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: May 31, 2004
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 001-31954
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CITY NETWORK, INC.
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(Exact name of small business issuer as specified in its charter)
NEVADA 88-0467944
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No)
#13F., NO. 77, HSIN TAI WU ROAD
SEC. HIS-CHIH, TAIPEI COUNTY
TAIWAN, REPUBLIC OF CHINA
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(Address of principal executive offices) (Zip Code)
011-886-2-2698-8588
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(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since
last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 27,500,000
Transitional Small Business Disclosure Format (check one):
Yes No X
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2
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION............................................ 1
Item 1. Financial Statements................................... 1
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION................ 1
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)............ 2
CONSOLIDATED STATEMENTS OF CASH FLOWS........................ 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY... 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS......... 15
Item 2. Management's Discussion and Analysis................... 16
Item 3. Controls And Procedures................................ 17
PART II. OTHER INFORMATION............................................... 17
Item 1. Legal Proceedings...................................... 17
Item 2. Changes in Securities and Use of Proceeds.............. 17
Item 3. Defaults Upon Senior Securities........................ 17
Item 4. Submission of Matters to a Vote of Security Holders.... 17
Item 5. Other Information...................................... 17
Item 6. Exhibits and Reports on Form 8-K....................... 17
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
May 31, 2004
(Unaudited) February 29, 2004
----------- -----------------
Current Assets
Cash and cash equivalents $ 1,745,979 $ 2,723,573
Accounts receivable, net 8,079,597 7,173,149
Inventory 538,474 910,190
Other receivables 101,449 126,492
Prepaid expenses 1,059,690 557,903
----------- -----------
Total Current Assets 11,525,189 11,491,307
----------- -----------
Fixed Assets, net 2,719,437 2,745,664
----------- -----------
Total Fixed Assets 2,719,437 2,745,664
----------- -----------
Other Assets
Deposits 301,126 255,706
Trademarks 1,927 1,966
Equity in net assets of affiliated company 770,845 770,678
Intangible assets 1,000,000 1,000,000
Other current assets 93 96
----------- -----------
Total Other Assets 2,073,991 2,028,446
----------- -----------
Total Assets $16,318,617 $16,265,417
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 6,475,389 $ 6,838,620
Due to related party 458,828 334,812
Loan payable 0 1,680,329
Deferred revenue 23,595 260,498
Deposits payable 0 4,371
Current portion, long-term debt 2,695,893 2,316,689
----------- -----------
Total Current Liabilities 11,334,034 11,435,319
Long-term debt, net of current portion 380,240 263,041
----------- -----------
Total Liabilities 11,714,274 11,698,360
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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 53,019 29,663
Retained earnings 266,207 252,277
----------- -----------
Total Stockholders' Equity 6,284,672 4,567,057
----------- -----------
Total Liabilities and Stockholders' Equity $16,318,617 $16,265,417
=========== ===========
See accompanying notes.
-1-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
--------------------------------
May 31, May 31,
2004 2003
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Sales, net $ 6,403,354 $ 4,742,451
Cost of sales 6,072,148 4,436,356
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Gross profit 331,206 306,095
General and administrative expenses 329,281 239,980
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Income (loss) from operations 1,925 66,115
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Other (Income) Expense
Interest income (782) (11,783)
Other income (2,557) (4,932)
Rent income (8,425) 0
Repair income (45,064) 0
Gain on currency exchange (1,392) (369)
Equity in earnings of investee (167) 0
Interest expense 19,945 11,699
Bad debt expense 4,275 36,645
Miscellaneous expense 11,852 0
------------ ------------
Total Other (Income) Expense (22,315) 31,260
------------ ------------
Income (loss) before income taxes 24,240 34,855
Provision for income taxes 10,310 4,548
------------ ------------
Income (loss) $ 13,930 $ 30,307
============ ============
Net income (loss) per share (basic
and diluted)
Basic $ 0.001 $ 0.001
Diluted $ 0.001 $ 0.001
Weighted average number of shares
Basic 25,833,333 24,500,000
Diluted 25,833,333 24,500,000
See accompanying notes.
-2-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
May 31, May 31,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 13,930 $ 30,307
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 27,280 6,596
Equity in earning of investee (167) 0
Bad debt 4,275 36,645
Gain on foreign currency exchange (1,392) (369)
Decrease (Increase) in receivables (906,448) (2,698,764)
Decrease (Increase) in inventory 371,716 163,684
Decrease (Increase) in other receivables 25,043 (101,511)
Decrease (Increase) in prepaid expenses (501,787) (258,975)
Decrease (Increase) in deferred charges 0 2,447
Decrease (Increase) in deposit (45,420) (108,711)
Decrease (Increase) in other current assets 3 (317,442)
(Decrease) Increase in accounts
payable and accrued expenses (363,231) 2,975,698
(Decrease) Increase in deferred revenue (236,903) 0
(Decrease) Increase in deposits payable (4,371) 0
----------- -----------
Total Adjustments (1,631,402) (300,702)
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Net cash used in operations (1,617,472) (270,395)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment 0 108,594
Purchase of furniture and equipment (933) (21,403)
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Net cash provided by (used in) investing activities (933) 87,191
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CASH FLOWS FROM FINANCING ACTIVITIES
Payment on current portion debt (1,198,086) (42,911)
Loan from related party debt 124,015 290,582
Issuance of notes payable 477,953 0
Issuance of short-term debt 1,214,386 306,328
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Net cash provided by financing activities 618,269 553,999
----------- -----------
Effect of exchange rate 22,543 (23,038)
Net change in cash and cash equivalents (977,593) 347,757
----------- -----------
Cash and cash equivalents at beginning of year 2,723,573 620,264
----------- -----------
Cash and cash equivalents at end of period $ 1,745,980 $ 968,021
=========== ===========
Supplemental cash flows disclosures:
Income tax payments $ 0 $ 0
----------- -----------
Interest payments $ 19,945 $ 11,699
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Non cash transaction:
Conversion of debt to equity $ 1,680,329 $ 0
See accompanying notes.
-3-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
May 31, 2004
(Unaudited) February 29, 2004
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Common stock, number of shares outstanding
Balance at beginning of period 25,000,000 24,500,000
Stock cancellation 0 0
Stock split 0 0
Common stock issued 2,500,000 500,000
----------- -----------
Balance at end of period 27,500,000 25,000,000
=========== ===========
Common stock, par value $.001 (thousands of shares)
Balance at beginning of period $ 25,000 $ 24,500
Stock cancellation 0 0
Stock split 0 0
Common stock issued 2,500 500
----------- -----------
Balance at end of period 27,500 25,000
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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
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Cumulative foreign-exchange translation adjustment
Balance at beginning of period 29,663 0
Foreign currency
translation 23,356 29,663
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Balance at end of period 53,019 29,663
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Total stockholders' equity at end of period $ 6,284,672 $ 4,567,057
See accompanying notes.
-4-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 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". 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.
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 May 31, 2004 and 2003 are not
necessarily indicative of the results that may be expected for the year ending
February 28, 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 for the year ended February 29, 2004.
-5-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 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, collectively referred to within as the Company.
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.
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 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 May 31, 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 May 31, 2004, inventory
consisted only of finished goods.
-6-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 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 May 31, 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.
-7-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 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 Statement of
Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based
Compensation." Under APB 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
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 109 "Accounting
for Income Taxes".
Exchange Gain (Loss) - As of May 31, 2004, the transactions of City Network,
Inc. - Taiwan and City Construction were denominated in a foreign currency and
are recorded in New Taiwan dollars at the rates of exchange in effect when the
transactions occur. Exchange gains and losses are recognized for the different
foreign exchange rates applied when the foreign currency assets and liabilities
are settled.
-8-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Translation Adjustment - As of May 31, 2004, the accounts of City Network, Inc.
- Taiwan and City Construction were maintained, and their financial statements
were expressed, in New Taiwan Dollars (NTD). Such financial statements were
translated into U.S. Dollars (USD) in accordance with Statement of Financial
Accounts Standards ("SFAS") No. 52, "Foreign Currency Translation", with the NTD
as the functional currency. According to the Statement, all assets and
liabilities were translated at the current exchange rate, stockholder's equity
are translated at the historical rates and income statement items are translated
at the weighted average exchange rate for the period. The resulting translation
adjustments are reported under other comprehensive income in accordance with
SFAS No. 130, "Reporting Comprehensive Income".
As of May 31, 2004 and 2003 the exchange rates between NTD and the USD was
NTD$1=USD$0.02992 and NTD$1=USD$0.02879. The weighted-average rate of exchange
between NTD and USD was NTD$1 = USD$0.03003 and NTD$1=USD$0.02874. Total
translation adjustment recognized for the period ended May 31, 2004 and 2003 is
$53,019 and $29,633 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.
-9-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 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.
Our 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 ten major customers during the three months ended May 31, 2004.
Those customers comprise 80.5% of the total sales during the first quarter ended
May 31, 2004. Sales to these customers were approximately $5,158,380. Included
in accounts receivable is $2,917,302 from these customers as of May 31, 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 May 31, 2004 and 2003, there were no uninsured portions of the
balances held at the bank.
-10-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
Note 5 - FIXED ASSETS
Fixed assets consist of the following:
May 31, 2004 February 29, 2004
------------ -----------------
Land $ 1,966,694 $ 1,966,694
Building 305,429 305,429
Machinery and equipment 428,057 427,126
Furniture and fixtures 142,402 142,402
----------- -----------
$ 2,842,582 $ 2,841,651
Accumulated depreciation (123,145) (95,987)
----------- -----------
$ 2,719,437 $ 2,745,664
=========== ===========
Note 6 - COMPENSATED ABSENCES
Employees can earn annual vacation leave at the rate of seven (7) days per year
for the first three years. Upon completion of the third year of employment,
employees earn annual vacation leave at the rate of ten (10) days per year for
years four through five. Upon completion of the fifth year of employment,
employees earn annual vacation leave at the rate of fourteen (14) days per year
for years six through ten. Upon completion of the tenth year of employment, one
(1) additional day for each additional year, until it reaches thirty (30) days
per year. At termination, employees are paid for any accumulated annual vacation
leave. As of May 31, 2004 no accumulated vacation liability exists.
Note 7 - COMMITMENTS
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.
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.
-11-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
Note 7 - COMMITMENTS (continued)
Operating Leases - The Company leases three office facilities under operating
leases that terminate on various dates. Rental expense for these leases
consisted of $20,722 and $0 for the three months ended May 31, 2004 and 2003.
The Company has future minimum lease obligations as follows:
Year ending
May 31,
-----------
2005 $54,973
-------
Total $54,973
=======
Note 8- 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 May 31, 2004 the Company recognized
a loss $1,507 from their acquisition.
Note 9 - DEBT
At May 31, 2004, the Company had notes payable outstanding in the aggregate
amount of $3,076,133. Payable as follows:
Note payable to a bank in Taiwan,
interest at 3.77% per annum, due on
December 30, 2004 $ 269,100
Note payable to a bank in Taiwan,
interest at 3.77% per annum, due on
June 13, 2004 119,600
Note payable to a bank in Taiwan,
interest at 3.77% per annum, due on
June 26, 2004 118,370
Note payable to a bank in Taiwan,
interest at 3.77% per annum, due on
July 1, 2004 171,820
Note payable to a bank in Taiwan,
interest at 3.77% per annum, due on
July 9, 2004 100,913
-12-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
Note 9- DEBT (continued)
Note payable to a bank in Taiwan,
interest at 3.77% per annum, due on
July 30, 2004 19,779
Note payable to a bank in Taiwan,
interest at 3.77% per annum, due on
Sept. 14, 2004 34,531
Note payable to a bank in Taiwan,
interest at 3.77% per annum, due on
Sept. 16, 2004 39,106
Note payable to a bank in Taiwan,
interest at 3.77% per annum, due on
Sept. 23, 2004 275,919
Note payable to a bank in Taiwan,
interest at 4.25% per annum, due on
August 25, 2004 328,352
Note payable to a bank in Taiwan,
interest at 4.25% per annum, due on
August 25, 2004 289,054
Note payable to a bank in Taiwan,
interest at 4.25% per annum, due on
Sept. 19, 2004 148,765
Note payable to a bank in Taiwan,
interest at 4.25% per annum, due on
October 23, 2004 250,432
Note payable to a bank in Taiwan,
interest at 4.25% per annum, due on
October 4, 2004 75,666
Notes payable to a bank in Taiwan,
interest at 4.25% per annum, due on
June 12, 2004 1,346
Secured note payable to a bank in Taiwan,
interest at 3.175% per annum, due on
May 29, 2016 274,706
-13-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
NOTE 9. DEBT (continued)
Secured note payable to a bank in Taiwan,
interest at 4.25% per annum, due on
June 12, 2005 10,721
Note payable to a corporation,
interest at 6.25% per annum, due on
November 20, 2005, personally guaranteed by
an Officer of the Company 477,953
----------
3,076,133
Current portion 2,695,893
Long-term portion $ 380,240
==========
Note 10 - EXCHANGE AGREEMENT
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. City Network, Inc. acquired all of the issued and
outstanding capital stock of City Network Technology, Inc. pursuant to the
Exchange Agreement, by issuing 12,000,000 shares of City Network, Inc. stock.
In connection with the exchange and change in control the name of the Company
was changed from Investment Agents, Inc. to City Network, Inc. and the officers
and directors of City Network, Inc. resigned and new officers and directors were
appointed.
Note 11 - STOCK PURCHASE BUSINESS COMBINATION
On November 14, 2002, the Company completed the purchase of City Network
Technology, Inc., a provider of internet broadband and wireless infrastructure
equipment and service for the rapidly expanding broadband marketplace, by
acquiring all of the outstanding capital stock of City Network Technology, Inc.
in exchange for 12,000,000 shares of City Network, Inc.'s common stock. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, City Network, Inc.'s results of operations have been included in
the consolidated financial statements since the date of acquisition.
Note 12 - 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 May 31, 2004, the Company
has a non interest-bearing loan from Andy Lai, the Company's President, in the
amount of $458,828. Mr. Lai has also personally guaranteed a note payable of
the Company in the amount of $477,953.
Note 13 - COMMON STOCK
In May 2004, the Company issued 2,500,000 shares of its common stock in
exchange 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.
-14-
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.
THREE MONTHS ENDED MAY 31, 2004 AND MAY 31, 2003 FOR CITY NETWORK, INC. AND FOR
CITY NETWORK-TAIWAN
SALES. Net sales for the three months ended May 31, 2004 were $6,403,354
compared to $4,742,451 for the three months ended May 31, 2003. The increase in
sales for the three months ended May 31, 2004 was due to the Company's
aggressive approach in diversifying and developing its sales products.
CNT-Taiwan's net sales for the three months ended May 31, 2004 were $6,403,354
compared to $4,742,451 for the three months ended May 31, 2003. The increase in
sales was due to CNT-Taiwan's aggressive approach in diversifying and developing
its sales products.
COST OF SALES. Cost of sales for the three months ended May 31, 2004 was
$6,072,148 or 94.8% of net sales, as compared to $4,436,356 during the three
months ended May 31, 2003. CNT-Taiwan's cost of sales for the three months ended
May 31, 2004 was $6,072,148, or 94.8% of net sales, as compared to $4,436,316 or
93.54 % of net sales, for the three months ended May 31, 2003. The increase in
cost of sales is related to the increase in sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$329,281, or 5.1% of net sales, for the three months ended May 31, 2004, as
compared to $239,980 for the three months ended May 31, 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 promotion development. CNT-Taiwan's general and administrative expense for
the three months ended May 31, 2004was $364,818 or 5.7 % of net sales as
compared to $266,040, or 5.61% for the three months ended May 31, 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 promotion development.
INCOME (LOSS) FROM OPERATIONS. Income from operations for the three months ended
May 31, 2004 was $1,925, compared to income from operations for the three months
ended May 31, 2003 of $66,115. The decrease in income from operations was due to
the gross profit rate decreasing and general & administrative expenses
increasing. CNT-Taiwan's income from operations for the three months ended May
31, 2004 was $10,420 as compared to income from operations of $76,700 for the
three months ended May 31, 2003. This decrease is primarily due to the gross
profit rate decreasing and general & administrative expenses increasing.
OTHER (INCOME) EXPENSE. Other (income) expense was $(22,315) for the three
months ended May 31, 2004, as compared to $31,260 for the three months ended May
31, 2003. This increase in other income was the result of rental income and
non-operating income, such as maintenance revenue. CNT-Taiwan's other (income)
expense for the three months ended May 31, 2004 was $22,302, as compared to
$31,260 for the three months ended May 31, 2003. The increase in other income is
attributed to rental income and non-operating income, such as maintenance
revenue.
NET INCOME (LOSS). Net income for three months ended May 31, 2004 was $13,930
compared to net income of $30,307 for the three months ended May 31, 2003. The
decrease in net income is due
-15-
to the gross profit rate decreasing and general and administrative expense
increasing. CNT-Taiwan had a net income for the three months ended May 31, 2004
of $22,245 as compared to net income of $40,932 for the three months ended May
31, 2003. The decrease in net income is due to the gross profit rate decreasing
and general and administrative expense increasing.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended May 31, 2004, the Company had cash and cash
equivalents of $1,745,979. The Company used $1,617,472 of net cash in
operations, used $933 of net cash in investing activities and had $618,269 of
net cash provided by financing activities. The Company's 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. The Company's short-term and long-term liquidity may be
influenced by uncollected accounts receivables. If the amount of bad debt is
high, it will severely effect the Company's ability to continue operations.
Therefore, the Company is 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. The Company's inability to manage
this risk will have a material adverse effect upon its business, financial
condition and results of operations.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including our chief executive officer and the chief financial officer, the
Company conducted an evaluation of the effectiveness of the design and operation
of its disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period
covered by this report (the "Evaluation Date"). Based on this evaluation, the
Company's chief executive officer and chief financial officer concluded as of
the Evaluation Date that the Company's disclosure controls and procedures were
effective such that the material information required to be included in our
Securities and Exchange Commission ("SEC") reports is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms
relating to the Company, including our consolidating subsidiaries, and was made
known to them by others within those entities, particularly during the period
when this report was being prepared.
Additionally, there were no significant changes in the Company's internal
controls or in other factors that has materially affected, or is reasonably
likely to materially affect our internal control over financial reporting..
-16-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 2004, the Registrant issued 2,500,000 shares of its common stock in
exchange for the conversion in full of a note and short term debt payable to
third parties in the amount 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. The shares were not registered and are exempted securities under
Section 3(a)(9) of the Securities Act of 1933, as amended.
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 Certifications of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certifications of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended May 31,
2004.
-17-
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.
Dated: July 20, 2004 CITY NETWORK, INC.
By: /s/ Tiao Tsan Lai
------------------------------------
Tiao Tsan Lai
Chief Executive Officer
(Principal Executive Officer)
Dated: July 20, 2004
By: /s/ Hsin Nan Lin
------------------------------------
Hsin Nan Lin
Chief Financial Officer
(Principal Financial Officer)
-18-