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: November 30, 2004
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 January 18, 2005 was 27,500,000.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION................................................ 2
Item 1. Financial Statements............................................ 2
Item 2. Management's Discussion and Analysis............................ 19
Item 3. Controls And Procedures......................................... 21
PART II. OTHER INFORMATION................................................... 22
Item 1. Legal Proceedings............................................... 22
Item 2. Changes in Securities and Use of Proceeds....................... 22
Item 3. Defaults Upon Senior Securities................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............. 22
Item 5. Other Information............................................... 22
Item 6. Exhibits and Reports on Form 8-K................................ 22
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 30, 2004
TABLE OF CONTENTS
Consolidated Statements of Financial Position 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flow 5
Consolidated Statements of Changes in Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
2
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
November 30, 2004 February 29, 2004
----------------- -----------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 1,290,197 $ 2,723,573
Accounts receivable, net 4,273,912 7,173,149
Inventory 770,260 910,190
Other receivables 51,818 126,492
Prepaid expenses 379,224 557,903
------------ ------------
Total Current Assets 6,765,411 11,491,307
------------ ------------
Fixed Assets, net 2,596,673 2,745,664
------------ ------------
Total Fixed Assets 2,596,673 2,745,664
------------ ------------
Other Assets
Deposits 1,775,519 255,706
Trademarks 1,825 1,966
Equity in net assets of affiliated company 755,246 770,678
Intangible assets 966,774 1,000,000
Other current assets 2,546 96
------------ ------------
Total Other Assets 3,501,910 2,028,446
------------ ------------
Total Assets $ 12,863,994 $ 16,265,417
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 3,458,239 $ 6,838,620
Due to related party 0 334,812
Loan payable 0 1,680,329
Deferred revenue 130,509 260,498
Deposits payable 0 4,371
Current portion, long-term debt 3,283,252 2,316,689
------------ ------------
Total Current Liabilities 6,872,000 11,435,319
Long-term debt, net of current portion 244,834 263,041
------------ ------------
Total Liabilities 7,116,834 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 136,598 29,663
Retained earnings (354,884) 252,277
------------ ------------
Total Stockholders' Equity 5,747,160 4,567,057
------------ ------------
Total Liabilities and Stockholders' Equity $ 12,863,994 $ 16,265,417
============ ============
3
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
November 30, November 30, November 30, November 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Sales, net $ 3,340,719 $ 4,914,720 $ 15,174,335 $ 14,581,408
Cost of sales 3,154,338 4,324,280 14,371,495 13,289,646
----------- ----------- ------------ ------------
Gross profit 186,381 590,440 802,840 1,291,762
General and administrative expenses 316,439 395,968 1,130,556 859,502
----------- ----------- ------------ ------------
Income (loss) from operations (130,058) 194,472 (327,716) 432,260
----------- ----------- ------------ ------------
Other (Income) Expense
Interest income (274) (4,907) (2,218) (19,451)
Other income (21,473) (4,835) (37,723) (22,193)
Rent income (3,729) 0 (17,787) 0
Repair income 0 0 (52,483) 0
Gain on currency exchange (40) (7,085) (5,653) (6,387)
Loss on sale of fixed assets 31,940 0 31,940 0
Equity in earnings of investee 12,454 (7,312) 15,432 2,676
Interest expense 46,888 16,991 103,656 42,393
Other expense 39,082 0 39,082 0
Bad debt expense 86,576 305,491 136,032 362,075
----------- ----------- ------------ ------------
Total Other (Income) Expense 191,424 298,343 210,278 359,113
----------- ----------- ------------ ------------
Income (loss) before income taxes (321,482) (103,871) (537,994) 73,147
Provison for income taxes (10,118) 24,930 69,167 43,679
----------- ----------- ------------ ------------
Income (loss) $ (311,364) $ (128,801) $ (607,161) $ 29,468
=========== =========== ============ ============
Net income (loss) per share (basic and diluted)
Basic $ (0.011) $ (0.005) $ (0.025) $ 0.001
Diluted $ (0.011) $ (0.005) $ (0.025) $ 0.001
Weighted average number of shares
Basic 27,500,000 24,944,444 23,888,889 24,777,778
Diluted 27,500,000 24,944,444 23,888,889 24,777,778
4
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
----------------------------------
November 30, November 30,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ (607,161) $ 29,468
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 146,157 29,326
Equity in earning of investee 15,432 2,676
Bad debt 136,032 362,075
(Gain) loss on foreign currency exchange (5,653) 0
Loss from sales of fixed assets 31,940 0
Decrease (Increase) in receivables 2,899,237 (4,885,150)
Decrease (Increase) in inventory 139,930 237,787
Decrease (Increase) in other receivables 74,674 (400,429)
Decrease (Increase) in prepaid expenses 178,679 (630,400)
Decrease (Increase) in deferred charges 0 6,635
Decrease (Increase) in deposit (1,519,813) (18,526)
Decrease (Increase) in other current assets (2,450) 72,758
(Decrease) Increase in accounts payable
and accrued expenses (3,380,381) 3,406,381
(Decrease) Increase in payable to investee 0 127,898
(Decrease) Increase in deferred revenue (129,989) 0
(Decrease) Increase in deposits payable (4,371) 0
----------- -----------
Total Adjustments (1,420,576) (1,688,969)
----------- -----------
Net cash used in operations (2,027,737) (1,659,501)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment 0 108,594
Proceeds from sale of fixed assets 36,775 0
Purchase of investment 0 (710,917)
Purchase of trademarks 0 (817)
Purchase of net assets of affiliated company 0 (325,000)
Purchase of furniture and equipment (5,008) (126,238)
----------- -----------
Net cash provided by (used in) investing activities 31,767 (1,054,378)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on current portion debt (4,074,883) (1,612,860)
Payment on loan from related party (455,227) 1,537,197
Payment on notes payable (219,051) 0
Loan from related party 120,415 0
Issuance of notes payable 477,953 0
Issuance of short-term debt 4,764,337 2,123,976
Issuance of common stock 0 720,000
----------- -----------
Net cash provided by financing activities 613,544 2,768,313
----------- -----------
Effect of exchange rate (50,950) (95,545)
Net change in cash and cash equivalents (1,433,376) (41,111)
----------- -----------
Cash and cash equivalents at beginning of year 2,723,573 620,264
----------- -----------
Cash and cash equivalents at end of period $ 1,290,197 $ 579,153
=========== ===========
Supplemental cash flows disclosures:
Income tax payments $ 139,541 $ 0
----------- -----------
Interest payments $ 103,656 $ 42,393
----------- -----------
Non cash transaction:
Conversion of debt to equity $ 1,680,329 $ 0
----------- -----------
5
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
November 30, 2004 February 29, 2004
----------------- -----------------
(Unaudited)
Common stock, number of shares outstanding
Balance at beginning of period 25,000,000 24,500,000
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 period $ 25,000 $ 24,500
Common stock issued 2,500 500
------------ ------------
Balance at end of period 27,500 25,000
============ ============
Additional paid in capital
Balance at beginning of period 4,260,117 3,540,617
Common stock issued 1,677,829 719,500
------------ ------------
Balance at end of period 5,937,946 4,260,117
============ ============
Cumulative foreign-exchange translation adjustment
Balance at beginning of period 29,663 0
Foreign currency translation 106,935 29,663
------------ ------------
Balance at end of period 136,598 29,663
============ ============
Retained (deficits)
Balance at beginning of period 252,277 76,082
Net income (loss) (607,161) 176,195
------------ ------------
Balance at end of period (354,884) 252,277
------------ ------------
Total stockholders' equity at end of period $ 5,747,160 $ 4,567,057
============ ============
6
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 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 Co., Ltd. was incorporated under the laws
of Republic of China on October, 10, 2003. City Network, Inc. owns 100% of the
capital stock of City Network Technology, Inc., and City Network Technology,
Inc. owns 100% of the capital stock of City Network, Inc. - Taiwan, and City
Construction. Collectively the four corporations are referred to herein as the
"Company". When used in these notes, the terms "Company," means City Network,
Inc. and its subsidiaries.
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
their 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.
The Company operates in an industry characterized by significant competition and
rapid technological changes. The Company will need additional investments and
funding in order to complete the development and improvements necessary for its
products and its planned operations.
7
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 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 nine months ended November 30, 2004 and 2003 are not
necessarily indicative of the results that may be expected for the ten months
ended December 31, 2004, 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 for the year ended February 29, 2004.
BASIS OF CONSOLIDATION - The consolidated financial statements for 2004 include
the accounts of City Network, Inc., and 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.
8
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 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 charged to expense as
incurred. Whenever an asset is retired or disposed of, its cost and accumulated
depreciation or amortization is 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 periods ended November 30, 2004 and 2003.
Trademarks and other intangible assets determined to have indefinite useful
lives are not amortized. We test 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 November 30, 2004, inventory
consisted only of finished goods.
9
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 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 November 30, 2004 and the date of our report, management has
informed us that there are no matters that warrant disclosure in the financial
statements.
ADVERTISING - Advertising costs are expensed in the year 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, however,
cash balances have exceeded the FDIC insured levels at various times during the
year. 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.
10
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK BASED COMPENSATION - The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized over the vesting period based on the difference, if any, on the
date of grant between the fair value of the Company's stock and the amount an
employee must pay to acquire the stock.
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 November 30, 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.
11
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
TRANSLATION ADJUSTMENT - As of November 30, 2004, and 2003 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 November 30, 2004 and 2003 the exchange rates between NTD and the USD was
NTD$1=USD$0.03109 and NTD$1=USD$0.02920, respectively. The weighted-average rate
of exchange between NTD and USD was NTD$1 = USD$0.02986 and NTD$1=USD$0.02905.
Total translation adjustment recognized for the period ended November 30, 2004
and 2003 is $136,598 and $29,663, respectively.
NEW ACCOUNTING PRONOUNCEMENTS - In October 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which requires companies to
record the fair value of a liability for asset retirement obligations in the
period in which they are incurred. The statement applies to a company's legal
obligations associated with the retirement of a tangible long-lived asset that
results from the acquisition, construction, and development or through the
normal operation of a long-lived asset. When a liability is initially recorded,
the company would capitalize the cost, thereby increasing the carrying amount of
the related asset. The capitalized asset retirement cost is depreciated over the
life of the respective asset while the liability is accreted to its present
value. Upon settlement of the liability, the obligation is settled at its
recorded amount or the company incurs a gain or loss. The statement is effective
for fiscal years beginning after June 30, 2003. The Company does not expect the
adoption to have a material impact to the Company's financial position or
results of operations.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003) ("Interpretation 46"), "Consolidation of Variable Interest Entities."
Application of this interpretation is required in our financial statements for
interests in variable interest entities that are considered to be
special-purpose entities for the year ended February 29, 2004. Our Company
determined that we do not have any arrangements or relationships with
special-purpose entities. Application of Interpretation 46 for all other types
of variable interest entities is required for our Company effective March 31,
2004.
12
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interpretation 46 addresses the consolidation of business enterprises to which
the usual condition (ownership of a majority voting interest) of consolidation
does not apply. This interpretation focuses on controlling financial interests
that may be achieved through arrangements that do not involve voting interests.
It concludes that in the absence of clear control through voting interests, a
company's exposure (variable interest) to the economic risks and potential
rewards from the variable interest entity's assets and activities are the best
evidence of control. If an enterprise holds a majority of the variable interests
of an entity, it would be considered the primary beneficiary. The primary
beneficiary is required to include assets, liabilities and the results of
operations of the variable interest entity in its financial statements.
The Company holds interests in certain entities currently accounted for under
the equity method of accounting that are not considered variable interest
entities. We do not expect compliance with Interpretation 46 to have an impact
on our financial statements.
NOTE 3 - CONCENTRATION
The Company had eighteen major customers during the nine months ended November
30, 2004. Those customers comprise 68% of the total sales during the nine months
ended November 30, 2004. Sales to these customers were approximately
$15,106,252. Included in accounts receivable is $1,760,761 from these customers
as of November 30, 2004.
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 November 30, 2004 and 2003, there were no uninsured portions of
the balances held at the bank.
13
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
Note 5 - FIXED ASSETS
Fixed assets consist of the following:
November 30, 2004 February 29, 2004
----------------- -----------------
Land $ 1,916,328 $ 1,966,694
Building 283,977 305,429
Machinery and equipment 430,656 427,126
Furniture and fixtures 143,880 142,402
----------- -----------
$ 2,774,841 $ 2,841,651
Accumulated depreciation (178,168) (95,987)
----------- -----------
$ 2,596,673 $ 2,745,664
=========== ===========
Note 6 - INTANGIBLE ASSETS
Intangible assets consist of the following:
November 30, 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 (33,551) (184)
----------- -----------
$ 968,599 $ 1,001,966
=========== ===========
Note 7 - 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. At
termination, employees are paid for any accumulated annual vacation leave. As of
November 30, 2004 vacation liability exists in the amount of $1,880.
14
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
Note 8 - COMMITTMENTS
A BEST INFORMATION - City Network, Inc. - Taiwan, signed an agreement with A
Best Information in 2002 for the exclusive right to sell A Best Information's
products. There is no expiration date in the agreement, and the Company has the
right to transfer the agreement to any third party with a negotiable price. The
Company paid $1,000,000 for these rights. As of November 30, 2004, net book
value is $966,774.
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 had leases for three office facilities under
operating leases that terminate on various dates. The Company as of November 30,
2004 only has one lease which terminates on May 31, 2005. Rental expense for
these leases consisted of $45,631 and $23,730 for the nine months ended November
30, 2004 and 2003, respectively. The Company has future minimum lease
obligations as follows:
Year ending
November 30,
------------
2005 $24,187
-------
Total $24,187
=======
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 November 30, 2004 the Company
recognized a loss $17,106 from their acquisition.
15
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
Note 10 - DEBT
At November 30, 2004, the Company had notes payable outstanding in the aggregate
amount of $3,528,086. Payable as follows:
Note payable to a bank in Taiwan, interest at
3.616% per annum, due on October 8, 2005 $ 497,440
Note payable to a bank in Taiwan, interest at
3.828% per annum, due on February 13, 2005 124,360
Note payable to a bank in Taiwan, interest at
4.42% per annum, due on March 29, 2005 245,421
Note payable to a bank in Taiwan, interest at
4.42% per annum, due on March 15, 2005 67,591
Note payable to a bank in Taiwan, interest at
4.42% per annum, due on April 11, 2005 76,083
Note payable to a bank in Taiwan, interest at
4.42% per annum, due on April 10, 2005 54,661
Note payable to a bank in Taiwan, interest at
3.616% per annum, due on March 10, 2005 195,369
Note payable to a bank in Taiwan, interest at
3.616% per annum, due on February 15, 2005 60,392
Note payable to a bank in Taiwan, interest at
4.42% per annum, due on May 29, 2005 232,075
16
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
Note 10 - DEBT (continued)
Note payable to a bank in Taiwan, interest at
3.616% per annum, due on March 8, 2005 140,652
Note payable to a bank in Taiwan, interest at
3.616% per annum, due on March 5, 2005 34,908
Note payable to a bank in Taiwan, interest at
3.616% per annum, due on March 1, 2005 43,234
Note payable to a bank in Taiwan, interest at
3.616% per annum, due on March 11, 2005 13,006
Note payable to a bank in Taiwan, interest at
3.616% per annum, due on January 15, 2005 13,561
Secured note payable to a bank in Taiwan,
interest at 2.5% per annum, due on December
23, 2004 870,520
Secured note payable to a bank in Taiwan,
interest at 2.5% per annum, due on March 11,
2005 310,852
Secured note payable to a bank in Taiwan,
interest at 4.25% per annum, due on May 29,
2016 268,151
Note payable to a corporation, interest at
6.25% per annum, due on November 20, 2005,
personally guaranteed by an Officer of the
Company 279,810
----------
Total 3,528,086
Current portion 3,283,252
----------
Long-term portion $ 244,834
==========
17
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
Note 11 - RELATED PARTY TRANSACTIONS
Throughout the history of the Company, certain members of the Board of Directors
and general management have made loans to the Company to cover operating
expenses or operating deficiencies. As of November 30, 2004, Mr. Lai has
personally guaranteed a note payable of the Company in the amount of $279,810.
Note 12 - COMMON STOCK
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.
Note 13 - SUBSEQUENT EVENT
On December 16, 2004, the Company and the Board of Directors approved a change
in the Company's fiscal year end from February 28 to December 31.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes thereto. The following discussion contains certain
forward-looking statements that involve risk and uncertainties. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, risks
and uncertainties related to the need for additional funds, the rapid growth of
the operations and our ability to operate profitably after the initial growth
period is completed.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 2004 COMPARED WITH THREE MONTHS ENDED NOVEMBER
30, 2003
NET SALES. Net sales for the three months ended November 30, 2004 were
$3,340,719 compared to $4,914,720 for the three months ended November 30, 2003.
The decrease in net sales for the three months ended November 30, 2004 was due
to timing issues as a result of a decrease in demand for our old products while
our new products were beginning to be introduced.
COST OF SALES. Cost of sales for the three months ended November 30, 2004
was $3,154,338 or 94.4% of net sales, as compared to $4,324,280 or 87.9% of net
sales, during the three months ended November 30, 2003. The decrease in cost of
sales is associated with the decrease in sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $316,439, or 9.5% of net sales, for the three months ended November 30,
2004, as compared to $395,968 or 8.1% of net sales, for the three months ended
November 30, 2003. The decrease was due to the decrease in sales and an
associated decrease in related expenses.
INCOME (LOSS) FROM OPERATIONS. Income (loss) from operations for the three
months ended November 30, 2004 was ($130,058), compared to income (loss) from
operations for the three months ended November 30, 2003 of $194,472. The loss
from operations for the three months ended November 30, 2004 compared with
income from operations for the three months ended November 30, 2003 was due to a
decrease in sales without a corresponding decrease in the cost of sales and
general and administrative expenses.
OTHER (INCOME) EXPENSE. Other (income) expense was $191,424 for the three
months ended November 30, 2004, as compared to $298,343 for the three months
ended November 30, 2003. This decrease in other expense was the result of the
valuation of bad debt expense decreasing.
INCOME (LOSS). Income (loss) for three months ended November 30, 2004 was
($311,364) compared to income of ($128,801) for the three months ended November
30, 2003. The increase in net loss is due primarily to the reasons described
above.
NINE MONTHS ENDED NOVEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED NOVEMBER 30,
2003
NET SALES. Net sales for the nine months ended November 30, 2004 were
$15,174,335 compared to $14,581,408 for the nine months ended November 30, 2003.
The increase in net sales for the nine months ended November 30, 2004 was due to
our aggressive approach in diversifying and developing our old products during
the first six months of our current fiscal year, offset by a decrease in net
sales for the three months ended November 30, 2004 as compared to the same
period for 2003 due to the timing issues described above.
19
COST OF SALES. Cost of sales for the nine months ended November 30, 2004
was $14,371,495, or 94.7% of net sales, as compared to $13,289,646, or 91.1% of
net sales during the nine months ended November 30, 2003. The increase in cost
of sales is related to the increase in development costs on new products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $1,130,556, or 7.5% of net sales, for the nine months ended November 30,
2004, as compared to $859,502, or 5.9% of net sales, for the nine months ended
November 30, 2003. The increase was due to increased marketing and promotion
costs related to new products and an increase in salary expense related to
hiring new employees to increase marketing and promotions development and to
improve our infrastructure.
INCOME (LOSS) FROM OPERATIONS. Income (loss) from operations for the nine
months ended November 30, 2004 was ($327,716), compared to income (loss) from
operations for the nine months ended November 30, 2003 of $432,260. The loss
from operations for the nine months ended November 30, 2004 compared with income
from operations for the nine months ended November 30, 2003 was due to the
decrease in gross profit and increase in general and administrative expenses.
OTHER (INCOME) EXPENSE. Other (income) expense was $210,278 for the nine
months ended November 30, 2004, as compared to $359,113 for the nine months
ended November 30, 2003. This decrease in other expense was the result of the
valuation of bad debt expense decreasing.
INCOME (LOSS). Income (loss) for nine months ended November 30, 2004 was
($607,161) compared to income of $29,468 for the nine months ended November 30,
2003. The decrease in net income is due primarily to the reasons described
above.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended November 30, 2004 and 2003, we had cash and cash
equivalents of $1,290,197 and $2,723,573, respectively. Our current assets
totaled $6,765,411 at November 30, 2004 as compared to $11,491,307 at November
30, 2003. Our total current liabilities were $6,872,000 at November 30, 2004 as
compared to $11,435,319 at November 30, 2003. Working capital at November 30,
2004 was ($106,589) and $55,988 at November 30, 2003. For the nine months ended
November 30, 2004, we used $2,027,737 of net cash in operations, and received
$613,544 of net cash from financing activities.
We deployed a large amount of cash in the three months ended November 30,
2004 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 since November 30, 2004.
Our liquidity is currently dependent on its ability to strengthen its
accounts receivable collection time period and its ability to continue to raise
cash from financing sources to fund its 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 nine months
ended November 30, 2004 were $5,008 compared to $126,238 for the nine months
ended November 30, 2003.
20
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 November 30, 2004. Based upon their evaluation and subject to
the foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that as of November 30, 2004 our disclosure controls and procedures were
effective at the reasonable assurance level in ensuring that material
information relating to us, is made known to the Chief Executive Officer and
Chief Financial Officer by others within our company during the period in which
this report was being prepared.
There were no changes in our internal controls or in other factors during
the most recent quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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.
22
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: January 19, 2005 By: /s/ Tiao-Tsan Lai
------------------------------
Tiao-Tsan Lai
Chief Executive Officer
(Principal Executive Officer)
Dated: January 19, 2005 By: /s/ Yun-Yi Tseng
------------------------------
Yun-Yi Tseng
Chief Financial Officer
(Principal Financial Officer)
23