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 June 30, 2003
[ ] 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 the latest practicable date: As of July 30, 2003 the issuer had
24,985,000 shares of common stock issued and outstanding.
Transitional Small Business Format: Yes [ ] No [ X ]
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of June 30, 2003 and 2002 3
Comparative Consolidated Statements of Operations
for the Three Months Ended June 30, 2003 and 2002
and for the Six Months ended June 30, 2003 and 2002 4
Consolidated Statement of Changes in
Stockholders' Equity for the Period Ended
June 30, 2003 5
Comparative Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 2003 and 2002
and for the Six Months June 30, 2003 and 2002 6
Notes to the Consolidated Financial Statements 7-17
Item 2. Management's Discussion and Analysis of Financial
Condition or Plan of Operation 18
Item 3. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
(Inapplicable items have been omitted)
2
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS
2003 2002
------------ ---------
Current Assets:
Cash (Note 1c). . . . . . . . . . . . . . . . . . . . . $ 1,794 $ 1,451
Prepaid Expenses. . . . . . . . . . . . . . . . . . . . 2,175 -0-
------------ ---------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . 3,969 1,451
Office Furniture and Equipment, at cost,
net of accumulated depreciation of
$8,697 and $4,997 respectively (Notes 1h & 2) . . . . . 16,816 4,181
Other Assets:
Related Party Receivable (Note 4) . . . . . . . . . . . 21,500 27,500
Deposit (Note 1g) . . . . . . . . . . . . . . . . . . . 2,770 2,491
------------ ---------
TOTAL OTHER ASSETS. . . . . . . . . . . . . . . . . . . 24,270 29,991
------------ ---------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 45,055 $ 35,623
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable & Accrued Expenses (Note 1i) . . . . . $ 31,904 $ 42,237
Income Taxes Payable (Notes 1j & 6) . . . . . . . . . . 1,600 1,600
Current Portion of Capital Lease Obligation (Note 9). . 1,629 -0-
------------ ---------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . 35,133 43,837
Capital Lease Obligation, net of Current Portion (Note 9) 11,718 -0-
Commitments and Contingencies (Note 10) . . . . . . . . . - - - - - -
Stockholders' Equity:
Common Stock, $.001 par value; 75,000,000 shares
authorized; shares issued and outstanding
24,985,000 and 21,390,000 (Notes 1b, 1k, 3 & 5) . . . 24,985 $ 21,390
Additional Paid in Capital - (Discount on Stock). . . . 995,942 (3,613)
Retained Deficit. . . . . . . . . . . . . . . . . . . . (1,022,723) (25,991)
------------ ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT). . . . . . . . . (1,796) (8,214)
------------ ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . $ 45,055 $ 35,623
============ =========
See notes to consolidated financial statements.
3
CAL-BAY INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2003 & 2002 and
For the Six Months Ended June 30, 2003 & 2002
Three Months Ended Six Months Ended
June 30 June 30
------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues . . . . . . . $ 21,651 $ 54,755 $ 38,226 $ 138,756
Cost of Sales. . . . . -0- -0- -0- -0-
Gross profit . . . . . 21,651 54,755 38,226 138,756
Operating expenses . . 39,902 59,704 323,345 140,909
Net (loss) . . . . . . $ (18,251) $ (4,949) $ (285,119) $ (2,153)
Net (loss)
Per share:
Basic & Diluted. . (0.00) (0.00) (0.11) (0.00)
Weighted average
Shares outstanding:
Basic & Diluted. . 24,985,000 21,390,000 24,921,602 21,390,000
See notes to consolidated financial statements.
4
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period Ended June 30, 2003
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) December 31, 2001 --- --- --- (23,838) (23,838)
---------- ------------ ---------- ------------ -------------
Balance at December 31, 2001 . . . . . . 21,390,000 21,390 (3,613) (23,838) (6,061)
Issuance of Common Stock for Services 2,320,000 2,320 784,080 --- 786,400
Net (Loss) December 31, 2002 --- --- --- (713,766) (713,766)
---------- ------------ ---------- ------------ -------------
Balance at December 31, 2002 . . . . . . 23,710,000 23,710 780,467 (737,604) 66,573
Issuance of Common Stock for Services 1,275,000 1,275 215,475 --- 216,750
Net (Loss) June 30, 2003 --- --- --- (285,119) (285,119)
---------- ------------ ---------- ------------ -------------
Balance at June 30, 2003 . . . . . . . . 24,985,000 $24,985 $ 995,942 $(1,022,723) $ (1,796)
========== ============ ========== ============ =============
See notes to consolidated financial statements.
5
CAL-BAY INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 2003 & 2002 and
For the Six Months Ended June 30, 2003 & 2002
Three Months Ended Six Months Ended
June 30 June 30
------------------- ---------------------
2003 2002 2003 2002
--------- -------- ---------- ---------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . $(18,251) $(4,949) $(285,119) $ (2,153)
--------- -------- ---------- ---------
Adjustments to reconcile net
Income (loss) to net cash
Provided by operating activities
Depreciation . . . . . . . . . . . . 1,260 459 2,488 918
Common stock issued for services . . -0- -0- 216,750 -0-
Increase (decrease)
To current assets &
Current liabilities. . . . . . . . 11,486 (1,735) 31,647 (22,916)
--------- -------- ---------- ---------
Total adjustments. . . . . . . . . . 12,746 (1,276) 250,885 (21,998)
--------- -------- ---------- ---------
Net cash provided (used) by
Operating activities . . . . . . . (5,505) (6,225) (34,234) (24,151)
--------- -------- ---------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of fixed asset. . . . . . . (945) -0- (945) -0-
--------- -------- ---------- ---------
Net cash used by
Investing activities . . . . . . . (945) -0- (945) -0-
--------- -------- ---------- ---------
Net increase (decrease). . . . . . . (6,450) (6,225) (35,179) (24,151)
In Cash
Cash & equivalents,
Beginning of period. . . . . . . . 8,244 7,676 36,973 25,602
--------- -------- ---------- ---------
Cash & equivalents,
End of period. . . . . . . . . . . $ 1,794 $ 1,451 $ 1,794 $ 1,451
========= ======== ========== =========
Supplemental cash flow information:
Cash paid for interest . . . . . . . $ -0- $ -0- $ -0- $ -0-
========= ======== ========== =========
Cash paid for taxes. . . . . . . . . $ -0- $ -0- $ -0- $ -0-
========= ======== ========== =========
Supplemental disclosure of non-cash activities:
In January of 2003, the Company issued 1,275,000 shares of common stock as
consideration for certain professional and consulting expenses.
See notes to consolidated financial statements.
6
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(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.
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.
7
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(1) Summary of Significant Accounting Policies (Continued)
(b) Capitalization (continued)
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. On November 15, 2002, the Company issued 80,000 common
shares in payment for professional services.
On January 9, 2003, the Company filed a Form S-8 Registration
Statement with the Securities and Exchange Commission and issued
1,275,000 common shares in payment for professional and consulting
services.
(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 June 30, 2003.
(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.
8
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(1) Summary of Significant Accounting Policies (Continued)
(e) Revenue Recognition (continued)
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 Related Parties
The balance of related party loan receivable is with the majority
stockholder, is interest free and is due and payable on December 31,
2003.
(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, as of December 31, 2001, and 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.
(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.
9
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(1) Summary of Significant Accounting Policies (Continued)
(j) Income Taxes (continued)
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. Future profitability of current
and unrelated business activities cannot be assured, resulting in the
recordation of 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 involved in limited trading on the Over the
Counter Bulletin Board under the symbol CBYI. The trading price at
June 30, 2003, was $0.04. See also Notes 3 and 5.
(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.
10
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(1) Summary of Significant Accounting Policies (Continued)
(l) Earnings Per Share (continued)
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.
(m) Recently Issued Accounting Pronouncements
In June 2001, the Financial Standards Board ("FASB") issued SFAS No.
141, "Business Combinations." This statement addresses financial
accounting and reporting for business combinations and supersedes APB
Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting
for Pre-Acquisition Contingencies of Purchased Enterprises." All
business combinations in the scope of this statement are to be
accounted for using one method, the purchase method. The provisions of
this statement apply to all business combinations initiated after June
30, 2001. Use of the pooling-of-interest method for those business
combinations is prohibited. This statement also applies to all
business combinations accounted for using the purchase method for
which the date of acquisition is July 1, 2001 or later. The Company
does not expect adoption of SFAS No. 141 to have a material impact, if
any, on its financial position or results of operations.
In June 2001, the ("FASB") issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This
statement also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in
the financial statements. It is effective for fiscal years beginning
after December 15, 2001. Early application is permitted for entities
with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not been issued previously.
This statement is not applicable to the Company.
In June 2001, the ("FASB") issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement applies to legal obligations
associated with the retirement of long-lived assets that result from
the acquisition construction, development, and/or the normal operation
of long-lived assets, except for certain obligations of lessees. This
statement is not applicable to the Company.
11
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(1) Summary of Significant Accounting Policies (Continued)
(m) Recently Issued Accounting Pronouncements - (continued)
In August 2001, the ("FASB") issued SFAS No. 144, "Accounting for the
Impairment or Disposal of long-lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement replaces SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the accounting and reporting provisions of APB No.
30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequent Occurring Events and Transactions," for the disposal of a
segment of a business, and amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. The Company does not expect adoption of SFAS No. 144 to
have a material impact, if any, on its financial position or results
of operations.
In April 2002, the ("FASB") issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 updates, clarifies, and
simplifies existing accounting pronouncements. This statement rescinds
SFAS No. 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result, the criteria in
APB No. 30 will now be used to classify those gains and losses. SFAS
No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has
been rescinded. SFAS No. 44 has been rescinded, as it is no longer
necessary. SFAS no. 145 amends SFAS No. 13 to require that certain
lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are
not substantive in nature, in some instances, they may change
accounting practice. The Company does not expect adoption of SFAS No.
145 to have a material impact, if any, on its financial position or
results of operations.
In June 2002, the ("FASB") issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF")
Issue No. 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." This statement requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF Issue 94-3, a
liability for an exit cost, as defined, was recognized at the date of
an entity's commitment to an exit plan. The provisions of this
statement are effective for exit or disposal activities that are
initiated after December 31, 2002 with earlier application encouraged.
The Company does not expect adoption of SFAS No. 146 to have a
material impact, if any, on its financial position or results of
operations.
12
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(1) Summary of Significant Accounting Policies (Continued)
(m) Recently Issued Accounting Pronouncements - (continued)
In December 2002, the ("FASB") issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This statement
amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation" to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends
the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company does not
expect adoption of SFAS No. 148 to have a material impact, if any, on
its financial position or results of operations.
In April 2003, the ("FASB") issued SFAS No. 149, "Accounting for
Derivative Instruments and Hedging Activities". This statement amends
FASB Statement No. 133 to improve financial reporting by requiring
that contracts with comparable characteristics be accounted for
similarly. This statement is effective for contracts entered into or
modified after June 30, 2003. The changes due to this statement will
result in more consistent reporting of contracts as either derivatives
or hybrid instruments. The Company does not expect adoption of SFAS
No. 149 to have a material impact, if any, on its financial position
or results of operations.
In May 2003, the ("FASB") issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". This statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The changes in this
statement will result in a more complete depiction of an entity's
liabilities and equity. The changes will also enhance the relevance of
accounting information by providing more information about the
entity's obligations to transfer assets or issue shares. The Company
does not expect adoption of SFAS No. 150 to have a material impact, if
any, on its financial position or results of operations.
(2) Office Furniture and Equipment
A summary of property and equipment is as follows as of June 30,:
2003 2002
-------- --------
Office Furniture &
Computer Equipment . . . . . $25,513 $ 9,178
Less: Accumulated Depreciation (8,697) (4,997)
-------- --------
Net Furniture and Equipment. $16,816 $ 4,181
======== ========
13
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(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, without the consolidating and
eliminating adjustments at:
June 30, 2003
-------------------------------
CBYI CBC Combined
------- ---------- ----------
Current assets. . . . . . . $ -0- $ 3,969 $ 3,969
Property and equipment, net -0- 16,816 16,816
Other assets. . . . . . . . -0- 24,270 24,270
------- ---------- ----------
$ -0- $ 45,055 $ 45,055
======= ========== ==========
Current liabilities . . . . $ -0- $ 35,133 $ 35,133
Long term liability . . . . 11,718 11,718
Stockholders' equity. . . . -0- (1,796)
(1,796)
------- ---------- ----------
$ -0- $ 45,055 $ 45,055
======= ========== ==========
June 30, 2002
-------------------------------
CBYI CBC Combined
------- ---------- ----------
Current assets. . . . . . . $ -0- $ 1,451 $ 1,451
Property and equipment, net -0- 4,181 4,181
Other assets. . . . . . . . -0- 29,991 29,991
------- ---------- ----------
-0- $ 35,623 $ 35,623
======= ========== ==========
Current liabilities . . . . $ -0- $ 43,837 $ 43,837
Stockholders' equity. . . . -0- (8,214) (8,214)
------- ---------- ----------
$ -0- $ 35,623 $ 35,623
======= ========== =========
14
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(4) Related Party Transactions & Significant Customers/Suppliers
The Company has advanced the majority stockholder a total of $21,500, which
is included in the accompanying financial statements as related party
receivable. The advance is interest free and is due and payable on December
31, 2003.
(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 over 1 million shares of the Company's
shares as of:
June 30, 2003
-------------------------
Shareholder/Position/Title Shares Held Ownership
- ---------------------------------------- ------------ -----------
Robert Thompson - President & CEO 11,059,653 44.3 %
Charles Prebay - Vice President & CFO 1,608,400 6.4
Chris Walker 1,059,000 4.2
Cede & Co. - Investor 7,868,650 31.5
All Other Investors 3,389,297 13.6
------------ -----------
Total shares issued & outstanding 24,985,000 100.0 %
============ ===========
June 30, 2002
-------------------------
Shareholder/Position/Title Shares Held Ownership
- ---------------------------------------- ------------ -----------
Robert Thompson - President & CEO 12,026,953 56.2 %
Charles Prebay - Vice President & CFO 2,000,000 9.4
Chris Walker 1,059,000 5.0
Cede & Co. - Investor 1,188,000 5.5
All Other Investors 5,116,047 23.9
------------ -----------
Total shares issued & outstanding 21,390,000 100.0 %
============ ===========
Robert Thompson, President and CEO was compensated $8,500 during the six
months ended June 30, 2003.
(6) Income Taxes
As of June 30, 2003, the Company had provided taxes on consolidated income
for Federal and State income taxes, estimated at $1,600.
At June 30, 2003 deferred taxes consisted of a net tax assets (benefits) of
approximately $470,974, due to operating loss carryforwards of the Company
totaling $1,056,457 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.
15
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(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) Equity Line of Credit
In April 2003, the Company entered into an equity line of credit investment
agreement with Dutchess Private Equities Fund, L.P. (Duchess). Under this
equity line of credit, the Company may periodically sell shares of common
stock to Duchess to raise capital. The Company has made a SB-2 filing to
register 10,675,675 shares of common stock to undertake this equity line of
credit.
(9) Leases
The Company lease certain office equipment that is accounted for as a
capital lease and capitalized using interest rates appropriate at the
inception of the lease.
The future minimum commitments under this lease arrangement at June 30,
2003 are as follows:
Period Ended December 31,
2003. . . . . . . . . . $ 1,629
2004. . . . . . . . . . 2,656
2005. . . . . . . . . . 2,933
2006. . . . . . . . . . 3,241
Thereafter. . . . . . 2,888
-------
Net minimum commitments 13,347
Less current portion. 1,629
-------
Long-term commitments $11,718
=======
16
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(10) Commitments and Contingencies
CBC leases an office/warehouse facility in Tustin, California which expires
in August 31, 2004. 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 . . . . $16,341
2004 . . . . 22,163
Thereafter 0
-------
Total. . . $38,504
=======
The Company was not involved in any litigation as of the date of this
examination.
17
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 Controls 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 Controls 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.
18
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,
however this market tends to be cyclical due to changes in regulatory
enforcement. During the past several years the number of new regulations being
promulgated has declined, as has the level of enforcement by many regulatory
agencies. Combined with the slow economy during the past few years, resulting
19
in fewer new plant start-ups, and even some plant closings, the environmental
market has been weak. 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 future.
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:
20
SPECTRA UNLIMITED - PRODUCT ACQUISITION/DEVELOPMENT
- -------------------------------------------------------
During the first quarter of 2003 Cal-Bay reached an agreement to acquire the
technology rights to several products developed by Spectra Unlimited, a recently
dissolved company. Cal-Bay had been in negotiations with the owners of this
technology during the past year, and a letter of intent had been signed in
late-2002. After completion of the due diligence process, a contractual
agreement for Cal-Bay to acquire the rights to the technology developed by
Spectra Unlimited was reached and signed by all parties.
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
- ---------------------------------------------------------
During the past several years Cal-Bay has evaluated several new types of
analytical products using "pattern recognition technology". Pattern recognition
is the art of separating and identifying complex chemical or electronic
signatures from even more complex backgrounds.
Initially, Cal-Bay worked with an inventor who had developed a prototype pattern
recognition device using neural net processing. Based upon limited marketing
research, this new device had tremendous potential for use in a number of areas,
but the inventor was unable or unwilling to perform the product development
required to produce a commercially viable new product. Cal-Bay was unable to
finalize a business relationship with the inventor, and as a result we began
evaluating other products capable of performing similar measurements.
One of these other products and/or technologies which was evaluated by Cal-Bay
was a new type of chemical sensor developed by a major university. Cal-Bay was
21
approached by the technology transfer agent for this university to consider the
possible further development and commercialization of this new sensor
technology. After reviewing the technology, and performing initial market
research studies and preparing cost estimates for the commercialization of this
product, Cal-Bay determined that the development costs and time to market were
not within our preferred guidelines and therefore we decided not to pursue this
opportunity.
Cal-Bay has also recently had discussions with another company that has
developed an "electronic nose" analytical device using fast gas chromatography
with a new proprietary detector. It is possible that Cal-Bay may become an
investor in this company, and/or may become a sales agent for the product.
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.
Unfortunately, these discussions have not progressed and are currently on hold.
It is possible that these discussions will continue in the future, but there are
currently no plans or schedule for this to occur.
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. We hope to finalize at
least one, and possibly two, of these acquisitions before the end of 2003.
22
THREE MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
Cal-Bay generated $21,651 in commission income from our
representative/distributor division, and product sales in the systems division
of $0, for a total revenue of $21,651 for the three-month period ended June 30,
2003 with cost of sales of $0 for a gross profit of $21,651. These revenues
compare with $54,755 in commission income and product sales revenues for the
three-month period ended June 30, 2002 with cost of sales of $0 and gross profit
of $54,755. Gross profit for the three-month period ended June 30, 2003 was
$33,104 less than the same period ended in 2002. Cash provided by operating
activities was ($5,505) for the three-month period ended June 30, 2003 compared
to ($6,225) for the same period ended in 2002.
The revenues generated for the three-month period ending June 30, 2003 were
lower than the normal levels of revenues forecast for this period, primarily due
to lowered commissions from a decrease in new orders booked during the later
part of 2002 and early part of 2003, and the lack of any business from our
systems division. Many projects that we had forecast for this time period have
been delayed due in general to the slow economy, 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 June 30, 2003 were $39,902
compared to $59,704 for the same period in 2002, which is a decrease of $19,802.
For the three month period ended June 30, 2003, Cal-Bay had a net loss of
$18,251 compared to a net loss of $4,949 for the same period in 2002,
representing a decrease in net income of $13,302.
SIX MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
Cal-Bay generated $38,226 in combined commission income from our
representative/distributor division and revenues from product sales in the
systems division for the six-month period ended June 30, 2002 with $0 cost of
sales for a gross profit of $38,226. This compares with $138,756 in commission
income and product sales revenues for the six-month period ended June 30, 2002
with cost of sales of $0 and gross profit of $138,756. Gross profit for the
six-month period ended June 30, 2003 was $100,530 less than the same period
ended in 2002. Cash provided by operating activities was ($34,234) for the
six-month period ended June 30, 2003 compared to ($24,151) for the same period
ended in 2002.
The revenues generated for the six-month period ending June 30, 2003 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 during this
period, and we believe that this decrease in business activity is due to the
slowdown in the economy in general. 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.
Operating expenses for the six months ended June 30, 2003 were $323,345 compared
to $140,909 for the same period in 2002, which is an increase of $182,436. For
the six month period ended June 30, 2003, Cal-Bay had a net loss of $285,119
compared to a net loss of $2,153 for the same period in 2002, which is a
decrease in net income of $282,966. The majority of this increase in expenses
and corresponding decrease in net income is a direct result of the issuance of
1,275,000 shares of common Cal-Bay stock registered on Form S-8 during the first
quarter of the year. This stock was valued at $216,750, 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.
23
Also, Cal-Bay continues to incur significant expenses in order to meet its
obligations as a reporting public company, due to fees for accounting and legal
services. If these fees had not been incurred, our net income would have
increased. We will require continuing legal and accounting services for our
future quarterly and annual reporting and for completion of and filing various
documents with the SEC. During this period, Cal-Bay's management was informed
that the health insurance premiums would increase significantly this year,
therefore a new health insurance plan was selected in an attempt to limit the
increase in costs.
Cal-Bay operated as a sole proprietorship in early-2001, until incorporation on
February 22, 2001 and then the acquisition by Var-Jazz on March 8, 2001. For the
initial period of operation after the acquisition by Var-Jazz, the officers of
the Company did not draw a salary from Cal-Bay, and were only reimbursed for
expenses directly relating to the operation of the Company. As of June 16, 2001
the Company agreed to pay salaries to the officers of the Company. 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 2003 sales for Cal-Bay will probably be less than the forecast
for the year, therefore the officers of Cal-Bay have agreed to accept reduced
salary payments if required to maintain adequate cash flow for the corporation.
Cal-Bay's management is also making an effort to reduce our operating expenses
for the remainder of the year.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, Cal-Bay has total assets of $45,055 including cash on hand,
loan receivables, prepaid rent, security deposits, and office furniture and
equipment. Current liabilities total $35,133 in accrued expenses, accrued
salaries and wages, and income taxes payable. Legal and accounting costs
increased substantially in 2001, 2002 and early 2003 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 a listing on the Over the Counter Bulletin Board. Cal-Bay does not
anticipate any substantial new capital expenditures for its current business for
the next six 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 and second quarter 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. Management believes that our
cash needs to maintain current operations can be met with cash on hand and
expected revenues from accounts receivable on orders for at least the next
twelve months.
However, should the Company proceed with its plans to either acquire one or more
companies or begin research and development on new products in the future, we
may require additional capital. To provide a means of raising additional
capital as it is needed in the future to finance the Company's growth plans, the
Company has arranged an equity line of credit with Dutchess Capital of Boston,
Massachusetts providing up to $10,000,000 of funding. The Company has recently
submitted an SB-2 Registration Statement with the SEC for the initial
registration of 10,000,000 shares of Cal-Bay International common stock for use
with this line of credit. The registration statement has not yet gone
effective.
24
EMPLOYEES
Cal Bay's officers and directors are employed full time by Cal Bay. The Company
intends to add an additional outside sales engineer in late 2003 in order to
increase business in southern California. The Company also plans to hire an
inside sales support person in late 2003 or 2004.
DESCRIPTION OF PROPERTY
Cal Bay currently leases a combined office/warehouse facility of approximately
2,328 square feet at 1582 Parkway Loop, Suite G, Tustin, CA 92780. The lease is
paid on a monthly basis of $2,630.64 per month and expires on August 31, 2004.
Our facility is located in a small mixed use, commercial/light industrial office
park in Central Orange County, California. This facility consists of a
reception area, three individual fully-enclosed offices, a conference room, a
restroom, sales literature storage area, printer/fax/copier area, and a combined
warehouse/system production/equipment test area. Management believes the
currently leased space is adequate to meet Cal Bay's needs for at least the term
of the lease.
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 reporting 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 June
30, 2003.
EXHIBIT NUMBER TITLE LOCATION
31.1 Certification of Chief Executive Officer pursuant to Attached
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Attached
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Attached
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Attached
Section 906 of the Sarbanes-Oxley Act of 2002
25
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: August 11, 2003 By:/s/Robert J. Thompson
-----------------------------------------
Robert J. Thompson
President and Chief Executive Officer
Date: August 11, 2003 By:/s/Charles A. Prebay
----------------------------------------------
Charles A. Prebay
Vice-President and Chief Financial Officer
26