months ended March 31, 2005 was
$1,255,040 or 97.0% of net sales, as compared to $5,697,879 or 90.6% of net
sales, during the three months ended March 31, 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 we believe is due to an increase in competitors
selling the old products, while the cost of producing such products has remained
constant.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $323,145, or 25.0% of net sales, for the three months ended March 31, 2005,
as compared to $382,440 or 6.1% of net sales, for the three months ended March
31, 2004. The decrease was due to the decrease in sales and an associated
decrease in related expenses. The decrease 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.
INCOME (LOSS) FROM OPERATIONS. Loss from operations for the three months
ended March 31, 2005 was $(284,835), compared to income from operations for the
three months ended March 31, 2004 of $206,774. The loss from operations for the
three months ended March 31, 2005 compared with income from operations for the
three months ended March 31, 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 $739,051 for the three
months ended March 31, 2005, as compared to $14,197 for the three months ended
March 31, 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 in the three months ended March 31, 2005.
NET INCOME (LOSS). Net income (loss) for three months ended March 31, 2005
was $(1,023,886) compared to income of $192,577 for the three months ended March
31, 2004. The net loss for the three months ended March 31, 2005 compared with
income for the three months ended March 31, 2004 was due to the reasons
described above, including the additional reserves made on accounts receivable.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005 and December 31, 2004, we had cash and cash equivalents
of $1,319,326 and $2,010,644, respectively. Our current assets totaled
$5,390,306 at March 31, 2005 as compared to $6,186,420 at December 31, 2004. Our
total current liabilities were $6,637206 at March 31, 2005 as compared to
$6,656,116 at December 31, 2004. Working capital at March 31, 2005 was
$(1,246,900) and $(469,696) at December 31, 2004. For the three months ended
March 31, 2005, total cash used in operations was $(969,775) as compared to net
cash provided by operations of $300,434 during the same period in 2004. Net cash
used in financing activities was $(90,585), which consisted of the payment on
notes payable and issuance of short-term debt, as compared with net cash used in
financing activities of $(282,489) during the three months ended March 31, 2004.
We deployed a large amount of cash in the three months ended March 31, 2005
for developing new products. Therefore there is a deficiency in working capital
at the end of such period. We have, however, begun selling our new products on a
large scale since March 31, 2005.
Our operations and short term financing does not currently meet our cash
needs. We believe we will be able to generate revenues from sales and raise
capital through private placement offerings of its equity securities to provide
the necessary cash flow to meet anticipated working capital requirements. Our
actual working capital needs for the long and short term will depend upon
numerous factors, including our operating results, competition, and the
availability of credit facilities, none of which can be predicted with
18
certainty. Our future expansion will depend on operating results and will be
limited by its ability to enter into financings and raise capital.
We currently are engaged in discussions with a number of companies
regarding strategic acquisitions or investments. Although these discussions are
ongoing, there can be no assurance that any of these discussions will result in
actual acquisitions or investment. Several potential investors have already
shown their interest to invest in our company. As of March 31, 2005, the amount
of committed funds was $2,400,000. An additional $1,800,000 is still required.
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.
CAPITAL EXPENDITURES. Total capital expenditures during the three months
ended March 31, 2005 were $0 compared to $22,093 for the three months ended
March 31, 2004.
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 March 31, 2005. Based upon their evaluation and subject to the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that as of March 31, 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.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are presently involved in litigation 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 are seeking the amount of New Taiwan Dollars ("NTD") 27.0
million, or approximately $900,000. This case is currently in the investigation
stage.
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. is seeking NTD40.0 million, or
approximately $1.2 million. Rong-Dian Co. has asked the court to hold our land,
buildings and cash in bank accounts in custody to prevent our use of those
assets pending the resolution of the case. We have resisted Rong-Dian Co.'s
custody action on our assets and have been required by the court to put up a
temporary guarantee bond in the amount of approximately NTD40.2 million, or
approximately 1.2 million, as we fight the custody action. This case is
currently in the pleading stage.
Our failure to satisfactory resolve these two cases may have a material
impact on our business, financial condition and results of operations. We have
taken a reserve for accounts receivable for the above described legal
proceedings.
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:
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NETWORK, INC.
Dated: May 23, 2005 By: /s/ Tiao-Tsan Lai
---------------------------------
Tiao-Tsan Lai
Chief Executive Officer
(Principal Executive Officer)
Dated: May 23, 2005 By: /s/ Yun-Yi Tseng
---------------------------------
Yun-Yi Tseng
Chief Financial Officer
(Principal Financial Officer)
21