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: August 31, 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.
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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 (I.R.S. Employer Identification No)
incorporation or organization)
#13F., NO. 77, HSIN TAI WU ROAD
SEC. HIS-CHIH, TAIPEI COUNTY
TAIWAN, REPUBLIC OF CHINA
-------------------------
(Address of principal executive offices)
011-886-2-2698-8588
-------------------
(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 October 15, 2004 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
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION............................ 1
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)........................ 2
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)........................ 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY............... 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 2004..... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS................................. 17
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
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
August 31, 2004
(Unaudited) February 29, 2004
----------- -----------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,006,745 $ 2,723,573
Accounts receivable, net 6,326,836 7,173,149
Inventory 706,117 910,190
Other receivables 36,748 126,492
Prepaid expenses 534,905 557,903
------------ -----------
Total Current Assets 8,611,351 11,491,307
------------ -----------
Fixed Assets, net 2,694,705 2,745,664
------------ -----------
Total Fixed Assets 2,694,705 2,745,664
------------ -----------
Other Assets
Deposits 275,586 255,706
Trademarks 1,860 1,966
Equity in net assets of affiliated company 767,700 770,678
Intangible assets 983,936 1,000,000
Other current assets 96 96
------------ -----------
Total Other Assets 2,029,178 2,028,446
------------ -----------
Total Assets $ 13,335,234 $16,265,417
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 4,080,447 $ 6,838,620
Due to related party 115,652 334,812
Loan payable 0 1,680,329
Deferred revenue 701,530 260,498
Deposits payable 0 4,371
Current portion, long-term debt 2,226,226 2,316,689
------------ -----------
Total Current Liabilities 7,123,855 11,435,319
Long-term debt, net of current portion 242,673 263,041
------------ -----------
Total Liabilities 7,366,528 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 46,780 29,663
Retained earnings (43,520) 252,277
------------ -----------
Total Stockholders' Equity 5,968,706 4,567,057
------------ -----------
Total Liabilities and Stockholders' Equity $ 13,335,234 $16,265,417
============ ===========
See accompanying notes.
-1-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- ----------------------------
August 31, August 31, August 31, August 31,
2004 2003 2004 2003
---- ---- ---- ----
Sales, net $ 5,430,262 $ 4,924,237 $11,833,616 $ 9,666,688
Cost of sales 5,145,009 4,529,010 11,217,157 8,965,366
------------ ------------ ----------- ------------
Gross profit 285,253 395,227 616,459 701,322
General and administrative expenses 484,836 223,554 814,117 463,534
------------ ------------ ----------- ------------
Income (loss) from operations (199,583) 171,673 (197,658) 237,788
------------ ------------ ----------- ------------
Other (Income) Expense
Interest income (1,162) (2,761) (1,944) (14,544)
Other income (25,545) (12,426) (16,250) (17,358)
Rent income (5,633) 0 (14,058) 0
Repair income (7,419) 0 (52,483) 0
Gain on currency exchange (4,221) 1,067 (5,613) 698
Equity in earnings of investee 3,145 9,988 2,978 9,988
Interest expense 36,823 13,703 56,768 25,402
Bad debt expense 45,181 19,939 49,456 56,584
------------ ------------ ----------- ------------
Total Other (Income) Expense 41,169 29,510 18,854 60,770
------------ ------------ ----------- ------------
Income (loss) before income taxes (240,752) 142,163 (216,512) 177,018
Provision for income taxes 68,975 14,201 79,285 18,749
------------ ------------ ----------- ------------
Income (loss) ($ 309,727) $ 127,962 ($ 295,797) $ 158,269
============ ============ =========== ============
Net income (loss) per share (basic and
diluted)
Basic ($ 0.011) $ 0.005 ($ 0.011) $ 0.006
Diluted ($ 0.011) $ 0.005 ($ 0.011) $ 0.006
Weighted average number of shares
Basic 27,500,000 24,833,333 26,666,667 24,666,667
Diluted 27,500,000 24,833,333 26,666,667 24,666,667
See accompanying notes.
-2-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
August 31, August 31,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) ($ 295,797) $ 158,269
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 102,410 18,558
Equity in earning of investee 2,978 9,988
Bad debt 49,456 56,584
(Gain) loss on foreign currency exchange (5,613) 698
Decrease (Increase) in receivables 846,313 (4,667,177)
Decrease (Increase) in inventory 204,073 (393,331)
Decrease (Increase) in other receivables 89,744 (94,779)
Decrease (Increase) in prepaid expenses 22,998 (39,868)
Decrease (Increase) in deferred charges 0 4,632
Decrease (Increase) in deposit (19,880) (136,779)
Decrease (Increase) in other current assets 0 (361,222)
(Decrease) Increase in accounts payable
and accrued expenses (2,758,173) 2,831,175
(Decrease) Increase in payable to investee 0 127,898
(Decrease) Increase in deferred revenue 441,032 0
(Decrease) Increase in deposits payable (4,371) (147,616)
----------- -----------
Total Adjustments (1,029,033) (2,791,239)
----------- -----------
Net cash used in operations (1,324,830) (2,632,970)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment 0 108,594
Purchase of net assets of affiliated company 0 (325,000)
Purchase of furniture and equipment (5,008) (78,806)
----------- -----------
Net cash provided by (used in) investing activities (5,008) (295,212)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on current portion debt (2,625,661) (44,330)
Payment on loan from related party (339,575) 0
Payment on notes payable (109,106) 0
Loan from related party 120,415 0
Issuance of notes payable 477,953 0
Issuance of short-term debt 2,151,499 2,123,976
Issuance of common stock 0 720,000
----------- -----------
Net cash provided by (used in) financing activities (324,475) 2,799,646
----------- -----------
Effect of exchange rate (62,515) (13,540)
Net change in cash and cash equivalents (1,716,828) (142,076)
----------- -----------
Cash and cash equivalents at beginning of year 2,723,573 620,264
----------- -----------
Cash and cash equivalents at end of period $ 1,006,745 $ 478,188
=========== ===========
Supplemental cash flows disclosures:
Income tax payments $ 139,541 $ 0
----------- -----------
Interest payments $ 56,768 $ 25,402
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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
August 31, 2004
(Unaudited) February 29, 2004
----------- -----------------
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
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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
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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 17,117 29,663
------------ -----------
Balance at end of period 46,780 29,663
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Retained (deficits)
Balance at beginning of period 252,277 76,082
Issuance of stock dividend 0 0
Net income (loss) (295,797) 176,195
------------ -----------
Balance at end of period (43,520) 252,277
------------ -----------
Total stockholders' equity at end of period $ 5,968,706 $ 4,567,057
============ ===========
See accompanying notes.
-4-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 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.
-5-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 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 six months ended August 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.
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.
-6-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 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 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 August 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 August 31, 2004, inventory
consisted only of finished goods.
-7-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 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 August 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.
-8-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 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 August 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.
-9-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Translation Adjustment - As of August 31, 2004 and 2003, 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 August 31, 2004 and 2003 the exchange rates between NTD and the USD was
NTD$1=USD$0.02942 and NTD$1=USD$0.2922. The weighted-average rate of exchange
between NTD and USD was NTD$1 = USD$0.02981 and NTD$1=USD$0.02886. Total
translation adjustment recognized for the period ended August 31, 2004 and 2003
is $46,780 and $99,524 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.
-10-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 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 fifteen major customers during the six months ended August 31,
2004. Those customers comprise 37% of the total sales during the six months
ended August 31, 2004. Sales to these customers were approximately $4,381,041.
Included in accounts receivable is $2,230,555 from these customers as of August
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 August 31, 2004 and 2003, there were no uninsured portions of the
balances held at the bank.
-11-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2004
Note 5 - FIXED ASSETS
Fixed assets consist of the following:
August 31, 2004 February 29, 2004
--------------- -----------------
Land $ 1,966,694 $ 1,966,694
Building 305,429 305,429
Machinery and equipment 430,656 427,126
Furniture and fixtures 143,880 142,402
----------- -----------
$ 2,846,659 $ 2,841,651
Accumulated depreciation (151,954) (95,987)
----------- -----------
$ 2,694,705 $ 2,745,664
=========== ===========
Note 6 - INTANGIBLE ASSETS
Intangible assets consist of the following:
August 31, 2004 February 29, 2004
--------------- -----------------
Trademarks $ 2,150 $ 2,150
Intangible asset 1,000,000 1,000,000
----------- -----------
$ 1,002,150 $ 1,002,150
Accumulated depreciation (16,354) (184)
----------- -----------
$ 985,796 $ 1,001,966
=========== ===========
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 for
years. At termination, employees are paid for any accumulated annual vacation
leave. As of August 31, 2004 vacation liability exists in the amount of $3,251.
-12-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2004
Note 8 - 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. As of August 31, 2004, net book value
is $983,936.
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 August 31,
2004 only has one lease that terminates on May 31, 2005. Rental expense for
these leases consisted of $33,278 and $0 for the six months ended August 31,
2004 and 2003. The Company has future minimum lease obligations as follows:
Year ending
August 31,
2005 $ 36,219
---------
Total $ 36,219
=========
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 August 31, 2004 the Company
recognized a loss $4,652 from their acquisition.
-13-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2004
Note 10 - DEBT
At August 31, 2004, the Company had notes payable outstanding in the aggregate
amount of $2,468,899. Payable as follows:
Note payable to a bank in Taiwan, interest
at 3.762% per annum, due on December 30,2004 $264,780
Note payable to a bank in Taiwan, interest
at 3.762% per annum, due on February 13,2005 117,680
Note payable to a bank in Taiwan, interest
at 3.762% per annum, due on March 26, 2005 185,346
Note payable to a bank in Taiwan, interest
at 4.302% per annum, due on October 23, 2004 246,412
Note payable to a bank in Taiwan, interest
at 4.302% per annum, due on October 4, 2004 74,452
Note payable to a bank in Taiwan, interest
at 33.762% per annum, due on October 8, 2004 294,200
Note payable to a bank in Taiwan, interest
at 3.762% per annum, due on October 28, 2004 131,650
Note payable to a bank in Taiwan, interest
at 3.762% per annum, due on November 12,2004 36,274
Note payable to a bank in Taiwan, interest
at 3.762% per annum, due on November 16,2004 100,722
-14-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2004
Note 10 - DEBT (CONTINUED)
Note payable to a bank in Taiwan,
interest at 3.762% per annum, due on
December 14, 2004 50,343
Note payable to a bank in Taiwan,
interest at 3.762% per annum, due on
December 24, 2004 323,923
Note payable to a bank in Taiwan,
interest at 4.25% per annum, due on
June 12, 2005 1,177
Secured note payable to a bank in Taiwan,
interest at 3.175% per annum, due on May
29, 2016 264,780
Secured note payable to a bank in Taiwan,
interest at 4.25% per annum, due on June
12, 2005 8,313
Note payable to a corporation,
interest at 6.25% per annum, due on
November 20, 2005, personally guaranteed by
an Officer of the Company 368,847
----------
2,468,899
Current portion 2,226,226
Long-term portion $ 242,673
==========
-15-
CITY NETWORK, INC. AND SUBSIDIARIES
(FORMERLY INVESTMENT AGENTS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 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 August 31, 2004, the Company
has a non interest-bearing loan from Andy Lai, the Company's President, in the
amount of $115,652. Mr. Lai has also personally guaranteed a note payable of the
Company in the amount of $368,847.
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.
-16-
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 AUGUST 31, 2004 COMPARED WITH THREE MONTHS ENDED AUGUST 31,
2003
SALES. Net sales for the three months ended August 31, 2004 were $5,430,262
compared to $4,924,237 for the three months ended August 31, 2003. The increase
in sales for the three months ended August 31, 2004 was due to the Company's
aggressive approach in diversifying and developing its sales products.
COST OF SALES. Cost of sales for the three months ended August 31, 2004 was
$5,145,009 or 94.7% of net sales, as compared to $4,529,010 or 91.9% of net
sales, during the three months ended August 31, 2003. The increase in cost of
sales is related to the increase in sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$484,836, or 8.9% of net sales, for the three months ended August 31, 2004, as
compared to $223,554 or 4.5% of net sales, for the three months ended August 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 and to improve our
infrastructure.
INCOME (LOSS) FROM OPERATIONS. Income (loss) from operations for the three
months ended August 31, 2004 was ($199,583), compared to income (loss) from
operations for the three months ended August 31, 2003 of $171,673. The loss from
operations for the three months ended August 31, 2004 compared with income from
operations for the three months ended August 31, 2003 was due to the gross
profit rate decreasing and general and administrative expenses increasing.
OTHER (INCOME) EXPENSE. Other (income) expense was $41,169 for the three months
ended August 31, 2004, as compared to $29,510 for the three months ended August
31, 2003. This increase in other expense was the result of increased interest
expense.
INCOME (LOSS). Income (loss) for three months ended August 31, 2004 was
($309,727) compared to income of $127,962 for the three months ended August 31,
2003. The decrease in net income is due to the gross profit rate decreasing and
general and administrative expense increasing.
SIX MONTHS ENDED AUGUST 31, 2004 COMPARED WITH SIX MONTHS ENDED AUGUST 31, 2003
SALES. Net sales for the six months ended August 31, 2004 were $11,833,616
compared to $9,666,688 for the six months ended August 31, 2003. The increase in
sales for the six months ended August 31, 2004 was due to the Company's
aggressive approach in diversifying and developing its sales products.
-17-
COST OF SALES. Cost of sales for the six months ended August 31, 2004 was
$11,217,157 or 94.8% of net sales, as compared to $8,965,366 or 92.7% of net
sales during the six months ended August 31, 2003. The increase in cost of sales
is related to the increase in sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$814,117, or 6.9% of net sales, for the six months ended August 31, 2004, as
compared to $463,534 or 4.8% of net sales for the six months ended August 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 and to improve our
infrastructure.
INCOME (LOSS) FROM OPERATIONS. Income (loss) from operations for the six months
ended August 31, 2004 was ($197,658), compared to income (loss) from operations
for the six months ended August 31, 2003 of $237,788. The loss from operations
for the six months ended August 31, 2004 compared with income from operations
for the six months ended August 31, 2003 was due to the gross profit rate
decreasing and general and administrative expenses increasing.
OTHER (INCOME) EXPENSE. Other (income) expense was $18,854 for the six months
ended August 31, 2004, as compared to $60,770 for the six months ended August
31, 2003. This decrease in other expense was the result of rental income and
non-operating income, such as maintenance revenue.
INCOME (LOSS). Income (loss) for six months ended August 31, 2004 was ($295,797)
compared to income of $158,269 for the six months ended August 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 six months ended August 31, 2004 and 2003, the Company had cash and cash
equivalents of $1,006,745 and $478,188 respectively. The Company's current
assets totaled $8,611,351 at August 31, 2004 as compared to $7,895,569 at August
31, 2003. The Company's total current liabilities were $7,123,855 at August 31,
2004 as compared to $7,341,103 at August 31, 2003. Working capital at August 31,
2004 was $1,487,496 and $554,466 at August 31, 2003. The Company used $1,324,830
of net cash in operations, and used $324,475 of net cash in 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 affect
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.
CAPITAL EXPENDITURES. Total capital expenditures during the six months ended
August 31, 2004 were $5,008 compared to $295,212 for the six months ended August
31, 2003.
OFF-BALANCE SHEET ARRANGEMENTS
We have never entered into any off-balance sheet financing arrangements
and have never established any special purpose entities. We have not guaranteed
any debt or commitments of other entities or entered into any options on
non-financial assets.
-18-
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.
-19-
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 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 August
31, 2004.
-20-
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: October 19, 2004 CITY NETWORK, INC.
By: /s/ Tiao Tsan Lai
------------------
Tiao Tsan Lai
Chief Executive Officer
(Principal Executive Officer)
Dated: October 19, 2004
By: /s/ Hsin Nan Lin
-----------------
Hsin Nan Lin
Chief Financial Officer
(Principal Financial Officer)
-21-