UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998
OR
[ ] 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 0-24778
NATIONAL HEALTH & SAFETY CORPORATION
(Exact name of small business issuer as specified in its charter)
Utah 87-0505222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
730 Louis Drive, Warminster, Pennsylvania 18974
(Address of principal executive offices)
Registrant's telephone no., including area code: (215) 442-0926
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
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
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Class Outstanding as of September 30, 1998
Common Stock, $.001 par value 47,686,176
<PAGE>
TABLE OF CONTENTS
Heading Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 1
Balance Sheets -- September 30, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . 2
Statements of Operations -- three and nine months
ended September 30, 1998 and 1997. . . . . . . . . . . 4
Statements of Stockholders' Deficiency . . . . . . . . . 5
Statements of Cash Flows -- three and nine months
ended September 30, 1998 and 1997. . . . . . . . . . . 7
Notes to Financial Statements . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis and
Results of Operations. . . . . . . . . . . . . . . . . 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes In Securities. . . . . . . . . . . . . . . . . . 20
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of
Securities Holders . . . . . . . . . . . . . . . . . . 20
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . 22
-i-
<PAGE>
PART I
Item 1. Financial Statements
The following unaudited Financial Statements for the period
ended September 30, 1998, have been prepared by the Company.
NATIONAL HEALTH & SAFETY CORPORATION
FINANCIAL STATEMENTS
September 30, 1998 and 1997
December 31, 1997
<PAGE>
NATIONAL HEALTH & SAFETY CORPORATION
Balance Sheets
ASSETS
September 30, December 31,
1998 1997
(Unaudited)
CURRENT ASSETS
Cash $ 4,236 $ 7,516
Accounts receivable, net of allowance for doubtful
accounts of $8,200 (Note 1) 40,007 31,918
Total Current Assets 44,243 39,434
PROPERTY AND EQUIPMENT (Note 1)
Furniture and fixtures 7,088 7,088
Computer equipment 129,649 129,649
Office equipment 29,062 29,062
Total Property and Equipment 165,799 165,799
Less accumulated depreciation 155,726 147,510
Net Property and Equipment 10,073 18,289
OTHER ASSETS
Other receivables 25,515 -
Prepaid expenses (Note 1) 220,015 500,000
Deposits 9,298 9,298
Total Other Assets 254,828 509,298
TOTAL ASSETS $ 309,144 $ 567,021
<PAGE>
NATIONAL HEALTH & SAFETY CORPORATION
Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
September 30, December 31,
1998 1997
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 293,906 $ 344,280
Loans payable, stockholder (Note 3) 656,025 652,025
Loans payable, individuals (Note 2) 501,124 759,582
Accrued expenses (Note 5 and 8) 1,426,545 1,041,924
Convertible debentures (Note 6) 125,000 175,000
Total Current Liabilities 3,002,600 2,972,811
LONG-TERM DEBT
Legal settlement (Note 5) 255,000 275,000
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value; 25,000,000 shares
authorized; 14,363 shares issued and outstanding 14 14
Common stock; $.001 par value, 50,000,000 shares
authorized; 47,686,176 and 34,241,074 shares
issued and outstanding, respectively 47,686 34,241
Additional paid-in capital 8,609,836 7,392,394
Stock subscription receivable (700,000) (700,000)
Accumulated deficit (10,905,992) (9,407,439)
Total Stockholders' Deficiency (2,948,456) (2,680,790)
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 309,144 $ 567,021
<PAGE>
NATIONAL HEALTH & SAFETY CORPORATION
Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
SALES $ 30,626 $ 27,909 $ 102,040 $ 77,845
OPERATING COSTS AND EXPENSES
Cost of sales 22,497 7,089 36,977 20,405
Operating expenses 501,971 425,697 1,533,743 952,293
Total Operating Costs
and Expenses 524,468 432,786 1,570,720 972,698
LOSS FROM OPERATIONS (493,842) (404,877) (1,468,680) (894,853)
OTHER EXPENSE
Interest 5,927 11,178 29,873 33,803
NET LOSS $ (499,769) $(416,055) $(1,498,553) $(928,656)
LOSS PER SHARE $ (0.01) $ (0.01) $ (0.04) $ (0.05)
<PAGE>
NATIONAL HEALTH & SAFETY CORPORATION
Statements of Stockholders' Deficiency
Additional Stock
Preferred Common Paid-in Subscriptions Accumulated
Stock Stock Capital Receivable Deficit
Balance, December 31, 1995 $ 14 $ 22,526 $83,823,970 $(80,500,000) $(5,853,195)
Cancellation of stock
subscriptions - (13,300)(79,986,700) 80,000,000 -
Contribution of capital
by investor - - 114,439 - -
Issuance of common
stock for cash - 3,105 521,894 - -
Issuance of common stock
in payment of debt - 378 329,030 (266,000) -
Issuance of common
stock for services rendered - 619 1,067,048 - -
Stock subscriptions receivable - 7,818 357,558 - -
Net (loss) for the year
ended December 31, 1996 - - - - (1,974,963)
Balance, December 31, 1996 14 21,146 6,227,239 (766,000) (7,828,158)
Issuance of common stock
in payment of debt - 2,918 197,082 - -
Issuance of common stock
for services rendered - 1,204 205,196 - -
Issuance of common stock
for cash - 8,973 732,877 - -
Contribution of capital by
investor - - 30,000 - -
Receipt of stock subscription
receivable - - - 66,000 -
Net (loss) for the year
ended December 31, 1997 - - - - (1,579,281)
Balance, December 31, 1997 $ 14 $ 34,241 $ 7,392,394 $ (700,000) $(9,407,439)
<PAGE>
NATIONAL HEALTH & SAFETY CORPORATION
Statements of Stockholders' Deficiency (Continued)
Additional Stock
Preferred Common Paid-in Subscriptions Accumulated
Stock Stock Capital Receivable Deficit
Balance, December 31, 1997 $ 14 $ 34,241 $ 7,392,394 $ (700,000) $(9,407,439)
Issuance of common stock in
payment of debt (unaudited) - 9,830 924,057 - -
Issuance of common stock for
services rendered (unaudited) - 8,595 45,905 - -
Issuance of common stock for
cash (unaudited) - 3,020 189,480 - -
Common stock canceled
(unaudited) - (8,000) 8,000 - -
Contribution of capital by
shareholder (unaudited) - - 50,000 - -
Net (loss) for the nine months
ended September 30, 1998
(unaudited) - - - - (1,498,553)
Balance, September 30, 1998
(unaudited) $ 14 $ 47,686 $ 8,609,836 $ (700,000) $(10,905,992)
<PAGE>
NATIONAL HEALTH & SAFETY CORPORATION
Statements of Cash Flows
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) $(499,769) $(416,055) $(1,498,553) $(928,656)
Adjustments to reconcile net (loss)
to net cash (used) by operating
activities:
Common stock issued for services 19,500 - 54,500 -
Depreciation and amortization 4,687 13,293 12,210 39,898
(Increase) decrease in:
Prepaid expenses 1,000 - 279,985 -
Accounts receivable (6,609) (2,880) (8,089) 3,486
Other receivables 8,000 - (25,515) -
Increase (decrease) in:
Accounts payable 20,994 12,673 (50,374) (59,281)
Accrued expenses 232,052 234,474 366,964 179,994
Net Cash Used by
Operating Activities (220,145) (158,495) (868,872) (764,559)
CASH FLOWS FROM INVESTING
ACTIVITIES: - - - -
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of loans - stockholders - (10,000) - (10,000)
Repayment of loans - individuals (154,193) (34,199) (154,193) (34,199)
Repayment of long -term debt - - (10,000) -
Proceeds from loans, individuals 60,000 - 833,285 178,659
Proceeds from stockholders' loan - - 4,000 10,000
Issuance of common stock 56,500 525,360 192,500 851,360
Net Cash Provided by
Financing Activities (37,693) 481,161 865,592 995,820
INCREASE (DECREASE) IN CASH (257,838) 322,666 (3,280) 231,261
CASH, BEGINNING OF PERIOD 262,074 70,098 7,516 161,503
NET CASH, END OF PERIOD $ 4,236 $ 392,764 $ 4,236 $ 392,764
SUPPLEMENTAL DISCLOSURE
Cash paid for interest
during the period $ 5,927 $ 11,178 $ 29,893 $ 32,616
<PAGE>
NATIONAL HEALTH & SAFETY CORPORATION
Notes to Financial Statements
September 30, 1998 and 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
a. Nature of Organization
The Company was incorporated on March 23, 1989. The
Company's principal business activities consist of
providing medical cost containment services to both
institutional and consumer markets. The Company performs
on-going credit evaluations of its customers' financial
condition and generally requires no collateral.
On March 22, 1993, the Company entered into a merger with
State Policeman Annual Magazine, Inc. (State), whereby each
share of the Company's common and preferred stock was
exchanged for one share of State's common and preferred
stock. State is a Company which was organized under the
laws of the State of Utah on May 14, 1983. Pursuant to the
merger agreement, State amended its Articles of
Incorporation to change its name to National Health &
Safety Corporation.
b. Accounts Receivable
Accounts receivable are shown net of an allowance for
doubtful accounts of $8,200. Bad debts are written off in
the period in which they are deemed uncollectible. Any bad
debts subsequently recovered are recorded as income in the
financial statements in the period during which they are
recovered.
c. Property and Equipment
Property and equipment are stated at cost. Depreciation is
provided using accelerated and straight-line methods, over
the estimated useful life of each class of asset as
follows:
Furniture and fixtures 7 years
Office equipment 7 years
Computers 5 years
Expenditures for repairs, maintenance and minor renewals
are charged against income as incurred and expenditures for
major renewals and betterment are capitalized. The cost
and accumulated depreciation of assets sold or retired are
removed from the respective accounts with any gain or loss
on disposal reflected in income. Depreciation expense was
$8,216 and $13,625 for the nine months ended September 30,
1998 and 1997, respectively.
d. Loss per Share
The Company has computed the loss per share based upon the
weighted average number of shares outstanding during the
period.
e. Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents.
<PAGE>
NATIONAL HEALTH & SAFETY CORPORATION
Notes to Financial Statements
September 30, 1998 and 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. Deferred Loan Costs
During 1995, the Company issued convertible debentures with
a face value of $250,000. The Company incurred issuance
costs of $70,000 relating to the debentures. The costs
have been capitalized and have been amortized over the life
of the debentures which matured on November 30, 1997, the
amount of deferred loan costs is $0.00. In, 1997, the
Company determined that due to the low trading price of its
stock, that the conversion of the debentures would result
in excessive dilution. Accordingly, it has offered the
holders of the debentures the full cash face value of the
debentures and a 10% cash bonus. The additional
compensation has been accrued as interest expense in the
1997 financial statements.
g. Provision for Taxes
At September 30, 1998, the Company had net operating loss
carryforwards of approximately $10,900,000 that may be
offset against future taxable income through 2013. No tax
benefit has been reported in the financial statements,
because the carryforwards are offset by a valuation
allowance of the same amount.
h. Prepaid Expenses
The Company has purchased $500,000 in radio air time, to be
used over the next year to promote its products. $279,985
was expensed in the nine months ended September 30, 1998.
i. Unaudited Financial Statements
The accompanying unaudited financial statements include all
of the adjustments which in the opinion of management are
necessary for a fair presentation. Such adjustments are of
a normal, recurring nature.
j. 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 period. Actual
results could differ from those estimates.
k. Uninsured Corporate Cash Balances
The Company maintains its corporate cash balances at
various banks and financial institutions. Corporate cash
accounts at banks are insured by the FDIC for up to
$100,000.
<PAGE>
NATIONAL HEALTH & SAFETY CORPORATION
Notes to Financial Statements
September 30, 1998 and 1997
NOTE 2 - LOANS PAYABLE, INDIVIDUALS
September 30, December 31,
1998 1997
(Unaudited)
Private Placement Advances
The Company received advances from
certain individuals under various private
placements. The Company has agreed to
issue common stock to these individuals upon
securing additional financing. Some of the
individuals who had advanced funds were
partially repaid. These loans are unsecured
and due upon demand. $ 48,040 $ 48,040
Loans, Individuals
During the last four years, the Company was
advanced money from various individuals for
working capital purposes which bear interest
at 8% to 10%. If the Company is successful in
obtaining additional capital, it intends to
exchange a majority of these loans for common
stock and the remainder of the loans will be
repaid. These loans are unsecured and due
upon demand. 453,084 711,542
$ 501,124 $ 759,582
NOTE 3 - LOAN PAYABLE, STOCKHOLDER
Prior to the Company's incorporation, one of the
stockholders incurred certain costs and expenses related to
the start-up of the Company. Over the years the
stockholder has advanced to the Company additional funds.
The Company expects to repay this loan in full when
financing occurs. The amount due the stockholder was
$656,025 at September 30, 1998. The loan is unsecured and
accrues interest at 10% per annum.
NOTE 4 - GOING CONCERN
These statements are presented on the basis that the
Company is a going concern. Going concern contemplates the
realization of assets and the satisfaction of liabilities
in the normal course of business over a reasonable length
of time. The continuation of the Company as a going
concern is dependent upon the success of the future
operations and obtaining additional financing.
Management is presently pursuing plans to increase sales
volume, reduce administrative costs, and improve cash flows
as well as obtain additional financing. The ability of the
Company to achieve its operating goals and to obtain such
additional financing, however, is uncertain.
<PAGE>
NATIONAL HEALTH & SAFETY CORPORATION
Notes to Financial Statements
September 30, 1998 and 1997
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company is in various stages of negotiations with
several securities and financial service companies in order
for the Company to obtain additional capital. The Company
has promised to repay certain debts, guarantee fees and
loan incentives with common stock, subsequent to the
Company securing additional capital.
The Company leases its office facility under a non-
cancelable operating lease. Future minimum annual rental
commitments are as follows:
1998 117,746
1999 50,146
Total $ 167,892
Rent expense amounted to $104,488 and $107,826 for the nine
months ended September 30, 1998 and 1997, respectively.
The Company has entered into a five year employment
agreement with its president and chief executive officer,
and five year employment agreements with its vice-president
and chief financial officer and its vice-president of
marketing. Under the terms of the agreements, the Company
will pay minimum annual compensation of $352,000 for the
year ended December 31, 1998. At September 30, 1998, total
deferred income for these three individuals was $868,943.
This amount is included in accrued expenses.
The Company has settled certain litigation involving
alleged improper use of a medical card benefit program.
Under terms of the proposed settlement, both parties agree
to dismiss the claims against each other, and agree to
enter into a commission agreement hereby the Company pays
a commission of 3.5% of sales, such commission to aggregate
$400,000 over the life of the agreement; the Company will
pay at a minimum, an annual commission of $30,000. The
Company is current with the terms of the settlement
agreement. $285,000 is accrued at September 30, 1998 of
which $255,000 is long-term debt which covers the total
remaining obligation.
On September 1, 1998, the Company entered into a written
settlement agreement with the Stein Group resolving all
disputes between the Company and the Stein Group (the
"Settlement Agreement"), subject to the parties' compliance
with two sets of conditions, including payment by the
Company of $150,000 in partial satisfaction of the
HealthMed Loan and deposit into escrow of an uncashed check
in the amount of $18,000 that was to be used to purchase
a portion of the common stock that was canceled, (i) all
three lawsuits (the Premium State Action, the HealthMed
Action and the Premium Federal Action, collectively the
"Litigation") would be dismissed without prejudice; (ii)
the stock certificate evidencing the 8,000,000 shares of
common stock would be deposited in escrow; and (iii) Stein
and Hawk would immediately disclaim any position as
directors of the company, as they had previously asserted.
The Company has already complied with all of the first set
of conditions; accordingly, the Litigation has been
dismissed without prejudice by the Courts in which they
were pending, and will not be refiled unless the Company
fails to comply in a timely manner with the second set of
conditions.
<PAGE>
NATIONAL HEALTH & SAFETY CORPORATION
Notes to Financial Statements
September 30, 1998 and 1997
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
The most significant of the second set of conditions is
that the Company has agreed to pay an additional $100,000
in satisfaction of the HealthMed Loan and to pay an
additional $200,000 in consideration for the dismissal of
all litigation and releases of all claims of the Stein
Group against the Company and its shareholders, officers
and directors. The $300,000 still due is to be paid in
twelve installments of $25,000 in principal plus accrued
interest at 8%, commencing on November 1, 1998. Upon
payment in full by the Company, (i) the certificate for
8,000,000 shares of the Company's common stock will be
returned to the Company; (iii) the uncashed $18,000 check
will be returned to the Stein Group; (iv) the Agreements
will be rescinded based upon the parties will be
terminated. The foregoing is not intended to be a complete
recitation of the terms of the Settlement Agreement, which
is lengthy and complex.
The Company issued shares to certain individuals in
connection with a private placement. The Company has
agreed to not dilute these shareholders below 5.3% of the
outstanding shares of the Company by allowing them to
purchase the shares for the par value amount, until the
Company raises $2,000,000 through a public offering of its
common stock.
The Company has agreed to repurchase stock issued to an
individual in a private placement. The individual
purchased 5,000 shares of the Company's common stock for
$25,000. The Company has committed to repurchasing the
stock for the same amount, contingent upon the success of
future stock placements. Additionally, the Company
received $25,000 from an individual. A judgment has been
issued against the Company to repay the $25,000. The
balance due at September 30, 1998 was $17,500.
During 1995, several stock subscription agreements were
canceled. Of the shares canceled, certificates
representing 4,000,000 shares have not been returned to the
Company, however, these certificates are legended so that
they cannot be traded.
NOTE 6 - CONVERTIBLE DEBENTURES
During 1995 and 1996, the Company issued convertible
debentures with a face value of $900,000. $400,000 of
these debentures were converted during 1996, and $320,000
were converted in 1997. The debentures may be converted
into the Company's common stock at the option of the holder
at a conversion price equal to 50% of the lowest closing
bid price on any day after December 31, 1997 until the date
of conversion. The balance due at September 30, 1998 was
$125,000. In 1997, the Company determined that due to the
low trading price of its stock, the conversion of the
debentures would result in excessive dilution.
Accordingly, it was offering the holders of the debentures
the full cash face value of the debentures and a 10% cash
bonus. The additional compensation has been accrued as
interest expense in the 1997 financial statements.
NATIONAL HEALTH & SAFETY CORPORATION
Notes to Financial Statements
September 30, 1998 and 1997
NOTE 7 - PREFERRED STOCK
In 1992, the Company entered into a stock exchange
agreement with certain shareholders, whereby such
stockholders agreed to exchange certain of their shares of
the pre-split common stock of the Company and certain other
rights for 14,363 authorized shares of a new class of
redeemable preferred stock. The stock is redeemable at
$41.78 per share (aggregate - $600,086), payable as
follows:
Upon closing of a private placement issue $ 50,011
Upon closing of secondary public offering 50,011
One year after closing of a secondary public offering 150,074
Two years after closing of a secondary public offering 174,975
Three years after closing of a secondary public offering 175,015
$ 600,086
NOTE 8 - RELATED PARTY TRANSACTIONS
Included in accounts payable at June 30, 1998 is an amount
due to a corporation affiliated with the Company through
common management and stock ownership, representing fees
for administrative services rendered to the Company in 1991
and prior years. The amount was $28,780 at September 30,
1998.
NOTE 9 - OPTIONS AND WARRANTS
The Company has the following outstanding warrants:
Number Expiration
Issued Purchase Price Date
487,500 Lessor of $1.50 or 75% of current price 12/31/00
131,665 Lessor of $2.13 or 75% of current price 12/31/00
250,000 $0.25 per share 04/01/01
200,000 $0.25 per share 04/01/01
30,202 $1.00 per share 06/25/98
The Company has issued 6,000,000 options to officers of the
Company at an exercise price of $0.17 per share. 3,000,000
options expire on June 6, 2010, and 3,000,000 expire on
April 30, 2011.
The Company has issued 6,000,000 options to officers of the
Company at an exercise price of $0.07 per share. These
options expire in February 2013.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following table sets forth the percentage relationship to
sales of principal items contained in the Company's Statements of
Operations for the three month and nine month periods ended
September 30, 1998 and 1997. It should be noted that percentages
discussed throughout this analysis are stated on an approximate
basis.
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
Sales. . . . . . . . . . . . . . . 100% 100% 100% 100%
Cost of sales. . . . . . . . . . 73 26 36 26
Operating expenses . . . . . . . . 1640 1525 1503 1224
(Loss) from operations . . . . . . (1613) (1451) (1439) (1150)
Other expenses - interest. . . . . 19 40 29 43
Net (loss) . . . . . . . . . . . . (1632) (1491) (1468) (1193)
Results of Operations for the Three and Nine Months Ended September
30, 1998 and 1997
Total sales for the third quarter of 1998 increased 10% from
the third quarter of 1997 primarily attributed to the 2655%
increase in other sales due to short-term consulting agreements.
This increase was partially offset by the 19% decrease in POWERX
Card sales due to the increase in monthly payments for memberships
versus annual payments. When sales are paid for on a monthly
basis, the income is recorded for only the current months. Medical
equipment sales also decrease 27% for the period. For the first
nine months of 1998, total sales increased 31% from the comparable
1997 period primarily attributed to the 14% increase in POWERX
sales due to increased marketing activity for the year to date, and
the 1058% increase in other sales. The increase was partially
offset by the 21% decrease in medical equipment sales attributed to
continued reduced marketing efforts for the year to date.
Cost of sales (as a percentage of total revenues) increased to
73% for the third quarter of 1998, from 26% for the third quarter
of 1997 period, and increased to 36% for the first nine months of
1998 from 26% for the comparable 1997 period. These increases were
the result of the increase in monthly payment for memberships
versus annual payments. Although monthly payments are recorded for
only the current month, the cost of sales is paid for totally in
the first month and there is no reduction if an individual cancels
during the remaining time of membership. Actual cost of sales
increased 217% for the third quarter of 1998 compared to the third
quarter of 1997 due to the mix of sales relating to monthly pays,
and increased 81% for the first nine months of 1998 due to the
change in sales mix.
Operating expenses for third quarter and first nine months of
1998 increased 18% and 61%, respectively, when compared to the
corresponding 1997 periods. Contributing to the increase during
the third quarter of 1998 were (i) the 8% increase in salaries paid
due to an additional employee; (ii) the 38% increase in commissions
due to a new marketing program; (iii) the 45% increase in rents due
to and increase in rent, additional office equipment and auto
leases; (iv) new expenditures of $22,746 for marketing and $7,937
for advertising reflecting increased marketing activity; and (v)
the 71% increase in mailing expenses due to increase selling and
advertising efforts. Also during the third quarter, the Company
made a $200,000 settlement in a legal action.
The 61% increase in operating expenses for the first nine
months of 1998 is primarily attributed to the increases in
advertising and marketing expenses reflecting the Company's
increased selling efforts, and the increases in salaries and
commissions.
As a percentage of total revenues, operating expenses
increased from 1525% for the third quarter of 1997 to 1640% for the
third quarter of 1998, and from 1224% for the first nine months of
1997 to 1503% for the first nine months of 1998.
The net loss for the third quarter and first nine months of
1998 increased 20% to $499,769 for the third quarter and 61% to
$1,498,553 for the first nine months, compared with the
corresponding 1997 periods. These results are primarily attributed
to the significant increases in operating expenses for the 1998
periods in comparison to smaller increases in revenues.
Liquidity and Capital Resources
Historically, the Company's working capital needs have been
satisfied primarily through financing activities including private
loans and raising capital through the sale of securities. Working
capital at September 30, 1997 was a negative $2,958,357 compared to
a negative $2,933,377 at December 31, 1997. This increase of less
than 1% was due to a 37% increase in accrued expenses and mostly
offset by the 34 decrease in loans payable to individuals and 29%
decrease in convertible debentures.
Net cash used by operating activities for the third quarter
and first nine months of 1998 was $220,145 and $868,872
respectively, compared to net cash used of $158,495 and $764,559
for the comparable 1997 periods. These increases are primarily
attributed to the larger net loss form operations in the 1998
periods and partially offset by a decrease in prepaid expense and
an increase in accrued expenses during the first nine months of
1998. Net cash provided by financing activities for the third
quarter and first nine months of 1998 was a negative $37,693 and a
positive $865,592, respectively, compared to net cash provided of
$481,181 and $995,820 for the 1997 periods. These results are
primarily due to proceeds received from loans in 1998 and partially
offset by repayments of loans of $154,193 during the third quarter
of 1998.
The Company anticipates meeting its near-term working capital
needs partially with revenues from operations, and by investigating
the possibility of interim financing to provide working capital and
to increase marketing activities related to the Company's products.
Management has not entered into any new arrangements or definitive
agreements for additional private placement of securities and/or a
public offering. If the Company's operations are not adequate to
fund its operations and it is unable to secure financing from the
sale of its securities or from private lenders, the Company could
experience additional losses which could curtail the Company's
operations and services which could result in the loss of current
customers. The continuation of the Company as a going concern is
directly dependent upon the success of its future operations and
ability to obtain additional financing.
As of September 30, 1998, the Company had total assets of
$309,144 and total stockholders' deficiency of $2,948,456. In
comparison, as of December 31, 1997, the Company had total assets
of $567,021 and total stockholders' deficiency of $2,680,790.
In the opinion of management, inflation has not had a material
effect on the operations of the Company.
During the remainder of fiscal 1998, the Company will stress
the marketing of its POWERX contracts and increasing the number of
POWERX members nationwide. The Company will also concentrate on
the development of the corporate infrastructure necessary to
service POWERX members, including the expansion of a customer
service staff. Among the priorities of the Company will be the
completion of an electronic data processing center to provide for
the improved processing of POWERX orders.
Management believes that the Company has sufficient capital
resources to fund its anticipated operations until some time in the
fourth quarter of 1998. Management estimates that its current
level of operations requires approximately $80,000 per month in
cash based upon average monthly cash flows during the first nine
months of 1998. Although management believes that sales of the
POWERX Card will improve appreciably during the next several
quarters, unless the Company is able to raise additional revenue
from operating activities or from additional sales of corporate
debt or equity securities, the Company may encounter a cash flow
shortage in the fourth quarter of 1998. To overcome this potential
cash flow shortage, management intends to seek additional equity or
debt capital through private sources, although there can be no
assurance such fund will be available. As of the date hereof, the
Company has not entered into any firm agreements or understanding
for the raising of capital from private sources.
Risk Factors and Cautionary Statements
Forward-looking statements in this report are made pursuant to
the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The Company wishes to advise readers that
actual results may differ substantially from such forward-looking
statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially
from those expressed in or implied by the statements, including,
but not limited to, the following: the ability of the Company to
secure additional financing, acceptance of the Company's products
and services in the marketplace, competitive factors, and other
risks detailed in the Company's periodic report filings with the
Securities and Exchange Commission.
PART II
Item 1. Legal Proceedings
Except as set forth below, there are presently no other
material pending legal proceedings to which the Company or any of
its subsidiaries is a party or to which any of its property is
subject and, to the best of its knowledge, no such actions against
the Company are contemplated or threatened.
(a) In 1993, the National Association of Securities Dealers, Inc.
("NASD") and the Securities and Exchange Commission ("SEC") made
preliminary inquiries regarding trading in the shares of the
Company's securities. A formal order of investigation was issued
by the SEC on October 19, 1994 ("In the Matter of Trading in the
Securities of National Health & Safety Corp. / NY-6155). The
Company has delivered to the SEC certain requested documents
pursuant to a subpoena duces tecum.
The Company has been advised by the NASD that its inquiries
should not be construed as indicating that any violation of NASD
rules had occurred, or as a reflection on the merits of the
Company's securities or on any person who effected a transaction in
such securities. The Company was similarly advised by the SEC that
the existence of the SEC's inquiry was not to be construed as an
indication by the SEC that any violation of law had occurred, nor
was it to be considered an adverse reflection on any person, entity
or security. The Company is unaware of the circumstances
concerning the investigation by the NASD and SEC and is not able to
speculate as to the outcome or possible effect of the investigation
on the Company. The Company does not believe that it, its officers
or directors violated any securities laws, rules or regulation in
offering, selling or trading in the securities of the Company. To
date, to the best knowledge of the Company, no action has been
taken by or on behalf of either the NASD or the SEC against the
Company or its officers or directors.
(b) In a Schedule 13D filed on June 9, 1998 (the "Schedule 13D"),
certain persons claimed ownership of 18,000,000 shares of the
Company's common stock. The claims were based on three Stock
Purchase Agreements. At the time the Schedule 13D was filed
8,000,000 shares had already been issued and delivered and certain
parties asserted the right to receive an additional 10,000,000
shares which had not yet been issued. The Company disputed the
assertions and contended that the agreements were unenforceable.
On July 16, 1998, Premium Holdings, Inc. filed an action in
the Superior Court of the State of California, County of Los
Angeles (the "California State Court"), entitled Premium Holdings,
Inc. v. National Health and Safety Corporation, el al. (Case No.
BC 194301; the "Premium State Action"), against the Company and
others. The Premium State Action alleged breach of contract for
failure to deliver the remaining shares and sought damages and
injunctive relief to prevent the Company from canceling shares
already issued and delivered pursuant. The Company had in fact
already canceled the subject shares. On July 16, 1998, the
California State Court issued a Temporary Restraining Order
prohibiting the Company from taking any further action to cancel,
dilute or otherwise interfere with the shares issued to Premium.
The California State Court also issued an Order to Show Cause why
a Preliminary Injunction should not be granted for the duration of
the Premium State Action incorporating the Temporary Restraining
Order and granting additional relief. On August 24, 1998, a
hearing was held on the Order to Show Cause, after which the
California State Court denied Premium's application for a
Preliminary Injunction and dissolved the Temporary Restraining
Order.
On July 16, 1998, HealthMed, Inc. ("HealthMed") also filed an
action in the California State Court, entitled HealthMed, Inc. v.
National Health and Safety Corporation, et al. (Case No. BC194405),
against the Company and others. The Action sought damages and
other relief arising out of the alleged failure of the Company
timely to repay a $250,000 loan evidenced by a demand note in favor
of HealthMed. The Company contended that the loan was not yet due
because, according to the Company, it was to be repaid out of the
proceeds of certain receivables financing.
On August 17, 1998, Premium filed a second action against the
Company, in the United States District Court for the Central
District of California (the "Federal Court"), entitled Premium
Holdings, Inc. v. National Health and safety Corporation, et al.
(Case No98-6720-DDP). This action also named as defendants Dr. R.
Dennis Bowers (a shareholder, officer and director of the Company),
and Barton Peck and Al Simon (both shareholders). The sought
damages for alleged securities fraud under Section 10(b) of the
Securities Exchange Act of 1934, as amended, and Rule, l0b-5
promulgated thereunder.
Following lengthy negotiations, on September 1, 1998, the
Company entered into a written settlement agreement resolving all
disputes between the Company and the plaintiffs, subject to the
parties' compliance with two sets of conditions. Upon satisfaction
of the first set of conditions, including payment by the Company of
$150,000 in partial satisfaction to HealthMed, (i) all three
lawsuits would be dismissed without prejudice; (ii) the stock
certificate evidencing the 8,000,000 shares would be deposited in
escrow; and (iii) two of the plaintiffs would immediately disclaim
any position as directors of the Company, as they had previously
asserted. The Company complied with all of the first set of
conditions and, accordingly suits were dismissed without prejudice
in the respective courts. The suits will not be refiled unless the
Company fails to comply in a timely manner with the second set of
conditions.
The most significant of the second set of conditions is that
the Company has agreed to pay an additional $100,000 in
satisfaction of the HealthMed Loan and to pay an additional
$200,000 in consideration for the dismissal of all litigation and
releases of all claims of certain plaintiffs against the Company
and its shareholders, officers and directors. The $300,000 still
due is to be paid in twelve installments of $25,000 in principal
plus accrued interest, commencing on November 1, 1998. Upon
payment in full by the Company, (i) the mutual general releases
will become effective; (ii) the certificate for 8,000,000 shares
will be returned to the Company; (iii) all agreements will be
rescinded based upon the parties' disagreement as to their terms;
and (iv) all other agreements between the parties will be
terminated.
Item 2. Changes In Securities
During the third quarter of 1998, the Company sold 9,441,670
shares of its authorized but previously unissued common to six
persons for prices ranging from $.05 to $.175 per share. The
Company also issued 275,000 shares to two persons for services
based on prices of $.06 and $.07 per share. The Company also
canceled 8,000,000 shares due to the settlement of litigation.
The issuance of the shares for services and for cash were made
in private transactions with individual investors executing
subscription agreements, and was made in reliance on the exemption
from registration provided by Sections 4(2) and 4(6) of the
Securities Act of 1933, as amended (the "Act").
Item 3. Defaults Upon Senior Securities
This Item is not applicable to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
This Item is not applicable to the Company.
Item 5. Other Information
This Item is not applicable to the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedules
(b) Reports on Form 8-K
Reports on Form 8-K were filed by the Company on July 13
and October 9, 1998. The reports contained disclosure under
Item 5, Other Events, concerning litigation and settlement of
a dispute of the claimed ownership of shares of common stock.
Information concerning the litigation is contained in Part II,
Item 1 hereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL HEALTH & SAFETY CORPORATION
Date: November 16, 1998 By /S/ R. Dennis Bowers
R. DENNIS BOWERS, President
Date: November 16, 1998 By /S/ Roger H. Folts
ROGER H. FOLTS,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE NATIONAL HEALTH & SAFETY
CORPORATION FINANCIAL STATEMENTS FOR THE PERIOD
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,236
<SECURITIES> 0
<RECEIVABLES> 48,207
<ALLOWANCES> 8,200
<INVENTORY> 0
<CURRENT-ASSETS> 44,243
<PP&E> 165,799
<DEPRECIATION> 155,726
<TOTAL-ASSETS> 309,144
<CURRENT-LIABILITIES> 3,002,600
<BONDS> 255,000
14
0
<COMMON> 47,686
<OTHER-SE> 8,609,836
<TOTAL-LIABILITY-AND-EQUITY> 309,144
<SALES> 102,040
<TOTAL-REVENUES> 102,040
<CGS> 36,977
<TOTAL-COSTS> 1,570,720
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,873
<INCOME-PRETAX> (1,498,553)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,498,553)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,498,553)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
