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, 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 October 31, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
eSAFETYWORLD, Inc.
INDEX
PART I.
FINANCIAL INFORMATION Page Number
Item 1.
Unaudited Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of September 30 2002 3
Condensed Statements of Consolidated Operations for the Three
Months Ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2002 and 2001 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2.
Management's Discussion and Analysis or Plan of Operation 18
Item 3.
Controls and Procedures 24
PART II.
Other Information 28
eSAFETYWORLD, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 696,805
Accounts receivable, net of allowance
for doubtful accounts of $3,000 22,361
Inventories 38,278
Prepaid expenses and other 45,526
---------
Total Current Assets 802,970
Property and equipment, less accumulated
depreciation of $132,768 331,105
Acquired intangibles, less accumulated
amortization of $1,261,069 50,000
Other assets 957,442
---------
Total Assets $ 2,141,517
=========
See Notes to Condensed Consolidated Financial Statements.
3
eSAFETYWORLD, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 160,357
---------
Long Term Liabilities:
Capital lease obligation 3,613
Notes payable (secured by a certificate
of deposit)-bank 233,277
---------
Total Long-term liabilities 236,890
---------
Total Liabilities 397,247
---------
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 (4,647,374)
---------
Stockholders' Equity 1,744,270
---------
Total Liabilities and Stockholders' Equity $ 2,141,517
=========
See Notes to Condensed Consolidated Financial Statements.
4
eSAFETYWORLD, Inc.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
------------------- ---------------
Revenues $ 35,536 $ 11,493
Cost of revenues 27,629 57,323
------------------- ---------------
Gross profit 7,907 (45,830)
------------------- ---------------
Expenses and Other:
Selling and administrative expenses 291,203 102,016
Other:
Amortization and impairments 20,970 --
Regulatory and legal costs 17,720 --
Other-net (principally interest) (6,182) (23,035)
------------------- ---------------
Total Expenses and Other 323,711 78,981
------------------- ---------------
Pretax Loss from Continuing Operations (315,804) (124,811)
Income Taxes (Benefit) -- (50,000)
------------------- ---------------
Loss From Continuing Operations (315,804) (74,811)
Discontinued Operations -net (20,103) (8,711)
------------------- ---------------
Net Loss ($335,907) ($83,522)
=================== ===============
Basic and Diluted Loss Per Share:
Continuing operations ($.10) ($.03)
Discontinued operations (.01) --
----- -----
Total ($.11) ($.03)
====== ======
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, 2002 AND 2001
(UNAUDITED)
2002 2001
----------- ---------
Cash flows from operating activities:
Net loss $ (335,907) $ (83,522)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation, amortization and impairments 38,422 16,966
Deferred tax benefit - (54,000)
Decrease in net operating assets (64,973) (185,101)
--------- ---------
Net cash used in operations (362,458 (305,657)
--------- ---------
Cash flows from investing activities:
Investments - (72,050)
Increase in certificates of deposits - (5,864)
Purchase of software, web site development,
and patent - (17,512)
--------- ---------
Net cash used in investing activities - (95,426)
--------- ---------
Cash flows from financing activities:
Repayment of debt (5,045) (27,479)
--------- ---------
Net cash used in financing activities (5,045) (27,479)
--------- ---------
Net decrease in cash (367,503) (428,562)
Cash and cash equivalents - beginning 1,064,308 2,929,807
--------- ---------
Cash and cash equivalents - ending $ 696,805 $2,501,245
========= =========
See Notes to Condensed Consolidated Financial Statements.
6
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 and completed an initial public offering of its common stock in February
2000.
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,
2002 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2003. 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, 2002.
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.
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-month periods ended September 3, 2002 and 2001 follows:
2002 2001
----------------- ----------------
Product development costs $ - $ 6,498
General and administrative 20,103 6,213
----------------- ----------------
Loss during the development stage $ 20,103 $ 12,711
================= ================
7
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, 2002, Blue Marble World's balance sheet consisted of:
ASSETS:
CURRENT ASSETS:
Inventories $ 38,278
Prepaid expenses 11,526
WEBSITE , COMPUTER and SOFTWARE 89,693
------
TOTAL ASSETS $ 139,497
========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY:
Due to eSAFETYWORLD $ 377,421
Accounts payable 11,600
Common stock 7,400
Deficit accumulated during the development stage (256,924)
---------
Total LIABILITIES AND STOCKHOLDER'S DEFICIENCY $ 139,497
=========
8
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 subsidiaries (collectively
referred to herein as the "Company"). All intercompany transactions and account
balances are eliminated in consolidation.
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, the value of
consideration received from consulting clients and the realizability of certain
investments. In future periods, the ultimate realizability and valuation of
assets, principally the equity securities issued to the Company by clients,
received in satisfaction for consulting services will involve assumptions and
estimates. The carrying value of the acquired intangibles was substantially
written down at June 30, 2002.
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
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 fiscal year ended June 30,
2002 that clearing certain other technical matters brought up during the review
process 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 at June
30, 2001. No consulting revenue has been recognized during the three months
ended September 30, 2002 or 2001 because no registration statements filed by
clients were deemed effective by the SEC.
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. If
eSafetyworld concludes that the issuer in which eSAFETYWORLD has an interest is
or may be a blank check company or the value is otherwise impaired, the carrying
value of such investment will be substantially reduced or written off.
Inventories - Product inventories consist of finished goods acquired from third
parties. Such costs, are stated at the lower of cost or market. Cost is
determined based on the first-in, first-out cost flow assumption.
9
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 and Diluted 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.
Fixed Assets - Fixed assets consist of the following at September 30, 2002:
Furniture and fixtures $ 10,812
Website development costs 252,429
Software 48,731
Database 96,711
Equipment 10,015
Patent 9,201
Assets acquired under capital lease 35,974
-------------
Total 463,873
Less - Accumulated depreciation 132,768
-------------
Net $ 331,105
=============
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.
10
Intangibles - The acquired intangible assets 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 is 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.
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 wrote off substantially all of the carrying value of
its goodwill at June 30, 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 September 30, 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 September 30, 2002, the Company has no recorded deferred tax
benefit. At June 30, 2002, the Company has net operating loss carryforwards of
approximately $4,300,000 and has fully reserved the potential tax benefit
therefrom because realization of such benefit is not more likely than not.
Basis of Presentation - The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. As of
September 30, 2002, the Company had experienced losses of $4,647,374 since its
inception. There is substantial doubt that the Company will be able to continue
as a going concern unless it can develop profitable operations and/or obtain
additional funding. Management is reviewing all aspects of the Company's
operations in an effort to identify potentially profitable opportunities and
will seek additional funding if necessary. However, there are no assurances that
the Company will be successful in any of these endeavors. The consolidated
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
11
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (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 wrote-off substantially all goodwill during the year
ended June 30, 2002.
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. The adoption of SFAS No. 143 did not have an
impact on the financial statements.
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. The implementation of these standards is not expected to
impact on the Company's results of operations and financial position.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145") Rescission of FASB Statements Nos. 4, 44 and 64,
Amendment to FASB Statement No. 13 and Technical Corrections, which rescinds
FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that Statement, FASB Statement No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements. This Statement rescinded FASB
Nos. 4 and 64 which required that all gains and losses from the extinguishment
of debt be aggregated and, if material, be reported as an extraordinary item,
net of related income tax effects. This Statement also rescinds FASB Statement
No. 44, Accounting for Intangible Assets of Motor Carriers and amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections.
Management does not believe that the adoption of this Statement will have a
material effect on the Company's financial statements.
12
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal
Activities ("SFAS 146"). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS 146 also addresses
recognition of certain costs related to terminating a contract that is not a
capital lease, costs to consolidate facilities or relocate employees and
termination benefits provided to employees who are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS 146 is not yet
effective and the impact of adoption on the Company's financial position or
results of operations has not been determined.
In November 2001, the Emerging Issues Task Force reached a consensus to
issue FASB Staff Announcement Topic No. D-103, which was re-characterized in
January 2002 as EITF Issue No. 01-14, Income Statement Characterization of
Reimbursement Received for Out-of-Pocket Expenses Incurred. This consensus
clarifies that reimbursements received for out-of-pocket expenses incurred
should be classified as revenue in the statement of operations. This consensus
should be applied in financial reporting periods beginning after December 15,
2001. Upon application of this consensus, comparative financial statements for
prior periods should be reclassified to comply with the guidance in this
consensus. The adoption of this consensus did not have a material effect on the
Company's results of operations.
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 September 30, 2002, Other Assets consisted of:
Deposits $ 10,000
Deferred contract costs - net 187,590
Note receivable from unrelated party 6,000
Pledged certificates of deposits 753,852
------------
Total $ 957,442
============
The deferred contract 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 pertaining to client filings. The Company
previously wrote-off or established reserves for projects that have been delayed
or deferred by clients or for which issues exist that could seriously delay or
impair the Company's ability to realize a benefit from the shares issued or
issuable by clients. It reassesses the carrying value of these assets at each
reporting period. The related charge associated with this review during the
three-month period ended September 30, 2002 amounted to $10,668 and is included
in the caption "Amortization and impairment" in the accompanying Statements of
Operations.
13
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Consulting and Employment Agreements
The Company has consulting agreements with four consulting firms,
including three entities controlled by officers or directors under which the
Company will pay minimum annual consulting fees of $390,000 during the fiscal
year ending June 30, 2003. None of these officers or directors receives any
other cash compensation from the Company for their services but receive
reimbursement for expenses including healthcare.
Rent
The Company is obligated under the terms of two short-term operating
leases for office space which call for minimum monthly payments of approximately
$1,900 through September 30, 2003.
Equipment Leases
The Company leases servers, computers and similar equipment under
various capital leases. Future minimum lease payments under these leases are as
follows:
Year Ending June 30, Amount
2003 $ 14,800
2004 7,400
----------
Total 22,200
Interest 2,313
-----------
Present value of minimum commitments $ 19,887
===========
Current portion (included in accounts
payable and accrued expenses) $ 16,274
============
Long-term portion $ 3,613
============
Assets acquired under capital leases are capitalized using interest
rates appropriate at the inception of each lease. Such assets are summarized
below at September 30, 2002:
Computer equipment:
Cost $ 35,974
Accumulated depreciation 12,591
------
Net $ 23,383
========
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.
14
Legal Matters
On March 7, 2002, Norwood Venture Corp. ("Norwood") commenced an action
in the Supreme Court of the State of New York, County of New York, against the
Company and various other defendants, including eSAFETYWORLD and two directors.
In this action, Norwood, a purported creditor of the now defunct Laininaire
Corporation ("Laminaire") has asserted a fraudulent conveyance claim against the
Company in connection with the Company's acquisition of certain intangible
assets from Laminaire in 1999 (the "1999 transaction"). The complaint also
asserts fraudulent conveyance and breach of fiduciary duty claims against the
two directors in connection with the 1999 transaction. In addition, the
complaint asserts fraudulent misrepresentation and negligent misrepresentation
claims against the two directors in connection with an alleged February 2000
transaction in which Norwood allegedly gave up a lien on certain Laminaire
property in exchange for a lien on Laminaire accounts receivable and inventory
and other consideration. However, it does not appear that such claims are
asserted against the two directors in their capacity as officers and/or
directors of eSAFETYWORLD.
After the commencement of this action, the parties entered into
negotiations to resolve the dispute. While negotiations have continued, the
parties have signed various stipulations extending defendants' time to respond
to the complaint. The Company will respond to the complaint if a satisfactory
settlement is not reached.
In December 2001, the Securities and Exchange Commission initiated an
investigation of the Company. The investigation closely followed a decision by
NASDAQ to de-list the Company's common stock. As of this date, no charges have
been brought or threatened by the SEC against the Company or any individual as a
result of the investigation.
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 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. That
registration statement has not been declared effective by the SEC, and there are
no assurances that it will ever be declared effective.
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.
16
At September 30, 2002, Blue Marble World owes the Company an aggregate
of $377,421. 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 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, 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, 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 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).
17
Item 2
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
starting in July 1999 and thereafter to 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 we were aware
of 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 evaluation 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 ordering
solutions 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 year ended
June 30, 2002 and continued at the same level during the three months ended
September 30, 2002. During the first quarter of fiscal 2002, we considered
implementing a program of introducing high technology and specialty products
designed by us. Our initial product in this area was our patent pending MailSafe
Containment Chamber which was designed to allow an individual to open mail or
standard size overnight packages in a confined airtight environment. A
significant demand for MailSafe did not materialize after our marketing efforts
were seriously impeded by regulatory concerns when the product was initially
introduced. The sale of MailSafe units is not profitable at the low levels of
production that we attained. In addition, our limited resources make it unlikely
that we will introduce new engineered designed products in the future.
18
The foregoing developments have resulted in our ongoing reassessment of
the Safety Products Business. We are currently exploring our strategic options
and have not come to any conclusion. Our options being considered are:
o Separate the safety products and consulting businesses into different
entities;
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);
o Continue the business without committing significant financial and
other resources that can best be used expanding the consulting
business; or
o Some other alternatives not yet identified.
Unless the level of product orders increases substantially, 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 slack demand. The
executive principally responsible for our product business accepted an executive
position with another company in May 2002 and has not been replaced.
Consulting Program - 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 we believed had the potential to benefit both the client and our
shareholders, although the realization of benefits was never and could never be
assured. The concept has required a large commitment of time and resources to
clear the regulatory process. We believe that we have resolved satisfactorily
many of the significant issues and concerns of which we are aware. We, together
with clients, continue to discuss client-specific issues. However, there are no
assurances that the current open issues will be resolved satisfactorily or that
new issues and concerns will not arise or that issues that we believe have been
resolved satisfactorily may reopen.
The uncertainties and delays that have arisen appear, in our opinion,
to be related to our intent to distribute shares received from clients as
dividends to our shareholders and the fact that our business model calls for us
to work multiple engagements simultaneously. Therefore, we are 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, particularly the shares of startup or development stage companies.
We plan to concentrate our efforts on established small and medium-sized
companies having no affiliation to any officer or director. If we receive shares
of stock from consulting clients and opt not to distribute those shares 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 and impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
If required, impairment losses are recognized based on the excess of the asset's
carrying value over its fair value. We have established reserves and allowances
for account balances associated with clients whose carrying values are impaired
because client-specific issues have been raised during the registration review
process. As of September 30, 2002, we have recognized no revenues from our
consulting projects and have established reserves and allowances in connection
with projects whose carrying values are impaired because they have been delayed
or postponed by clients or which have had client-specific issues raised during
the regulatory review process.
Our management has devoted a substantial portion of its time and
resources to the issues relating to the registration and dividend distribution
process of the shares to be received from consulting clients. The initial
concept was to distribute shares received from clients to the Company's
shareholders in a way that we believed had the potential to benefit both the
client and our shareholders, although the actual realization of benefits was
never and could never be assured. The concept has required a large commitment of
time and resources to clear the regulatory review process. We believe that we
have resolved satisfactorily many of the significant structural issues and
concerns of which we are aware. We, together with clients, continue to discuss
client-specific issues. However, there are no assurances that the current
client-specific issues will be resolved satisfactorily or that new issues and
concerns may arise or that issues that we believe have been resolved
satisfactorily may reopen.
19
The foregoing problems have caused us to completely reassess our
strategy. We are considering a policy of not distributing the shares of startup
or development stage client companies and focusing efforts on established small
and medium sized businesses. If we receive shares of stock from consulting
clients and opt not to distribute those shares 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 consulting services and such initial evaluation will be
reviewed for reasonableness and impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
If required, impairment losses are recognized based on the excess of the asset's
carrying value over its fair value. We have established reserves and allowances
for account balances relating to clients whose carrying values are impaired
because client-specific issues have been raised as part of the regulatory review
process.
We have not significantly marketed our consulting services. All of our
previous engagements have come as referrals. We do not anticipate soliciting or
accepting new client engagements of a similar nature to those undertaken in the
past until or unless current uncertainties are resolved. This means that the
consulting initiative may not go forward if we ultimately lack the resources
necessary to resolve the issues satisfactorily or if we exhaust our resources to
resolve those issues.
If the matters described above are resolved before we exhaust our
resources, we are considering marketing our consulting services to attorneys,
accountants and other professionals who provide services to established small
and medium-sized businesses. If we go forward, we will also establish a website
for our consulting services operations at www.accixx.com and will outsource many
service requirements. We may outsource some of those requirements to firms that
are or were related to some of our officers and directors. Any arrangements that
we make with related parties will, in our judgment, be on terms no less
favorable to us than would be available from unrelated parties. While our
preference is to emphasize this portion of our business, there can be no
assurances that we will be able to do so. We believe that our competitive
advantage is largely related to our willingness to take securities for services.
That strategy does not benefit us if we are unable to obtain liquidity for the
shares that are received or we have exhausted our liquid resources. We do not
intend to allow our acquisition of shares of clients to cause us to become
classified as an investment company subject to the Investment Company Act of
1940.
If we go forward in consulting, our efforts will be to work with
established companies, including entities having the ability to pay fees in
cash. If we do decide to accept new client engagements, of which there are no
assurances, we will emphasize being engaged by:
o Clients that have established businesses and are not in the
development stage;
o Clients that are not affiliated with any of our officers or directors;
and
o Engagement terms that do not result in us being considered affiliated
with or promoters of the client.
We believe that following the foregoing criteria will address most of the
client-specific issues that we have identified. However, no assurances can be
given that we will obtain client engagements meeting these criteria or that
other issues will not arise.
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. That registration statement has not been declared
effective by the SEC, and there are no assurances that it will ever go
effective.
20
Results of Operations
General:
Three months ended September 30, 2002 compared to the three months ended
September 30, 2001
A significant portion of the Company's resources in the 2002 period
were devoted to trying to advance open projects and identify and determine a
viable strategy for going forward. No new consulting engagements were sought or
accepted. There are no assurances that we will be successful in identifying or
implementing a viable strategy before our resources are fully depleted.
Revenue and Cost of Product Revenues
Revenue and cost of revenues were not significant in either period. The
Company was not successful in increasing product sales in a generally depressed
economy.
Loss from Operations
The loss from operations in the 2002 period was caused by:
o Unexpected delays and problems that prevented us from recognizing
revenues from the consulting business;
o Costs aggregating $17,720 relating to dealing with regulatory issues
as well as significant management time; and
o The ongoing decline in safety products orders.
These factors resulted in us continuing not to recognize revenue on consulting
engagements.
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. If we are unable to accomplish the goals of our
consulting initiative in the next few months, we will need financing. If we are
unable to obtain financing or if the financing we do obtain is insufficient to
cover our operating losses, we may substantially curtail or terminate our
operations or seek other business opportunities through strategic alliances,
acquisitions or other arrangements that may dilute the interests of existing
stockholders.
If the issues described above relating to our consulting practice are
not resolved satisfactorily during the first half of the fiscal year ending June
30, 2003, we will have to consider other alternatives and strategies that may
offer benefits to our Company and shareholders before we exhaust our financial
resources completely. These alternatives will include, but not be limited to,
merger or joint venture opportunities. No such options have been discussed or
sought nor has any entity been engaged or authorized to seek such possible
transactions on our behalf.
In conclusion, no assurances can be given that we will identify and
implement a viable business strategy prior to our resources being completely
depleted. Our strategy may also result in the discontinuance of a portion or all
of our current business activities.
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.
21
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.
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, if continued, will be seasonal.
Recent Accounting Pronouncements
No new pronouncement issued by the Financial Accounting Standards
Board, the American Institute of Certified Public Accountants or the Securities
and Exchange Commission is expected to have a material impact on our financial
position or reported results of operations.
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 adoption of SFAS No. 141 did not have an 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. We
wrote-off substantially all goodwill during the year ended June 30, 2002.
However, we probably would have had a significant write-off under pre-existing
accounting principles as well..
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. The FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS 144") which is effective for fiscal years beginning after December
15, 2001 and supersedes SFAS 121 while retaining many of its requirements. The
adoption of SFAS No. 143 and 144 did not have an impact on the financial
statements.
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. The implementation of these standards is not expected to
impact on the Company's results of operations and financial position.
22
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145") Rescission of FASB Statements Nos. 4, 44 and 64,
Amendment to FASB Statement No. 13 and Technical Corrections, which rescinds
FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that Statement, FASB Statement No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements. This Statement rescinded FASB
Nos. 4 and 64 which required that all gains and losses from the extinguishment
of debt be aggregated and, if material, be reported as an extraordinary item,
net of related income tax effects. This Statement also rescinds FASB Statement
No. 44, Accounting for Intangible Assets of Motor Carriers and amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections.
Management does not believe that the adoption of this Statement will have a
material effect on our financial statements.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal
Activities ("SFAS 146"). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS 146 also addresses
recognition of certain costs related to terminating a contract that is not a
capital lease, costs to consolidate facilities or relocate employees and
termination benefits provided to employees who are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS 146 is not yet
effective and the impact of adoption on the Company's financial position or
results of operations has not been determined.
In November 2001, the Emerging Issues Task Force reached a consensus to
issue FASB Staff Announcement Topic No. D-103, which was re-characterized in
January 2002 as EITF Issue No. 01-14, Income Statement Characterization of
Reimbursement Received for Out-of-Pocket Expenses Incurred. This consensus
clarifies that reimbursements received for out-of-pocket expenses incurred
should be classified as revenue in the statement of operations. This consensus
should be applied in financial reporting periods beginning after December 15,
2001. Upon application of this consensus, comparative financial statements for
prior periods should be reclassified to comply with the guidance in this
consensus. The adoption of this consensus did not have a material effect on our
results of operations.
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's 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.
The proposals would also require the following information in the MD&A section:
o 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;
23
o 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;
o 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;
o If the company operates in more than one segment, an identification of
the segments of the company's business the accounting estimate
affects; and
o 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.
Item 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (collectively,
the "Certifying Officers") are responsible for establishing and
maintaining disclosure controls and procedures for us. Such officers
have concluded (based upon their evaluation of these controls and
procedures as of a date within 90 days of the filing of this report)
that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in this report is
accumulated and communicated to management, including our principal
executive officers as appropriate, to allow timely decisions regarding
required disclosure.
The Certifying Officers also have indicated that there were no
significant changes in our internal controls or other factors that
could significantly affect such controls subsequent to the date of
their evaluation, and there were no corrective actions with regard to
significant deficiencies and material weaknesses.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
In December 2001, the Securities and Exchange Commission initiated an
investigation of the Company. The investigation closely followed a decision by
NASDAQ to de-list the Company's common stock. As of this date, no charges have
been brought or threatened by the SEC against the Company or any individual as a
result of the investigation.
On March 7, 2002, Norwood Venture Corp. ("Norwood") commenced an action
in the Supreme Court of the State of New York, County of New York, against the
Company and various other defendants, including eSAFETYWORLD, Edward A. Heil and
K. Ivan F. Gothner. In this action, Norwood, a purported creditor of the now
defunct Laininaire has asserted a fraudulent conveyance claim against the
Company in connection with the Company's acquisition of certain intangible
assets from Laminaire in 1999 (the "1999 transaction"). The complaint also
asserts fraudulent conveyance and breach of fiduciary duty claims against
Messrs. Heil and Gothner in connection with the 1999 transaction. In addition,
the complaint asserts fraudulent misrepresentation and negligent
misrepresentation claims against Messrs. Heil and K. Ivan F. Gothner in
connection with an alleged February 2000 transaction in which Norwood allegedly
gave up a lien on certain Laminaire property in exchange for a lien on Laminaire
accounts receivable and inventory and other consideration. However, it does not
appear that such claims are asserted against Mr. Heil or Mr. Gothner in their
capacity as officers and/or directors of eSAFETYWORLD. After the commencement of
this action, the parties entered into negotiations to resolve the dispute. While
negotiations have continued, the parties have signed various stipulations
extending defendants' time to respond to the complaint.
24
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
Exhibit Number Description
99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
25
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: November 14, 2002
25
CERTIFICATIONS
CHIEF EXECUTIVE OFFICER
I, Edward A. Heil, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
eSAFETYWORLD, Inc.
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Edward A. Heil
- ------------------------------------
Edward A. Heil
Chief Executive Officer
CHIEF FINANCIAL OFFICER
I, R. Bret Jenkins, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
eSAFETYWORLD, Inc.
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ R. Bret Jenkins
R. Bret Jenkins
Chief Financial Officer