<PAGE> 1
THIS REPORT WAS THE SUBJECT OF A FORM 12b-25
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 2-93277-D
MEDIZONE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0412648
(State or other jurisdiction (I.R.S. Employer)
of incorporation or Identification No.)
organization)
123 East 54th Street
New York, New York 10022
(Address of principal executive offices, zip code)
(212) 421-0303
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
--- ---
At May 13, 1996, there were outstanding 120,123,359 shares of the registrant's
common stock.
Page 1 of 32 pages
<PAGE> 2
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
FORM 1O-Q
INDEX
March 31, 1996
PART I - FINANCIAL INFORMATION
Page
Number
------
Item 1. - Financial Statements
Unaudited Interim Consolidated Balance Sheets 3
Unaudited Interim Consolidated Statements of
Operations 5
Unaudited Interim Consolidated Statements of
Changes in Stockholders' Equity 6
Unaudited Interim Consolidated Statements of Cash
Flow 12
Notes to Unaudited Interim Consolidated Financial
Statements 15
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
Signatures
Page 2 of 32 pages
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1996 1995
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ -- $ --
Prepaid expenses and advances 16,987 19,431
-------- --------
Total Current Assets 16,987 19,431
FIXED ASSETS
Leasehold improvements 3,004 --
Office equipment 4,663 4,663
Furniture and fixtures 2,711 2,711
-------- --------
10,378 7,374
Less accumulated depreciation 5,683 5,401
-------- --------
4,695 1,973
-------- --------
OTHER ASSETS
Investment in affiliate (Note 1) -- --
Receivable from affiliate (Note 1) 48,947 48,947
License agreement (Note 5) -- --
Organization costs (net of accumulated
amortization) -- --
Deposits (Note 6) 61,047 54,302
-------- --------
$131,676 $124,653
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Checks issued in excess of deposit $ 12,738 $ 1,760
Accounts payable 299,476 315,972
Accrued liabilities 79,056 91,986
Notes payable (Note 10) 194,815 147,815
-------- --------
Total Current Liabilities 586,085 557,553
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 6 and 13) --
REDEEMABLE COMMON STOCK (Note 13) -- --
-------- --------
MINORITY INTEREST (Note 9) -- --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 3 of 32 pages
<PAGE> 4
<TABLE>
<S> <C> <C>
STOCKHOLDERS' DEFICIENCY (Notes 1, 2, 3, 7, 8, 9
and 11)
Common stock, authorized 250,000,000 shares;
par value $.001 per share, issued and
outstanding 120,123,359 and 120,123,359
shares for 1996 and 1995, respectively $ 120,123 $ 120,123
Common stock subscribed 7,250 5,047
Additional paid-in capital 10,772,753 10,554,674
Accrued stock option compensation -- --
Deficit accumulated during development stage (11,354,535) (11,112,724)
------------ ------------
Total Stockholders' Deficiency (454,409) (432,880)
------------ ------------
$ 131,676 $ 124,653
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4 of 32 pages
<PAGE> 5
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
From the Date of
From the Three Months Inception (Jan.
Ended March 31, 31, 1986) through
1996 1995 March 31, 1996
---- ---- -----------------
<S> <C> <C> <C>
SALES $ -0- $ -0- $ 133,349
------------- ------------- ------------
COST AND EXPENSES:
Cost of sales -0- -0- 103,790
Research and development 39,600 9,000 2,368,174
expenses
General and administrative 198,909 259,839 7,841,162
expenses
Compensation under stock -0- -0- 872,894
options (Note 8)
Interest expense 3,302 2,282 734,891
Other (income) and expense, $ -0- $ -0- (16,018)
net ------------- ------------- ------------
Total Costs and Expenses 241,811 270,671 11,904,893
------------- ------------- ------------
Net loss before extraordinary (241,811) (270,671) (11,771,544)
gain or minority interest
Extraordinary gain on sale of -- -- 100,000
investment in subsidiary ------------
(Note 1)
Net loss before minority -- -- (11,671,544)
interest
Minority interest in loss -- -- 26,091
Prior period adjustment (Note -- -- 291,228
11) ------------- ------------- ------------
Net loss $ (241,811) $ (270,671) $(11,354,225)
============= ============= ============
Weighted average number of 120,123,359 110,180,620 76,371,000
shares outstanding ============= ============= ============
Loss per share $ 0.00 $ 0.00 $ (0.15)
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 5 of 32
<PAGE> 6
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Statements of Changes in Stockholders' Equity
From the Date of Inception (January 31, 1986)
through March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Accrued During
Common Stock Paid-in Stock Option Development
Shares Amount Capital Compensation Stage
------ ------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
MEDIZONE - DELAWARE
-------------------
Initial capitalization
of Medizone Delaware
(no par value) Feb
1986 ($10.21 per
share) 882 $ 9,001
Shares of Medizone
(Delaware [no par
value] issued for
cash, March 1986
($22.58 per share) 50 1,129
------------ ------------
932 $ 10,130
============ ============
MEDIZONE - NEVADA
-----------------
(formerly Madison
Funding, Inc.
Existing shares of
Medizone Nevada
(formerly Madison
Funding, Inc.) (par
value $.001 per
share) 5,500,000 $ 5,500 $ 139,998 $ (310)
Exchange of 932 shares
of Medizone Delaware
for shares of
Medizone Nevada
resulting in a
reverse merger,
March 1986 37,500,000 10,130
Reallocation of paid-
in capital to par
value due to
recapitalization as
a result of reverse
merger 27,370 (27,370)
------------ ------------ ------------ ------------
Balance after reverse
merger, March 1986
(par value $.001 per
share) 43,000,000 43,000 112,628 (310)
Shares issued for
services, July 1986
($.10 per share) 50,000 50 4,950
Shares issued for
warrants, Aug
through Oct. 1986
($.10/share) 7,814,600 7,815 773,645
Stock issuance cost in
connection with
shares issued for
warrants (105,312)
Adjustment to accrued
stock option
compensation $ 223,521
Net/(loss) for the
year ended December
31, 1986 (795,758)
------------ ------------ ------------ ------------ ------------
Balance, December 31,
1986 50,864,600 $ 50,865 $ 785,911 $ 223,521 $ (796,068)
</TABLE>
Page 6 of 32 pages
<PAGE> 7
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Statements of Changes in Stockholders' Equity
From the Date of Inception (January 31, 1986)
through March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Accrued During
Common Stock Paid-in Stock Option Development
Shares Amount Capital Compensation Stage
------ ------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1986 50,864,600 $ 50,865 $ 785,911 $ 223,521 $ (796,068)
Shares issued for
warrants, Jan. 1987
($.10 per share) 2,600 2 257
Shares issued for
patent, March 1987
($.69275 per share) 1,000,000 1,000 692,750
Shares issued for
cash, June 1987
(from $.10 to $.25
per share) 950,000 950 149,050
Shares issued for
services, June and
July 1987 (from $.10
to $.25 per share) 203,167 203 24,314
Stock option
compensation expense
relating to option
exercised in August
1987 388,551
Option exercised,
August 1987 ($.001
per share) 250,000 250 437,250 (437,250)
Adjustment to accrued
stock option
compensation 510,527
Net/(loss) for the
year ended December
31, 1987 (2,749,400)
----------- ----------- ----------- ----------- -----------
Balance, December 31,
1987 53,270,367 53,270 2,089,532 685,349 (3,545,468)
Options exercised,
Jan. 1988 ($.001 per
share) 200,000 200 99,800 (99,800)
Shares issued for
cash, Sept. 1988
($.0833 per share) 1,000,000 1,000 79,000
Shares issued for
services (from $.10
to $.25/share) 35,000 35 7,965
Adjustment to accrued
stock option
compensation (584,599)
Issuance of shares by
subsidiaries 174,126
Net/(loss) for the
year ended December
31, 1988 (714,347)
---------- ----------- ----------- ----------- -----------
Balance, December 31,
1988 54,505,367 $ 54,505 $ 2,450,423 $ 950 $(4,259,815)
</TABLE>
Page 7 of 32 pages
<PAGE> 8
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Statements of Changes in Stockholders' Equity
From the Date of Inception (January 31, 1986)
through March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Accrued During
Common Stock Paid-in Stock Option Development
Shares Amount Capital Compensation Stage
------ ------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1988 54,505,367 $ 54,505 $ 2,450,423 $ 950 $(4,259,815)
Shares issued for
services (from $.10
to $.19/share) 261,889 262 46,363
Shares issued for cash
(from $.03 to $.10
per share) 5,790,000 5,790 285,710
Shares issued for
notes and accrued
liabilities (from
$.06 to $.24 per
share) 4,749,532 4,750 578,978
Options exercised
($.001 per share) 375,000 375 59,125 (59,125)
Adjustment to accrued
stock option
compensation 58,175
Net/(loss) for the
year ended December
31, 1989 (862,051)
---------- ----------- ----------- ----------- -----------
Balance, December 31,
1989 65,681,788 65,682 3,420,599 -0- (5,121,866)
Shares issued for
services ($.10 per
share) 880,000 880 87,120
Shares issued for cash
(from $.03 to $.05
per share) 4,250,000 4,250 175,250
Shares issued for
notes and accrued
liabilities (from
$.055 to $.10 per
share) 2,422,727 2,423 137,577
Adjustment to accrued
stock option
compensation 6,000
Issuance of shares by
subsidiaries 100,000
Net/(loss) for the
year ended December
31, 1990 (606,309)
---------- ----------- ----------- ----------- -----------
Balance, December 31,
1990 73,234,515 $ 73,235 $ 3,920,546 $ 6,000 $(5,728,175)
</TABLE>
Page 8 of 32 pages
<PAGE> 9
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Statements of Changes in Stockholders' Equity
From the Date of Inception (January 31, 1986)
through March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Accrued During
Common Stock Paid-in Stock Option Development
Shares Amount Capital Compensation Stage
------ ------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1990 73,234,515 $ 73,235 $ 3,920,546 $ 6,000 $(5,728,175)
Shares issued for
services (from $.15
to $.20/share) 425,000 425 72,075
Shares issued for cash
(from $.036 to $.20
per share) 4,366,667 4,366 305,634
Adjustment to accrued
stock option
compensation 324,800
Options exercised
(from $.22 to $.93
per share) 450,000 450 204,050 (204,050)
Sale of subsidiary's
stock 5,000
Net/(loss) for the
year ended December
31, 1991 (1,220,152)
---------- ----------- ----------- ----------- -----------
Balance, December 31,
1991 78,476,182 78,476 4,507,305 126,750 (6,948,327)
Shares issued for
services ($.20 per
share) 151,500 152 30,148
Shares issued for
accrued liabilities
($.15/share) 250,000 250 37,250
Shares issued for cash
($.15 to $.20 per
share) 2,702,335 2,702 427,648
Shares issued in
settlement of
advances from and
amounts due to
stockholder ($.10
per share) 13,118,619 13,119 800,248
Options exercised
($.50 per share) 250,000 250 124,750 (124,750)
Adjustment to accrued
stock option
compensation (2,000)
Sale of subsidiary's
stock 81,100
Net/(loss) for the
year ended December
31, 1992 (649,941)
---------- ----------- ----------- ----------- -----------
Balance, December 31,
1992 94,948,636 $ 94,949 $ 6,008,449 -- $(7,598,268)
</TABLE>
Page 9 of 32 pages
<PAGE> 10
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Statements of Changes in Stockholders' Equity
From the Date of Inception (January 31, 1986)
through March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Accrued During
Common Stock Paid-in Stock Option Development
Shares Amount Subscribed Capital Compensation Stage
------ ------ ---------- ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1992 94,948,636 $ 94,949 $ 6,008,449 -- $ (7,598,268)
Cancelled shares
previously issued
in settlement of
advances from and
amounts due to
stockholder ($.062/share) (13,118,619) (13,119) (800,248)
Shares issued for
services from $.10
to $.46/sh.) 5,347,219 5,347 542,859
Shares issued for
cash (from $.15 to
$.20/share) 1,471,666 1,472 269,528
Shares subscribed $ 2,619 259,296
Net/(loss) for the
year ended December
31, 1993 (1,598,342)
----------- ------------- ------------- ------------ -------- -------------
Balance, December
31, 1993 88,648,902 88,649 2,619 6,279,884 (9,196,610)
Shares issued for
services ($.10 per
share) 1,431,590 1,431 141,727
Shares subscribed
($.10 per share) 9,552 945,682
Shares subscribed
for cancellation of
indebtedness ($.10
per share) 417 41,234
Shares subscribed
for cancellation of
indebtedness to
former management
($.18 per share) 11,250 2,022,379
Issuance of
subscribed stock 10,384,900 $ 10,385 $ (10,385)
Issuance of shares
to certain prior
purchasers of
common stock in
recognition of
disparity in
purchase price in
contemporaneous
offering 1,125,834 1,126 $ (1,126)
Prior period
adjustment $ 219,422
Net loss for the
year ended December
31, 1994 (1,126,315)
----------- ------------- ------------- ------------ -------- -------------
Balance, December
31, 1994 101,591,226 101,591 13,453 9,429,780 -- (10,103,503)
</TABLE>
Page 10 of 32 pages
<PAGE> 11
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Statements of Changes in Stockholders' Equity
From the Date of Inception (January 31, 1986)
through March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Accrued During
Common Stock Paid-in Stock Option Development
Shares Amount Subscribed Capital Compensation Stage
------ ------ ---------- ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994 101,591,226 101,591 13,453 9,429,780 - (10,103,503)
Redeemable shares
converted to common
stock 200,000 200 39,800 71,806
Shares issued for
services ($.10/sh) 2,050,000 2,050 202,950
Issuance of
subscribed stock 17,524,860 17,524 (17,524)
Cancelled shares
previously issued
to former
management (1,242,727) (1,242) (70,563)
Shares subscribed
($.10 per share) 9,118 902,707
Prior period
adjustment
Sales of
subsidiary's stock 50,000
Net/(loss) for the
year ended December
31, 1995 (1,081,027)
----------- ------------ ------------ ------------ ------------
Balance, December
31, 1995 120,123,359 $ 120,123 $ 5,047 $ 10,554,674 - (11,112,724)
Shares subscribed
($.10 per share)
Shares subscribed 2,203 218,079
($.10 per share)
Net/(loss) for the (241,811)
quarter ended March
31, 1996
Balance, March 31, 120,123,359 $ 120,123 $ 7,250 $ 10,772,753 - (11,354,535)
1996
=========== ============ ============ ============ ============
</TABLE>
Page 11 of 32 pages
<PAGE> 12
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From the Date of
From the Three Months Inception (Jan.
Ended March 31, 31, 1986) through
1996 1995 March 31, 1996
---- ---- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss of Madison Funding, $ -- $ -- $ (310)
Inc
Net loss (241,811) (270,671) (9,392,402)
Prior period adjustment -- -- --
Adjustments to reconcile net
loss to net cash in
operating activities:
Issuance of stock for -- 30,000 1,171,306
services
Stock subscription for -- 13,380 13,380
services
Compensation - stock -- -- 924,975
options
Write-off of license -- -- 2
agreement
Write-off of patent -- -- 693,750
Depreciation and 282 302 18,459
amortization
Minority interest in loss -- -- (26,091)
Changes in assets and
liabilities:
Current and other assets 2,444 (27,803) (65,934)
Accounts payable (16,496) (74,608) 505,665
Accrued liabilities (12,930) (7,719) 135,841
----------- ----------- -----------
Net Cash Used in Operating (268,511) (337,119) 6,021,359)
----------- ----------- -----------
Activities
INVESTMENT ACTIVITIES
Additions to organization -- -- (8,904)
costs
Additions to fixed assets (3,004) -- (14,249)
Additions to deposits (6,745) -- (61,047)
----------- ----------- -----------
Net Cash Used in Investment (9,749) -- (84,200)
----------- ----------- -----------
Activities
FINANCING ACTIVITIES
Issuance of stock for cash -- -- 1,867,977
Stock issuance cost -- -- (105,312)
Exercise of warrants -- -- 781,719
Exercise of stock options -- -- 1,525
Sale of stock of subsidiary -- -- 421,847
Proceeds of long-term debt -- -- 191,657
Proceeds of notes payable 47,000 -- 330,665
Payment of notes payable -- -- (189,150)
Redeemable common stock -- -- 40,000
Increase in minority interest -- -- 14,470
Common stock subscribed 220,282 394,066 2,337,527
Increase in notes and loans -- -- 399,896
----------- ----------- -----------
payable
Cash Provided by Financing 267,282 394,066 6,092,821
----------- ----------- -----------
Activities
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 12 of 32 pages
<PAGE> 13
<TABLE>
<CAPTION>
From the Date of
From the Three Months Inception (Jan.
Ended March 31, 31, 1986) through
1996 1995 March 31, 1996
---- ---- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND $ (10,978) $ 56,947 $ (12,738)
CASH EQUIVALENTS
Cash and cash equivalents, (1,760) 25,568 --
beginning of period
----------- ----------- -----------
Cash and cash equivalents, $ (12,738) $ 82,515 $ (12,738)
end of period
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest -- -- $ 26,483
SUPPLEMENTAL SCHEDULE OF
NONCASH ACTIVITIES
Conversion of notes payable -- -- $ 2,091,980
to stock
Conversion of long-term debt -- -- 191,658
to stock
Conversion of accrued -- -- 258,689
liabilities to stock
Conversion of accounts -- -- 4,285
payable to stock
Conversion due to -- -- 1,103,263
stockholders to stock
Issuance of stock for license -- -- 2
agreement
Issuance of stock for patent -- -- 693,750
Cancellation of stock for -- -- 813,367
reinstatement due to
stockholders
Conversion of redeemable -- -- 40,000
common stock to common
stock
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 13 of 32 pages
<PAGE> 14
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
Background
Medizone International, Inc., a Delaware corporation ("Medizone-Delaware") was
formed on January 31, 1986. Medizone International, Inc. (the "Company") was
organized under the laws of the State of Nevada on August 27, 1984 as Madison
Funding, Inc. ("Madison") for the purposes of investing in, acquiring, operating
and disposing of businesses or assets of any nature. On March 26, 1986, control
of Madison was acquired by the stockholders of Medizone-Delaware, and Madison
changed its name to Medizone International, Inc. The substance of this
transaction was the acquisition of the net monetary assets of Madison in
exchange for the equity of Medizone-Delaware. As a result of this transaction,
the stockholders of Medizone-Delaware acquired 87.2% of Madison. Therefore, the
transaction was accounted for as a pooling of interests.
On November 18, 1987, Medizone Canada Ltd. ("MedCan") was incorporated under the
laws of the Province of British Columbia with authorized capital of 25,000,000
common shares without par value. Shortly thereafter, MedCan entered into a
license agreement with the Company wherein the Company transferred to MedCan the
licenses and rights necessary to permit MedCan to hold substantially the same
rights with respect to the medical applications of ozone in Canada as the
Company does in the United States. As consideration for the transfer, the
Company received 3,000,000 shares of MedCan and, in addition, purchased one
share for the sum of $1.00. Under a separate agreement among the Company, MedCan
and Australian Gold Mines Corporation (AGMC), (which later changed its name to
International Blue Sun Resource Corporation), a company incorporated under the
laws of the Province of British Columbia, AGMC purchased 130,000 shares of
MedCan for (U.S.) $100,000. On December 23, 1988, MedCan was recapitalized in a
transaction in which the majority of its shares were exchanged for shares of KPC
Investments, a Utah corporation ("KPC"). Following this transaction, the Company
owned 25,029,921 shares of KPC, representing 72% of the outstanding shares. KPC
then changed its named to Medizone Canada, Ltd. (MCL). MedCan acquired all of
the assets of KPC, consisting solely of cash in the amount of approximately
$89,000. KPC and its subsidiary MedCan are hereinafter referred to as MCL.
Formation of Joint Venture Subsidiary
On June 22, 1995, the Company entered into a series of contracts (collectively
the "Transaction Documents") which resulted in the formation of a joint venture
subsidiary incorporated in New Zealand, Medizone New Zealand Limited ("MNZ").
MNZ, a privately held corporation equally owned by the Company and Solwin
Investments Limited ("Solwin"), a New Zealand corporation, was organized on June
22, 1995, and is a research and development stage company whose objective is to
obtain regulatory approval for the distribution of the Company's patented
technology in New Zealand, Australia, South East Asia and the South Pacific
Islands.
Pursuant to the Transaction Documents, the Company purchased one hundred percent
of MNZ from Richard G. Soloman ("Solomon"), a New Zealand citizen, who became a
director of the Company in January, 1996 and who caused the formation of MNZ on
June 22, 1995. Contemporaneously with this transaction, the Company sold fifty
percent of MNZ to Solwin, a corporation owned by Solomon, for U.S. $150,000, of
which $50,000 was thereupon loaned by the Company to MNZ on a demand basis. The
Directors of MNZ are Solomon and Dr. Joseph L. Latino, the Company's President
and Chief Executive Officer.
Page 14 of 32 pages
<PAGE> 15
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF THE BUSINESS (CONTINUED)-
Formation of Joint Venture Subsidiary (continued)
Contemporaneous with the creation of the above share structure, the Company and
MNZ entered into a Licensing Agreement (the "Licensing Agreement") and a
Managing Agent Agreement (the "Managing Agent Agreement) with MNZ.
Pursuant to the Licensing Agreement, the Company granted an exclusive license to
MNZ for its process and equipment patents and trademark in New Zealand. MNZ has
agreed to apply for corresponding patent protection for the patents in New
Zealand and to use its best efforts to exploit the rights granted in the
agreement. The License Agreement shall terminate on the date of the expiration
of the last to expire of any patent obtained in New Zealand, or, if no such
patents are obtained, on June 22, 2010. The Company is to receive a guaranteed
minimum royalty (the "Guaranteed Minimum Royalty") in an amount to be agreed to
by the Company and MNZ, commencing in the third year after all necessary
regulatory approvals requisite to the licenses, use or distribution of the
Company's proprietary technology have been obtained in New Zealand. If the
Company and MNZ are unable to agree upon the amount of the Guaranteed Minimum
Royalty, the Company may terminate the license on thirty days' notice.
Commencing on the first sale to a user by MNZ, the Company shall receive a sales
royalty in an amount equal to ten percent of MNZ's gross annual sales under the
License Agreement.
Pursuant to the Managing Agent Agreement, MNZ will act as the Company's agent in
the finding of other licensees of the Company's patents and trademark in the
following countries: Australasia (including Australia and New Zealand), the
South Pacific Islands and South East Asia (including the Philippines, Indonesia
and Vietnam). Licensing fees obtained as a result of the Managing Agent
Agreement shall be divided between the Company and MNZ on a sliding scale as set
forth below:
<TABLE>
<CAPTION>
Medizone
Medizone New Zealand
International, Inc. Limited
------------------- -------
<S> <C> <C>
Initial license 50% 50%
Subsequent license
fees up to $500,000 50% 50%
Subsequent license fees
between $500,000 and $750,000 75% 25%
Subsequent license fees in
excess of $750,000 85% 15%
</TABLE>
MNZ and the Company will also divide any net royalties paid to the Company
pursuant to any license obtained pursuant to the Managing Agent Agreement, with
MNZ being paid 10% of the net royalties and the Company receiving 90% of the net
royalties.
Page 15 of 32 pages
<PAGE> 16
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF THE BUSINESS (CONTINUED)-
Formation of Joint Venture Subsidiary (continued)
The Managing Agent Agreement shall expire on the termination or expiration of
the last of the licenses obtained pursuant thereto, subject to earlier
termination by the Company upon an occurrence of certain events.
Pursuant to Emerging Issues Task Force Statement No. 89-7, the Company
recognized a $100,000 gain on the sale of MNZ to Solwin.
Business Activities
The Company's objective is to gain regulatory approval for the medical uses of
ozone to inactivate certain viruses and to assist in the treatment of certain
diseases and to develop, promote and distribute ozone-generating equipment and
related products for medical applications.
By letter agreement with the Italian Scientific Society for Oxygen-Ozone Therapy
("ISSOT") in Bergamo, Italy, dated March 23, 1993, the Company entered into a
collaborative arrangement to research and examine the efficacy of ozone therapy
and the Company's technology in the treatment of various bloodrelated human
diseases. The research is to be conducted by ISSOT in Italy, under the direction
of a research group assembled by the Italian Ministry, to which the Company's
president was appointed in April, 1993.
On May 16, 1994, the Company announced that human trials were to commence at the
University of Naples on May 30, 1994 to study the effects of Medizone (the drug)
on patients infected with either HIV or Hepatitis B (chronic active). The two
protocols, either for HIV or Hepatitis B patients, were designed by the Company
as classical Phase 1 trials of the Company's patents to determine, in
dose-ranging study, the relative toxicity of this treatment against surrogate
markers of efficacy. To date, the University of Naples remains the only site
that has commenced these trials, with other university-based hospitals still
awaiting approval by their Italian university authorities on a site by site
basis. There can be no assurance that any of the data generated from the ISSOT
research will be permitted to be utilized in connection with the Company's
applications to the FDA.
2. CHANGES IN MANAGEMENT CONTROL AND LITIGATION AGAINST FORMER MANAGEMENT
Changes in Control
In November 1992, four directors resigned from the Board. Two of the outgoing
directors, who were the founding shareholders of the company, were also the
Company's sole officers (former management or former officers and directors),
and they resigned from these management positions as well. Three new directors
were elected by the outgoing directors and three new officers (new management)
were then appointed on an interim basis, to serve until the formal election of
directors and appointment of officers at the next annual meeting of
shareholders.
Page 16 of 32 pages
<PAGE> 17
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CHANGES IN MANAGEMENT CONTROL AND LITIGATION AGAINST FORMER MANAGEMENT
Litigation Against Former Management
In November 1992, a derivative action was filed in the U.S. District Court for
the District of New Jersey by two shareholders of the Company against two of its
former officers and directors. The Company was named as a nominal defendant in
the action but in January 1993, the Company substituted itself as a real party
plaintiff. The Company filed an amended complaint seeking damages and equitable
remedies and alleging, among other things, that the former officers and
directors defrauded the Company, breached fiduciary duties owed to the
shareholders, and committed violations of federal securities laws.
In November 1993, the defendants replied to the counterclaims asserted by the
Company. The reply contained additional counterclaims seeking monetary and
injunctive relief under various provisions of the federal securities laws and
the common law. The defendants also asserted a derivative counterclaim on behalf
of the Company against certain current and former directors based upon alleged
breaches of a written agreement between the defendants and the Company's board
of directors. Although the claims originally asserted by the defendants in the
New York action sought only declaratory relief, the newly asserted claims sought
damages in excess of $2.0 million.
On May 18, 1994, the parties reached agreement in principle to settle all their
litigation. On September 27, 1994, the parties stipulated to discontinue the
action pending the finalization of the settlement. On December 28, 1994, the
written settlement agreement was signed. The settlement agreement provides (i)
that Messrs. McGrath and Watrous will not challenge the validity of the
Company's board of directors resolution to rescind approximately 13,000,000
shares of the Company's stock previously issued to Mr. McGrath and approximately
1,200,000 shares previously issued to Mr. Watrous and to reinstate the Company's
debt to Messrs. McGrath and Watrous that had been retired by the issuance of
those shares; and (ii) for the Company to acknowledge the validity of $2,033,628
of debt to Messrs. McGrath and Watrous. In connection with the settlement, Mr.
McGrath assigned his portion of the above mentioned debt to Mr. Watrous, which
was thereupon satisfied by the Company's issuance to Mr. Watrous of 11,250,000
shares of the Company's common stock restricted under the Securities Act of
1933.
3. GOING CONCERN
Continuation of the Company as a going concern is dependent upon obtaining
additional capital, obtaining the requisite approvals from the Food and Drug
Administration ("FDA") for the marketing of ozone-related products and
equipment, and ultimately, upon the Company's attaining profitable operations.
The Company will require a substantial amount of additional funds to complete
the development of its products, to establish manufacturing facilities, to build
a sales and marketing organization and to fund additional losses which the
Company expects to incur over the next several years.
Page 17 of 32 pages
<PAGE> 18
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. GOING CONCERN (CONTINUED)
The Company has filed with the FDA an application for an Investigational New
Drug ("IND") exemption. Until such application is granted, the Company may only
provide ozone-related equipment to researchers who agree to follow FDA
guidelines. There can be no assurance that the FDA will grant such application.
The Company has been advised that clinical studies (i.e., on human subjects) may
not commence unless and until the Company complies with a number of conditions
which include additional studies, in particular with regard to chronic animal
toxicity and other research, which will require the expenditure of considerable
resources. These regulatory restrictions greatly limit the ability of the
Company to generate revenues. The financial condition of the Company will
continue to deteriorate until profitable operations are achieved or additional
capital is received, of which there can be no certainty.
The management of the Company intends to seek additional funding which will be
utilized to fund additional research and continue operations. The Company
recognizes that, if it is unable to raise additional capital, it may find it
necessary to substantially reduce or cease operations.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, MCL,
a 66.6% owned subsidiary and Medizone-Delaware (an inactive company).
Intercompany transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity at
the time of purchase of less than three months to be cash equivalents.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over five years for office equipment and ten years for
furniture and fixtures. Maintenance and repairs are charged to expense as
incurred. Upon retirement or sale, the cost of the assets disposed and the
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is credited or charged to income.
Other Assets - Organization Costs
Organization costs were deferred and amortized over a 60-month period on a
straight-line basis.
Loss per Share
The computation of primary loss per share of common stock is based on the
weighted average number of shares outstanding during the period.
Page 18 of 32 pages
<PAGE> 19
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER ASSETS
Patent
In March 1987, the Company acquired a patent from Immunologics Limited
Partnership ("Immunologics") in exchange for 1,000,000 shares of the Company's
common stock. In 1988, Immunologics purchased for $25,000, 5,000,000 shares of
the Company's common stock from the former Chairman and Chief Executive Officer
of the Company. The patent covers a procedure for "ozone decontamination of
blood and blood products" through the treatment of stored blood and blood
components. The Board of Directors assigned a value of approximately $700,000 to
the patent based upon the fair market value of the stock on the date of
acquisition together with related legal costs. The Company charged the cost of
the patent to research and development expense at acquisition because the
technologies covered by the patent have not been approved by the FDA.
Additionally, the Company agreed to pay the seller a royalty fee equal to 3% of
the net receipts received by the Company in connection with the sale of any
product, device or apparatus which embodies the patent. The Company's management
considers the acquisition and retention of the patent to be material in its
development and prospects. In 1992, the General Partner of Immunologics became
chairman of the Company's Board of Directors and subsequently resigned from the
Company's Board of Directors in September 1993.
License Agreement
On February 4, 1986, the Company, in exchange for shares of its common stock,
acquired from a principal stockholder his interest in a license agreement
covering the distribution of ozone-generating equipment. The license agreement
was carried at $1.00 through December 31, 1991; as that was the stockholder's
basis, and was written off as of December 31, 1992.
6. COMMITMENTS AND CONTINGENCIES (SEE ALSO NOTE 10)
The Company leases its main office facilities at a rental of $1,745 per month
through February 28, 1998.
During 1992, a financial consulting entity agreed to raise equity financing for
Medizone. An agreement was executed requiring the Company to tender $50,000 to a
third party whose obligation was to hold the funds in escrow pending completion
of the financing; however, these sums were not tendered at that time. In the
event of completion of the financing, the $50,000 would be released from escrow
to the consultant to defray legal fees of the consultant. In the event the
financing failed to be completed, the funds were to be returned to the Company.
In a separate transaction during 1992, the Company sold 250,000 shares of common
stock to five investors for $50,000, and caused the proceeds to be paid directly
to the third party in the pending financing transaction. The Company
acknowledged constructive receipt of the funds by executing stock purchase
agreements and the 250,000 shares were subsequently issued in 1993. The equity
financing has not yet taken place and the Company continues to seek the return
of the $50,000. However, the financial consulting entity intends to continue its
efforts to raise equity financing and has not refunded the $50,000.
Page 19 of 32 pages
<PAGE> 20
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (SEE ALSO NOTE 10) (CONTINUED)
On or about June 6, 1994, Maureen Abato, the Company's former outside counsel,
filed suit in the Supreme Court of the State of New York, County of New York
entitled Abato v. Medizone International, Inc., Medizone Canada, Ltd. and Joseph
S. Latino. The complaint contains thirteen causes of action. Three of the causes
of action are for breach of contract, account stated and quantum meruit for
recovery of unpaid legal fees allegedly due plaintiff by the Company in the
amount of $67,864. The remaining claims are for fraud, wrongful termination,
sexual discrimination, defamation, tortious interference with contract and
intentional infliction of emotional distress. With respect to each of these
causes of action, plaintiff sought unspecified compensatory damages and punitive
damages of not less than $1 million.
On October 24, 1994, the Company and the other defendants moved for partial
summary judgment dismissing all of plaintiff's claims except her legal fee claim
based on quantum meruit. By decision and order dated February 14, 1995, the
Court dismissed all of the plaintiff's claims except for breach of contract and
for an account stated; however, the court limited plaintiff's claim to her
actual damages and dismissed her claim for punitive damages on these counts. In
addition, the court dismissed these claims in their entirety as against Medizone
Canada, Ltd. and Dr. Latino.
A Stipulation of Settlement was executed by the parties, dated October 30, 1995,
whereby the Company agreed to pay $61,000 in full settlement of all remaining
claims, to be paid as follows:
<TABLE>
<S> <C>
November 15, 1995 $20,000
December 15, 1995 5,000
January 15, 1996 5,000
February 15, 1996 5,000
March 15, 1996 5,000
April 15, 1996 5,000
May 15, 1996 5,000
June 15, 1996 5,000
July 15, 1996 6,000
-------
Total $61,000
========
</TABLE>
7. ISSUANCE OF COMMON STOCK AND WARRANTS
Under the terms of the settlement, if the Company defaults in any of the
payments, the plaintiff can, after seven days' notice, enter judgment against
the Company for the balance due. On November 10, 1995, the plaintiff executed a
release against Medizone International, Inc., Medizone Canada Ltd. and Joseph S.
Latino.
Unless otherwise stated, all transactions shown below were with unrelated
parties and the securities issued were restricted.
Madison initially issued 1,500,000 shares in a private transaction for proceeds
of $3,000.
Page 20 of 32 pages
<PAGE> 21
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ISSUANCE OF COMMON STOCK AND WARRANTS (continued)-
In May 1985, Madison sold in a public offering, 4,000,000 shares of common stock
and 8,000,000 warrants to purchase a common stock at $0.10 per share. The
proceeds from the offering to Madison were $200,000. The costs of the offering
were offset against paid-in capital.
On March 26, 1986, Madison issued 37,500,000 shares of common stock,
representing 87.2% of the then outstanding shares, to the stockholders of
Medizone - Delaware, including two officers and directors, in exchange for all
of the shares of Medizone - Delaware. The costs of the transactions were offset
against paid-in capital.
In July 1986, the Company issued 50,000 shares of common stock to individuals
for services rendered.
During the period from August 1986 through October 31, 1986, the final
expiration date for exercise, warrants to purchase 7,814,600 shares together
with cash totaling $781,460 were received by the Company which then issued
7,814,600 shares of new common stock. In January 1987, an additional 2,600
shares were issued in exchange for warrants and cash of $259.
In March 1987, the Company issued 1,000,000 shares of common stock in exchange
for a patent (see Note 5).
In June 1987, the Company issued 950,000 shares to individuals in private
transactions for aggregate proceeds of $150,000.
During the period from June 1987 through July 1987, the Company issued 203,167
shares of common stock to various vendors and individuals for services rendered
in 1986 and 1987.
On August 26, 1987, an officer of the Company exercised options to purchase
250,000 shares of common stock. In January 1988, two holders exercised their
options and acquired an aggregate of 200,000 shares of common stock.
On September 26, 1988, the Company sold, in a private placement, 1,000,000
shares of common stock at $0.08 per share to an individual.
During 1988, the Company issued a total of 35,000 shares of common stock for
services. During 1989, the Company issued 261,889 shares of common stock to
various vendors and individuals for services rendered in 1988 and 1989.
During 1989, the Company issued 5,790,000 shares to individuals in private
transactions for aggregate proceeds of $291,500.
Also during 1989, the Company satisfied obligations for notes payable to and
accrued interest due to unrelated individuals totaling $377,539 by the issuance
of 3,899,532 shares of common stock. The Company issued 250,000 shares of common
stock to an officer and 600,000 shares of common stock
Page 21 of 32 pages
<PAGE> 22
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ISSUANCE OF COMMON STOCK AND WARRANTS (CONTINUED)-
to three advisors to the Company as additional compensation for work done for
the Company. These issuances were ascribed values of $60,650 and $145,539,
respectively, by the Company. Also during 1989, two holders exercised their
options and acquired an aggregate of 375,000 shares of common stock.
During 1990, the following equity transactions occurred: The Company issued
4,250,000 shares to individuals in private transactions for aggregate proceeds
of $179,500; the Company satisfied obligations totaling $125,000 to the former
vice president, secretary and treasurer as well as director by issuing 2,272,727
shares of common stock at $0.55 per share; the Company satisfied an outstanding
account payable to an unrelated individual totaling $15,000 by the issuance of
150,000 shares of common stock at $0.10 per share; and the Company issued to an
employee and four other unrelated persons as compensation or payment a total of
880,000 shares of common stock to which it ascribed a value of $88,000.
During 1991, the following equity transactions occurred: The Company issued
4,366,667 shares to individuals in private transactions for aggregate proceeds
of $310,000; the Company issued a total of 425,000 shares of common stock for
services and accrued liabilities of which an aggregate of 100,000 shares were
issued to two directors; and three holders exercised their options and acquired
an aggregate of 450,000 shares of common stock.
During 1992, the following equity transactions occurred: The Company issued
2,702,335 shares to individuals in private transactions for aggregate proceeds
of $430,350; the Company issued a total of 401,500 shares of common stock for
services and accrued liabilities; holders exercised options and acquired an
aggregate of 250,000 shares of common stock. Also, during 1992, 13,118,619
restricted shares of the Company's stock were issued pursuant to an approval by
the Company's board of directors in December 1989 to the former president, chief
executive officer and board chairman for the settlement of $813,367 of advances
made to the Company.
During 1993, the following equity transactions occurred: The Company issued
1,471,666 shares to individuals in private transactions for aggregate proceeds
of $271,000; the Company issued a total of 5,347,219 shares of common stock for
services; the Company canceled the 13,118,619 shares of common stock issued in
1992 to the former president, chief executive officer and board chairman. As a
result of this cancellation of shares, the debt that was removed from the
Company books when the shares were issued, was restored. The restored debt was
$813,367. Also, during 1993, a total of $261,915 was received in cash for
2,619,150 shares subscribed as a result of a private placement offering
(Offering). The Offering commenced as of November 26, 1993, with a maximum of
$700,000 to be raised in gross proceeds from the sale of up to 7,000,000 shares.
Page 22 of 32 pages
<PAGE> 23
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ISSUANCE OF COMMON STOCK AND WARRANTS (CONTINUED)-
During 1994, the following equity transactions occurred: The Company issued a
total of 1,431,590 shares of common stock for services; the Company issued a
total of 1,125,834 shares of common stock to certain prior purchasers of common
stock in recognition of disparity in purchase in contemporaneous Offering. Also
during 1994, a total of $680,040 was received in cash for 6,800,499 shares
subscribed as a result of the Offering. Subsequent to the Offering, an
additional $316,860 was received in cash from foreign investors subscribing to
3,168,600 shares of common stock. On December 28, 1994, the Company settled a
dispute regarding the validity of notes payable to former management in the
amount of $2,033,628 (see Note 2) by agreeing to issue 11,250,000 common shares
(recorded as shares subscribed) in satisfaction of the total amount of the debt.
Also in 1994, $40,000 of notes payable (a portion of loans totaling $60,000)
together with interest was satisfied by issuing 416,500 shares of common stock.
(See Note 10.)
During 1995, the following equity transactions occurred: The Company issued a
total of 2,050,000 shares of common stock for services. $911,825 was received
from investors subscribing to 9,118,260 shares of common stock. Also, 7,524,860
common shares, previously recorded as shares subscribed, were issued, and
1,242,727 were retired in accordance with the settlement agreement with former
management (see Note 2). Two hundred thousand of redeemable shares were
converted into common stock. The Company sold shares of its New Zealand
subsidiary for aggregate proceeds of $150,000.
During the first quarter of 1996, the Company received $220,283 in cash from
investors subscribing to 2,202,835 shares of the Company's common stock.
8. STOCK OPTIONS
During 1986, the Company granted nonqualified options to a number of persons,
consisting of an officer, employee and consultants to the Company, to purchase
an aggregate of l,150,000 shares of common stock of the Company at an initial
exercise price of $.25 per share, the estimated fair value at the date of grant.
During 1988, the Company granted a nonqualified option to a newly appointed
member of the Board of Directors of the Company to purchase an aggregate of
150,000 shares of common stock of the Company at an exercise price of $.001 per
share. The options were exercisable 50,000 shares on each of November 29, 1989,
1990 and 1991 and were to expire on November 29, 1994. This director exercised
the option which became exercisable on November 29, 1989 and resigned on January
22, 1990.
During 1989, in consideration for services rendered over the prior three years,
the Company granted to a member of it Scientific Advisory Board a nonqualified
option to purchase 325,000 shares of common stock of the Company at an exercise
price of $.001 per share. This option was exercised in 1989.
Page 23 of 32 pages
<PAGE> 24
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED)-
During 1990, in consideration for services rendered over the prior four years,
the Company granted to a member of its Scientific Advisory Board a nonqualified
option to purchase 150,000 shares of common stock of the Company at an initial
exercise price of $.10 per share. This option was exercised in 1991.
All options were exercisable for a period of five years beginning one year from
the date of grant. Compensation expense, measured as to the excess of the
estimated fair value over the exercise price, was accrued over the service
period. If, on the date of exercise, the estimated fair value of a share of the
Company's common stock exceeded the exercise price, the exercise price was
decreased by a like amount (but not below the par value of $.001). At the end of
each fiscal period, total accrued compensation was recorded as the difference
between the adjusted exercise price and the fair market value at the end of the
period for all exercisable shares. The total accrued compensation was adjusted
each year for changes in the fair market value of the Company's stock and for
option exercises and cancellations.
The shares issued in connection with the exercise of the options were restricted
shares to be held for investment purposes only.
In 1995, as part the their employment agreements, the Company's president and
chief executive officer, and vice-president and chief financial officer and
treasurer, were granted options to purchase an aggregate of 4,500,000 shares of
the Company's common stock at an exercise price of $.20 per share, which vest
fully on January l, 1998 over the following vesting schedule; 33% on January 1,
1996, 33% on January 1, 1997, and 33% on January 1, 1998.
The following is a summary of option transactions:
<TABLE>
<CAPTION>
SHARES UNDER OPTION
<S> <C> <C> <C>
1995 1994 1993
---- ---- ----
Outstanding, beginning of year -- -- --
Granted 4,500,000 -- --
--------- --- ---
Canceled -- -- --
Exercised -- -- --
Outstanding, end of year 4,500,000
Eligible, end of year, for current
exercise -- -- --
========= === ===
</TABLE>
Page 24 of 32 pages
<PAGE> 25
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. MINORITY INTEREST
In June 1988, MCL issued 2,000,000 units consisting of one share of common stock
and two warrants which allow the holder to purchase one share of common stock
per warrant. The warrants are exercisable at $.125 per share. The net proceeds
of this offering were $84,024. The warrants were originally scheduled to expire
on December 31, 1992 but were extended to December 31, 1995. In 1988, MCL issued
1,938,000 shares of common stock at $.005 per share to a consultant for services
rendered. Following these transactions, the Company's ownership of MCL was
72.2%.
In 1990, MCL issued 983,333 shares of common stock at prices ranging from $.05
to $.075 in private offerings to two individuals unrelated to MCL for proceeds
of $57,400. MCL also issued 850,000 shares to five individuals, 550,000 shares
to the three directors of MCL, 50,000 shares to an employee, and 250,000 shares
to a consultant for services rendered to which MCL assigned the value of $.05
per share for an aggregate of $42,500. Following these transactions, the
Company's ownership of MCL was 68,6%. These transactions had previously been
incorrectly reported as minority interest. Minority interest should not have
been recorded on the balance sheet because of the magnitude of the stockholders'
deficiency of these stockholders. Accordingly, amounts previously stated as
minority interest have been restated to additional paid-in capital.
10. TRANSACTIONS WITH RELATED PARTIES (SEE ALSO NOTE 6)
On April 7, 1988, a group of ten stockholders advanced funds to the Company
totaling $60,815. The loans bear simple interest at 10%; due on demand. The
Company is obligated to accept the note at face value plus accrued interest as
partial payment for shares the lender may purchase from the Company upon
exercise of the lender's option to acquire shares from the Company.
During 1994 the Company received loans of $37,000. Of this amount $28,000 was
received from directors of the Company and $9,000 from a third party. The loans
bear simple interest at 8%. All principal and interest is due on August 22,
1995. Each lender has the right to convert any portion of the principal and
interest into common stock at a price per share equal to the price per share
under the most recent private placement transaction.
During 1995, the Company received loans of $50,000 from a director and a family
member of the same director. Also in 1995, the Company advanced approximately
$50,000 to its joint venture partner in New Zealand. (See Note 1.)
During the first quarter of 1996, the Company received loans of $47,000 from
directors.
11. RESTATEMENTS OF PRIOR PERIODS (UNAUDITED)
Beginning in 1991, the Company began selling off its holdings of MCL to raise
cash for operations. The Company sold 100,000 and 610,000 shares of MCL's common
stock during 1991 and 1992, respectively, through a broker for $5,000 and
$81,100 at $.05 per share in 1991 and per share prices ranging from $.093 to
$.179 in 1992. Because the Company's investment in MCL was only $2, the entire
$5,000 and $81,100 were recorded as gains in the Company's statement of
operations during the fourth quarter of 1991 and the first three quarters of
1992, respectively. During the fourth quarter of 1992, an adjustment was made to
classify these sales as equity transactions.
Page 25 of 32 pages
<PAGE> 26
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RESTATEMENTS OF PRIOR PERIODS (UNAUDITED) (CONTINUED)-
The effect of these restatements is as follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------
December 31, 1991 March 31, 1992 June 30, 1992 September 30, 1992 December 31, 1992
<S> <C> <C> <C> <C> <C>
Net loss:
Previously
Reported $1,215,200 $151,930 $173,496 $147,905 $ 89,510
Adjustment 5,000 24,555 -- 24,470 32,075
As adjusted $1,220,200 $176,485 $173,496 $172,375 $121,585
========== ======== ======== ======== ========
</TABLE>
These restatements do not affect previously reported loss per share because of
rounding.
See Note 9 for restatement of minority interest in prior years.
The Company has restated its financial statements to reflect adjustments to
write off liabilities which were accrued and expended in years prior to fiscal
1992. These adjustments increased previously reported accumulated deficit and
reduced previously reported results of operations (for the period January 31,
1986, date of inception, through December 31, 1994) by $219,422. During the
first quarter of 1995, the Company recorded a further reduction to accumulated
deficit in the amount of $71,806 relating to the cancellation of shares
previously issued to former management.
12. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. The cumulative effect of the
change in accounting principle is immaterial.
At December 31, 1995, the Company has a net operating loss ("NOL") carryforward
totaling approximately $7,450,000 that may be offset against future taxable
income in varying amounts through 2004. No benefit has been reported in the 1995
or 1994 financial statements, however, because the Company believes there is at
least a 50% chance that the carryforward will expire unused. Accordingly, the
tax benefit of the loss carryforward has been offset by a valuation allowance of
the same amount. The expected tax benefit that would result from applying
federal statutory tax rates to the pretax loss differs from amounts reported in
the financial statements because of the increase in valuation allowance.
Under certain circumstances, Section 382 of the Internal Revenue Code of 1986
restricts a corporation's use of its NOL carryforward. Due to the Company's
issuance of additional stock the Company's use of its existing NOL carryforward
could be limited. Therefore, the Company may have to pay federal income taxes
sooner than if the use of its NOL carryforward were not restricted.
Page 26 of 32 pages
<PAGE> 27
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. REDEEMABLE COMMON STOCK
On February 12, 1993, per a settlement agreement ("Agreement"), the Company
issued 200,000 shares of restricted common stock to an unrelated third party
("Party"). According to the Agreement, if net funds available to the Company
totaled at least $1.75 million prior to the shares becoming unrestricted, then
the Party would have the continuing right to require the Company to purchase all
or a portion of the shares pursuant to a formula specified in the Agreement. If
the Company filed a registration statement for an offering of its securities, it
was required to use its best efforts to include such shares in the registration
statement. If all, or any portion of the shares had not been purchased by the
Company pursuant to the exercise of the put option described above, or all the
shares had not been covered by an effective registration, then the Company would
have been required to pay, no later than April 13, 1995, an amount equal to the
lesser of $50,000 minus the aggregate purchase price amount payable under the
formula set forth in the Agreement, or $25,000. In September 1995, the Company
paid $5,000 and issued 200,000 shares of restricted common stock in full and
final settlement of the Agreement.
(Remainder of page intentionally left blank)
Page 27 of 32 pages
<PAGE> 28
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
From its commencement, the Company has been a development stage company
primarily engaged in retaining research consultants and sponsoring research to
investigate the medical uses of ozone. The Company has not generated and cannot
predict when or if it will generate sufficient cash flow from operations to fund
its continuing operations. Since its organization, the Company has paid or
accrued a total of $2,368,174 for research and development.
By letter agreement with the Italian Scientific Society for Oxygen-Ozone Therapy
(ISSOT) in Bergamo, Italy, tested March 23, 1993, the Company entered into a
collaborative arrangement to research and examine the efficacy of ozone therapy
and the Company's technology in the treatment of various blood-related human
diseases. The research is to be conducted by ISSOT in Italy, under the direction
of a research group assembled by the Italian Ministry, to which the Company's
president was appointed in April 1993. The research is to be conducted in
accordance with the FDA's protocols for human clinical trials.
Litigation Against Former Management
In November 1992, a derivative action was filed in the U.S. District Court for
the District of New Jersey by two shareholders of the Company against two of its
former officers and directors. The Company was named as a nominal defendant in
the action, but in January 1993 the Company substituted itself as a real party
plaintiff. The Company filed an amended complaint seeking damages and equitable
remedies and alleging, among other things, that the former officers and
directors defrauded the Company, breached fiduciary duties owed to the
shareholders and committed violations of federal securities laws.
In November 1993, the defendants replied to the counterclaims asserted by the
Company. The reply contained additional counterclaims seeking monetary and
injunctive relief under various provisions of the federal securities laws and
the common law. The defendants also asserted a derivative counterclaim on behalf
of the Company against certain current and former directors based upon alleged
breaches of a written agreement
Page 28 of 32 pages
<PAGE> 29
between the defendants and the Company's board of directors. Although the claims
originally asserted by the defendants in the New York action sought only
declaratory relief, the newly asserted claims sought damages in excess of $2.0
million.
On May 18, 1994, the parties reached agreement in principle to settle all their
litigation. On September 27, 1994, the parties stipulated to discontinue the
action pending the finalization of the settlement. On December 28, 1994, the
written settlement agreement was signed. The settlement agreement provides (i)
that Messrs. McGrath and Watrous will not challenge the validity of the
Company's board of directors resolution to rescind approximately 13,000,000
shares of the Company's stock previously issued to Mr. McGrath and approximately
1,200,000 shares previously issued to Mr. Watrous and to reinstate the Company's
debt to Messrs. McGrath and Watrous that had been retired by the issuance of
those shares; and (ii) for the Company to acknowledge the validity of $2,033,628
of debt to Messrs. McGrath and Watrous. In connection with the settlement, Mr.
McGrath assigned his portion of the above-mentioned debt to Mr. Watrous, which
was thereupon satisfied by the Company's issuance to Mr. Watrous of 11,250,000
shares of the Company's common stock restricted under the Securities Act of
1933.
Three-month periods ended March 31, 1996, and March 31, 1995
The Company has had no sales since January 1989. Sales commenced in May 1986
and, except for incidental items, ceased in October 1987. In cooperation with
the FDA, the Company has assisted in deactivating ozone-generating machines
owned by several practitioners/researchers who formerly purchased supplies from
the Company, and the Company does nor intend to sell equipment or supplies for
ozone-generating purposes until it receives FDA approval to do so.
Expenditures for research and development performed by independent contractors
was $39,600 during the 1996 period and was $9,000 during the 1995 period.
General and administrative expenses were $198,909 in the 1996 period as compared
to $259,389 in the 1995 period.
Interest expense increased from 1995 to 1996 by approximately $1,000 to $3,302
due to the increase in notes payable to Company directors.
Net cash used in operating activities was $268,511 in the 1996 period as
compared to $337,119 in the 1995 period. The decrease was due primarily to
decreased general and administrative expenses.
Page 29 of 32 pages
<PAGE> 30
Cash provided by financing activities decreased in the 1996 period by $126,784.
The decrease was due primarily to common stock subscriptions received during the
period.
Three-month periods ended March 31, 1995, and March 31, 1994
The Company has had no sales since January 1989. Sales commenced in May 1987
and, except for incidental items, ceased in October 1987. In cooperation with
the FDA, the Company has assisted in deactivating ozone-generating machines
owned by several practitioners/researchers who formerly purchased supplies from
the Company, and the Company does not intend to sell equipment or supplies for
ozone-generating purposes until it receives FDA approval to do so.
Expenditures for research and development performed by independent contractors
was $9,000 during the 1995 period and was $9,000 during the 1994 period.
General and administrative expenses were $259,389 in the 1995 period as compared
to $101,830 in the 1994 period.
Interest expense decreased from 1994 to 1995 by approximately $44,000 to $2,282
due to the elimination of the notes payable to former management in accordance
with the settlement agreement.
Net cash used in operating activities was $337,119 in the 1995 period as
compared to $255,045 in the 1994 period. The increase was due primarily to
increased general and administrative expenses.
Cash provided by financing activities increased in the 1995 period by $104,695.
The increase was due primarily to common stock subscriptions received during the
period.
Liquidity and Capital Resources
At March 31, 1996, the Company had a working capital deficiency of $569,098 and
stockholders' deficiency of $454,409. At December 31, 1995, the Company had a
working capital deficiency of $538,102 and stockholders' deficiency of $432,880.
From January 1, 1996, through March 31, 1996, the Company received subscriptions
to purchase 2,202,835 shares of its common stock at a per share price of $.10
for aggregate proceeds of $220,283.
The management of the Company continues to require funds to enable it to fund
requisite research necessary to gain regulatory approval(s) and continue
operations. The Company is engaged in a number of research initiatives which it
believes may enable it to
Page 30 of 32 pages
<PAGE> 31
successfully achieve its primary goals, which include the submission of
appropriate research data to the FDA Center for Drugs and Biologics for the
approval of its blood decontamination process and to the FDA Division of
Antiviral Drug Products for approval of Phase I human clinical trial status for
the treatment of AIDS.
The Company recognizes that, if it is unable to raise additional capital, it may
find it necessary to substantially reduce, or cease, operations.
(Remainder of page intentionally left blank)
Page 31 of 32 pages
<PAGE> 32
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
MEDIZONE INTERNATIONAL, INC.
----------------------------
(Registrant)
/s/ Arthur P. Bergeron
----------------------------
Arthur P. Bergeron
Vice President and
Chief Financial Officer
May 15, 1996
Page 32 of 32 pages
<PAGE> 33
EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) INTERIM
CONSOLIDATED BALANCE SHEETS, INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) QUARTERLY REPORT ON FORM 10-Q FOR THE
PERIOD ENDED MARCH 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16987
<PP&E> 10378
<DEPRECIATION> 5683
<TOTAL-ASSETS> 131676
<CURRENT-LIABILITIES> 586085
<BONDS> 0
0
0
<COMMON> 120123
<OTHER-SE> (574532)
<TOTAL-LIABILITY-AND-EQUITY> 131676
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 238509
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3302
<INCOME-PRETAX> (241811)
<INCOME-TAX> 0
<INCOME-CONTINUING> (241811)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (241811)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
