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, 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 CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the most recent practicable date:
As of September 30, 2003, the issuer had 30,493,356 shares of common stock
issued and outstanding.
Transitional Small Business Format:
Yes [ ] No [ X ]
CAL-BAY INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO
-------
Item 1. Financial Statements
Independent Accountant's Review Report 3
Consolidated Balance Sheets as of
September 30, 2003 and 2002 4
Comparative Consolidated Statements of Operations
for the Three Months Ended September 30, 2003 and 2002
and for the Nine Months ended September 30, 2003 and 2002 5
Consolidated Statement of Changes in
Stockholders' Equity for the Period Ended
September 30, 2003 6
Comparative Consolidated Statements of Cash Flows
for the Three Months Ended September 30, 2003 and 2002
and for the Nine Months September 30, 2003 and 2002 7
Notes to the Consolidated Financial Statements 8-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-26
Item 3. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 26
Item 6. Exhibits and Reports on Form 8-K 27
(a) Exhibits
(b) Reports on Form 8-K
Signatures 28
(Inapplicable items have been omitted)
2
INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors
CAL-BAY INTERNATIONAL, INC.
I have reviewed the accompanying consolidated balance sheets of Cal-Bay
International, Inc. (A Nevada Corporation), and subsidiaries, as of September
30, 2003 and 2002, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the three and nine month
periods then ended. All information included in these financial statements is
the representation of the management of Cal-Bay International, Inc.
I conducted my review in accordance with standards established by the American
Institute of Public Accountants. A review of interim financial information
consists principally of obtaining an understanding of the system for the
preparation of interim financial information, applying analytical review
procedures to financial data, and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, I do not express such an opinion.
Based on my review, I am not aware of any material modifications that should be
made to the accompanying consolidated financial statements and the cumulative
results of operations and cash flows in order for them to be in conformity with
generally accepted accounting principles.
/s/ARGY & COMPANY
------------------
October 28, 2003
Fountain Valley, California
3
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
ASSETS
2003 2002
------------ ----------
Current Assets:
Cash (Note 1c). . . . . . . . . . . . . . . . . . . . . $ 6,512 $ 8,351
Accounts Receivable . . . . . . . . . . . . . . . . . . -0- 62,210
Prepaid Expenses. . . . . . . . . . . . . . . . . . . . 2,175 25,506
------------ ----------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . 8,687 96,067
Office Furniture and Equipment, at cost,
net of accumulated depreciation of
$9,973 and $5,463 respectively (Notes 1h & 2) . . . . . 15,540 4,605
Other Assets:
Related Party Receivable (Note 4) . . . . . . . . . . . 21,500 21,500
Deposit (Note 1g) . . . . . . . . . . . . . . . . . . . 2,770 2,491
------------ ----------
TOTAL OTHER ASSETS. . . . . . . . . . . . . . . . . . . 24,270 23,991
------------ ----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 48,497 $ 124,663
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable & Accrued Expenses (Note 1i) . . . . . $ 37,996 $ 100,440
Current Portion of Capital Lease Obligation (Note 9). . 1,232 -0-
------------ ----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . 39,228 100,440
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
30,493,360 and 23,630,000 (Notes 1b, 1k, 3 & 5) . . . 30,493 $ 23,630
Additional Paid in Capital - (Discount on Stock). . . . 1,204,653 758,147
Retained Deficit. . . . . . . . . . . . . . . . . . . . (1,237,595) (757,554)
------------ ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT). . . . . . . . . (2,449) 24,223
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . $ 48,497 $ 124,663
============ ==========
See notes to consolidated financial statements.
4
CAL-BAY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2003 & 2002 and
For the Nine Months Ended September 30, 2003 & 2002
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues . . . . . . . $ 61,888 $ 118,139 $ 100,113 $ 256,645
Cost of Sales. . . . . 36,808 101,485 36,808 101,485
------------ ------------ ------------ ------------
Gross profit . . . . . 25,080 16,654 63,305 155,160
Operating expenses . . 239,952 748,217 563,296 888,876
------------ ------------ ------------ ------------
Net (loss) . . . . . . $ (214,872) $ (731,563) $ (499,991) $ (733,716)
============ ============ ============ ============
Net (loss)
Per share:
Basic & Diluted. . (0.01) (0.03) (0.02) (0.03)
Weighted average
Shares outstanding:
Basic & Diluted. . 26,203,765 22,135,879 25,353,687 21,638,889
See notes to consolidated financial statements.
5
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period Ended September 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 6,733,356 6,733 422,736 --- 429,469
Private sale of Common Stock 50,000 50 1,450 --- 1,500
Net (Loss) September 30, 2003 --- --- --- (499,991) (499,991)
---------- ------------ ----------- ------------ -------------
Balance at September 30, 2003. . . . . . 30,493,356 $30,493 $1,204,653 $(1,237,595) $ (2,449)
========== ============ =========== ============ ==============
See notes to consolidated financial statements.
6
CAL-BAY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 2003 & 2002 and
For the Nine Months Ended September 30, 2003 & 2002
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) . . . . . . . . . . . . . $(214,872) $(731,563) $(499,991) $(733,716)
---------- ---------- ---------- ----------
Adjustments to reconcile net
Income (loss) to net cash
Provided by operating activities
Depreciation . . . . . . . . . . . . 1,276 466 3,764 1,384
Stock based professional &
Consulting expenses . . . . . . . 212,719 764,000 429,469 764,000
Increase (decrease)
To current assets &
Current liabilities. . . . . . . . 4,492 (25,114) 37,292 (48,030)
---------- ---------- ---------- ----------
Total adjustments. . . . . . . . . . 218,487 739,352 470,525 717,354
---------- ---------- ---------- ----------
Net cash provided (used) by
Operating activities . . . . . . . 3,615 7,789 (29,466) (16,362)
---------- ---------- ---------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of fixed asset. . . . . . . -0- (889) (945) (889)
---------- ---------- ---------- ----------
Net cash used by
Investing activities . . . . . . . -0- -0- (945) -0-
---------- ---------- ---------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Stock issuance for cash. . . . . . . 1,500 -0- 1,500 -0-
Payment of capital lease . . . . . . (397) -0- (1,550) -0-
---------- ---------- ---------- ----------
Net cash provided (used) by
Financing activities . . . . . . . 1,103 -0- (50) -0-
---------- ---------- ---------- ----------
Net increase (decrease)
In Cash. . . . . . . . . . . . . . 4,718 6,900 (30,461) (17,251)
Cash & equivalents,
Beginning of period. . . . . . . . 1,794 1,451 36,973 25,602
---------- ---------- ---------- ----------
Cash & equivalents,
End of period. . . . . . . . . . . $ 6,512 $ 8,351 $ 6,512 $ 8,351
========== ========== ========== ==========
Supplemental cash flow information:
Cash paid for interest . . . . . . . $ -0- $ -0- $ -0- $ -0-
========== ========== ========== ==========
Cash paid for taxes. . . . . . . . . $ 1,600 $ 3,200 $ 1,600 $ 3,200
========== ========== ========== ==========
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.
In July and September of 2003, the Company issued 5,458,356 shares of common
stock as consideration for certain professional and consulting expenses.
See notes to consolidated financial statements.
7
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(1) Summary of Significant Accounting Policies
(a) Nature of Business
Cal-Bay International, Inc. and subsidiaries ("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, and safety markets. On February 22,
2001, CBC was incorporated in Nevada 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.
On August 7, 2003, the Company formed a Nevada corporation, Cal-Bay
Analytical, Inc., (CBA) as a wholly owned subsidiary. As of September
30, 2003, this subsidiary does not have any business transactions and
therefore does not have an impact on the Company's financial position
or results of operations.
CBA is a manufacturer's representative and distribution firm, serving
California, Nevada, Arizona, Utah and Hawaii. CBA supplies analytical
products, services and associated equipment primarily to the
laboratory markets 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. Several of the
principals represented by CBA were formerly represented by CBC, and
CBA will search for additional principals and products to represent in
the laboratory markets.
(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.
8
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(1) Summary of Significant Accounting Policies (Continued)
(b) Capitalization (continued)
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. 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.
On July 9 and September 11, 2003, the Company issued 3,008,356
restricted common shares in payment for consulting services. Also on
September 9, 2003, the Company filed a Form S-8 Registration Statement
with the Securities and Exchange Commission and issued 2,450,000
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 September 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.
9
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(1) Summary of Significant Accounting Policies (Continued)
(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 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 and have been expensed as incurred in accordance
with SOP 98-5. Betterments 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.
10
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(1) Summary of Significant Accounting Policies (Continued)
(j) Income Taxes (continued)
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. 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
September 30, 2003, was $0.068. 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.
11
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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.
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
12
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(1) Summary of Significant Accounting Policies (Continued)
(m) Recently Issued Accounting Pronouncements - (continued)
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.
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
13
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(1) Summary of Significant Accounting Policies (Continued)
(m) Recently Issued Accounting Pronouncements - (continued)
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 September 30,:
2003 2002
-------- --------
Office Furniture &
Computer Equipment . . . . . $25,513 $10,068
Less: Accumulated Depreciation (9,973) (5,463)
-------- --------
Net Furniture and Equipment. $15,540 $ 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.
14
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(3) Acquisition of Cal-Bay Controls, Inc. - (continued)
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:
September 30, 2003
-------------------------------
CBYI CBC Combined
------- ---------- ----------
Current assets. . . . . . . $ -0- $ 8,687 $ 8,687
Property and equipment, net -0- 15,540 15,540
Other assets. . . . . . . . -0- 24,270 24,270
------- ---------- ----------
$ -0- $ 48,497 $ 48,497
======= ========== ==========
Current liabilities . . . . $ -0- $ 39,228 $ 39,228
Long term liability . . . . 11,718 11,718
Stockholders' equity. . . . -0- (2,449)
(2,449)
------- ---------- ----------
$ -0- $ 48,497 $ 48,497
======= ========== ==========
September 30, 2002
-------------------------------
CBYI CBC Combined
------- ---------- ----------
Current assets. . . . . . . $ -0- $ 96,067 $ 96,067
Property and equipment, net -0- 4,605 4,605
Other assets. . . . . . . . -0- 23,991 23,991
------- ---------- ----------
-0- $ 124,663 $ 124,663
======= ========== ==========
Current liabilities . . . . $ -0- $ 100,440 $ 100,440
Stockholders' equity. . . . -0- 24,223 24,223
------- ---------- ----------
-0- $ 124,663 $ 124,663
======= ========== ==========
(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.
15
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(4) Related Party Transactions & Significant Customers/Suppliers - (continued)
A majority of CBC's commission income is derived from two unrelated
manufacturing companies that it represents. The commission income from
these two significant customers was $34,763 and $3,871, respectively, for
the nine month period ended September 30, 2003. The commission income from
these two significant customers was $104,799 and $31,220, respectively, for
the nine month period ended September 30, 2002 (see also Note 7).
(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:
September 30, 2003
-------------------------
Shareholder/Position/Title Shares Held Ownership
- ---------------------------------------- ------------ -----------
Robert Thompson - President & CEO 11,059,653 36.3 %
Charles Prebay - Vice President & CFO 1,608,400 5.3
Linwood C. Meehan III 2,000,000 6.6
Cede & Co. - Investor 7,868,650 25.8
All Other Investors 7,956,653 26.0
------------ -----------
Total shares issued & outstanding 30,493,356 100.0 %
============ ===========
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 %
============ ===========
Robert Thompson, President and CEO was compensated $8,500 during the nine
months ended September 30, 2003.
(6) Income Taxes
As of September 30, 2003, the Company had provided taxes on consolidated
income for Federal and State income taxes, estimated at $1,600.At September
30, 2003 deferred taxes consisted of a net tax assets (benefits) of
approximately $567,665, due to operating loss carryforwards of the Company
totaling $1,271,324 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.
16
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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. (Dutchess). Under this
equity line of credit, the Company may periodically sell shares of common
stock to Duchess to raise capital. The Company has filed a Form SB-2
registration statement with the SEC to register 10,675,675 shares of common
stock to undertake this equity line of credit. As of September 30, 2003
this registration statement has not become effective and there have been no
transactions under this equity line of credit agreement
(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 September
30, 2003 are as follows:
Period Ended December 31,
2003. . . . . . . . . . $ 1,232
2004. . . . . . . . . . 2,656
2005. . . . . . . . . . 2,933
2006. . . . . . . . . . 3,241
Thereafter. . . . . . 2,888
-------
Net minimum commitments 12,950
Less current portion. 1,232
-------
Long-term commitments $11,718
=======
17
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30,
2004 30,474
Thereafter 0
------------
Total $ 30,474
============
The Company was not involved in any litigation as of the date of this
examination.
(11) Subsequent Event, Withdrawal of Registration Statement
Subsequent to the date of this report, on November 3, 2003 the Company
filed notice with the SEC that it was withdrawing its registration
statement on Form SB-2 relating to the equity line of credit agreement with
Dutchess Private Equities Fund, LP. The Company intends to renegotiate the
terms of the equity line agreement and refile the registration statement
when the terms of the renegotiated agreement are finalized.
18
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, Cal-Bay International's Form 10-SB registration statement went
effective and in June of 2002, Cal-Bay International, Inc. moved from the Pink
Sheets to the Over the Counter Bulletin Board where the Company currently trades
under the symbol CBYI.
Cal-Bay Analytical, Inc. was incorporated on August 7, 2003 in the State of
Nevada and is also operated as a wholly owned subsidiary.
OUR BUSINESS
Cal-Bay International's operating subsidiaries are Cal-Bay Controls (CBC) and
Cal-Bay Analytical (CBA). Both CBC and CBA operate as manufacturer's sales
representatives and distributors of analytical products, services and associated
equipment through license and distribution agreements. CBC primarily serves the
process, environmental and safety markets, while CBA primarily serves the
laboratory markets. 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.
19
CAL-BAY CONTROLS (CBC)
CBC is composed of three divisions, the Representative/Distribution Division,
the Systems Division and the New Products Division. CBC's operations are
focused mainly in California and Nevada with a small percentage of sales made
elsewhere in the United States.
REPRESENTATIVE/DISTRIBUTION DIVISION
CBC'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 and safety 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 uses instrumentation and equipment to
measure or help reduce air and/or water pollution produced by industrial,
utility or municipal facilities. The safety market requires instrumentation for
use in various industries to meet personnel safety requirements typically
imposed by OSHA regulations.
CBC has a signed contract/agreement with each of the companies it represents
which grants CBC 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. CBC 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, CBC 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. CBC has been
20
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, CBC 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.
The safety market is also regulatory driven, usually by OSHA rules. CBC
anticipates the safety market to remain fairly static in the near future.
The EPA and OSHA frequently implement new regulations 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 CBC cannot assure new regulations
translate directly to additional sales, it is management's experience that
increased regulations typically result in an increase in sales.
Process and quality control 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,
CBC produces a small number of operational systems that integrate a variety of
products and components from numerous vendors. Notably, CBC 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, CBC 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
CBC is currently exploring several opportunities to develop new products and/or
technologies, as follows:
21
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.
22
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
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.
CAL-BAY ANALYTICAL (CBA)
CBA operates as a manufacturer's sales representative and distributor of
analytical products, services and associated equipment through license and
distribution agreements.
CBA primarily serves the laboratory markets. The laboratory markets include a
variety of industrial, governmental and private contract testing laboratories as
well as research and development laboratories operated by private industries,
universities and governmental research laboratories.
CBA has a signed contract/agreement with each of the companies it represents
which grants CBA the rights to sell the assigned products/services within a
defined sales territory (typically California, Nevada, Arizona, Utah and
23
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. CBA 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.
FUTURE POTENTIAL MERGERS & ACQUISITIONS AND/OR NEW SUBSIDIARY COMPANIES TO BE
FORMED BY CAL-BAY INTERNATIONAL
The Company 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 and compatibility with Cal-Bay's
goals and plans. 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.
Alternatively, the Company may decide to form a new subsidiary company or
companies n the future as it either develops new products or identifies new
areas of business opportunity.
THREE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
Cal-Bay Analytical did not have any business transactions as of September 30,
2003 and therefore had no impact on the total Company business results. All of
the following business results are from the Cal-Bay Controls operating
subsidiary.
Cal-Bay generated $17,954 in commission income from our
representative/distributor division, and product sales in the systems division
of $43,934, for a total revenue of $61,888 for the three-month period ended
September 30, 2003 with cost of sales of $36,808 for a gross profit of $25,080.
These revenues compare with $118,139 in commission income and product sales
revenues for the three-month period ended September 30, 2002 with cost of sales
of $101,485 and gross profit of $16,654. Gross profit for the three-month period
ended September 30, 2003 was $8426 more than the same period ended in 2002. The
net cash provided by operating activities for the three months ended September
30, 2003 was $3,615 compared to net cash of $7,780 from the comparable period in
2002.
The revenues generated for the three-month period ending September 30, 2003 were
primarily due to sales from one large project won in the systems division during
this period.
Operating expenses were $239,952 for the three-month period ended September 30,
2003 compared with $748,217 for the three-month period ended September 30, 2002,
which is a decrease of $508,265. The net gain (loss) was ($214,872) for the
three-month period ended September 30, 2003 compared to ($731,563) for the same
period ended in 2002 which is an increase in net income of $516,691. The
majority of the expenses during the current period are a direct result of the
issuance of 5,458,356 shares of common Cal-Bay stock, valued at $212,719, 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.
24
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
Cal-Bay generated $100,113 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, 2003 with $36,808
cost of sales for a gross profit of $63,305. This compares with $256,645 in
commission income and product sales revenues for the nine-month period ended
September 30, 2002 with cost of sales of $101,485 and gross profit of $155,160.
Gross profit for the nine-month period ended September 30, 2003 was $91,855 less
than the same period ended in 2002. Cash provided by operating activities was
($29,466) for the nine-month period ended September 30, 2003 compared to
($16,362) for the same period ended in 2002.
The revenues generated for the nine-month period ending September 30, 2003 were
less than the anticipated levels of revenues forecast for this period, due to
low levels of commissions income received as well as 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, 2003 were $563,296
compared to $888,876 for the same period in 2002, which is a decrease of
$325,580. For the nine month period ended September 30, 2003, Cal-Bay had a net
loss of $499,991 compared to a net loss of $733,716 for the same period in 2002,
which is a reduction in net loss or increase in net income of $233,725. The
majority of the expenses during the nine months ended September 30, 2003 are a
direct result of the issuance of 6,733,356 shares of common Cal-Bay stock,
valued at $429,469, 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.
Many of the expenses through the first nine months of 2002 and 2003 are
attributed to Cal-Bay becoming a reporting public company. As a result of
becoming a public company, we have incurred ongoing legal and accounting costs
related to preparing and filing our public reports during the past two years.
The majority of these auditing costs, legal fees and organizational expenses
would not have been incurred had Cal-Bay continued to operate as a sole
proprietorship, and our net income would have increased substantially.
In addition, through the first nine months of 2003, we had increased
professional fees relating to preparing and filing a registration statement with
the SEC on Form SB-2. The registration statement related to a proposed equity
line of credit with Dutchess Private Equities Fund, LP. Subsequent to the date
of this report, on November 3, 2003, we withdrew the registration statement to
renegotiate the terms of the equity line. We intend to refile the registration
statement when the terms of the new agreement are finalized.
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 significantly this
year, therefore a new health insurance plan was selected in an attempt to limit
the increase in costs. We do not foresee any other increases in expenses or any
other major expenditures for the remainder of 2003.
25
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 company stock in lieu of salary if required to
maintain adequate cash flow for the corporation. During the three months ended
September 30, 2003, the officers of Cal-Bay did not draw any salary, and the
amount of salary taken during the nine month period ended September 30, 2003 was
minimal. 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 September 30, 2003, Cal-Bay had total assets of $8,687 including cash on
hand, loan receivables, prepaid rent, security deposits, and office furniture
and equipment. Current liabilities totaled $39,228 in accrued expenses, accrued
salaries and wages, and income taxes payable.
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 subsidiaries 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.
ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2003, under the supervision of our Chief Executive Officer
and Chief Financial Officer, we evaluated the effectiveness and operation of our
information disclosure controls and reporting 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 9, 2003 we issued 1,275,000 common shares to four individuals for
professional and consulting services. The services were not connected to any
fund raising activities. At the time of issuance, the common stock was valued
at $216,750. The shares were registered on Form S-8 as filed with the
Securities and Exchange Commission.
On September 2, 2003 we filed a registration statement on Form S-8 dated August
29, 2003 reporting the issuance of 2,450,000 shares valued at $73,500. The
shares were issued to two individuals for ongoing consulting and legal services
unrelated to fund raising activities.
In July and September of 2003, we issued a total of 3,008,356 restricted common
shares of Cal-Bay to three unrelated individuals for ongoing consulting
services. The shares were issued in a private transaction without registration
in reliance of the exemption provided by Section 4(2) of the Securities Act.
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The investors had access to all material information pertaining to Cal-Bay and
its financial condition. The investors also completed and signed investment
agreements attesting to their sophistication or accredited investor status and
investment intent. No broker was involved and no commissions were paid on the
transactions.
On July 29, 2003, we sold 50,000 shares Cal-Bay common stock to an accredited
investor for $1,500. The shares were issued in a private transaction without
registration in reliance of the exemption provided by Section 4(2) of the
Securities Act. The investor had access to all material information pertaining
to Cal-Bay and its financial condition. The investor completed and signed a
statement attesting to his sophistication or accredited investor status and
investment intent. No broker was involved and no commissions were paid on the
transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
REPORTS ON FORM 8-K:
Cal-Bay did not file any reports on Form 8-K during the 90 days ended September
30, 2003.
EXHIBITS:
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
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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 12, 2003 By: /s/Robert J. Thompson
----------------------------
Robert J. Thompson
Chief Executive Officer
Date: November 12, 2003 By: /s/Charles A. Prebay
---------------------------
Charles A. Prebay
Chief Financial Officer
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