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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2002
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ___________________ to ______________
Commission File Number 0-32892
CAL BAY INTERNATIONAL, INC.
(Name of small business issuer in its charter)
NEVADA 26-0021800
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
1582 PARKWAY LOOP, SUITE G, TUSTIN, CA 92780
(Address and Zip Code of principal executive offices)
Issuer's telephone number, including area code: 714-258-7070
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
$.001 par value, common voting shares
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenue for its most recent fiscal year was: $344,450
The aggregate market value of the issuer's voting stock held as of December 31,
2002, by non-affiliates of the issuers was $ 1,727,191.50. (10,794,947 shares
valued at $0.16 each)
As of December 31, 2002, issuer had 23,710,000 shares of its $.001 par value
common stock outstanding.
Transitional Small Business Format: Yes [ ] No [ X ]
Documents incorporated by reference: none
FORM 10-KSB
CAL BAY INTERNATIONAL
INDEX
Page
PART I . Item 1. Description of Business 3
Item 2. Description of Property 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II. Item 5. Market for Common Equity and Related Stockholder Matters 8
Item 6. Management's Discussion and Analysis or Plan of Operation 9
Item 7. Financial Statements 10
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure 10
PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act 10
Item 10. Executive Compensation 11
Item 11. Security Ownership of Certain Beneficial Owners and Management 12
Item 12. Certain Relationships and Related Transactions 12
Item 13. Exhibits and Reports on Form 8-K 13
Item 14. Controls and Procedures 13
Signatures 14
Certifications 15
(Inapplicable items have been omitted)
2
PART I
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.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
The Company originally incorporated in the State of Nevada on December 9, 1998,
under the name Var-Jazz Entertainment, Inc. Var-Jazz was organized to engage in
the business of music production and sales. Var-Jazz did not succeed in the
music business and the board of directors determined it was in the best interest
of the Company to seek additional business opportunities. On March 8, 2001,
Var-Jazz entered into an Agreement and Plan of Reorganization with Cal-Bay
Controls, Inc. whereby Var-Jazz changed its name to Cal-Bay International, Inc.,
and acquired Cal-Bay Controls, Inc. as a wholly owned subsidiary in exchange for
17,112,000 shares of common stock.
Cal-Bay Controls, Inc. originally formed in 1976 as a sole proprietorship that
was acquired by Robert J. Thompson in 1990. On February 22, 2001, Cal-Bay
Controls incorporated in the state of Nevada and was subsequently acquired by
Var-Jazz on March 8, 2001. On March 7, 2002, the SEC approved Cal-Bay
International's Form 10-SB registration statement and in June of 2002, Cal-Bay
received approval from the NASD to move from the Pink Sheets to the Over the
Counter Bulletin Board (OTC BB) exchange where Cal-Bay currently trades under
the symbol CBYI.
OUR BUSINESS
Cal-Bay supplies analytical products, services and associated equipment through
license and distribution agreements. Cal-Bay also targets new technologies and
products for research and development, marketing and distribution.
Cal-Bay operates three divisions, the Representative/Distribution Division, the
Systems Division and the New Products Division. Cal-Bay's operations are
focused mainly in California and Nevada with a small percentage of sales made
elsewhere in the United States. Cal-Bay does not currently have any
international operations and does not intend to pursue an international market
at this time, but expects to do so in the future.
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
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within the plant. The environmental market supplies instrumentation and
equipment used to measure or help reduce air and/or water pollution produced by
industrial, utility or municipal facilities. The safety market primarily
supplies instrumentation used by various industries to meet personnel safety
requirements typically imposed by OSHA regulations. The laboratory market
supplies equipment for research and development laboratories operated by private
industries, universities and governmental research laboratories.
The Company has a signed contract/agreement with each of the companies it
represents which grants Cal-Bay the rights to sell the assigned
products/services within a defined sales territory (typically California, Nevada
and Hawaii). In most cases these contracts are exclusive in the sense that no
other sales representative is allowed to sell the products covered by the
contract in the same sales area, however, there are a few contracts which are
non-exclusive in the sense that there may be more than one authorized sales
agents in a given sales area. Cal-Bay receives compensation for selling efforts
in the form of commissions (typically 10-20% of the net sales price) on all
sales of products within the specified sales territory.
Within the designated sales territory, Cal-Bay serves the following
markets:
* Environmental market
* Industrial Process Markets
* Petroleum Refineries
* Chemical plants
* Pharmaceutical and Biotechnology
* Computer related
* Paint and coating
* Printing
* Metal processing
* Bulk industrial gases and specialty gases
* Semiconductor
* Aerospace
* Plastics/Polymers
* Original Equipment Manufactures (OEM's)
The environmental market is typically driven by local, state and national
regulations promulgated by regulatory agencies, including: the South Coast Air
Quality Management District (SCAQMD), California Air Resources Board (CARB) and
the U.S. Environmental Protection Agency (EPA), which has both air and water
protection departments.
During the 1980's and 1990's there were many new regulations, on the local and
federal level, which required the installation of new analytical instrumentation
and monitoring systems for both air and water pollution control. Cal-Bay has
been very successful in selling analyzers for use in the environmental markets
and we believe the market will continue to be strong in this area. During the
late 1990's the number of new regulations declined, however, Cal-Bay expects new
regulations to be implemented in several areas in the coming decade which should
result in an increase in this market in the near future.
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
4
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:
SPECTRA UNLIMITED - PRODUCT ACQUISITION/DEVELOPMENT
- -------------------------------------------------------
Cal-Bay has reached tentative agreement and signed a letter of intent to acquire
the technology rights to several products developed by Spectra Unlimited, a
recently dissolved company. The rights to these products are owned by the
former partners in Spectra Unlimited. We believe that a final purchase agreement
will be negotiated in early 2003.
The Spectra products include the following:
- 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.
5
- 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.
- Calorimeter - this analyzer is used to determine the energy or Btu
value of gas fuel supplies.
- 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. 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
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 is currently in 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.
6
ANALYTICAL SENSORS - PRODUCT DEVELOPMENT
- --------------------------------------------
Cal-Bay has had preliminary discussions with the former owner of an analytical
sensor company regarding the potential development of a new line of sensors.
Based upon these initial discussions, we believe that a new line of sensors
could be developed for use in a wide variety of analytical instrumentation.
Initial development would be limited to specific sensors and markets with the
greatest return on investment. It is estimated that the initial resources
required for product research and development would be minimal, and that profit
margins and return on investment will be excellent. In return for funding the
product R&D, providing manufacturing facilities and performing most of the sales
and marketing functions, Cal-Bay will receive majority ownership of any new
sensors developed.
FUTURE PRODUCT R&D
In addition to the product development plans referenced above, Cal-Bay 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.
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 2003 in order to increase
business in southern California. The Company also plans to hire an inside sales
support person in 2003.
ITEM 2. 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.
7
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. LEGAL PROCEEDINGS.
No legal proceedings are threatened or pending against the Company or any of its
officers or directors. Further, none of the Company's officers or directors or
affiliates of the Company are parties against the Company or have any material
interests in actions that are adverse to the Company's interests.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is listed on the Over the Counter Bulletin Board under the
symbol "CBYI". At December 31, 2002 the Company had 67 shareholders holding
23,710,000 shares of common stock. Of the issued and outstanding common stock,
7,687,800 are free trading, the balance of 16,022,200 are restricted stock as
that term is used in Rule 144 and may be sold pursuant to Rule 144. The Company
has not agreed to register any shares for resale by selling stockholders. The
following table shows the highs and lows of the closing bid and ask on the
Company's stock since January 2, 2001 through the year ended December 31, 2002.
CLOSING BID CLOSING ASK
2001 HIGH LOW HIGH LOW
Jan. 2 thru Mar. 13 . . . . .61 .125 None None
Mar. 14 thru Mar. 30
(After 3 for 1 split) . . . 1.30 .43 2.0 .65
June 1 thru June 30 . . . . 1.20 .30 1.60 .59
July 2 thru September 28. . 1.68 1.01 1.73 1.15
October 1 thru December 31. 1.21 .25 1.26 .50
2002
Jan 2 thru March 28 . . . . .85 .35 .90 .40
April 1 thru June 28. . . . .46 .215 .51 .23
July 1 thru September 30. . .38 .20 .42 .23
October 1 thru December 31. .275 .16 .30 .17
The above quotations, as provided by the National Quotation Bureau, LLC,
represent prices between dealers and do not include retail markup, markdown or
commission. In addition, these quotations do not represent actual transactions.
8
The Company has not paid, nor declared, any dividends since its inception and
does not intend to declare any such dividends in the foreseeable future. The
Company's ability to pay dividends is subject to limitations imposed by Nevada
law. Under Nevada law, dividends may be paid to the extent that the
corporation's assets exceed its liabilities and it is able to pay its debts as
they become due in the usual course of business.
RECENT SALES OF UNREGISTERED SECURITIES.
In March 2001, the Company exchanged 17,112,000 shares of common stock for all
of the issued and outstanding shares of Cal-Bay Controls, Inc., a Nevada
corporation. The transaction was a tax-free reorganization under Section
368(a)(1)(B) of the Internal Revenue Code of 1986 and were exchanged pursuant to
Section 4(2) of the Securities Act of 1933. The transaction did not involve any
public offering and no commissions were paid on the transaction.
On November 15, 2002 the Company issued 80,000 common shares to 1st Capital
Investments, Inc. for investment relations services valued at $12,000. The
shares were issued in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933. No underwriters were involved in the issuance, no
public solicitations were made by the Company and no commissions were paid.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS FOR THE PERIODS ENDED DECEMBER 31, 2002 AND DECEMBER 31,
2001
For the period ended December 31, 2002, the Company generated total revenues of
$344,450 with cost of sales totaling $101,485 resulting in gross profit of
$242,965. The Company's expenses were $954,331, mainly for professional fees of
$785,595 which were paid in shares of common stock. Other expenses, such as
telephone and utilities charges, property rent, and equipment rentals totaled
$168,736. As a result, the Company realized a net loss after taxes of $713,766
during the year ended December 31, 2002.
For the period ended December 31, 2001, the Company generated revenues from
sales and commission income totaling $396,150. Costs of sales were $69,195
resulting in gross profits of $326,955. The Company had expenses of $349,993
resulting in a net loss after taxes of $23,838. Expenses were due chiefly to
salaries and wages, property rent, payroll taxes, and professional fees incurred
during the reverse acquisition of Cal Bay Controls.
LIQUIDITY AND CAPITAL RESOURCES
For the period ended December 31, 2002, the Company had total assets of $96,821.
Total current assets were $75,692 consisting of $36,973 in cash, $17,219 in
prepaid expenses and $21,500 due in a note receivable. Other assets at December
31, 2002 consisted of $18,359 in office equipment, and a $2,770 security
deposit. Liabilities at December 31, 2002 were $18,320 consisting of $15,288 in
accrued expenses, $460 sales tax payable and the current portion of a capital
lease payable of $2,572.
For the period ended December 31, 2001, the Company had total assets of $33,193
consisting of $25,602 in cash, office equipment valued at $5,100, and a $2,491
security deposit. The Company had total liabilities during the same period of
$39,254 consisting of $33,431 in accounts payable, $5,023 in sales tax payable,
and $800 in income tax payable.
A majority of the Company's commission income is derived from two unrelated
manufacturing companies that it represents. The commission income from these
9
two significant customers was $114,431 and $44,191, respectively for the period
ended December 31, 2002 and $252,033 and $28,765, respectively, for the period
ended December 31, 2001.
On August 29, 2002, the Company issued 2,240,000 shares of common stock as
payment for consulting services valued at $739,200 as reported on Form S-8.
Subsequent to the date of this report, the Company issued an additional
1,275,000 shares as reported on Form S-8 on January 9, 2003. The shares were
issued as compensation for consulting services valued at $216,750.
The Company has no material commitments for capital expenditures and believes
that it has sufficient cash on hand to satisfy its administrative needs for the
next twelve months.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements of the Company appear at the end of this report
beginning with the Index to Financial Statements on page 17.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth as of December 31, 2002, the name, age, and
position of each executive officer and director and the term of office for each
director of the Company.
NAME AGE POSITION SINCE
- ------------------ --- -------------------------------------- ----------
Robert J. Thompson 54 President, Secretary and Director March 2001
Charles A. Prebay. 47 Vice President, Treasurer and Director March 2001
All officers hold their positions at the will of the Board of Directors. All
directors hold their positions for one year or until their successors are duly
elected and qualified.
The following is a brief biography of the officers and directors.
ROBERT J. THOMPSON. Mr. Thompson holds a B.S. degree in Mechanical Engineering
from Ohio State University. He has been employed in the analytical
instrumentation industry for over 20 years. Since 1990, Mr. Thompson has been
self employed as a representative/distributor in the analytical instrumentation
industry. Prior to 1990, Mr. Thompson was employed by or associated with
Hartshaw Chemical as Chief Engineer, Teledyne Analytical Instruments as Regional
Sales Manager, and Advanced Micro Instruments as a Partner.
CHARLES A. PREBAY. Mr. Prebay holds a B.S. degree in Biological Sciences from
Michigan State University and has taken graduate courses in marketing and
10
management from the University of Michigan and the University of
California/Irvine. He has been employed in the analytical instrumentation
industry for over 20 years. Mr. Prebay was employed by or associated with
Teledyne Analytical Instruments as a Sales Engineer from 1979 to 1980. He was
at Research-Cottrell/KVB as a Product Manager and Marketing Manager from 1980
until 1992 and served as Regional Sales Manager at Anarad from 1992 until 1995.
From 1995 until 2000, Mr. Prebay worked at Baseline Industries as Western
Regional Sale Manager. Mr. Prebay has worked at Cal Bay Controls since June
2000.
ITEM 10. EXECUTIVE COMPENSATION
The Company has no formal arrangements for the remuneration of its officers and
directors, except that they will receive reimbursement for actual, demonstrable
out-of-pocket expenses, including travel expenses, if any, made on the Company's
behalf in the investigation of business opportunities.
SUMMARY COMPENSATION TABLE
Other Annual
Name and Principal Position Year Salary ($) Bonus ($) Compensation
Robert J. Thompson. . . . . . . 2002 35,000 -0- -0-
President, Secretary and. . . 2001 126,039 -0- -0-
Director. . . . . . . . . . . 2000 -0- -0- -0-
Charles A. Prebay . . . . . . . 2002 32,000 -0- -0-
Vice President, Treasurer and 2001 62,937 -0- -0-
Director. . . . . . . . . . . 2000 -0- -0- -0-
Arthur E. Vargas. . . . . . . . 2002 -0- -0- -0-
Former President. . . . . . . 2001 -0- -0- 3,538 (1)
2000 -0- -0- -0-
(1) The Company gave Mr. Vargas, president of the Company from inception until
March 8, 2001, all right, title and interest of inventory and the
production and distribution of compact discs featuring Nevada lounge acts,
valued at $3,538 as compensation for past services to the Company.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
There are no compensatory plans or arrangements, including payments to be
received from the Company, with respect to any person which would in any way
result in payments to any person because of employment with the Company or its
subsidiaries, or any change in control of the Company, or a change in the
person's responsibilities following a change in control of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
11
The following table sets forth as of December 31, 2002 the name and the number
of shares of the Registrant's Common Stock, no par value, held of record or was
known by the Registrant to own beneficially more than 5% of the 23,710,000
issued and outstanding shares of the Registrant's Common Stock, and the name and
shareholdings of each officer and director individually and of all officers and
directors as a group.
Name and Address of Amount and Nature of Percentage
-----------
Title of Class Beneficial Owner (1) Beneficial Ownership of Class
- -------------- --------------------------- -------------------- -----------
Common . . . . Robert J. Thompson (2) 11,306,653 47.7%
1582 Parkway Loop, Suite G
Tustin, CA 92780
Common . . . . Charles A. Prebay (2) 1,608,400 6.8%
1582 Parkway Loop, Suite G
Tustin, CA 92780
Common . . . . Cede & Co. 7,868,650 33.2%
PO Box 222
Bowling Green Station
New York, NY 10274
Common . . . . Officers, Directors and 12,915,053 54.47%
Nominees as a Group:
2 persons
(1) For purposes of this table, a beneficial owner is one who, directly or
indirectly, has or shares with others (a) the power to vote or direct the
voting of the Voting Stock (b) investment power with respect to the Voting
Stock which includes the power to dispose or direct the disposition of the
Voting Stock.
(2) Officer and/or director of the Company.
There are no contracts or other arrangements that could result in a change of
control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Between January 15, 2002 and May 31, 2002, the Company made a series of loans to
Mr. Robert Thompson, the Company's Chief Executive Officer. The loans were
issued as follows:
DATE: AMOUNT:
January 15, 2002 . . . . . $ 6,500
February 20, 2002. . . . . $ 6,000
April 15, 2002 . . . . . . $ 2,000
May 1, 2002. . . . . . . . $ 2,000
May 31, 2002 . . . . . . . $ 5,000
Total at December 31, 2002 $ 21,500
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There are no formal written loan agreements on the above-listed notes. The
notes bear no interest and are payable to the Company on demand. None of the
notes had been repaid as of December 31, 2002.
On January 15, 2002 the Company loaned $6,000 to Charles Prebay, the Company's
Chief Financial Officer. There was no written loan agreement. The loan carried
no interest and was payable on demand.
Mr. Prebay repaid the loan on September 17, 2002.
The Company is not expected to have significant dealing with affiliates.
However, if there are such dealings, the parties will attempt to deal on terms
competitive in the market and on the same terms that either party would deal
with a third person.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBIT NUMBER TITLE LOCATION
99.1 Certification of Chief Executive Officer pursuant to Attached
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to Attached
Section 906 of the Sarbanes-Oxley Act of 2002
99.3 Cal-Bay International Corporate Code of Ethics . . . Attached
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 2002.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this report, we evaluated the
effectiveness and operation of our disclosure controls and procedures pursuant
to Rule 13a-14 of the Securities Exchange Act of 1934. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective. There have
been no significant changes in internal controls or other factors that could
significantly affect internal controls subsequent to the date we carried out our
evaluation.
To demonstrate our commitment to maintaining effective disclosure controls and
procedures, we have recently adopted a Code of Ethics and Business Conduct. In
pertinent part, the Code authorizes the establishment of an audit committee to
oversee the effectiveness of our disclosure controls and procedures. A copy of
the Code is attached as an exhibit to this report.
13
SIGNATURES
In accordance with Section 13 or 15(d) of 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: March 21, 2003 By: /s/Robert J. Thompson
----------------------------
Robert J. Thompson
Chief Executive Officer
Date: March 21, 2003 By: /s/Charles A. Prebay
----------------------------
Charles A. Prebay
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: March 21, 2003 By: /s/Robert J. Thompson
----------------------------
Robert J. Thompson
Director
Date: March 21, 2003 By: /s/Charles A. Prebay
---------------------------
Charles A. Prebay
Director
14
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert J. Thompson, the Chief Executive Officer of Cal Bay International,
Inc. (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-KSB of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
March 21, 2003 /s/Robert J. Thompson
--------------------------
Robert J. Thompson
Chief Executive Officer
15
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Charles A. Prebay, the Chief Financial Officer of Cal Bay International, Inc.
(the "Company"), certify that:
1. I have reviewed this annual report on Form 10-KSB of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
March 21, 2003 /s/Charles A. Prebay
-------------------------
Charles A. Prebay
Chief Financial Officer
16
CAL-BAY INTERNATIONAL, INC.
And Subsidiary
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
INDEX
-----
Page
----
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . 18
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . 19
Consolidated Statements of Operations. . . . . . . . . . . . . . . . 20
Consolidated Statements of Changes in Stockholders' Equity (Deficit) 21
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . 22
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 23
17
INDEPENDENT AUDITOR'S REPORT
Board of Directors
CAL-BAY INTERNATIONAL, INC.
I have audited the accompanying consolidated balance sheets of Cal-Bay
International, Inc. (A Nevada Corporation), and subsidiary, as of December 31,
2002 and 2001, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the periods then ended. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cal-Bay
International, Inc. and subsidiary, as of December 31, 2002 and 2001, and the
results of its operations, changes in stockholders' equity and cash flows for
the periods then ended, in conformity with generally accepted accounting
principles.
/s/ ARGY & COMPANY
--------------------------
February 15, 2003
Fountain Valley, California
18
CAL-BAY INTERNATIONAL, INC.
And Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
2002 2001
---------- ---------
Current Assets:
Cash (Note 1c). . . . . . . . . . . . . . . . . . . . . $ 36,973 $ 25,602
Prepaid Expenses. . . . . . . . . . . . . . . . . . . . 17,219 -0-
Related Party Receivables (Note 4). . . . . . . . . . . 21,500 -0-
---------- ---------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . 75,692 25,602
Office Furniture and Equipment, at cost,
net of accumulated depreciation of
$6,209 and $4,079 respectively (Notes 1h & 2) . . . . . 18,359 5,100
Deposit (Note 1g) . . . . . . . . . . . . . . . . . . . . 2,770 2,491
---------- ---------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 96,821 $ 33,193
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable & Accrued Expenses (Note 1i) . . . . . $ 15,288 $ 33,431
Sales Tax Payable . . . . . . . . . . . . . . . . . . . 460 5,023
Income Taxes Payable (Notes 1j & 6) . . . . . . . . . . -0- 800
Current Portion of Capital Lease Obligation (Note 9). . 2,572 -0-
---------- ---------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . 18,320 39,254
Capital Lease Obligation, net of Current Portion (Note 9) 11,928 -0-
Commitments and Contingencies (Note 8). . . . . . . . . . - - - - - -
Stockholders' Equity:
Common Stock, $.001 par value; 75,000,000 shares
authorized; shares issued and outstanding
23,710,000 and 21,390,000 (Notes 1b, 1k, 3 & 5) . . . 23,710 $ 21,390
Additional Paid in Capital - (Discount on Stock). . . . 780,467 (3,613)
Retained Deficit. . . . . . . . . . . . . . . . . . . . (737,604) (23,838)
---------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT). . . . . . . . . 66,573 (6,061)
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . $ 96,821 $ 33,193
========== =========
The accompanying notes are an integral part of these financial statements.
19
CAL-BAY INTERNATIONAL, INC.
And Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2002 2001
------------ ------------
REVENUES:
Sales. . . . . . . . . . . . . . . . . . . . . . . $ 110,052 $ 77,111
Commission Income (Note 1e). . . . . . . . . . . . 228,498 319,039
Other Income . . . . . . . . . . . . . . . . . . . 5,900 -0-
------------ ------------
TOTAL REVENUES . . . . . . . . . . . . . . . . . . 344,450 396,150
COST OF SALES:
Purchases. . . . . . . . . . . . . . . . . . . . . 101,485 69,195
------------ ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . 242,965 326,955
EXPENSES:
Salaries and Wages . . . . . . . . . . . . . . . . 67,000 188,976
Auto Expense . . . . . . . . . . . . . . . . . . . 14,573 14,270
Depreciation Expense (Notes 1h & 2). . . . . . . . 2,130 1,262
Equipment Rentals. . . . . . . . . . . . . . . . . 3,989 4,061
Insurance. . . . . . . . . . . . . . . . . . . . . 12,480 7,763
Telephones & Utilities . . . . . . . . . . . . . . 5,482 5,428
Property Rent (Note 8) . . . . . . . . . . . . . . 33,212 23,979
Office Expenses & Miscellaneous. . . . . . . . . . 5,943 4,606
Organizational Costs (Note 1h) . . . . . . . . . . -0- 1,554
Outside Services . . . . . . . . . . . . . . . . . 12,649 12,409
Payroll Taxes. . . . . . . . . . . . . . . . . . . 5,728 19,906
Professional Fees. . . . . . . . . . . . . . . . . 785,595 59,860
Travel and Entertainment . . . . . . . . . . . . . 5,550 5,919
------------ ------------
TOTAL EXPENDITURES . . . . . . . . . . . . . . . . 954,331 349,993
------------ ------------
NET LOSS BEFORE TAXES. . . . . . . . . . . . . . . (711,366) (23,038)
TAXES ON INCOME (Note 1j & 6). . . . . . . . . . . 2,400 800
------------ ------------
NET LOSS AFTER TAXES . . . . . . . . . . . . . . . $ (713,766) $ (23,838)
============ ============
Basic and Fully Diluted Earnings Per Share (Note 1l) $ (.03) $ .00
============ ============
Weighted Average Shares Outstanding (Note 1l). . . . 22,162,205 21,198,038
============ ============
The accompanying notes are an integral part of these financial statements.
20
CAL-BAY INTERNATIONAL, INC.
And Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Years Ended December 31, 2002 And 2001
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
========== ======= ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
21
CAL-BAY INTERNATIONAL, INC.
And Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
2002 2001
Cash Flows From Operating Activities:
Loss from Operations. . . . . . . . . . . . . . . . . . . . . $(713,766) $(23,838)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation (Note 1h & 2). . . . . . . . . . . . . . . . . 2,130 1,262
Common stock issued for services. . . . . . . . . . . . . . 786,400 -0-
(Increase) Decrease in Prepaid Expenses . . . . . . . . . . (17,497) 2,275
(Decrease) Increase in Accounts Payable & Accrued Expenses. (18,144) 38,335
(Decrease) Increase in Sales Tax Payable. . . . . . . . . . (4,563) 5,023
(Decrease) Increase in Income Taxes Payable . . . . . . . . (800) 800
---------- ---------
Total adjustments to net income . . . . . . . . . . . . . . . 747,526 47,695
---------- ---------
Total Cash Provided by Operating Activities . . . . . . . . . 33,760 23,857
Cash Flows From Investing Activities:
Purchase of Fixed Asset . . . . . . . . . . . . . . . . . . (889) (2,679)
Loans to Related Party. . . . . . . . . . . . . . . . . . . (21,500) -0-
Reverse acquisition of Cal-Bay International, Inc.
(net of cash acquired). . . . . . . . . . . . . . . . . . -0- 3,499
---------- ---------
Total Cash (Used) Provided by Investing Activities. . . . . . (22,389) 820
---------- ---------
Net Increase In Cash. . . . . . . . . . . . . . . . . . . . . . 11,371 24,677
Cash, beginning of period . . . . . . . . . . . . . . . . . . . 25,602 925
---------- ---------
Cash, end of period . . . . . . . . . . . . . . . . . . . . . . $ 36,973 $ 25,602
========== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . $ -0- $ -0-
Income taxes (Note 1j). . . . . . . . . . . . . . . . . . . 3,200 -0-
---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,200 $ -0-
========== =========
Acquisition Note: In connection with the reverse acquisition of Cal-Bay
International, Inc. by Cal-Bay Controls, Inc., the Company acquired assets with
a fair value of $8,442 (including cash of $4,904) and assumed liabilities of
$39. See also Note 3.
Supplemental disclosure of non-cash activities:
In August and November of 2002, the Company issued 2,320,000 shares of
common stock as consideration for certain professional and consulting expenses.
The accompanying notes are an integral part of the financial statements.
22
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 And 2001
(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.
23
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 And 2001
(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.
(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 December 31, 2002.
(d) Principles of Consolidation and Basis of Accounting
The accompanying consolidated financial statements include the
accounts of Cal-Bay International, Inc. and of its wholly owned
subsidiary, CBC. All material inter-company transactions and accounts
have been eliminated in consolidation. The Company has no continuing
operating activities other than that of CBC.
(e) Revenue Recognition
The Company recognizes commission income in accordance with SAB 101 -
Topic 13.A.3. The nature of each of CBC's manufacturer's
representation agreements requires that the products be shipped from
the manufacturer to the customer, and that either a significant period
of time elapse thereafter or that the manufacturer must receive
payment from the customer before payments are ultimately made to CBC
for orders submitted. The determination as to exactly when the terms
specified in the sales arrangements are substantially completed or
fulfilled by the manufacturer and have been accepted by the customer
and the ultimate collectibility of the commission can only be
reasonably assured when the payments are ultimately received by the
Company. Commission expense is recorded when the commission income
that it is related to is recognized.
24
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 And 2001
(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 as of December
31, 2002.
(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.
25
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 And 2001
(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
December 31, 2002, was $0.16. 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.
26
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 And 2001
(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.
27
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 And 2001
(1) Summary of Significant Accounting Policies (Continued)
(m) Recently Issued Accounting Pronouncements - (continued)
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 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.
28
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 And 2001
(1) Summary of Significant Accounting Policies (Continued)
(m) Recently Issued Accounting Pronouncements - (continued)
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 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.
(2) Office Furniture and Equipment
A summary of property and equipment is as follows:
2002 2001
-------- --------
Office Furniture &
Computer Equipment . . . . . $24,568 $ 9,179
Less: Accumulated Depreciation (6,209) (4,079)
-------- --------
Net Furniture and Equipment. $18,359 $ 5,100
======== ========
29
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 And 2001
(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:
December 31, 2002
-------------------------------
CBYI CBC Combined
------- ---------- ----------
Current assets. . . . . . . $ -0- $ 75,692 $ 75,692
Property and equipment, net -0- 18,359 18,359
Other assets. . . . . . . . -0- 2,770 2,770
------- ---------- ----------
. . . . . . . . . . . $ -0- $ 96,821 $ 96,821
======= ========== ==========
Current liabilities . . . . $ -0- $ 18,320 $ 18,320
Long term liability . . . . 11,928 11,928
Stockholders' equity. . . . -0- 66,573 66,573
------- ---------- ----------
. . . . . . . . . . . $ -0- $ 96,821 $ 96,821
======= ========== ==========
December 31, 2002
-------------------------------
CBYI CBC Combined
------- ---------- ----------
Current assets. . . . . . . $ -0- $ 25,602 $ 25,602
Property and equipment, net -0- 5,100 5,100
Other assets. . . . . . . . -0- 2,491 2,491
------- ---------- ----------
. . . . . . . . . . . $ -0- $ 33,193 $ 33,193
======= ========== ==========
Current liabilities . . . . $ -0- $ 39,254 $ 39,254
Stockholders' equity. . . . -0- (6,061) (6,061)
------- ---------- ----------
. . . . . . . . . . . -0- $ 33,193 $ 33,193
======= ========== ==========
30
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 And 2001
(4) Related Party Transactions & Significant Customers/Suppliers
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 $44,191 and $114,431, respectively, for
the period ended December 31, 2002 (see also Note 7).
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 as of
December 31, 2002.
(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:
December 31, 2002
-------------------------------
Shareholder/Position/Title Shares Held Ownership
- --------------------------------------- ----------------- -------------
Robert Thompson - President & CEO 11,306,653 47.7%
Charles Prebay- Vice Presient & CFO 1,608,400 6.8
Chris Walker 1,059,000 4.5
Cede & Co. - Investor 7,868,650 33.2
All Other Investors 1,867,297 7.8
----------------- -------------
Total shares issued & outstanding 23,710,000 100.0%
================= =============
December 31, 2001
-------------------------------
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 $35,000 during the year 2002
and $126,039 during the year 2001.
31
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 And 2001
(6) Income Taxes
As of December 31, 2002, the Company had provided taxes on consolidated
income for Federal and State income taxes, estimated at $1,600.
At December 31, 2002deferred taxes consisted of a net tax assets (benefits)
of approximately $343,000, due to operating loss carryforwards of the
Company totaling $771,679 which were fully offset by equal valuation
allowances since there is no assurance of recovery. The net operating loss
carryforwards will expire beginning in 2013.
(7) Off Balance Sheet Risk
The Company could be affected by the inability to establish a market for
their shares of stock. Additionally, since the date of incorporation, the
short-term sales revenue for the Company has come primarily from two
principal accounts, which is due to the fact that the markets for the
products from these accounts have been very active recently. Over the
long-term, management expects the markets for these products and accounts
to diversify. Also, these principals are not the only suppliers for these
products and management has other sources for identical products if it
becomes necessary to find other suppliers.
(8) 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 December 31,
2003 $ 32,126
2004 22,163
Thereafter 0
------------
Total $ 54,289
============
The Company was not involved in any litigation as of the date of this
examination.
32
CAL-BAY INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 And 2001
(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 December 31,
2002 are as follows:
Period Ended December 31,
2003. . . . . . . . . . $ 2,572
2004. . . . . . . . . . 2,634
2005. . . . . . . . . . 2,910
2006. . . . . . . . . . 3,214
Thereafter. . . . . . 3,170
-------
Net minimum commitments 14,500
Less current portion. 2,572
-------
Long-term commitments $11,928
=======
33