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 March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to________
Commission file 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 December 31, 2001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
eSAFETYWORLD, Inc.
INDEX
PAGE
PART I.
FINANCIAL INFORMATION
Item 1.
Unaudited Consolidated Financial Statements:
Condensed Consolidated Balance Sheet
as of March 31, 2002 3-4
Condensed Statements of Consolidated Operations
for the Nine Months Ended March 31, 2002 and 2001 5
Condensed Statements of Consolidated Operations
for the Three Months Ended March 31, 2002 and 2001 6
Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2002 and 2001 7
Notes to Condensed Consolidated Financial Statements 8
Item 2.
Management's Discussion and Analysis or Plan of Operation 20
PART II.
OTHER INFORMATION 27
eSAFETYWORLD, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2002
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $1,839,583
Certificate of deposit, including
$300,000 collateralizing note payable bank 301,641
Accounts receivable, net of allowance for
doubtful accounts of $3,000 30,131
Loans Receivable 190,979
Inventories 48,904
Prepaid expenses and other 96,000
----------
Total Current Assets 2,507,238
Property and Equipment, less accumulated
depreciation of $95,286 393,673
Acquired Intangibles, less accumulated
amortization of $1,254,376 56,693
Other Assets - net 815,660
----------
Total Assets $3,773,264
==========
See Notes to Condensed Consolidated Financial Statements.
3
eSAFETYWORLD, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2002
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 53,058
----------
Long Term Liabilities:
Capital lease obligation 10,469
Notes payable (secured by a certificate
of deposit)-bank 237,328
----------
Total Long-term liabilities 247,797
----------
Total Liabilities 300,855
----------
Stockholders' Equity:
Common stock, $.001 par value, 20,000,000
shares authorized; 3,000,000 shares issued
and outstanding 3,000
Additional paid-in capital 6,388,644
Accumulated deficit (2,919,235)
----------
Stockholders' Equity 3,472,409
----------
Total Liabilities and Stockholders' Equity $3,773,264
==========
See Notes to Condensed Consolidated Financial Statements.
4
eSAFETYWORLD, Inc.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
--------- ---------
Revenues $ 141,233 $ 860,192
Cost of Revenues 123,769 567,529
--------- ---------
Gross Profit 17,464 292,663
--------- ---------
Expenses and Other:
Selling and administrative expenses 734,470 222,335
Other:
Amortization and writedowns 1,681,593 84,543
Regulatory costs 204,835 -
Other-net (principally interest) (56,300) (188,937)
--------- ---------
Total Expenses and Other 2,564,598 117,941
--------- ---------
Income (Loss) from Continuing Operations
before Income Taxes (2,547,134) 174,722
Income Taxes 120,160 7,000
--------- ---------
Income (Loss) from Continuing Operations (2,667,294) 167,722
Discontinued Operations - net of
applicable income tax benefit of
$4,000 in 2000 (40,220) (139,113)
--------- ---------
Net Income (Loss) $(2,707,514) $ 28,609
========= =========
Basic and Diluted Income (Loss) per Share:
Continuing operations $ (.89) $ .06
Discontinued operations (.01) (.05)
--------- ---------
Net $ (.90) $ .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 STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
--------- ---------
Revenues $ 48,203 $ 374,152
Cost of Revenues 39,430 254,066
--------- ---------
Gross Profit 8,773 120,086
--------- ---------
Expenses and Other:
Selling and administrative expenses 275,294 83,345
Other:
Amortization and writedowns 100,000 28,978
Regulatory costs 80,835 -
Other-net (principally interest) (14,029) (60,044)
--------- ---------
Total Expenses and Other 442,100 52,279
--------- ---------
Income (Loss) from Continuing Operations
before Income Taxes (433,327) 67,807
Income Taxes (8,925) (13,900)
--------- ---------
Income (Loss) from Continuing Operations (424,402) 81,707
Discontinued Operations (21,509) (96,289)
--------- ---------
Net Income (Loss) $ (445,911) $ (14,582)
========= =========
Basic and Diluted Income (Loss) per Share:
Continuing operations $ (.14) $ .03
Discontinued operations (.01) (.03)
--------- ---------
Net $ (.15) $ .00
========= =========
Weighted average number of common and
common equivalent shares outstanding 3,000,000 3,000,000
========= =========
See Notes to Condensed Consolidated Financial Statements.
6
eSAFETYWORLD, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
---------- ----------
Cash flows from operating activities:
Net income (loss) $(2,707,514) $ 28,609
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation, amortization and writedowns 1,733,785 101,807
Deferred tax benefit 120,160 -
Increase (decrease) in net operating assets 330,556 631,335
--------- ---------
Net cash (used in) provided by operations (523,013) 761,751
--------- ---------
Cash flows from investing activities:
Investments (147,843) (345,360)
Increase in certificates of deposits (301,641) -
Purchase of software, web site development,
and patent (71,268) (185,258)
--------- ---------
Net cash used in investing activities (520,752) (530,618)
--------- ---------
Cash flows from financing activities:
Borrowings - 293,718
Repayment of debt (46,459) -
Settlement costs - (40,000)
--------- ---------
Net cash used in provided by
financing activities (46,459) 253,718
--------- ---------
Net increase (decrease) in cash (1,090,224) 484,851
Cash and cash equivalents - beginning 2,929,807 3,017,852
--------- ---------
Cash and cash equivalents - ending $ 1,839,583 $ 3,502,703
========= =========
See Notes to Condensed Consolidated Financial Statements.
7
eSAFETYWORLD, Inc.
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 was initially 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 began providing consulting services to other companies
in the summer of 2000. 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. It is in the process of spinning
off the shares of Blue Marble World, which remains in the development stage, to
its shareholders.
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 and nine-month periods ended
March 31, 2002 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 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 and six-month periods ended March 31, 2002 follows:
8
Three Nine
Months Months
-------- -------
Product development costs $ - $ 6,498
General and administrative 21,509 33,722
------ ------
Loss during the development stage $ 21,509 $ 40,220
======= =======
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 March 31, 2002, Blue Marble World's balance sheet consisted of:
ASSETS:
CURRENT ASSETS:
Inventories $ 48,904
WEBSITE , COMPUTER and SOFTWARE 89,693
-------
TOTAL ASSETS $ 138,598
=======
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Due to eSAFETYWORLD $ 352,519
Accounts Payable 300
Common stock 7,400
Deficit accumulated during the development stage (221,621)
-------
Total LIABILITIES AND STOCKHOLDER'S DEFICIT $ 138,598
=======
9
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 March
31, 2002, Blue Marble World's operations were limited to start-up activities.
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 and certain
investments included in the financial statements. In future periods, the
ultimate realizability and valuation of assets, principally the equity
securities issued by clients, received in satisfaction for consulting services
will involve assumptions and estimates.
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. The initial clients of the Company's consulting business
have opted to pay the Company by issuing shares of their common stock. The
Company decided to distribute a significant portion of the shares to be received
from its clients to its shareholders. Because of the Company's role in the
planned 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. In addition, the Company also concluded during the nine
months ended March 31, 2002 that clearing certain other technical matters
pertaining to the distribution process with applicable regulatory agencies would
require more time than had been anticipated. The changes in facts and
circumstances that arose during the fourth quarter of the fiscal year ended June
30, 2001 resulted in the Company recognizing that more uncertainties existed
than were originally known or could have been known. Accordingly, in the quarter
ended June 30, 2001 and thereafter it opted to change the means by which it
estimated revenue on consulting agreements from recognizing revenue as work is
performed to recognizing revenue after the shares to be received from clients
have been registered by clients and a market value has been established. All
consulting revenue recognized prior to March 31, 2001 was written off and
deferred at June 30, 2001. No consulting revenue has been recognized during the
nine months ended March 31, 2002 because no registration statements filed by
clients were deemed effective.
10
Prior to March 31, 2001, which was before the uncertainties referred to
above were known, the Company recognized revenue on consulting contracts as the
work was performed. If the uncertainties had been known, the Company would not
have recognized the revenues of those contracts until the issues giving rise to
the uncertainties were resolved. The impact of recognizing revenues on
consulting agreements during the quarters ended March 31, 2001,September 30,
2000 and December 31, 2000 is as follows:
Quarter Ended
- --------------------------------------------------------------------------------
September 30, 2000 December 31, 2000 March 31, 2001
------------------ ----------------- --------------
As reported As adjusted As reported As adjusted As reported As adjusted
----------- ----------- ----------- ----------- ----------- -----------
Revenues $249,420 $ 99,420 $236,619 $ 86,619 $374,152 $134,152
Costs and expenses 209,163 113,513 212,389 169,905 402,634 282,782
Pretax income 40,257 (14,093) 24,320 (83,286) (28,482) (148,630)
Income taxes
(expense) (13,180) 4,482 (8,100) 26,485 13,900 47,264
Net income (loss) 27,077 (9,611) 16,130 (56,801) (14,582) (101,366)
Income (loss) per
share $ .01 $ .00 $ .01 $ (.02) $ .00 $ (.03)
The "as adjusted" column assumes that the changes in facts and circumstances
described above had been known at each period presented.
As of March 31, 2002, no revenue has been recognized on any consulting
agreement undertaken by the Company.
If the Company receives shares of stock from consulting clients and
elects not to distribute those shares to its shareholders, the estimated value
of the shares will be recorded upon receipt. If no market exists for those
shares, they will initially be recorded at the cost incurred to perform the work
and such initial evaluation will be reviewed for reasonableness thereafter.
Inventories - Product inventories consist of finished goods acquired from third
parties. Such costs, are stated at the lower of FIFO cost or market.
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 Earnings (Loss) Per Share -- Basic earnings (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.
11
Fixed Assets - Fixed assets consist of the following at March 31, 2002:
Furniture and fixtures $ 10,812
Website development costs 277,589
Software 48,677
Database 96,711
Equipment 10,015
Patent 9,201
Assets acquired under capital lease 35,974
-------
Total 488,959
Less - Accumulated depreciation 95,286
-------
Net $393,673
=======
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.
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.
12
The Company has experienced a material decline in the demand for its
disposable safety products and believes that such decline may not be short-term
in nature. Accordingly, it has written off substantially all of the carrying
value of its goodwill at March 31, 2002.
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 March 31, 2002 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 March 31, 2002, the Company has no recorded deferred tax benefit. No
benefit was recorded for the losses incurred during the three months ended March
31, 2002. In addition, during the nine months ended March 31, 2002, the Company
fully reserved deferred tax benefits of $183,235 recorded in prior periods.
Current Accounting Pronouncements - In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Business Combinations." SFAS No. 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interest method. The Company believes that the
adoption of SFAS No. 141 will not have a significant impact on the financial
statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"),
which is effective for fiscal years beginning after December 15, 2001. SFAS 142
requires, among other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for the impairment of existing goodwill and other intangibles. The
Company believes that the adoption of SFAS No. 142, in part, resulted in the
write-down of goodwill during the nine months ended March 31, 2002. In addition,
the requirements of SFAS 142 may require writedowns in the future with respect
to goodwill that may result from future acquisitions.
13
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"), which is effective for all fiscal years beginning after June 15, 2002;
however, early adoption is encouraged.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets," which supersedes Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and certain provisions of APB Opinion
No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at the lower
of carrying amount or fair value, less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that have operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. Management believes that the implementation of these
standards will have no impact on the Company's results of operations and
financial position.
Reclassifications - Certain prior period amounts have been reclassified to
conform with the current presentation.
Fiscal Year - The Company's fiscal year ends on June 30.
NOTE 3 -- OTHER ASSETS
At March 31, 2002, Other Assets consisted of:
Loan to Harbor Ridge Communications (a) $ 545,338
Investment in Oakland Technologies (b) 100,000
Deferred project costs(C) 691,529
Investment in broker-dealer (d) 37,000
Other 41,793
---------
Total 1,415,660
Allowance (e) 600,000
---------
Net $ 815,660
=========
(a) The Company is currently negotiating to modify the terms of this loan
and is considering converting all or a portion of the loan into equity.
If it converts 100% of the principal balance into equity, it will be
entitled to a 50% ownership interest. A final decision will be made
prior to June 30, 2002.
(b) A bridge loan in the principal amount of $100,000 was made to SwapIt 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.
14
(C) The deferred project costs relate to consulting clients. The Company
cannot predict a timeframe in which the registration statements filed
by its clients will be declared effective. Various technical issues
have slowed the registration process significantly and created timing
uncertainties as the issues became known or were raised by the SEC in
comment letters pertaining to client filings.
(d) On February 11, 2002, the Company agreed to acquire, subject to
regulatory approvals, a broker dealer for a purchase price of $37,000.
If the regulatory approvals are received, the broker dealer will be
used to perform appropriate ministerial functions in the distribution
of dividends and will permit the Company to consider expanding its
corporate finance service offerings within the consulting business. The
broker dealer will have no brokers, perform no retail business and
undertake no trading business.
(e) The Company established an allowance of $600,000 during the nine months
ended March 31, 2002 to cover the estimated exposure to loss associated
with these assets.
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
through September 2002.
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 March 31, Amount
2003 $14,800
2004 11,100
------
Total 25,900
Interest 3,090
------
Present value of minimum commitments 22,810
Current portion (included in accounts
payable and accrued expenses) 12,341
------
Long-term portion $10,469
======
15
Assets acquired under capital leases are capitalized using interest
rates appropriate at the inception of each lease. Such assets are summarized
below at March 31, 2002:
Computer equipment:
Cost $35,974
Accumulated depreciation 8,994
------
Net $26,980
=======
Related Party Transaction
Several consulting clients are affiliated with officers and directors
of the Company. No revenue has been recognized with respect to these client
engagements.
Legal Matters
The Company is a co-defendant in a lawsuit brought by a creditor of
Laminaire Corporation in which the plaintiff is seeking unspecified damages in
connection with the purchase by the Company of customer and vendor lists from
Laminaire. Based on a preliminary review of the claims by the Company, it
appears that the lawsuit is substantially without merit. The Company will file
responses and motions in late May.
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.
16
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 grant 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 options is 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.
17
At March 31, 2002, Blue Marble World owes the Company an aggregate of
$352,519. 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, 2003, the remaining unpaid balance
shall be paid, without interest, in 12 equal monthly installments commencing on
July 31, 2003. If Blue Marble World is unable to pay the balance by July 31,
2004, the unpaid balance may, at the Company's option, be converted into shares
of 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, 2004, 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 days
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.
18
The president shall receive a fee of $4,000 per month when and if Blue Marble
World raises 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).
19
PART II
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION
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 catalogs 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 our 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.
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 exposed to environmental hazards. We operate a Business-to-Business
e-Commerce 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.
20
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 three quarters
ended March 31, 2002. We do not believe that this decline is short-term in
nature and, accordingly, wrote-off substantially all of the carrying value of
goodwill associated with this aspect of our business resulting in a net charge
to earnings of $1,080,693 during the six months ended December 31, 2001.
The foregoing developments, combined with the early success of our
consulting initiatives, have resulted on our ongoing reassessment of the Safety
Products Business. We explored and are continuing to explore 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 or consulting business off as a separate
company;
o Merge the safety product business with a larger business in need of an
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 2001, we introduced the first product under our advanced
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. The product is being manufactured for
us by a contract manufacturer with whom we have placed an open purchase order
which we may cancel at any time.
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 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.
21
A significant demand for MailSafe has not materialized. Through March
31, 2002, we shipped 29 units. 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. The sale of MailSafe units is not
profitable at that low level of production. In addition, our experience makes it
less likely that we will emphasize engineered designed products in the future.
The executive principally responsible for our product business has
accepted an executive position with another company effective May 20, 2002. He
has agreed to remain on our board of directors and to serve as a consultant to
us. His departure will require us to make a decision about the direction of the
product business during the three months ending June 30, 2002.
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 have not accepted 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, because of our
intention to distribute the shares as dividends to our shareholders. Several
clients have 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 plan to
expand our services in this area to include a greater level of web design and
similar tools available to clients. These services will be "sold" for cash.
We have elected a financial reporting policy of not recognizing revenue
on consulting projects until the shares that we will receive from clients are
fully earned and registered. We cannot predict a timeframe in which the
registration statements filed by our clients will be declared effective. Various
technical issues, including whether we are considered statutory underwriters in
the dividend distribution process and whether that dividend distribution process
involves us functioning as a broker/dealer and results in our shareholders
receiving free trading shares, have slowed the registration process
significantly and created timing uncertainties as the issues became known or
were raised by the SEC in comment letters pertaining to client filings.
Our management has devoted a substantial portion of its time and
resources to the issues relating to the registration and distribution process of
the shares to be received from consulting clients. The initial concept was to
distribute shares received to the Company's shareholders in a way that had the
potential to benefit the client and the shareholder, although the realization of
benefits was never assured. The concept appears to be relatively unique and has
required a large commitment of time and resources to clear the regulatory
process. We believe that we have resolved satisfactorily most of the significant
issues and concerns of which we are aware. However, there are no assurances that
new issues and concerns may arise or that issues that we believe have been
resolved satisfactorily may reopen.
The uncertainties and delays that have arisen appear to be related to
our intent to distribute shares received from clients as dividends to our
shareholders. Therefore, we are also considering a policy of not distributing
the shares if all issues pertaining to the proposed distributions are not
resolved shortly. Even if the issues are resolved satisfactorily, we may decide
not to distribute some or all shares received in the future. If we receive
shares of stock from consulting clients and opt not to distribute those shares
22
to our shareholders, the estimated value of the shares will be recorded as
revenue upon receipt. If no market exists for those shares, they will initially
be recorded at the cost incurred to perform the work and such initial evaluation
will be reviewed for reasonableness thereafter.
We will expand our consulting website during the three months ending
June 30, 2002 and anticipate that we will be devoting the substantial portion of
our resources to consulting in fiscal 2003.
On February 11, 2002, we agreed to acquire, subject to regulatory
approvals, a broker dealer for a purchase price of $37,000. If the regulatory
approvals are received, the broker dealer was to be used to perform appropriate
ministerial functions in the distribution of dividends and would also permit us
to consider expanding its corporate finance service offerings within the
consulting business. Subsequently, we believe that we satisfactorily resolved
the regulatory questions concerning the need for a broker dealer to be involved
in the dividend distribution process and do not believe that such involvement is
required. Therefore, we may sell the broker dealer rather than incur the costs
necessary to obtain regulatory approvals. The broker dealer, if retained, will
have no brokers, perform no retail business and undertake no trading business.
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.
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:
Nine months ended March 31, 2002 compared to nine months ended March 31, 2001
A significant portion of the Company's manpower and financial resources during
the 2002 period were devoted to the development of MailSafe and the issues
surrounding our delisting by NASDAQ. We incurred costs aggregating $204,835 in
reviewing and responding to NASDAQ and the SEC during that period.
In addition, the manpower devoted to dealing with questions raised by NASDAQ
significantly reduced the resources available to devote to the consulting
engagements and comment letters associated with the filings of clients.
23
Revenue
Total product revenues for the nine months ended March 31, 2002 ("the 2002
period") decreased by $718,959, or approximately 84%, to $141,233 from $860,192
for the nine months ended March 31, 2001 ("the 2001 period") due to declining
order flow, order cancellations and adverse economic and market conditions.
Cost of Product Revenues
Cost of product revenues decreased $443,760, or 78.2% to $123,769 in the 2002
period as compared to $567,529 in the 2001 period, primarily as a result of
lower revenues.
Loss from Operations
The loss from operations in the 2002 period was caused by:
o Unexpected delays in recognizing revenues from the consulting business;
o Costs relating to dealing with regulatory issues; and
o The ongoing decline in safety products orders.
These factors resulted in us:
o Not recognizing revenue on consulting engagements;
o Writing down substantially goodwill and recorded deferred income tax
benefits; and
o Establishing a $500,000 allowance to cover other exposure areas.
Outlook
We are likely to incur operating losses and negative cash flow for the
foreseeable future unless the registration statements filed by consulting
clients are declared effective and liquid markets develop for the shares of
client stock that we receive. We cannot predict the likelihood or timing of
these events occurring. However, we believe that our strategy must be based on
developing the consulting business and overcoming the delays in realizing
revenues from that business. No assurances can be given as to our likelihood of
success in this regard.
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 six months.
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.
24
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 our 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.
On April 30, 2002, the SEC proposed a disclosure requirement for
companies to include a separately-captioned section regarding the application
of critical accounting policies in the "Management's Discussion and Analysis"
(MD&A) section of annual reports, registration statements and proxy and
information statements. The Application of Critical Accounting Policies section
would encompass both disclosure about the critical accounting estimates that are
made by the company in applying its accounting policies and disclosure
concerning the initial adoption of an accounting policy by a company.
The SEC proposals define an accounting estimate recognized in the
financial statements as a "critical accounting estimate" if:
o the accounting estimate requires a company to make assumptions about
matters that are highly uncertain at the time the accounting estimate
is made; and
o different estimates that a company reasonably could have used in the
current period, or changes in the accounting estimate that are
reasonably likely to occur from period to period, would have a material
impact on the presentation of a company's financial condition, changes
in financial condition or results of operations.
o The proposals would also require the following information in the MD&A
section:
A discussion that identifies and describes the estimate, the
methodology used, certain assumptions and reasonably likely changes;
An explanation of the significance of the accounting estimate to the
company's financial condition, changes in financial condition and
results of operations and, where material, an identification of the
line items in the company's financial statements affected by the
accounting estimate;
25
A quantitative discussion of changes in line items in the financial
statements and overall financial performance if the company were to
assume that the accounting estimate were changed, either by using
reasonably possible near-term changes in certain assumption(s)
underlying the accounting estimate or by using the reasonably possible
range of the accounting estimate;
A quantitative and qualitative discussion of any material changes made
to the accounting estimate in the past three years, the reasons for the
changes, and the effect on line items in the financial statements and
overall financial performance;
A statement of whether or not the company's senior management has
discussed the development and selection of the accounting estimate, and
the MD&A disclosure regarding it, with the audit committee of the
company's board of directors;
If the company operates in more than one segment, an identification of
the segments of the company's business the accounting estimate affects;
and
A discussion of the estimate on a segment basis, mirroring the one
required on a company-wide basis, to the extent that a failure to
present that information would result in an omission that renders the
disclosure materially misleading.
The proposals also would include a requirement that companies update
this part of the required disclosure to show material changes in their quarterly
reports.
These SEC proposals will require us to discuss in detail the
assumptions underlying the revenue recognition policies of the consulting
business.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
The Company is a co-defendant in a lawsuit brought by a creditor of Laminaire
Corporation in which the plaintiff is seeking unspecified damages in connection
with the purchase by the Company of customer and vendor lists from Laminaire.
Based on a preliminary review of the claims by the Company, it appears that it
is substantially without merit. The Company will file responses and motions in
late May.
Item 2 Changes in Securities
None
Item 3 Defaults on Senior Securities
None
Item 4 Submission of Matters to a Vote of Shareholders
None
26
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
10.34 Agreement with Adirondack Capitall, LLC
27
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
/s/ R. Bret Jenkins
---------------
By: R. Bret Jenkins
Chief Financial Officer
Date: May __, 2002