U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-32893
CAL-BAY INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 26-0021800
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1582 PARKWAY LOOP, SUITE G, TUSTIN, CA 92780
(Address of principal executive offices)
714-258-7070
(Issuer's telephone number)
Not Applicable
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 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 [
]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Check whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13, or 15(d) of the Exchange Act subsequent to the
distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of September 30, 2002: 23,630,000 shares of common stock.
Transitional Small Business Format: Yes [ ] No [ X ]
CAL-BAY INTERNATIONAL, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
---------
Item 1. Financial Statements
Consolidated Balance Sheet as of
September 30, 2002 3
Comparative Unaudited Consolidated Statements of
Operations for the Three and Six Months Ended
September 30, 2002, and 2001 4
Unaudited Consolidated Statement of Changes in
Stockholders' Equity for the Period Ended
September 30, 2002 5
Comparative Unaudited Consolidated Statements of
Cash Flows for the Three and Six Months Ended
September 30, 2002, and 2001 6
Notes to the Unaudited Consolidated Financial
Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-19
Item 3. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
(Inapplicable Items have been omitted)
2
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (unaudited)
September 30, 2002
ASSETS
Current Assets:
Cash (Note 1c). . . . . . . . . . . . . . . . . . $ 8,351
Accounts Receivable (Note 1e) . . . . . . . . . . 62,210
Prepaid Expenses. . . . . . . . . . . . . . . . . 25,506
Loan Receivable from Stockholder (Note 4) . . . . 21,500
----------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . 117,567
Office Furniture and Equipment, at cost,
net of accumulated depreciation of
$5,463 (Notes 1i & 2) . . . . . . . . . . . . . . 4,605
Deposit (Note 1h) . . . . . . . . . . . . . . . . . 2,491
----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . $ 124,663
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable (Note 1j). . . . . . . . . . . . $ 78,895
Accrued Expenses (Note 1j). . . . . . . . . . . . 21,545
----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 100,440
Commitments and Contingencies (Note 9). . . . . . . - - -
Stockholders' Equity:
Common Stock, $.001 par value; 75,000,000 shares
authorized; 23,630,000 shares issued and
outstanding (Notes 1b, 1l, 3 & 8) . . . . . . . $ 23,630
Additional Paid in Capital. . . . . . . . . . . . 758,147
Retained Deficit. . . . . . . . . . . . . . . . . (757,554)
----------
TOTAL STOCKHOLDERS' EQUITY. . . . . . . . . . . 24,223
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . $ 124,663
==========
See notes to consolidated financial statements.
3
CAL-BAY INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2002 & 2001 and
For the Nine Months Ended September 30, 2002 & 2001
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues . . . . . . . $ 118,139 $ 65,930 $ 256,645 $ 219,727
Cost of Sales. . . . . 101,485 15,700 101,485 63,423
------------ ------------ ------------ -----------
Gross profit . . . . . 16,654 50,230 155,160 156,304
Operating expenses . . 748,217 84,939 888,876 191,452
------------ ------------ ------------ -----------
Net (loss) . . . . . . $ (731,563) $ (34,709) $ (733,716) $ (35,148)
============ ============ ============ ============
Net (loss)
Per share:
Basic & Diluted. . (0.03) (0.00) (0.03) (0.00)
Weighted average
Shares outstanding:
Basic & Diluted. . 22,135,879 21,390,000 21,638,889 20,340,088
See notes to consolidated financial statements.
4
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
For the Period Ended September 30, 2002
Additional
Paid-in
Common Stock Capital Total
Number of ($0.001 Par) (Discount Retained Stockholders'
Shares $Amount on Stock) Deficit Equity
----------- ------------ ---------- ------------ --------------
Balance at inception
(February 22, 2001) 17,112,000. $ 17,112 $(7,738) $ -0- $ 9,374
Recapitalization for Reverse
Acquisition on March 8, 2001 4,278,000 4,278 4,125 --- 8,403
Net (Loss) September 30, 2001 --- --- --- (35,236) (35,236)
----------- ------------ ---------- ------------ --------------
Balance at September 30, 2001 . . . . . . . . . . . . . 21,390,000 21,390 (3,613) (35,236) (17,459)
Net Income December 31, 2001 --- --- --- 11,398 11,398
----------- ------------ ---------- ------------ --------------
Balance at December 31, 2001. . . . . . . . . . . . . . 21,390,000 21,390 (3,613) (23,838) (6,061)
Stock Issued for Services
(Note 1b) 2,240,000 2,240 761,760 --- 764,000
Net (Loss) September 30, 2002 --- --- --- (733,716) (733,716)
----------- ------------ ---------- ------------ --------------
Balance at September 30, 2002 . . . . . . . . . . . . . 23,630,000 $23,630 $ 758,147 $ (757,554) $ 24,223
=========== ============= ========== ============= =============
See notes to consolidated financial statements.
5
CAL-BAY INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 2002 & 2001 and
For the Nine Months Ended September 30, 2002 & 2001
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . $ (731,563) $ (34,709) $ (733,716) $ (35,148)
------------ ------------ ------------ ------------
Adjustments to reconcile net
Income (loss) to net cash
Provided by operating activities
Depreciation. . . . . . . . . . . . . . . 466 325 1,384 975
Stock based professional &
Consulting expenses . . . . . . . . . . 764,000 -0- 764,000 -0-
Increase (decrease)
To current assets &
Current liabilities . . . . . . . . . . (25,114) 9,105 (48,030) 34,137
------------ ------------ ------------ ------------
Total adjustments . . . . . . . . . . . . 739,352 9,430 717,354 35,112
------------ ------------ ------------ ------------
Net cash provided (used) by
Operating activities. . . . . . . . . . 7,789 (25,279) (16,362) (36)
------------ ------------ ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Fixed asset purchases . . . . . . . . . . (889) -0- (889) -0-
Reverse acquisition of Cal Bay
International Inc. (net of cash acquired) -0- -0- -0- 3,499
------------ ------------ ------------ ------------
Net cash (used) provided by
Investing activities. . . . . . . . . . (889) -0- (889) 3,499
------------ ------------ ------------ ------------
Net increase (decrease) In Cash . . . . . 6,900 (25,279) (17,251) 3,463
Cash & equivalents,
Beginning of period . . . . . . . . . . 1,451 31,310 25,602 2,568
------------ ------------ ------------ ------------
Cash & equivalents,
End of period . . . . . . . . . . . . . $ 8,351 $ 6,031 $ 8,351 $ 6,031
============ ============ ============ ============
Supplemental cash flow information:
Cash paid for interest. . . . . . . . . . $ -0- $ -0- $ -0- $ -0-
============ ============ ============ ============
Cash paid for taxes . . . . . . . . . . . $ 3,200 $ -0- $ 3,200 $ -0-
============ ============ ============ ============
Supplemental disclosure of non-cash activities:
In August of 2002, the Company issued 2,240,000 shares of common stock as
consideration for certain professional and consulting expenses (see also Note
1b).
Acquisition Note: In connection with the reverse acquisition of Cal-Bay
International, Inc. by Cal-Bay Controls, Inc., the Company acquired net assets
with a fair value of $8,442 (including cash of $4,904) and assumed liabilities
of $39. See also Note 3.
See notes to consolidated financial statements.
6
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
(1) Summary of Significant Accounting Policies
(a) Nature of Business
Cal-Bay International, Inc. and subsidiary ("The Company"), was originally
organized as Var-Jazz Entertainment, Inc., under the laws of the State of
Nevada, on December 8, 1998. On March 8, 2001, Var-Jazz Entertainment, Inc.
acquired 100% of the outstanding common shares of Cal-Bay Controls, Inc.,
which has been accounted for as a reverse acquisition. Subsequent to this
acquisition, Var-Jazz Entertainment, Inc. changed its name to Cal-Bay
International, Inc. The Company does not currently have any international
operations but expects to in the future. See also Note 3.
Cal-Bay Controls, Inc. (CBC) was originally a sole proprietorship, being
operated since 1990 under the name Cal-Bay Controls, in Tustin, California,
by its owner Robert Thompson. CBC, which represents the only operating
entity of the Company, is a manufacturer's representative and distribution
firm, serving California, Nevada and Hawaii in process, environmental,
safety and laboratory markets. On February 22, 2001, CBC was incorporated
under the name Cal-Bay Controls, Inc. The accompanying consolidated
statements of operations and cash flows reflect the comparative three and
nine month periods of operations of the sole proprietorship for the periods
prior to incorporation and include pro forma adjustments to the operations
of the sole proprietorship for comparison purposes.
CBC supplies analytical products, services and associated equipment through
license distribution agreements, and receives compensation for its selling
efforts in the form of commissions, typically 10-20% of the net sales
price, on all sales of products within the specified sales territory.
(b) Capitalization
Var-Jazz Entertainment, Inc. was initially capitalized in December, 1998 by
the issuance of 1,500,000 shares of its common stock, at $0.004 per share,
totaling $6,000. In June, 1999 the Company circulated a self written
confidential offering memorandum, resulting in the issuance of an
additional 2,778,000 common shares, for a total of $46,300, less offering
costs of $8,415.
On March 8, 2001, Cal-Bay International, Inc. (formerly Var-Jazz
Entertainment, Inc.) acquired all of the issued and outstanding common
stock of CBC in exchange for 17,112,000 shares of its common stock. The
shares issued in the acquisition resulted in the owners of CBC having
operating control of Cal-Bay International, Inc. immediately following the
acquisition. Therefore, for financial reporting purposes, CBC is deemed to
have acquired Cal-Bay International, Inc. in a reverse acquisition
accompanied by a recapitalization.
The surviving entity reflects the assets and liabilities of Cal-Bay
International, Inc. and CBC at their historical book values and the
historical operations of the Company are those of CBC. The issued common
stock is that of Cal-Bay International, Inc. and the retained earnings is
that of CBC.
Immediately subsequent to this acquisition, the Company increased its
authorized common stock from 25,000,000 to 75,000,000 and initiated a
forward 3 for 1 stock split, resulting in 21,390,000 total outstanding
common shares. See also Note 3.
On August 29, 2002, the Company filed a Form S-8 Registration Statement
with the Securities and Exchange Commission and issued 2,240,000 common
shares in payment for professional and consulting services.
7
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
(c) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents. There were no cash equivalents
as of September 30, 2002.
(d) Principles of Consolidation and Basis of Accounting
The accompanying consolidated financial statements include the accounts of
Cal-Bay International, Inc. and of its wholly owned subsidiary, CBC. All
material inter-company transactions and accounts have been eliminated in
consolidation. The Company has no continuing operating activities other
than that of CBC.
(e) Revenue Recognition
The Company recognizes commission income in accordance with SAB 101 - Topic
13.A.3. The nature of each of CBC's manufacturer's representation
agreements requires that the products be shipped from the manufacturer to
the customer, and that either a significant period of time elapse
thereafter or that the manufacturer must receive payment from the customer
before payments are ultimately made to CBC for orders submitted. The
determination as to exactly when the terms specified in the sales
arrangements are substantially completed or fulfilled by the manufacturer
and have been accepted by the customer and the ultimate collectibility of
the commission can only be reasonably assured when the payments are
ultimately received by the Company. Commission expense is recorded when the
commission income that it is related to is recognized.
The Company recognizes sales revenue in the Systems and New Products
divisions on the date of delivery of goods to the customer in accordance
with SAB 101.
(f) Loan Receivable From Stockholder & Related Parties
The balance of related party loan receivable is with the majority
stockholder, is interest free and is due and payable as of December 31,
2002. See also Note 4.
(g) Deposits
This balance consists of a security deposit on the Company's leased
premises.
(h) Property and Equipment and Organizational Expenditures
Office furniture and equipment is stated at cost and is depreciated using
the straight-line method over their estimated useful lives, currently five
years. Organizational expenditures for the Company were paid as completed,
totaling $1,554, have been expensed as incurred in accordance with SOP
98-5. Betterment's and improvements are capitalized and depreciated over
their estimated useful lives, while repairs and maintenance costs are
expensed when incurred.
(i) Accounts Payable an Accrued Expenses
The balance consists primarily of unpaid operating expenditures and
contractual obligations due currently.
8
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
(1) Summary of Significant Accounting Policies (Continued)
(j) Income Taxes
The Company has applied the Financial Accounting Standards Board Statement
109, Accounting for Income Taxes (SFAS 109), to all operations since
inception, for all periods disclosed in this financial examination, and all
other disclosures of information for periods prior to acquisitions of the
operating subsidiary, CBC.
SFAS 109 "Accounting for Income Taxes" requires the liability method in
accounting for income taxes. Deferred tax assets and liabilities arise from
the difference between the tax basis of an asset or liability and its
reported amount on the financial statements. Deferred tax amounts are
determined by using the tax rates expected to be in effect when the taxes
will actually be paid or refunds received, as provided under currently
enacted laws. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense or benefit is the tax payable or refundable, respectively, for the
period, plus or minus the change during the period, in deferred tax assets
and liabilities. The Company, exclusive of the operations of its wholly
owned subsidiary CBC, has experienced operating losses during its period of
existence. These losses occurred in a business activity unrelated to that
of CBC and the Company does not have any current plans to re-enter that
market. Therefore, future profitability of this related business activity
cannot be assured, resulting in reserves for the valuation allowance of the
entire amount of the determined deferred tax assets (See also Note 6).
(k) Transactions in Capital Stock
All securities issued by the Company and CBC have not been registered under
the Securities Act of 1933, as amended. They may not be sold, offered for
sale, transferred, pledged or hypothecated, in the absence of a
registration statement in effect with respect to the securities under such
act, or an opinion of counsel or other evidence satisfactory to the Company
that such registration is not required, or unless sold pursuant to Rule 144
under such act. The Company's free trading stock is currently traded on the
Over the Counter Bulletin Board under the symbol CBYI. The trading price at
September 30, 2002 was $0.30. See also Notes 3, 5 and 8.
(l) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS 128).
SFAS 128 specifies the computation, presentation, and disclosure
requirements of earnings per share and supersedes Accounting Principles
Board Opinion 15, "Earnings Per Share". SFAS 128 requires dual presentation
of basic and, where applicable, diluted earnings per share. Basic earnings
per share, which excludes the impact of common stock equivalents, replaces
primary earnings per share. Diluted earnings per share which utilizes the
average market price per share or ending market price per share when
applying the treasury stock method in determining common stock equivalents,
replaces fully diluted earnings per share. SFAS 128 is effective for the
Company in all years since inception. However, there were no common stock
equivalents during the any of these periods and, therefore, there is no
effect on the earnings per share presented for any of these periods, due to
the Company's adoption of SFAS 128. Basic earnings per share have been
computed using the weighted average number of common shares outstanding.
9
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
(2) Office Furniture and Equipment
A summary of property and equipment is as follows:
Office Furniture &
Computer Equipment . . . . . . . . . . . . . . . $10,068
Less: Accumulated Depreciation . . . . . . . . . . (5,463)
--------
Net Furniture and Equipment. . . . . . . . . . . $ 4,605
========
(3) Acquisition of Cal-Bay Controls, Inc.
As previously discussed in Note 1b, Cal-Bay International, Inc. (formerly
Var-Jazz Entertainment, Inc.) acquired all of the issued and outstanding
common stock of CBC in exchange for 17,112,000 shares of its common stock.
The transaction has been accounted for as a reverse acquisition, in
accordance with the terms of Accounting Principles Board Opinion No. 16,
paragraph 70 and SAB Topic 2A. Since Cal-Bay International, Inc. was a
non-operating public shell company with minimal assets, the transaction has
been treated as a capital transaction in substance, with no goodwill or
intangible being recorded, and no pro forma financial information being
presented.
The following is a summary of the financial position of the Cal-Bay
International, Inc. (CBYI) and CBC at September 30, 2002, without the
consolidating and eliminating adjustments:
CBYI CBC Combined
----- -------- ---------
Current assets. . . . . . . $ -0- $117,567 $ 117,567
Property and equipment, net -0- 4,605 4,605
Other assets. . . . . . . . -0- 2,491 2,491
----- -------- ---------
$ -0- $124,663 $ 124,663
===== ======== =========
Current liabilities . . . . $ -0- $100,440 $ 100,440
Stockholders' equity. . . . -0- 24,223 24,223
----- -------- ---------
$ -0- $124,663 $ 124,663
===== ======== =========
Included in consolidated results of operations for the period ended September
30, 2002 are the following results of the previously separate companies:
CBYI CBC Consolidated
----- ----------- ----------
Net sales $ -0- $ 256,645 $ 256,645
===== =========== =============
Net income (loss). . . $ -o- $ (733,716) $ (733, 716)
===== =========== =============
(4) Related Party Transactions & Significant Customers/Suppliers
As of the period ended September 30, 2002, the Company has advanced the
majority stockholder a total of $21,500, which is included in the
accompanying financial statements as loan receivable from stockholder (see
Note 1f). Additionally, a majority of CBC's commission income is derived
from two unrelated manufacturing companies that it represents (see also
Note 7).
10
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
(5) Certain Beneficial Owners and Management
The following is a list of the officers and directors of the Company, along
with all other shareholders owning directly or indirectly at least 5% of
the Company's shares as of September 30, 2002.
Shareholder/Position/Title Shares Held Ownership
- -------------------------------- ----------- ----------
Robert Thompson - President &CEO. . . . 12,026,953 50.9%
Charles Prebay - Vice President & CFO . 2,000,000 8.5
Cede & Co. - Investor . . . . . . . . . 1,188,000 5.0
All Other Investors . . . . . . . . . 8,415,047 35.6
---------- ----------
Total shares issued & outstanding . 23,630,000 100.0%
========== ==========
(6) Income Taxes
As of September 30, 2002, the Company had provided taxes on consolidated
income for Federal and State income taxes, estimated at $1,600.
At September 30, 2002 deferred taxes consisted of a net tax assets
(benefits) of approximately $160,199, due to operating loss carryforwards
of the Company totaling $800,997, which were fully offset by equal
valuation allowances since there is no assurance of recovery. The net
operating loss carryforwards will expire beginning in 2013.
(7) Off Balance Sheet Risk
The Company could be affected by the inability to establish a market for
their shares of stock. Additionally, since the date of incorporation, the
short-term sales revenue for the Company has come primarily from two
principal accounts, which is due to the fact that the markets for the
products from these accounts have been very active recently. Over the
long-term, management expects the markets for these products and accounts
to diversify. Also, these principals are not the only suppliers for these
products and management has other sources for identical products if it
becomes necessary to find other suppliers.
(8) Common Stock
The Company is authorized to issue 75,000,000 common shares with a $0.001
par value. Following a 3 for 1 forward split of common shares outstanding
on March 8, 2001, and the issuance of 2,240,000 common shares on August 29,
2002 for services, the total outstanding shares amounted to 23,630,000.
Each common share is entitled to one vote and there are no other
preferences. The Company since inception has paid no dividends.
(9) Commitments and Contingencies
CBC maintains an office/warehouse facility in Tustin, California. The
future minimum annual aggregate rental payments required for the remaining
non-cancelable lease term in excess of one year are as follows:
Period Ended June 30,
2003 $ -0-
Thereafter -0-
---------
Total $ -0-
=========
The Company was not involved in any litigation as of the date of this
examination.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENT NOTICE
When used in this report, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend," and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27a of the Securities Act of 1933 and Section 21e of the Securities Exchange Act
of 1934 regarding events, conditions, and financial trends that may affect the
Company's future plans of operations, business strategy, operating results, and
financial position. Persons reviewing this report are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such factors are discussed under the "Item 2. Management's Discussion
and Analysis of Financial Condition or Plan of Operations," and also include
general economic factors and conditions that may directly or indirectly impact
the Company's financial condition or results of operations.
BUSINESS DESCRIPTION
GENERAL
The Company originally incorporated in the State of Nevada on December 9,
1998, under the name Var-Jazz Entertainment, Inc. Var-Jazz was organized to
engage in the business of music production and sales. Var-Jazz did not succeed
in the music business and the board of directors determined it was in the best
interest of the Company to seek additional business opportunities. On March 8,
2001, Var-Jazz entered into an Agreement and Plan of Reorganization with Cal-Bay
Controls, Inc. whereby Var-Jazz changed its name to Cal-Bay International, Inc.,
and acquired Cal-Bay Controls, Inc. as a wholly owned subsidiary in exchange for
17,112,000 shares of common stock.
Cal-Bay Controls, Inc. originally formed in 1976 as a sole proprietorship
that was acquired by Robert J. Thompson in 1990. On February 22, 2001, Cal-Bay
Controls incorporated in the state of Nevada and was subsequently acquired by
Var-Jazz on March 8, 2001. On March 7, 2002, the SEC approved Cal-Bay
International's Form 10-SB registration statement and in June of 2002, Cal-Bay
received approval from the NASD to move from the Pink Sheets to the Over the
Counter Bulletin Board (OTC BB) exchange where Cal-Bay currently trades under
the symbol CBYI.
OUR BUSINESS
Cal-Bay supplies analytical products, services and associated equipment
through license and distribution agreements. Cal-Bay also targets new
technologies and products for research and development, marketing and
distribution.
Cal-Bay operates three divisions, the Representative/Distribution Division,
the Systems Division and the New Products Division. Cal-Bay's operations are
focused mainly in California and Nevada with a small percentage of sales made
elsewhere in the United States. Cal-Bay does not currently have any
international operations and does not intend to pursue an international market
at this time, but expects to do so in the future.
12
REPRESENTATIVE/DISTRIBUTION DIVISION
Cal-Bay's Representative and Distribution Division currently serves markets
in California, Nevada and Hawaii. Cal-Bay represents and/or distributes products
from many manufacturers of engineered products for the process control,
environmental, safety and laboratory markets. The process control market
involves instrumentation and equipment used to help manufacturing plants control
or improve the operations of specific production or manufacturing processes
within the plant. The environmental market supplies instrumentation and
equipment used to measure or help reduce air and/or water pollution produced by
industrial, utility or municipal facilities. The safety market primarily
supplies instrumentation used by various industries to meet personnel safety
requirements typically imposed by OSHA regulations. The laboratory market
supplies equipment for research and development laboratories operated by private
industries, universities and governmental research laboratories.
The Company has a signed contract/agreement with each of the companies it
represents which grants Cal-Bay the rights to sell the assigned
products/services within a defined sales territory (typically California, Nevada
and Hawaii). In most cases these contracts are exclusive in the sense that no
other sales representative is allowed to sell the products covered by the
contract in the same sales area, however, there are a few contracts which are
non-exclusive in the sense that there may be more than one authorized sales
agents in a given sales area. Cal-Bay receives compensation for selling efforts
in the form of commissions (typically 10-20% of the net sales price) on all
sales of products within the specified sales territory.
Within the designated sales territory, Cal-Bay serves the following
markets:
* Environmental market
* Industrial Process Markets
* Petroleum Refineries
* Chemical plants
* Pharmaceutical and Biotechnology
* Computer related
* Paint and coating
* Printing
* Metal processing
* Bulk industrial gases and specialty gases
* Semiconductor
* Aerospace
* Plastics/Polymers
* Original Equipment Manufactures (OEM's)
The environmental market is typically driven by local, state and national
regulations promulgated by regulatory agencies, including: the South Coast Air
Quality Management District (SCAQMD), California Air Resources Board (CARB) and
the U.S. Environmental Protection Agency (EPA), which has both air and water
protection departments.
During the 1980's and 1990's there were many new regulations, on the local
and federal level, which required the installation of new analytical
instrumentation and monitoring systems for both air and water pollution control.
Cal-Bay has been very successful in selling analyzers for use in the
environmental markets and we believe the market will continue to be strong in
this area. During the late 1990's the number of new regulations declined,
however, Cal-Bay expects new regulations to be implemented in several areas in
the coming decade which should result in an increase in this market in the near
future.
13
The safety market is also regulatory driven, usually by OSHA rules. Cal-Bay
anticipates the safety market to remain fairly static in the near future.
The EPA and OSHA implement new regulations every year seeking to improve
quality, safety and the environment. When new regulations are implemented,
industry is required to comply with the regulations, often necessitating the
purchase of new equipment and controls. While Cal-Bay cannot assure new
regulations translate directly to additional sales for the Company, it is
management's experience that increased regulations typically result in an
increase of the Company's sales.
Process, industrial, Quality Control and laboratory markets are much less
likely to be affected by regulatory concerns, however, these markets are more
likely to be affected by changes in the economy. Sales to these markets are
typically not regulatory driven but are driven by the need for improved
production efficiency, reductions in cost, improvement in product quality, etc.
New technology developments are often the driving force behind sales of new
equipment into these markets as each company searches for a competitive
advantage.
SYSTEMS DIVISION
In addition to selling products and services as a
representative/distributor, Cal-Bay produces a small number of operational
systems that integrate a variety of products and components from numerous
vendors. Notably, Cal-Bay is able to provide Continuous Emissions Monitoring
Systems ("CEMS") to selected clients for regulatory compliance. These clients
typically have unique requirements that cannot be addressed by one of the larger
CEM integration companies. On CEMS projects, Cal-Bay will often act as the prime
contractor with several sub-contractors who will be responsible for design,
manufacture, test and/or installation and certification to meet the regulatory
requirements. A typical CEM system will include sample probe, heated sample
line, sample conditioning system to remove moisture and particulates, sample
flow controller and distribution manifold, analyzer(s) for the gas species to be
measured, a micro-processor based system controller, data-logger and/or data
acquisition and reporting system, and calibration gases. Services may include
installation supervision, start-up and training, certification to meet
regulatory standards, maintenance contracts and regulatory permitting
assistance.
The market for CEMS is entirely driven by local, state and national
regulations promulgated by regulatory agencies, including the South Coast Air
Quality Management District, California Air Resources Board and the U.S.
Environmental Protection Agency.
The Company is interested in expanding its core business into new areas of
business opportunity. Some potential methods of accomplishing this goal are to
expand into new markets with existing products, develop and manufacture new
products for sale into our existing markets and search for acquisition
candidates.
NEW PRODUCTS DIVISION
Cal-Bay is currently exploring several opportunities to develop new
products and/or technologies, as follows:
14
SPECTRA UNLIMITED - PRODUCT ACQUISITION/DEVELOPMENT
- -------------------------------------------------------
Cal-Bay has reached tentative agreement and signed a letter of intent to
acquire the technology rights to several products developed by Spectra
Unlimited, a recently dissolved company. The rights to these products are owned
by the former partners in Spectra Unlimited.
The Spectra products include the following:
- Streaming Current Analyzer - this analyzer uses the proven
thermoconductivity principle of analysis and is unique in that it can
discriminate a single component of interest from a complex mixture of
different components. Potential applications include: measurement of
solids in a binary solution, selective measurement of a single gas in
a complex mixture of gases for purity or quality control, various
solvent ratios for process control, product quality measurements, etc.
- Infrared Spectrometer - This is a highly sensitive NDIR spectrometer
designed for gas measurements in environmental or process control
applications. It uses dual measurement channels and an
energy-balancing circuit that allows the use of the same optical
filters for sample and reference wavelengths.
- Catalytic Scrubbers - A series of proprietary non-depleting catalytic
scrubbers that can turn most active substances inert to improve
sampling and analysis in difficult applications.
It is currently unknown what the market potential of these products are, or
the amount of additional research and product development that will be required
before taking these products to market, however Cal-Bay believes that each of
these products can be developed with a fairly limited amount of resources and
that these products will fit very well into our existing areas of business. If
the R&D of these products is successful it is anticipated that these products
will be manufactured and sold either by a new subsidiary company to be
established or by a company to be acquired by Cal-Bay that already has a
manufacturing capability and sales organization.
PATTERN RECOGNITION TECHNOLOGY - PRODUCT DEVELOPMENT
---------------------------------------------------------
Cal-Bay has been working on the development of a new type of analytical
product during the past few years that has tremendous potential. This product
uses pattern recognition and neural net processing, together with software
programming which enables almost any measurement based technology to perform at
improved levels. Pattern recognition is the art of separating complex electronic
signatures from even more complex backgrounds. By improving the measurement
signal and reducing the background noise, these products can provide results
that are not achievable with conventional analytical devices. As an analytical
technology it is unique in that it is fast responding (within milliseconds),
accurate, sensitive (parts per trillion levels), inexpensive, compact and can
identify multiple substances at the molecular level.
Currently, this technology has not been developed for use in many markets
and/or applications and little or no marketing research has been performed to
determine suitable applications for the technology. Additional product
development is necessary to refine the basic technology into products designed
for specific use in specific applications. Marketing research will be needed to
determine viable markets and applications as well as the features required to be
successful in those markets.
15
Cal-Bay intends to focus initially on the use of this new pattern
recognition technology to enhance conventional technology with which Cal-Bay is
most familiar, primarily in the measurement of various chemical compounds in the
environmental, process, safety, QC and laboratory markets. If the R&D of these
products is successful it is anticipated that these products will be
manufactured and sold either by a new subsidiary company to be established or by
a company to be acquired by Cal-Bay that already has a manufacturing capability
and sales organization.
Cal-Bay has also developed a strategic alliance with another company that
will provide Cal-Bay with an entry into the explosives detection market for the
military which has significant potential for growth.
This company is presently working at a military facility in Iowa to develop
new technology, has offices and laboratory facilities in Iowa, and is an
established government contractor with a secure government contract number, is
listed in several DOD databases, and is currently a sub-contractor to American
Ordinance Inc. which is owned by General Dynamics. Cal-Bay will utilize an
existing network of contacts within the military and government contractors to
sell the pattern recognition technology for the measurement of explosives. There
are hundreds of currently operating or recently closed military facilities in
the U.S. which have existing of former supplies of explosives and munitions
which require safe disposal. This represents a significant opportunity in a
prime market, with little or no viable competition, and an existing client base.
Cal-Bay will also pursue the possibility of expanding these joint efforts
into several other markets related to the explosives market. These could
include the airport security market, and drug enforcement markets. Each of
these markets have significant potential, especially since the tragic events of
September 11, 2001, which has created a need for new analytical tools to be used
in the "homeland security" effort.
The capability of pattern recognition technology to rapidly and accurately
differentiate a wide variety of substances at very low levels (parts per
trillion) and its portability makes it ideal for airport security (including
aircraft cargo bays, baggage handling and passenger scans). Identification of
ammonia and nitrogen based explosives, gunpowder, alcohol and any number of
illegal drugs in a rapid non-invasive manner using this technology as a
stand-alone or portable recognition device could significantly improve the
airport security industry. There are currently about 3,000 airport
bomb-scanning systems in use worldwide.
Pattern recognition technology is also ideal for use in a "screening"
application to identify the presence of a targeted chemical substance, such as
an illegal drug. This analyzer can be programmed to store multiple drugs
signatures into memory and can then be used to perform a very fast, accurate and
sensitive, non-invasive screen of a person or property to determine the presence
of the targeted substance. This market includes federal, state and local law
enforcement agencies, as well as hospitals, clinics and emergency health care
facilities.
Existing regulations and governmental requirements will be a driving force
behind the future sales of pattern recognition technology to the
explosives/munitions, airport security, drug enforcement, environmental and
safety markets. Marketing for this technology will be tailored to the targeted
markets. We expect that the initial marketing efforts will be limited until
Cal-Bay is successful in demonstrating the technology and until we approvals
from various industry standards organizations.
16
ANALYTICAL SENSORS - PRODUCT DEVELOPMENT
- --------------------------------------------
Cal-Bay has had preliminary discussions with the former owner of an
analytical sensor company regarding the potential development of a new line of
sensors. Based upon these initial discussions, we believe that a new line of
sensors could be developed for use in a wide variety of analytical
instrumentation. Initial development would be limited to specific sensors and
markets with the greatest return on investment. It is estimated that the initial
resources required for product research and development would be minimal, and
that profit margins and return on investment will be excellent. In return for
funding the product R&D, providing manufacturing facilities and performing most
of the sales and marketing functions, Cal-Bay will receive majority ownership of
any new sensors developed.
FUTURE PRODUCT R&D
In addition to the pattern recognition technology that Cal-Bay plans to
develop, we will continually be searching for other new technology ideas that we
may develop internally, partner with or acquire in the future.
One resource that Cal-Bay will utilize to aid in the search for new
technologies is the services of "technology brokers" that specialize in
identifying new technology and matching that technology with companies that are
looking for new products to develop. Cal-Bay has recently used such a service to
evaluate a new technology patented by the faculty of a public U.S. university
that had reached the "proof of concept" stage and needed additional funding and
resources to complete the development into a commercially-viable product.
Each year there are many thousands of new patent applications filed,
including many by universities or by small, private inventors who do not have
the resources or facilities or inclination to complete the development of their
new idea into a commercial product. Of these new patents, many are in areas of
interest to Cal-Bay, including new sensor technology, new analytical
methodologies, and new processes for environmental measurement and remediation.
Cal-Bay will review new patents in these areas, and will select appropriate new
technologies to target for possible acquisition for future development.
FUTURE POTENTIAL MERGERS & ACQUISITIONS BY CAL-BAY INTERNATIONAL
Cal-Bay has identified a number of companies that would be good candidates
for future mergers and/or acquisitions. Each of these companies has been
selected based upon such criteria as profitability, existing management team,
ownership desire for exit strategy, synergy/compatibility with Cal-Bay's goals
and plans, etc. At this time, Cal-Bay's management is evaluating each of the
candidates currently identified and we are actively searching for new candidates
in order to determine the best growth strategy for the future.
THREE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
Cal-Bay generated $11,900 in commission income from our
representative/distributor division, and product sales in the systems division
of $106,238, for a total revenue of $118,139 for the three-month period ended
September 30, 2002 with cost of sales of $101,485 for a gross profit of $16,654.
These revenues compare with $65,930 in commission income and product sales
revenues for the three-month period ended September 30, 2001 with cost of sales
of $15,700 and gross profit of $50,230. Gross profit for the three-month period
ended September 30, 2002 was $33,576 less than the same period ended in 2001.
Cash provided by operating activities was ($731,563) for the three-month period
ended September 30, 2002 compared to ($34,709) for the same period ended in
2001.
17
The revenues generated for the three-month period ending September 30, 2002
were higher than the normal levels of revenues forecast for this period,
primarily due to sales from one large project won in the systems division during
this period. However, several other projects that we had forecast for this time
period have been delayed, and we have been told by many clients that capital
spending budgets have been reduced or placed on hold until later in the year or
until next year.
Operating expenses for the three months ended September 30, 2002 were
$748,217 compared to $84,939 for the same period in 2001, which is a increase of
$663,278. For the three month period ended September 30, 2002, Cal-Bay had a net
loss of $731,563 compared to a net loss of $34,709 for the same period in 2001,
which is an decrease in net income of $696,854. The majority of this increase in
expenses and corresponding decrease in net income is a direct result of the
issuance of 2,240,000 shares of common Cal-Bay stock, valued at $764,000, as
consideration for certain existing and future professional and consulting
expenses. For accounting purposes, the value of this stock is being taken as an
expense in this period, although much of the professional and consulting
services will be performed in the future, which should help to reduce expenses
in the future.
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
Cal-Bay generated $256,645 in combined commission income from our
representative/distributor division and revenues from product sales in the
systems division for the nine-month period ended September 30, 2002 with
$101,485 cost of sales for a gross profit of $155,160. This compares with
$219,727 in commission income and product sales revenues for the nine-month
period ended September 30, 2001 with cost of sales of $63,423 and gross profit
of $156,304. Gross profit for the nine-month period ended September 30, 2002 was
$1,144 less than the same period ended in 2001. Cash provided by operating
activities was ($733,716) for the nine-month period ended September 30, 2002
compared to ($35,148) for the same period ended in 2001.
The revenues generated for the nine-month period ending September 30, 2002
were less than the anticipated levels of revenues forecast for this period,
partly due to the lack of sales from the systems division or new products
division early in this period, and we believe that this decrease in business
activity is due to the slowdown in the economy in general during this year.
Several projects that we had forecast for this time period have been delayed,
and we have been told by many clients that capital spending budgets have been
reduced or placed on hold until later in the year or early next year.
Operating expenses for the nine months ended September 30, 2002 were
$888,876 compared to $191,452 for the same period in 2001, which is an increase
of $697,424. For the nine month period ended September 30, 2002, Cal-Bay had a
net loss of $733,716 compared to a net loss of $35,148 for the same period in
2001, which is a decrease in net income of $698,568. The majority of this
increase in expenses and corresponding decrease in net income is a direct result
of the issuance of 2,240,000 shares of common Cal-Bay stock, valued at $764,000,
as consideration for certain existing and future professional and consulting
expenses. For accounting purposes, the value of this stock is being taken as an
expense in this period, although much of the professional and consulting
services will be performed in the future, which should help to reduce expenses
in the future. This increase in expenses is also attributed to Cal-Bay becoming
a reporting public company with increased fee for accounting and legal services.
During this period, the accounting fees for completion of an audit, and legal
fees and organizational expenses associated with our incorporation would not
have been incurred had Cal-Bay continued to operate as a sole proprietorship. If
these fees had not been incurred, our net income would have increased
substantially. We expect our legal and accounting fees to decrease in the
future, although we will require continuing legal and accounting services for
our future quarterly and annual reporting. During this period, Cal-Bay's
management was also informed that the health insurance premiums would increase
18
significantly this year, therefore a new health insurance plan was selected in
an attempt to limit the increase in costs. In addition, during this period
Cal-Bay's management approved the selection of a new liability insurance policy
which resulted in additional expense to the Company. We do not foresee any other
increases in expenses or any other major expenditures for the remainder of 2002.
From the initial period of operation through reorganization in March 2001,
CalBay's officers did not draw a salary and were only reimbursed for expenses
directly relating to the operation of the Company. As of June 16, 2001, CalBay
agreed to pay salaries to the officers and the first salary payments were made
to Cal-Bay employees at the end of June 2001. We believe that the salaries to be
paid to the Cal-Bay officers are fair and reasonable compensation consistent
with the duties and responsibilities of these positions. These executive
salaries were based upon the expected levels of revenues for Cal-Bay, based upon
the projected sales forecasts and income projections and expense budgets for the
year. At this time, based upon the actual sales to date and the projected sales
for the remainder of the year it appears that the 2002 sales for Cal-Bay will
probably be less than the forecast for the year, therefore the officers of
Cal-Bay have agreed to accept company stock in lieu of salary if required to
maintain adequate cash flow for the corporation. In anticipation of this,
Cal-Bay's management is making an effort to reduce our operating expenses for
the remainder of the year. Also, much of the expense associated with becoming a
fully-reporting company has now been incurred and is behind us, and therefore we
expect the accounting and legal fees to stabilize and remain fairly constant in
the future.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, Cal-Bay has total assets of $124,663 including
cash on hand, loan receivables, prepaid rent, security deposits, and office
furniture and equipment. Current liabilities total $100,440 in accrued expenses,
accrued salaries and wages, and income taxes payable. Legal and accounting costs
increased substantially in 2001 and early 2002 for the Company due to the public
company reporting requirements imposed as a result of the Company's Form 10-SB
registration statement, which was approved by the SEC in March, 2002. In June of
2002 Cal-Bay received approval from the NASD to move from the Pink Sheets to the
Over the Counter Bulletin Board (OTC BB) exchange. Cal-Bay does not anticipate
any substantial new capital expenditures for the next twelve months, and does
not plan to move to a new facility or to otherwise increase the overhead expense
level in any way. Cal-Bay plans to continue the current operations of all
divisions with the present management structure, financial and operational goals
for the near term. Based upon the sales, expense and income results from the
first three quarters of operations and our projections for the remainder of the
year, the Company believes that it can maintain the current level of operations
for the rest of the year without having to raise additional funds for
operational purposes. The company believes that its cash needs to maintain
current operations can be met with cash on hand and revenues from accounts
receivable on orders for at least the next twelve months. However, should the
Company require additional capital, the Company may sell additional stock,
arrange debt financing or seek other avenues of raising capital.
19
ITEM 3. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this report, we evaluated the
effectiveness and operation of our disclosure controls and procedures pursuant
to Rule 13a-14 of the Securities Exchange Act of 1934. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective. There have
been no significant changes in internal controls or other factors that could
significantly affect internal controls subsequent to the date we carried out our
evaluation.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on Form 8-K: No reports on Form 8-K were filed by the Company during
the quarter ended September 30, 2002.
Exhibits:
EXHIBIT NUMBER TITLE LOCATION
99.1 . . . . . Certification of Chief Executive Officer Attached
99.2 . . . . . Certification of Chief Financial Officer Attached
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
CAL-BAY INTERNATIONAL, INC.
Date: November 6, 2002 /s/ Robert Thompson
---------------------
Robert Thompson
President
Date: November 6, 2002 /s/ Charles A. Prebay
-----------------------
Charles A. Prebay
Chief Financial Officer
20