UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to________
Commission file number: 000-29511
eSAFETYWORLD, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 11-3496415
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
80 Orville Dr.
Bohemia, New York 11716
(Address of principal executive offices)
(631) 244-1454
(Issuer's telephone number)
Check whether the registrant (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 reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,000,000 shares of Common Stock, as
of October 31, 2001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
eSAFETYWORLD, Inc.
INDEX
PAGE
PART I.
FINANCIAL INFORMATION
Item 1.
Unaudited Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
2001 and June 30, 2001 3-4
Condensed Statements of Consolidated Operations for the
Three Months Ended September 30, 2001 and 2000 5
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2001 and 2000 6
Condensed Consolidated Statement of Stockholders' Equity for the
Three Months Ended September 30, 2001 7
Notes to Condensed Consolidated Financial Statements 8-17
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-22
PART II.
OTHER INFORMATION 23
2
eSAFETYWORLD, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2001 June 30, 2001
-----------------------------------
(unaudited)
Current Assets:
Cash and cash equivalents $2,501,245 $2,929,807
Certificate of deposit, including $300,000 collateralizing note
payable bank 744,061 738,197
Accounts receivable, net of allowance for doubtful accounts of
$3,000 and deferred net revenues of approximately $440,000 5,806 43,302
Loans Receivable 172,235 126,520
Inventory and deferred contract costs 650,927 421,451
Prepaid expenses and other 96,271 198,157
---------- ----------
Total Current Assets 4,170,545 4,457,434
Property and Equipment, less accumulated depreciation of $60,060
and $43,094 366,803 366,257
Acquired Intangibles, less accumulated amortization of $ 197,683 1,078,099 1,078,099
Deferred income tax benefit 183,000 129,000
Other Assets 648,573 576,289
---------- ----------
Total Assets $6,447,020 $6,607,079
========== ==========
See Notes to Condensed Consolidated Financial Statements.
3
eSAFETYWORLD, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, 2001 June 30, 2001
-----------------------------------
(unaudited)
Current Liabilities:
Accounts payable, accrued expenses, and other $ 83,843 $ 132,901
----------- -----------
Long Term Liabilities:
Capital Lease Obligation 16,858 19,886
Notes payable (secured by a certificate of deposit)-bank 249,918 274,369
----------- -----------
Total Long-term liabilities 266,776 294,255
----------- -----------
Total Liabilities 350,619 427,156
----------- -----------
Stockholders' Equity:
Common stock, $.001 par value, 20,000,000 shares authorized; 3,000,000
shares issued and outstanding 3,000 3,000
Additional paid-in capital 6,388,644 6,388,644
Deficit (295,243) (211,721)
----------- -----------
Stockholders' Equity 6,096,401 6,179,923
----------- -----------
Total Liabilities and Stockholders' Equity $ 6,447,020 $ 6,607,079
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
eSAFETYWORLD, Inc.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2001 2000
--------------------------
Revenues $ 11,493 $ 249,420
Cost of Revenues 57,323 179,247
----------- -----------
Gross Profit (45,830) 70,173
----------- -----------
Expenses and Other:
Selling and administrative expenses 102,016 66,893
Amortization of intangibles 0 27,616
Other-net (principally interest) (23,035) (64,593)
----------- -----------
Total Expenses and Other 78,981 29,926
----------- -----------
Pretax Income (Loss) from Continuing Operations (124,811) 40,257
Income Taxes (Benefit) (50,000) 13,180
----------- -----------
Income (Loss) from Continuing Operations (74,811) 27,077
----------- -----------
Discontinued Operations -net of applicable income tax
benefit of $4,000 (8,711) --
----------- -----------
Net Income (Loss) ($ 83,522) $ 27,077
=========== ===========
Basic Income per Share $ (.03) $ .01
=========== ===========
Weighted average number of common and Common equivalent
shares outstanding 3,000,000 3,000,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
eSAFETYWORLD, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2001 2000
--------------------------
Cash flows from operating activities:
Net income $ (83,522) $ 27,077
Adjustments to reconcile net earnings to net cash
provided by operating
activities:
Depreciation and amortization 16,966 32,680
Deferred tax benefit (54,000) --
Decrease in net operating assets (185,101) (168,435)
----------- -----------
Net cash used by operations (305,657) (108,678)
----------- -----------
Cash flows from investing activities:
Investments made (72,050)
(Increase) Decrease in certificates of deposits (5,864)
Purchase of software and equipment (17,512) (42,575)
----------- -----------
(95,426)
------------
Cash flows from financing activities:
Repayment of debt (27,479)
-----------
Net cash provided by financing activities (27,479)
-----------
Net increase (decrease) in cash (428,562) (151,253)
Cash and cash equivalents - beginning 2,929,807 3,017,852
----------- -----------
Cash and cash equivalents - ending $ 2,501,245 $ 2,866,599
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
6
eSAFETYWORLD, Inc.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Common Common Additional
Stock Stock Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
Balance, June 30, 2001 3,000,000 $ 3,000 $6,388,644 $(211,721) $6,179,923
Net Loss (83,522) (83,522)
--------- ----------
Balance, September 30, 2001 3,000,000 $ 3,000 $6,388,644 $(295,243) $6,096,401
========== ======== ========== ========= ==========
See Notes to Condensed Consolidated Financial Statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 -- BASIS OF PRESENTATION
eSAFETYWORLD, Inc. was incorporated as a Nevada corporation in July 1997 as
The SL Group, Inc. and changed its name to eSAFETYWORLD, Inc. in August 1999. It
completed an initial public offering of its common stock in February 2000.
The Company is engaged in the sale and distribution of industrial safety,
cleanroom, laboratory supply and first aid products on the world wide web and
through conventional use of catalogs and toll free telephone numbers. The
Company also provides consulting services to other companies. In December 2000,
the Company established a subsidiary, Blue Marble World, Inc., to sell personal
care, personal first aid, and nutrition products to independent distributors.
The accompanying unaudited condensed financial statements of eSAFETYWORLD,
Inc. (the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-QSB and Item 310 of Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended September 30, 2001
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 2001.
The condensed consolidated balance sheet as of June 30, 2001 has been derived
from the Company's audited balance sheet as of that date.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amount of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Certain amounts in prior period financial statements have been reclassified
to conform to the current period presentation.
Blue Marble World filed a registration statement with the Securities and
Exchange Commission in July 2001 pursuant to a plan by the Company to distribute
81% of Blue Marble World's stock to eSAFETYWORLD's shareholders as a dividend.
Accordingly, Blue Marble World is reflected as a discontinued operation in the
accompanying financial statements. Throughout its existence, Blue Marble World
functioned as a startup or development stage company without any revenues. A
summary of Blue Marble World's operating activities for the three months ended
September 30, 2001 follows:
Product development costs $6,498
General and administrative 6,213
-----
Loss during the development stage $12,711
=======
8
The startup costs incurred relate principally to work performed by employees and
consultants of eSAFETYWORLD relating to the formulation of products, the design
and development of a website and software, the design and preparation of sales
literature and forms, and the establishment of a distribution network. Such
amounts were allocated to Blue Marble World at cost without any markup based on
the estimated percentage of time that each employee or consultant worked for the
benefit of Blue Marble World. The amount of estimated time and expense was
determined based on reference to specific time and expense reports. There were
no allocations of general overhead. Management believes that the allocation by
specific identification is reasonable.
At September 30, 2001, Blue Marble World's balance sheet consisted of:
ASSETS:
CURRENT ASSETS:
Inventories $48,604
WEBSITE , COMPUTER and SOFTWARE 87,115
--------
TOTAL ASSETS $135,719
========
LIABILITIES AND SHAREHOLDER'S DEFICIENCY:
Due to eSAFETYWORLD $247,431
Common stock 7,400
Deficit 110,401)
Loss incurred in development stage, net of tax benefit,
for three months ended September 30, 2001 (8,711)
--------
Total LIABILITIES AND
STOCKHOLDER'S DEFICIENCY $135,719
========
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting and financial reporting
policies follows.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of eSAFETYWORLD, Inc. and its subsidiary, Blue Marble
World, Inc. (collectively referred to herein as the "Company"). All intercompany
transactions and account balances are eliminated in consolidation. Through
September 30, 2001, Blue Marble World's operations were limited to start-up
activities.
9
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates. The
principal assumptions inherent in the accompanying financial statements relate
to the realizability and life of the acquired intangibles included in the
financial statements.
Revenue Recognition -- Revenue for product sales is recognized in the period in
which the product is shipped.
Long-term service contracts are generally agreements to provide services
over a period of time of one year or more and with respect to which the Company
has no contractual right to adjust the prices or terms at or on which its
services are supplied during the term of the contract without the consent of the
customer or client. Sales under these long-term service contracts are recorded
under the percentage of completion method as work is performed. Costs and
estimated gross margins are recorded as sales as work is performed based on the
percentage that incurred costs bear to estimated total costs utilizing the most
recent estimates of costs and manpower requirements.
In determining the profitability of a long-term service contract, only
direct costs associated with the contract are included in the estimate. General
and administrative costs and selling costs are not included in the analysis.
Provisions for estimated losses on long-term service contracts, if any, are made
in the period in which the loss first becomes probable and reasonably estimable.
Projected losses are based on management's best estimates of a contract's
revenue and costs. Actual losses on individual long-term service contracts are
compared to the loss projections periodically, with any changes in the estimated
total contract loss recognized as they become probable and reasonably estimable.
The initial clients of the Company's consulting business have opted to pay
the Company by issuing shares of their common stock. The Company may distribute
a significant portion of the shares received to its shareholders in the form of
a dividend. Because of the Company's role in the dividend distributions, during
the fourth quarter of fiscal 2001, it concluded that it is likely functioning as
a statutory "underwriter" within the meaning of Section 2(11) of the Securities
Act of 1933 with respect to those distributions.
The Company may not be able to rely on the exemption afforded under Section
4(2) of the Securities Act with respect to the receipt of such shares from
clients. It, therefore, elected a financial reporting policy of not recognizing
income on consulting projects until the shares are fully earned. Accordingly, it
has deferred net revenues of approximately $440,000 relating to consulting
engagements at September 30, 2001. The work related to these revenues has been
completed and, accordingly, a significant portion of the deferred revenue is
expected to be realized in the next 12 months. It appears that revenues from
consulting activities may comprise a significant portion of the Company's
revenues during the next 12 months.
Inventories - Product inventories consist of finished goods acquired from third
parties. Such costs, which are stated at the lower of FIFO cost or market,
amounted to $48,604 at September 30, 2001. The remaining costs relate to
deferred costs associated with consulting service engagements in progress.
10
Advertising -- The Company charges advertising costs to expense as incurred.
Costs related to CD-ROMs, promotional literature and catalogs produced by
outside vendors are charged to operations when mailed or distributed.
Basic Income Per Share -- Basic income (loss) per common and common equivalent
share are calculated by dividing net income by the weighted average number of
common and common equivalent shares outstanding during each period. The assumed
exercise of options or convertible instruments outstanding during both periods
would have been antidilutive.
Fixed Assets - Fixed assets consist of the following at September 30, 2001:
Furniture and fixtures $10,812
Website development costs 225,402
Software 47,949
Database 96,711
Equipment 10,015
Assets acquired under capital lease 35,974
------
Total 426,863
Less - Accumulated depreciation 60,060
------
Net $366,803
========
Fixed assets are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method based upon the estimated useful life of
five years.
Website development costs are capitalized in accordance with Consensus Position
00-2 of the Emerging Issues Task Force.
Expenditures for repairs and maintenance are charged to expense as incurred.
Upon retirement, sale or other disposition of property and equipment, the cost
and accumulated depreciation are eliminated from the accounts and gain or loss
is included in operations.
Marketable Securities - The Company will classify equity securities received in
connection with its consulting business as available-for-sale in accordance with
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." These
securities will be carried at fair market value, with unrealized gains and
losses reported in stockholders' equity as a component of other comprehensive
income (loss). Gains or losses on securities sold will be based on the specific
identification method and reported in operations in the period sold.
Long-lived Assets -- Long lived assets, including intangibles, to be held and
used are reviewed for impairment whenever events or changes in circumstances
indicate that the related carrying amount may not be recoverable. If required,
impairment losses on assets to be held and used are recognized based on the
excess of the asset's carrying value over its fair value. Long-lived assets to
be sold are reported at the lower of carrying amount or fair value reduced by
estimated disposal costs.
11
Intangibles - The intangible assets acquired from Laminaire Corporation were
being amortized on the straight-line basis over ten years. Statement No. 141 of
the Financial Accounting Standards Board, Business Combinations, and Statement
No. 142, Goodwill and Other Intangible Assets mandate that goodwill recorded on
corporate balance sheets, arising from acquisitions completed prior to June 30,
2001 should no longer be amortized. From the date of effectiveness of these
pronouncements, all goodwill will be accounted for using an impairment approach
which means that it will be written down only in periods in which the recorded
value of goodwill exceeds its fair value.
Blue Marble Startup Costs - The costs directly associated with the startup of a
new subsidiary's business are charged to operations as incurred and are included
in Discontinued Operations in the accompanying Statements of Operations.
Statement of Cash Flows -- For the purposes of this statement, investments and
time deposits having an initial term of 90 days or less are considered to be
cash equivalents.
The Company maintains substantially all of its cash and certificates of deposit
with one bank. The aggregate cash balances maintained at that bank exceed the
balance insured by the Federal Deposit Insurance Corporation. The cost of all
monetary investments at September 30, 2001 approximates their market value.
Income Taxes -- The Company complies with Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109,
the liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
At September 30, 2001, the Company has recorded a deferred tax benefit of
$183,000.
Fiscal Year - The Company's fiscal year ends on June 30.
NOTE 3 -- OTHER ASSETS
At September 30, 2001, Other Assets consisted principally of:
o loans to Harbor Ridge Communications, Inc. , an investor and public
relations company, in the aggregate amount of $545,338. The Company
has agreed to convert $200,000 of the principal balance of this loan
into a 19.9% equity interest in Harbor Ridge and the remainder into a
two year loan with interest payable at the prevailing prime lending
rate.
o A bridge loan in the principal amount of $100,000 to SwapIt, which was
made at the recommendation of the Company's underwriter. The bridge
loan was converted to equity in July 2001 at which time the business
became known as Oakland Technologies.
12
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Consulting and Employment Agreements
The Company has consulting agreements with four entities controlled by
officers or directors and an employment agreement with another officer under
which the Company will pay minimum annual consulting fees and salaries of
$480,000, $490,000, and $510,000 in each of the three years in the period ended
June 30, 2004. None of these officers or directors receives any other cash
compensation from the Company for their services but receive reimbursement for
expenses including healthcare. Each of these officers has devoted an average of
more than 40 hours per week to the Company during the year ended June 30, 2001.
Rent
The Company is obligated under the terms of two short-term operating leases for
office space which call for minimum monthly rentals of approximately $1,500.
Equipment Leases
The Company leases servers, computers and similar equipment under various
capital leases. Future minimum lease payments under these leases are as follows:
Twelve Months Ended September 30, Amount
2002 $14,801
2003 14,801
2004 3,700
-------
Total 33,302
Interest 4,946
-------
Present value of minimum commitments $28,356
=======
Current portion $11,499
=======
Long-term portion $16,857
=======
Assets acquired under capital leases are capitalized using interest rates
appropriate at the inception of each lease. Such assets are summarized below at
June 30, 2001:
Computer equipment:
Cost $ 35,974
Accumulated depreciation 5,396
--------
Net $30,578
========
Legal Matters
The Company is a not a defendant in any legal action. However, in September
2001, the Company advised Community Home Mortgage Corporation and Community Home
13
Funding Group,Ltd. (collectively referred to as "Community"), two affiliated
entities, that it would seek remedies to settle unpaid balances due under
consulting agreements. Community advised the Company that it would commence an
arbitration proceeding in which it would seek damages of $2,000,000. However, in
November 2001 the parties agreed to withdraw their claims with prejudice.
NASDAQ Delisting Notice
On October 22, 2001, the Company received a Nasdaq Staff Determination
indicating that as of such date Nasdaq had not received the Company's Annual
Report on Form 10-KSB for its fiscal year ended June 30, 2001, that it had
failed to comply with Nasdaq Marketplace Rule 4310(c)(14) and that its common
stock was, therefore, subject to delisting from the Nasdaq SmallCap Market on
October 30, 2001. The Company subsequently filed its Annual Report on Form
10-KSB for its fiscal year ended June 30, 2001 and requested a hearing before a
Nasdaq Listing Qualifications Panel to review the Staff Determination. On
November 5, 2001, the Company received another Nasdaq Staff Determination
indicating that the Nasdaq staff has determined to delist its common stock from
The Nasdaq Stock Market pursuant to Nasdaq Marketplace Rules 4300, 4330(a)(2),
4310(c)(16), 4350(c), 4350(d)(2)(C) and 4310(c)(13) because of concerns about
the content of and procedures relating to its recent press releases, its
reported financial results, including revenues, and other matters. The Company
has requested a hearing before a Nasdaq Listing Qualifications Panel to review
this Staff Determination. Nasdaq has informed the Company that it has a hearing
scheduled before a Nasdaq Listing Qualifications Panel on December 13, 2001. At
this hearing, the Company will be required to demonstrate its ability to sustain
long term compliance with all applicable Nasdaq maintenance requirements. There
can be no assurance that the Panel will grant the Company's request for
continued listing.
If the Company's stock does not satisfy Nasdaq's listing requirements, it
may apply for quotation of its common stock on any other organized market or
quotation system on which the common stock may be eligible for trading, such as
the NASD's OTC Electronic Bulletin Board or pinksheets.com. There can be no
assurance that the Company's common stock will be accepted for listing or
trading on either of these quotation systems. A delisting of the Company's
common stock from Nasdaq could have an adverse effect on the market price of its
common stock and the ability and capacity of persons to acquire or sell shares
of its common stock.
Related Party Transaction
On September 27, 2000, The StockGame Company engaged the Company to provide
StockGame with:
o administrative and customer service support;
o assistance in the design, development and hosting of a website;
o accounting and management services support, and
o office space and telephone services.
StockGame agreed to pay the Company a one-time fee of $300,000 payable at the
election of StockGame in either cash or 600,000 shares of StockGame common
stock. In February 2001, StockGame advised the Company that it would issue the
shares of its common stock to satisfy this obligation under the agreement and
subsequently filed a registration statement with the Securities and
14
Exchange Commission to register the Company's shares. Under the terms of the
agreement, the Company is also entitled to receive a cash fee equal to 5% of
StockGame's annual revenue.
In September 2001, StockGame and the Company rescinded their consulting
agreement, the Company returned the 600,000 shares of StockGame common stock and
the two parties entered into a new consulting agreement. The contract is
renewable for a one year period on its contract anniversary date at StockGame's
option, provided that its president remains in his current position on the
renewal date. If he is not StockGame's president at the renewal date, then the
extension requires the consent of both parties. In the event that StockGame
elects to issue shares of common stock for compensation to the Company to
satisfy the obligations under the new consulting agreement, it agreed to
register such common stock under the Securities Act of 1933, as amended, on Form
SB-2 or S-1 prior to the issuance of the shares. It also agreed to deliver
certificates for the 600,000 shares to the Company within 24 hours after the
applicable registration statement becomes effective. StockGame has advised the
Company that it will elect to compensate the Company in shares.
Edward A. Heil, a minority shareholder and director of StockGame, is president
of the Company. Neither Mr. Heil nor any other Company officer, director or
employee is involved in StockGame's day-to-day decision making process or
operations, other than pursuant to the consulting services provided by the
Company to StockGame.
NOTE 5 -- STOCKHOLDERS' EQUITY
The Company was incorporated in the state of Nevada and is authorized to
issue up to 20,000,000 shares of common stock having a par value of $.001 per
share and 1,000,000 shares of preferred stock. There are 3,000,000 shares of
common stock issued and outstanding. Each share of common stock entitles the
holder to one vote on each matter submitted to the stockholders. The holders of
common stock:
o have equal ratable rights to dividends from funds legally available
for payment of dividends when, as and if declared by the board of
directors;
o are entitled to share ratably in all of the assets available for
distribution to holders of common stock upon liquidation, dissolution
or winding up of our affairs;
o do not have preemptive, subscription or conversion rights, or
redemption or access to any sinking fund; and
o are entitled to one non-cumulative vote per share on all matters
submitted to stockholders for a vote at any meeting of stockholders.
The Company's certificate of incorporation authorizes the issuance of 1,000,000
shares of preferred stock with designations, rights and preferences determined
from time to time by its board of directors. Its board of directors is
empowered, without stockholder approval, to issue shares of preferred stock with
voting, liquidation, conversion, or other rights that could adversely affect the
rights of the holders of the common stock. It has no present intention to issue
any shares of preferred stock. There can be no assurance that it will not do so
in the future. No preferred stock may be issued without the underwriter's
consent for 12 months following the effective date of the Company's public
offering.
15
The Company has not paid any dividends on its common stock to date.
Stock Option Plan
The Company has a stock option plan that expires in 2009 under which it may
grant incentive stock options, non-qualified options and stock appreciation
rights for up to an aggregate of 450,000 shares of common stock. Incentive stock
options granted under the plan must conform to applicable federal income tax
regulations and have an exercise price not less than the fair market value of
shares at the date of grant or 110% of fair market value for ten percent or more
stockholders. Other options and stock appreciation rights may be granted on
terms determined by the compensation committee of the board of directors.
In October 2000, the Company granted 450,000 options with an exercise price
equal to the market price per share at the date of grants which was $.87 per
share. All options are exercisable but none have been exercised.
Other Options Granted
The Company granted to a public relations firm options to purchase 200,000
shares of the Company's common stock at prices ranging from $3.75 to $7.00 per
share. The options will expire two years after a registration statement covering
the shares underlying the optionsis deemed effective. Such registration
statement has not been filed.
NOTE 6 -- BLUE MARBLE WORLD
Blue Marble World filed a Registration Statement with the Securities and
Exchange Commission in July 2001 pursuant to a plan to distribute 81% of Blue
Marble World's stock to the Company's shareholders as a dividend.
The Company and Blue Marble World signed a Business Management Agreement,
which as amended requires Blue Marble World to pay a management fee to the
Company in a sum equal to 10% of Blue Marble World's gross revenues with a
monthly minimum fee requirement of $3,500. Payment may be made, at Blue Marble
World's option, in cash or shares of Blue Marble World's common stock. If
payment is made in common stock, the Company shall have demand registration
rights which may be exercised once in each 12 month period. The number of shares
that will be issuable will be based on the closing bid price of Blue Marble
World's shares on the last business day of each month. If no bid price exists,
the number of shares issuable will be based on a price of $.50 per share. In
addition, the Company shall be reimbursed for the costs incurred by it for
outside contractors and consultants. The agreement covers three years and
automatically rolls over for an additional year at the end of each contract year
unless terminated by one of the parties. Rates to be paid are to be renegotiated
on each contract anniversary date.
At September 30, 2001, Blue Marble World owes the Company an aggregate of
$247,431. The Master Distribution Agreement between the two companies stipulates
that the liability to the Company shall be paid from 50% of the proceeds of any
capital infusion that Blue Marble World obtains. If the balance due to the
Company is not repaid in full by June 30, 2002, the remaining unpaid balance
shall be paid, without interest, in 12 equal monthly installments commencing on
July 31, 2002. If Blue Marble World is unable to pay the balance by July 31,
2003, the unpaid balance may, at the Company's option,
16
be converted into shares of our common stock at a price per share equal to the
closing average bid price of such shares during the first 20 days of trading, If
the Company converts amounts due it at any point after July 31, 2003, it shall
have demand registration rights with respect to the shares received upon
conversion and shall pay all registration costs. The master agreement was
negotiated between affiliated parties. Accordingly, the Company can make no
assurances that any of this agreement, or that any of the transactions provided
for in this agreement, will be effected on terms at least as favorable to the
Company as could have been obtained from unaffiliated third parties.
Commissions - Blue Marble World has entered into a distributor contract with
Blue Marble Base. Two of the Company's officers and directors control Blue
Marble Base. Blue Marble World is obligated to pay Blue Marble Base a commission
based upon its distributor compensation plan even if these two individuals are
not associated with Blue Marble World in the future.
Commitments - Blue Marble World has entered into a three-year consulting
agreement with its president, Thomas Swenson, who has no other affiliation with
the Company, effective on June 1, 2001, under which he is entitled to receive:
o Downline positions and placement as is mutually agreed by the parties.
The commission will be paid in the same manner other distributors
receive payment pursuant to Blue Marble World's compensation plan.
o A percentage of sales of products in the United States and other
countries agreed to by the parties equal to 4% of the first $100,000
in monthly sales for the term of this agreement; 3% of monthly sales
between $100,000 to $300,000 per month for the term of this agreement;
2% of monthly sales between $300,000 to $1,000,000; and 1% of monthly
sales above $1,000,000 for the term of this agreement. The payment
will be made 30 days after the close of each month.
o An option to acquire 50,000 shares of Blue Marble World's common
stock. The exercise price of the option shall be the opening price on
the date that Blue Marble World's shares commence trading on the OTC
Bulletin Board. The option becomes exercisable as follows: 10,000
shares 30 days after the shares begin trading and 10,000 shares every
thirty day thereafter until the option on all 50,000 shares becomes
fully exercisable.
o An additional option to acquire up to 25,000 shares of Blue Marble
World's common stock which becomes exercisable when monthly sales
equal or exceed $25,000 per month for three consecutive months; 25,000
shares when monthly sales equal or exceed $50,000 for three
consecutive months; 100,000 shares when monthly sales equal or exceed
$100,000 for three consecutive months; and 100,000 shares when monthly
sales equal or exceed $200,000 for three consecutive months. The
exercise price of the option shall be the average closing bid price
for the 31st through the 60th day following the date on which the
Company's shares commence trading on the OTC Bulletin Board.
The president shall receive a fee of $4,000 per month when and if we raise a
minimum of $200,000 in equity financing from sources other than eSAFETYWORLD.
Such payments will continue until Mr. Swenson's monthly payments from
commissions exceed $5,000 per month. In other months, the consulting fee shall
be reduced using the following formula - ($4,000 minus payments received from
commissions minus $1,000).
17
PART II
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Information set forth herein contains "forward-looking statements" which
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The Company cautions readers that important factors
may affect the Company's actual results and could cause such results to differ
materially from forward-looking statements made by or on behalf of the Company.
These include the Company's lack of historically profitable operations, the
market success of its products, its lack of infrastructure to support popular
products, dependence on key personnel, the success of the Company's consulting
services business, ability to manage anticipated growth and other factors
identified in the Company's filings with the Securities and Exchange Commission,
press releases and other public communications.
Operations
We had no revenue generating history prior to July 1, 1999. In August 1999,
we acquired intangible assets, including customer and vendor lists, from the
Distribution Product Group of Laminaire Corporation. We devoted the period from
August 1999 to late 2000 developing our business plan, designing and completing
an e-commerce website, establishing fulfillment systems, developing marketing
tools and catalogues and establishing infrastructure. We adopted a cautious
approach in implementing our strategies because the experience of other smallcap
and Internet companies as well as market conditions made it obvious that further
access to the capital markets would be extremely difficult. Therefore, we became
increasingly committed to a strategy that does not require a high level of fixed
costs or require major cash outlays to establish brand recognition. We completed
an initial public offering of its common stock in February 2000.
During the fourth calendar quarter of 2000, our analysis of market
conditions as well as the capital markets caused us to consider augmenting our
initial business focus in order to increase the likelihood of successfully
achieving our business goals. As a result, we decided to take advantage of the
existing core skills of our management team and expand into two new areas,
personal care and nutrition products and business consulting. Neither of these
areas requires substantial capital commitments.
At September 30, 2001, we had two core business groups:
Safety Products Business - We market and distribute disposable industrial
safety, laboratory and critical environment products to companies whose
employees work in manufacturing, construction or critical environments and may
be to environmental hazards. We operate a Business-to-Business e-Commerce
18
site over the Internet and also offer our customers a 360 degree ordering
solution by making toll free numbers and catalogs available for customers who
prefer traditional ordering methods.
During the past year, many companies that are or were based on
Internet-sales strategies have experienced significant financial problems. At
the same time, these companies have found that economic and financial market
conditions have made it nearly impossible to raise additional capital. Many of
our initial customers were using us to provide products that supplemented the
principal supply or blanket orders previously placed with large competitors.
Many of these customers were involved in the semiconductor or microprocessor
businesses. The slumps in those industries substantially reduced those
companies' needs to supplement orders placed under blanket purchase orders with
our competitors. Our order flow declined significantly during the two quarters
ended September 30, 2001. In addition, orders aggregating approximately $300,000
received previously were cancelled or deferred indefinitely.
The foregoing developments, combined with the early success of our
consulting initiatives, have resulted on our ongoing reassessment of the Safety
Products Business. We are currently exploring our options and have not come to
any conclusion. Our options being considered are:
o Emphasize a limited number of high technology and specialty products;
o Spin the safety product business off as a separate company;
o Merge the safety product business with a larger business in need of a
e-business or distribution strategy (in which case the other entity
might manage the combined businesses); or
o Continue the business without committing significant financial and
other resources that can best be used expanding the consulting
business.
In October 2002, we introduced the first product under our high technology and
specialty products plan. This product, which is designed to help protect
corporate mailrooms as well as the home, is our MailSafe Containment Chamber. It
allows an individual to open mail or standard size overnight packages in a
confined airtight environment. MailSafe is designed and tested to be air tight
and allows the operator to view the contents of an envelope or package without
having direct exposure to such contents. If there appears to be an unusual or
suspicious item in the mail, it can be retained in the airtight chamber until
appropriate authorities are summoned to inspect those contents. The initial unit
is a commercial unit designed to accommodate mailrooms and has a list price of
$850 plus shipping costs. This product is now available for shipment to
customers. We have received orders for 24 units through November 12, 2001. The
product is being manufactured for us by a contract manufacturer with whom we
have placed on open purchase order which we may cancel at any time. We will
commence the marketing campaign consisting of telemarketing and mailing programs
for MailSafe during the third week of November 2001.
We have applied for a provisional patent on our MailSafe Containment
Chamber product. We subsequently have been informed by Seavisions of South
Florida, Inc. that it claims to have filed for patent protection for a similar
product before we did. Based on the advice of our patent counsel, we believe
that our application for a provisional patent should be granted; however, no
assurance can be given that we will receive provisional patent protection or
that MailSafe will not eventually be considered to be infringing on the patent
rights of third parties.. We also have become aware of at least
19
three companies that have introduced products similar to MailSafe. We believe
that these products were introduced after we filed for preliminary patent
protection, but no assurances can be given that we will be able to prevent or
limit these competing products from being sold.
There is no way that we can predict the likely demand for the MailSafe
Containment Chamber or our ability to satisfy that demand. MailSafe is designed
as a product that can be used in either the office mailroom or the home. We
expect that reaching these markets will require a substantial marketing program
and distribution system. We currently do not have the infrastructure or the
financial resources to undertake a major national marketing and distribution
program and would consider a strategic alliance with a national distributor. No
discussions or negotiations are currently underway with any such potential
strategic partner and no assurances can be given that we will be successful in
making such an arrangement. In November 2001, we commenced a direct mailing and
telemarketing campaign to sell MailSafe.
Unless MailSafe or another product is very successful, we believe that we
are likely to incur operating losses and negative cash flow during the next
fiscal year on this area of our business because of the current reduced level of
demand.
Consulting Program - We established a consulting program to assist companies to
develop an effective business strategy and take advantage of financial,
technological and general business opportunities. Fees due by these companies
are generally payable in cash or stock, at the client's option. We may consider
dividending shares of stock received from our clients to our shareholders, but
are not obligated to do so. We generally do not accept shares from clients until
those shares are registered by such clients in an effective registration
statement filed pursuant to the Securities Act of 1933, as amended. During the
fiscal year ended June 30, 2001, three clients filed registration statements
with respect to their shares to be issued to us in payment of consulting fees.
Even if the registration statements of clients are declared effective, there are
no assurances that a liquid trading market will ever develop for the shares of
stock that we receive.
We have elected a financial reporting policy of not recognizing income on
consulting projects until the shares are fully earned. Accordingly, we have
deferred net revenues of approximately $440,000 relating to consulting
engagements at September 30, 2001. Substantially all of that deferred revenue is
expected to be realized in the next 12 months. It appears that revenues from
this initiative will comprise a significant portion of our revenues during the
next 12 months, and we are expanding the resources devoted to this new endeavor.
Discontinued Operations - Personal Care and Nutrition - In December 2000, we
established a subsidiary, Blue Marble World, Inc., to sell personal care and
nutrition products through a direct marketing chain of independent distributors.
The independent distributors will purchase products from Blue Marble World's
website or by use of faxes or a toll-free telephone number. Blue Marble World
has developed a family of products and production techniques that we believe to
be distinctive, developed a distributor compensation plan and entered into an
agreement with a contract manufacturer and a fulfillment center. A substantial
portion of Blue Marble World's resources since inception were devoted to the
development of products, a website, software, marketing materials and the final
design of the distributor compensation plan. Most of these tasks are expected to
be completed in late 2001 or early 2002.
20
In June 2001, we filed a registration statement with the Securities and
Exchange Commission for the purpose of spinning off approximately 81% of Blue
Marble World's shares to eSAFETYWORLD's shareholders as a dividend. Accordingly,
Blue Marble World is reflected as a discontinued operation in the accompanying
financial statements.
Results of Operations
General:
Three Months ended September 30, 2001compared to three months ended September
30, 2000
Revenue
Total revenues for the three months ended September 30, 2001 ("the 2001 period")
decreased by $237,927, or approximately 95%, to $11,493 from $249,420 for the
three months ended September 30, 2000 ("the 2000 period") due to declining order
flow, order cancellations and adverse economic and market conditions.
Cost of Revenues
Cost of revenues decreased $121,924, or 68% to $57,323 in the 2001 period as
compared to $179,247 in the 2000 period, primarily as a result of lower
revenues. As a percentage of revenues, cost of revenues increased from 72% to
499% in the 2001 period, primarily because fixed costs were a higher component
of overall reduced revenues.
Expenses
Net expenses increased by $49,055, or 164%, to $78,981 in the 2001 period from
$29,926 in the 2000 period, and constituted approximately 687% and 12% of
revenues in the 2001 and 2000 periods, respectively.
Net Income
Net income decreased by $110,599 to a loss of ($83,522) in the 2001 period from
$27,077 in the 2000 period. The decrease was primarily attributable to lower
revenues.
Liquidity and Capital Resources
We believe that the remaining net proceeds of our initial public offering
are sufficient to satisfy our working capital and business development
requirements for at least the next nine to 12 months. At September 30, 2001, we
had cash and certificates of deposit of approximately $3,245,306.
We have no commitments for financing. We intend to engage the services of
an investment banking firm to assist us in raising capital if needed, although
no assurances can be given that we will be successful in those efforts. We may
pursue discretionary drawdown equity lines of credit or similar facilities if
our common stock begins to trade at sufficient volumes. However, no assurances
can be given that we will be successful in obtaining an equity facility or any
other investment capital if needed.
21
Seasonality
The demand for many of our distribution products is seasonal. Our customers
have a reduced demand for products in the summer and during December because
many of our customers' employees take vacation, plants are often closed during a
portion of that period and there is a general reduction of business activity in
those months.
We do not yet have a basis to determine whether its consulting business
will be seasonal.
New Accounting Pronouncements
No new pronouncement issued by the Financial Accounting Standards Board,
the American Institute of Certified Public Accountants, the Emerging Issues Task
Force or the Securities and Exchange Commission is expected to have a material
impact on our financial position or reported results of operations, except for
Statement No. 141 of the Financial Accounting Standards Board, Business
Combinations, and Statement No. 142, Goodwill and Other Intangible Assets which
conclude that goodwill recorded on corporate balance sheets, arising from
acquisitions completed prior to June 30, 2001 should no longer be amortized.
From the date of issuance, all goodwill would be accounted for using an
impairment approach which means that it will be written down only in periods in
which the recorded value of goodwill exceeds its fair value.
22
PART II OTHER INFORMATION
Item 1 Legal Proceedings
The Company is a not a defendant in any legal action. However, in September
2001, the Company advised Community Home Mortgage Corporation and Community Home
Funding Group, Ltd. (collectively referred to as "Community"), two affiliated
entities, that it would seek remedies to settle unpaid balances due under
consulting agreements. Community advised the Company that it would commence an
arbitration proceeding in which it would seek damages of $2,000,000. However, in
November 2001 the parties agreed to withdraw their claims with prejudice.
Item 2 Changes in Securities
None
Item 3 Defaults on Senior Securities
None
Item 4 Submission of Matters to a Vote of Shareholders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
23
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
eSAFETYWORLD, Inc.
------------------
(Registrant)
/s/ Edward A, Heil
------------------
By: Edward A. Heil
President
By: /s/ R. Bret Jenkins
------------------
R. Bret Jenkins
Chief Financial Officer
Date: November __, 2001
24
[logo] Eichler Bergsman & Co., LLP Gilbert Bergman
Certified Public Accountants Paul Eichler
404 Park Avenue South, New York, New York 10016 Michael E. Silverman
Tel 212-447-9001 Fax 212-447-9006
ACCOUNTANTS' REVIEW REPORT
To the Stockholders of
eSAFETYWORLD, INC.
We have reviewed the accompanying balance sheet of eSAFETYWORLD, INC. as of
September 30, 2001 and the related statements of operations and cash flows, and
stockholders' equity for the three months then ended, in accordance with
Statements on Standard for Accounting and Review Services issued by the American
Institute of Certified Public Accountants. All information included in these
financial statements is the representation of the management of eSAFETYWORLD,
INC.
A review consists principally of inquiries of Company personal and analytical
procedures applied to financial data. 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, we do not express such an opinion.
Based on our review, we are not aware of any material modification that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/Eichler Bergsman & Co., LLP
New York, New York
November 13, 2001