Item 5 and Item 8 were subjects of a Form 12b-25
and are now included in this report
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number: 2-93277-D
MEDIZONE INTERNATIONAL, INC. (originally Madison Funding, Inc.)
----------------------------------------------------------------
(Exact name of Registrant as stated in its corporate charter)
Nevada 87-0412648
- -----------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer I.D. Number)
4505 South Wasatch Boulevard, Suite 210, Salt Lake City, Utah 84124
- -----------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (801) 274-8400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
The Registrant has (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
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained herein, and will be contained in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment hereto. Yes No X
The aggregate market value of voting common stock held by non-affiliates of
the Registrant was $65,789,197 on March 30, 1998, based on the average bid and
asked prices of such stock as reported in the NASD OTC Bulletin Board and the
"pink sheets" of the National Daily Quotation Bureau.
According to information received from Registrant's transfer agent, as of March
17, 1998, Registrant had 138,609,519 shares outstanding (of which 41,490,125
were restricted).
DOCUMENTS INCORPORATED BY REFERENCE: None
SUPPLEMENTAL INFORMATION: The Registrant intends to furnish its shareholders
with an annual report for 1997 and a proxy statement subsequent to the filing of
the 10-K.
<PAGE>
TABLE OF CONTENTS
PART I
Page
Item 1. Business..........................................................3
Item 2. Properties.......................................................10
Item 3. Legal Proceedings................................................10
Item 4. Submission of Matters
to a Vote of Security Holders...........................10
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters..................11
Item 6. Selected Financial Data..........................................13
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations..............................................13
Item 8. Financial Statements and Supplementary
Data....................................................15
Item 9. Changes in and Disagreements with
Accountants on Auditing and Financial
Disclosure..............................................15
PART III
Item 10. Directors and Executive Officers.................................15
Item 11. Executive Compensation...........................................19
Item 12. Security Ownership of Certain
Beneficial Owners and Management........................24
Item 13. Certain Relationships and Related
Transactions............................................26
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K......................28
Signatures..............................................28
Exhibits Index..........................................E-1
Financial Statements and Schedules......................F-1
-2-
<PAGE>
PART I
Item 1. Business
--------
General
Medizone International, Inc., a Nevada corporation (the "Company" or
the "Registrant") organized in 1986, is a development stage company whose
objective is to (i) gain regulatory approval for its drug, a precise mixture of
ozone and oxygen called MEDIZONE(R), and its process of inactivating lipid
enveloped viruses for the intended purpose of decontaminating blood and blood
products and assisting in the treatment of certain diseases; and (ii) develop
the related technology and equipment for the medical application of its
products, including its drug production and delivery system (the "Medizone
Technology"). MEDIZONE(R) is one of two registered trademarks of the Company.
Throughout this report, whether or not the trademark symbol is used, the phrase
"Medizone (the drug)" is intended to have the same effect as if the trademark
symbol had been used.
Medizone (the drug) is intended to be used as a therapeutic drug in humans
to inactivate certain viruses, and thereby afford a treatment for certain
virally-based diseases (including Human Immunodeficiency Virus ["HIV"], the AIDS
related virus, Hepatitis B, Epstein-Barr, herpes, and cytomegalovirus), and to
decontaminate blood and blood products, applications which are covered under the
Company's patent (Patent No. 4,632,980). The Medizone Technology was developed
for the production of Medizone (the drug), and has led to the design of
equipment for which a patent has been issued in the United States (Patent No.
5,052,382). The Company has obtained patents based on each of these patents in
various foreign countries. See "Patents".
Patents
The proprietary scope of the Company is covered under a United States
process patent (U.S. Patent No. 4,632,980) entitled, "Ozone Decontamination of
Blood and Blood Products" (the "Patent") and a related United States equipment
patent (U.S. Patent No. 5,052,382) entitled "Approaches for the Control
Generation and Administration of Ozone" (the "Equipment Patent").
The Patent, which covers a procedure for ozone decontamination of blood and
blood products through the treatment of blood and blood components, is the
Company's principal asset, and was purchased, together with rights to other
ozone-related inventions, from Immunologics Limited Partnership, L.P. ("ILP") in
1987, for an aggregate of 6,000,000 shares of the Company's common stock (the
"Patent Purchase Agreement"). John M. Kells, the general partner of ILP, was
Chairman of the Company's Board of Directors from November 1992 through
September 1993.
The Patent Purchase Agreement requires the Company to pay to ILP an annual
royalty equal to 3% of the net receipts (i.e., net receipts after all credits,
returns and customary deductions, and exclusive of all taxes) received by the
Company in connection with the sale of any product, device or apparatus
embodying the Patent. The method covered by the Patent is the principal use of
ozone under study by the Company and is the method incorporated in its
regulatory applications. (See "Governmental Regulation" below.) In June 1990,
pursuant to the Company's request for re-examination of the Patent, the U.S.
Patent Office issued a re-examination certificate, confirming the patentability
of the claims covered by the Patent. The Company's United States patent
protection for the Patent will expire in 2003, subject to extension based upon
the length of time required to bring the Patent to commercial fruition. The
Company has been granted patents (based on the Patent) in Canada and the
European Patent Community, Australia, Malaysia, Hong Kong and Japan, with
applications pending in Singapore. The foreign patents
-3-
<PAGE>
began to be issued in 1990 and will expire 17 years after their respective dates
of issuance.
The Equipment Patent, which covers apparatus for the controlled generation,
monitoring and dosage of a precise admixture of ozone and oxygen (Medizone, the
drug), was developed by a consultant engineer to the Company and issued and
assigned to the Company in 1991. The Equipment Patent was developed to provide
the physical means to deploy the Patent. The foreign patent coverage of the
Equipment Patent parallels the coverage of the Patent.
In late 1996, the Company became aware that a United States patent had been
issued to a Canadian corporation which it believes infringes on the Patent. The
Company has consulted its patent counsel and intends to take the appropriate
steps to protect its rights with respect to the Patent. However, at the present
time, the nature of any action to be taken by the Company has been and will
continue to be limited by its lack of funding.
Research and Development
The Company does not maintain laboratories or other clinical research or
testing facilities. The Company's research and development activities have been
conducted by utilizing contract laboratories and clinicians. The research and
development activities have been directed by the Company's Scientific Advisory
Board, whose sole member since June 1997 has been Dr. Gerard V. Sunnen, the
Company's Director of Science (see "Employees and Consultants").
Pre-clinical Studies
Pre-clinical Studies are defined as non-human studies. Since 1988, the
Company has both sponsored and been the beneficiary of research to determine,
among other things, (i) whether the use of ozone, either alone or with other
modalities, is efficacious in the treatment of certain diseases and (ii) to
establish additional scientific evidence that ozone, through the use of the
patents and/or applications of scientific methodologies of a similar nature can
decontaminate blood of lipid enveloped viruses and thereby significantly
diminish the degree of transfusion related disease.
Pre-clinical projects sponsored by the Company to date include: (1) studies
to test ozone's ability to inactivate HIV, conducted at the State University of
New York ("SUNY") Health Science Center at Syracuse; (2) a pilot animal study of
the potential toxicity of ozone, conducted by the Arnold & Marie Schwartz
College of Pharmacy and Health Science at Long Island University; and (3)
studies investigating the effects of ozone/oxygen admixtures on human peripheral
blood, including whole blood, serum and plasma, conducted by the Blood Bank of
Mt. Sinai Medical Center, New York City.
In 1990, the Canadian Blood Forces Program (under the aegis of the Canadian
Department of Defense and Agriculture and the Canadian Red Cross) requested that
the Company add the Medizone Technology to the other proprietary technology
being investigated as an experimental arm of an ozone- based blood sterilization
investigative program. The program was an attempt to develop an effective
technology for sterilizing whole blood and blood products. This program, which
was to study the Medizone Technology as it relates to the inactivation of Simian
Immunodeficiency Virus ("SIV"), included a live primate model. The program
continued until 1994, completing two out of the three proposed stages, when the
funding arm of the Canadian Blood Forces Program discontinued funding the
program. The Company's current management learned in late 1997 that the program,
as it involves the Medizone Technology, was stopped primarily due to an
equipment failure and the generation of erroneous data due to the equipment
failure. The third stage of the study was resumed in May 1996, but did not
utilize the Medizone Technology.
-4-
<PAGE>
Governmental Regulation
Medizone (the drug), the Medizone Technology and any related products
derived therefrom are regulated under the Federal Food, Drug and Cosmetic Act
and the regulations promulgated thereunder (the "FDC Act") and are regulated by
the Food and Drug Administration (the "FDA"). The FDA exercises broad and
extensive authority in regulating the development, production, importation,
distribution and promotion of "new drug" products and "investigational devices"
pursuant to the FDC.
Because ozone-generation for the purposes of interfacing with blood and
blood products is regarded as a new drug delivery system, the Company is
precluded from selling or distributing Medizone (the drug) or the Medizone
Technology until after FDA approval has been granted. In order to obtain FDA
approval, the Company will be required to submit medical and scientific evidence
sufficient to demonstrate that Medizone (the drug) and the Medizone Technology
has been successfully used in pre- clinical studies followed by well-controlled
clinical studies using human volunteer subjects. The FDA will not grant an NDA
unless it contains sufficient medical evidence and data to permit a body of
qualified and experienced scientists to conclude that the new drug product is
safe and effective for its recommended and proposed medical uses. Historically,
the FDA has held a strong bias against treating humans with ozone, due largerly
to issues of safety.
In order to initiate the first phase (i.e., Phase I) of human clinical
studies required as part of an NDA, an applicant must submit to the FDA an
application for an Investigational New Drug Exemption ("IND"), which contains
adequate information to satisfy the FDA that human clinical studies can be
conducted without exposing the volunteer human subjects to an unreasonable risk
of illness or injury. The Compay submitted an IND application (assigned to the
Registrant by its former president) to the FDA on October 6, 1985, and requested
FDA approval to commence human clinical trials using ozone- oxygen to inactivate
HIV. The FDA deemed the IND application to be incomplete, and required the
Company to conduct additional animal studies prior to commencing a large animal
study and human trials. In September 1994, after not receiving responses to
requests for information from the Company, the FDA inactivated the Company's
IND. The Company has no present plans to commence a large animal study, which
would require, as a precursor, additional small animal and laboratory work.
Accordingly, there can be no assurance that the Company's IND application will
ever be re-opened. Until an NDA has been granted to the Company, it may not
distribute ozone-generating devices, except to researchers who agree to follow
FDA guidelines, and provided the devices are labeled as "Investiga- tional
Devices."
Because ozone has been used to treat humans in Europe for at least 30
years, the European Union (the "EU") is more accepting of human clinical trials
of ozone therapies being conducted than is the United States. Accordingly,
Management believes that the Company should pursue the option of conducting
human clinical trials in Europe, using stringent protocols that will meet EU
standards, with a view to utilizing the results of such trials in an effort to
obtain EU approval and to re-open the Company's FDA file.
Clinical Studies
Overview
To date the Company has not performed any human clinical studies.
The Italian Initiative
-5-
<PAGE>
In late 1992, the Italian Ministry of Health suspended the clinical use of
ozone until such time as sufficient scientific evidence was available to support
its use as a human therapeutic treatment. In this regard, the Italian Ministry
of Health designated the Italian Scientific Society for Ozone-Oxygen Therapy in
Bergamo, Italy ("ISSOT") as the agency to select those treatment protocols
utilizing ozone as worthy of investigation and to provide those protocols to the
Italian Ministry of Health for review and approval. By letter agreement dated
March 23, 1993, with ISSOT, the Company entered into a collaborative arrangement
to research and examine the efficacy of the Medizone Technology in the treatment
of various blood-related human diseases. The research is to be supervised by
ISSOT in Italy, under the direction of a research group assembled by the Italian
Ministry of Health. The research is to be conducted in accordance with protocols
that will meet EU Standards for human clinical trials (to be furnished by the
Company) at University based hospitals, which will enter into agreements with
the Company on a site by site basis. The ISSOT letter agreement requires the
Company to furnish ozone-generating instruments for use in the trials and to pay
for laboratory tests performed by each testing institution that are outside the
scope of the normal realm of clinical analyses performed by the testing
institutions. 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
efforts to re-open the FDA IND (see "Governmental Regulation").
On May 16, 1994, the Company announced that human trials were to commence
at the University of Naples ("Naples"). However, after the termination of Joseph
S. Latino's employment with the Company's, the Company's inquiry into the
conduct of its operations during Dr. Latino's tenure as its Chairman, President
and Chief of Research disclosed that human trials of the Company's ozone therapy
on patients infected with either Acquired Immunodeficiency Syndrome (AIDS) or
Hepatitis B (chronic active) has not been authorized by Naples or commenced at
that institution. The Company also learned that the Italian Ministry of Health
had not issued approvals for human clinical trials to commence at certain sites
as previously disclosed. While the ethics committees at certain university
hospitals have stated their approval for the Company to conduct Phase II trials,
they would require the Company to have either completed a large animal study and
Phase I trials or to have these requirements waived. The Company has never
performed a large animal study or Phase I clinical trials and does not possess
the necessary data with respect to its ozone therapy to commence Phase II study.
However, there does exist a broad use and understanding of ozone therapy
throughout Europe and there have been numerous scientific articles published in
European medical journals describing the use of ozone on humans. The Company has
held discussions with an Italian Contract Research Organization (the "ICRO")
with a view to having the ICRO act as an intermediary on behalf of the Company
with the Italian Ministry of Health and prepare a written submission to the
Italian Ministry of Health regarding the data in the public domain on ozone
therapy with a view to having the Italian Ministry of Health accept this
material as proof of safety, toxicity and tolerance of the use of the Company's
ozone technology on humans in lieu of having the Company perform a large annual
study and possibly even a Phase I clinical study. The ICRO would also design a
research program and protocols for clinical trials which would meet the
standards of the EU and FDA, monitor the clinical terms and collect and prepare
analyses of the data produced by the trials. The Company will not be able to
enter into a formal contract with ICRO unless it obtains additional funding. If
the Italian Ministry of Health does not accept the published evidence on the use
of ozone therapy on humans, the Company will be required to perform its own
Phase I clinical trials and possibly a large animal study. In late 1997, the
Company entered into a discussions with Italian and Belgium clinicians with
regard to them performing Phase I clinical studies. However, assuming the
Italian Ministry of Health did not grant the Company's request for a waiver, no
formal agreements with these clinicians would be signed and the studies would
not begin until the Company obtains additional funding. The Company estimates
that it would require an infusion of approximately $1.5 million to advance the
above-described research initiatives through the completion of a Phase III study
and submission of the data for approval to the Italian Ministry of Health.
Instrument Development
On October 17, 1996, the Company executed an agreement with Multiossigen,
S.r.L., an Italian corporation located in Bergamo, Italy (the "Manufacturer"),
dated as of September 13, 1996 (the "Equipment Contract"), providing for the
manufacture of ozone generating devises to be used in the human trials to be
commenced pursuant to the Company's letter agreement with the ISSOT, as trials
are approved by the Italian Ministry of Health.
-6-
<PAGE>
Pursuant to the Equipment Contract, the Manufacturer will produce a working
prototype of ozone generating devices dedicated to the use of hollow fibers or
similar gas exchange technology covered under the Company's patents,
satisfactory to the Company (the "Equipment"), and will make all data generated
from the use of the Equipment available to the Company. The Equipment Contract
calls for the Manufacturer to manufacture twenty pieces of the Equipment at a
purchase price of $9,000 per unit, for an aggregate of $180,000, payable as
follows:
(a) $25,000, paid upon approval of the prototype;
(b) $55,000, payable in fifteen installments of $3,667 with five such
installments ($18,335) being paid on each delivery of five units of
the Equipment; and
(c) one million shares of the Company's common stock, bearing a
restrictive legend, 500,000 shares of which were issued on the date
the Equipment Agreement was executed with the remaining 500,000 shares
issued on March 16, 1997.
Pursuant to the Equipment Agreement, the Company granted to the
Manufacturer a license to use the Company's patents in Europe, subject to the
regulations of all documents necessary to protect the Company's rights in and to
the patents, and appointed the Manufacturer as the Company's exclusive
manufacturer and distributor of the Equipment in Europe. Notwithstanding the
forgoing, the present distribution of the Equipment shall be limited to Italy,
but such distribution will be expanded to the rest of Europe upon the mutual
agreement of the parties.
The Equipment Agreement (together with its grants of license and
distribution described above) will terminate on September 13, 1998 and may be
renewed by mutual agreement of the partners at least thirty days prior to the
end of its term.
Units of Equipment shall be delivered in lots of five units and shall be
deliverable to the appropriate hospital site within 60 days of the written
request by the Company, based upon such hospital's ethics committee granting
approval to committee trials at a particular site.
Since its organization, the Company has attributed $2,202,685 as
expenditures for research and development, including $25,000 in 1996.
International Activities
Medizone Canada Limited
-----------------------
In order to maximize both research opportunities and the potential market
for its products, the Company intends to establish subsidiary or affiliated
corporations in other countries. The organization of such subsidiaries may
initially require the Company to incur significant expenses; thereafter, it is
intended that the subsidiaries would be responsible for organizing research
programs and/or generating possible sources of financing, from which the Company
would benefit directly or indirectly. It is anticipated that the Company would
also enter into license agreements with all subsidiary companies.
Registrant owns approximately two-thirds of the equity of Medizone Canada
Limited, a publicly-owned Utah corporation ("MCL"), which is engaged in the same
business as the Registrant in Canada through its wholly-owned subsidiary, MCL
Medizone Canada Ltd. ("MedCan") As described above under "Research and
Development", MedCan was a participant in the Canadian Blood Forces Program's
SIV Study.
Four million redeemable common stock purchase warrants, each exercisable to
purchase one share of the common stock of MCL for $.125, are publicly-held. The
MCL warrants originally had a nine month exercise period. The expiration date
was extended numerous times (but expired on December 31, 1997.)
-7-
<PAGE>
Medizone New Zealand Limited
----------------------------
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 which is an
affiliate of Richard G. Solomon ("Solomon"), who became a director of the
Company on January 16, 1996, but later resigned on February 27, 1997, 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 Solomon, who had 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, which was
repaid on October 26, 1995. On October 26, 1995, the Company loaned MNZ $50,000
on a demand basis, which has not been repaid as of the date of this report. The
Directors of MNZ, as of September 1997, are Solomon and Milton Adair, the
Company's President.
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 these
patents in New Zealand and to use its best effort 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 license, 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: Australia (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:
The Company MNZ
----------- ---
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%
-8-
<PAGE>
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.
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.
Competition
The area in which the Company seeks to do business is extremely
competitive. The Company is aware of a number of domestic companies that have
commenced research into the use of ozone as a virucide in the treatment of HIV
and other diseases, or have announced the intention to do so. Other companies,
foundations, research laboratories or institutions may also be conducting
similar investigations into the use of ozone as a virucide or as a decontaminant
for blood or blood products. The Company is also aware that another company has
provided ozone-generating equipment to departments of the Canadian government
conducting studies in Canada for the purposes of comparison of technologies. In
addition, as reported in scientific journals and newspapers, there are many
commercial, not-for-profit and governmental agencies investigating possible
treatments for HIV and other viral diseases, as well as a variety of
methodologies aimed toward blood fractionate decontamination.
Employees and Consultants
The Company has three employees, its President, its Vice President/Chief
Financial Officer and a Vice-President of Operations (who is not an officer of
the Company).
The Company has established a Scientific Advisory Board which suggests and
formulates avenues of research and reviews research in progress. As of December
31, 1996, the Scientific Advisory Board was comprised of two members, Joseph S.
Latino, Ph.D., the Company's President and Chief Executive Officer and Bernard
J. Poiesz, M.D., Head, Regional Oncology Center, S.U.N.Y. at Syracuse, Syracuse,
New York. The Scientific Advisory Board met three times in 1996. Dr. Poiesz was
not compensated by the Company for his services on the Company's has Scientific
Advisory Board, although he has applied for research grants in connection with
the Company's research and development efforts. Dr. Poiesz became a member of
the Scientific Advisory Board in 1987. From 1989 to 1995, Fred Quimby, D.V.M.,
Ph.D., Chairman, Animal Research Institute, New York State School of
Veterinarian Medicine, Cornell University, was a member of the Scientific
Advisory Board, but resigned when he became the sole principal investigator for
the SIV Study being conducted under the auspices of the Canadian Blood Forces
Program. See "Research and Development".
In June 1997, the Scientific Advisory Board was reorganized. It currently
has one member, Dr. Gerard V. Sunnen, who serves as the Company's Director of
Science.
The Company retains CTC, Inc. ("CTC"), of Cincinnati, Ohio, to act as the
Company's liaison with the brokerage community. The agreement is for a period of
one year, but may be extended by the parties for additional one year periods.
CTC receives a monthly payment of $2000, plus expenses.
Insurance
The Company presently has no product liability insurance, since none of its
products are in clinical use. It presently has no officers and directors
liability insurance.
-9-
<PAGE>
Certain Business Risks Associated with the Company
Development Stage Company/Net Losses
------------------------------------
Although the Company was incorporated in 1986, it is still in the
development stage and has not yet commenced full operations, nor has it earned
any revenues. No assurance can be given that its business activities will ever
generate revenues. As indicated in the Company's financial statements, it has
experienced substantial losses throughout its history. Such losses can be
expected to continue for the foreseeable future.
No Revenues/Need for Additional Financing
-----------------------------------------
The Company has generated no revenues, has had no source of funds other
than through the sale of its common stock and will require substantial
additional capital, which will most likely be obtained through sales of its
common stock, in order continue the research program outlined above, pay its
administrative and operating expenses, meet its filing and disclosure
obligations as a public company, and repay certain outstanding indebtedness. No
assurances can be given that the Company will be able to obtain sufficient
additional capital for it to continue its research program, or that any
additional financing will be sufficient to satisfy the Company's administrative
and operating expenses for any significant period of time.
Status of the Company's Research
--------------------------------
As described above, the Company's research has not progressed to a point
where it would be appropriate to predict when, if ever, Medizone (the drug) and
the Medizone Technology would have commercial application or be marketable.
Forward-Looking Information May Prove Inaccurate
This Form 10K/A contains forward-looking statements and information that
are based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate," "believe," "estimate," and "expert," and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
Company's current views with respect to future events and are subject to certain
risks, uncertainties and assumptions, including the specific risk factors
described above. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements and information.
Item 2. Properties
----------
As of January 1997, Registrant leased from an unaffiliated party
approximately 900 square feet of office space at 123 East 54th Street, Suite 7B,
New York, NY 10022, under a two-year lease expiring on February 28, 1998, at an
annual rental of $20,940. The Company terminated this lease in June 1997 and
paid $4,598.96 to the landlord in settlement of any claim for unpaid rent under
the lease. On September 23, 1997, the Company entered into a three-year lease
with an unaffiliated third party for its present offices at 4505 South Wasatch
Boulevard, comprising approximately 1400 square feet, at an annual rental of
$22,984.56. The office space is used for executive offices and administrative
purposes.
Item 3. Legal Proceedings
-----------------
In November 1992, the Company consented to the entry of a final judgment of
permanent injunction (S.E.C. v. Medizone International, Inc., Civil Action
93-2761, D.D.C.), pursuant to which the Company was permanently enjoined from
failing to timely file the reports required to be filed pursuant to the
Securities Exchange Act of 1934.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders. No matters
-----------------------------------------------------
were submitted to a vote of
No matters were submitted to a vote of securities holders during the fourth
quarter of the fiscal year ending December 31, 1997.
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
-------------------------------------------------
Prices/Trading Market Information
The Company's shares are traded in the over-the-counter market, with price
quotes listed on the NASD Electronic Bulletin Board under the trading symbol
"MZEI," and in the "pink sheets" published by the National Quotation Bureau.
On March 30, 1998, according to the NQB Non-NASDQ Price Report furnished by
the National Quotation Bureau, there were approximately 18 marketmakers in the
Company's shares, with a high bid for the shares of $.1055 and a low bid of
$.05. Such prices reflect interdealer prices without retail markup, markdown or
commission; are not necessarily representative of actual transactions, or of the
value of the Company's securities; and are, in all likelihood, not based upon
any recognized criteria of securities valuation as used in the investment
banking community.
Shown below is information obtained from the National Quotation Bureau,
indicating the high bid and low bid prices for a share of the Company's common
stock at the end of each of the four calendar quarters of fiscal 1996 and 1997,
representing prices between dealers which do not include retail markup, markdown
or commission. They do not reflect actual transactions.
Bid Price
---------
Calendar Period High Low
--------------- ---- ---
1996 First Quarter .10 .075
Second Quarter .17 .11
Third Quarter .15 .10
Fourth Quarter .125 .075
1997 First Quarter .085 .01
Second Quarter .0825 .05
Third Quarter .105 .085
Fourth Quarter .10 .065
Number of Holders
On March 18, 1998, according to the Company's transfer agent, there were
3891 holders of record of the Company's par value $.001 common stock.
Dividends
The Company has never paid cash dividends on its common stock. Payment of
cash dividends is subject to the discretion of the Board of Directors and is
dependent upon various factors, including the Company's earnings, capital needs
and general financial condition. The Company does not believe that it has any
immediate prospect of earnings. However, the Company anticipates that in the
foreseeable future, it will follow a policy of retaining earnings, if any, in
order to finance research and development.
-11-
<PAGE>
Private Sales of Shares
In June 1997, the Company issued warrants to purchase an aggregate of
73,333,333 shares of its common stock to The Sand Dollar Solution ("Sand
Dollar"), a California limited partnership, whose general partner is Edwin G.
Marshall, the Chairman of the Company's Board of Directors (the "Sand Dollar
Warrants"). No consideration was paid to the Company for the Sand Dollar
Warrants.
The Sand Dollar Warrants have the following exercise prices and expiration
dates:
Shares Exercise Price Termination Dates
- ------ -------------- -----------------
15,000,000 $.07 per share Originally
September 7, 1997, then
extended until ten
days after the Company
becomes current in its
filings with
Securities and
Exchange Commission,
now extended to May 31, 1998
33,333,333 $.15 per share June 9, 1998
25,000,000 $.20 per share June 9, 1999
On September 23, 1997, Sand Dollar purchased 5,714,285 shares of the
Company's common stock pursuant to the Sand Dollar Warrant, paying $.07 a share,
or aggregate consideration of $400,000, which shares were authorized for
issuance in December 1997. In March 1998, Sand Dollar purchased 857,143 shares
of the Company's common stock pursuant to the Sand Dollar Warrant, paying $.07 a
share, or $60,000. The Company relied on the private offering exemption from
registration under the Securities Act of 1933 (the "Securities Act") in issuing
the Sand Dollar Warrants and for the sale of shares pursuant to the exercise of
the Sand Dollar Warrants.
In March and May 1997, the Company issued an aggregate of 2,716,600 shares
of its common stock to Kenneth Gropper (500,000 shares), Arthur P. Bergeron
(500,000 shares), George Handel (750,000 shares), counsel to the Company (an
aggregate of 666,666 shares), an employee (50,000 shares), and its public
relations firm (250,000 shares) in consideration of services rendered, relying
on the private offering exemption under the Securities Act. In December 1997,
the Company authorized the issuance of 100,000 shares of common stock to Dr.
Gerard Sunnen in consideration of his services as the Company's Director of
Science. The Company issued 103,200 shares of its common stock to an employee of
its New Zealand subsidiary, pursuant to Regulation S promulgated under the
Securities Act, as consideration for services rendered.
-12-
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues $ -0- $ -0- $ -0- $ -0- $ -0-
Net income (775,559) (1,329,395) (1,081,027) (1,126,315) (1,598,342)
(loss) before
minority interest
Net income (loss) (775,559) (1,329,395) (1,081,027) (1,126,315) (1,598,342)
Net income (loss) (.01) (.01) (.01) (.01) (.02)
per common share
Weighted average 133,568,000 118,022,000 111,306,000 98,292,000 93,384,000
common shares
outstanding
Balance Data
Sheet:
Working capital (945,859) (949,254) (538,102) (576,101) (2,844,085)
(deficiency)
Total assets 307,019 74,368 124,653 87,230 81,705
Long-term -0- -0- -0- -0- -0-
liabilities
Accumulated (13,217,678) (12,442,119) (11,112,724) (10,103,503) (9,196,610)
(deficit)
Stockholders' (886,167) (885,241) (432,880) (558,679) (2,825,458)
equity
deficiency
</TABLE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
----------------------------------------------
Results of Operations
General
-------
From its organization in January 1986, Registrant has been a development
stage company primarily engaged in retaining research consultants and sponsoring
research to investigate the medical uses of ozone. Registrant has not generated,
and cannot predict when or if it will generate, sufficient cash flow to fund its
continuing operations. Since its organization, Registrant has attributed
$2,319,635 as expenditures for research and development, including $111,950 in
1997.
Restatements
Registrant has restated each of its quarterly reports for 1992 to account
properly for the proceeds from the Company's sale of a portion of its holding of
Medizone Canada Limited ("MCL") as equity transactions.
-13-
<PAGE>
During the first quarter of 1992, Registrant sold 250,000 shares of MCL
common stock at per-share prices ranging from $.093 to $.10, and during the
third quarter of 1992, an additional 150,000 shares were sold through a broker.
Aggregate proceeds from the transactions were $24,555 (first quarter) and
$24,470 (third quarter), respectively.
Because the Company's investment in MCL was only $2, the $24,555 and
$24,470 was reported as a gain in the Company's statement of operations for each
respective period. In the restated reports, the transactions have been
characterized as equity transactions.
The restatements result in an increase in the first quarter loss in the
amount of $24,555, and an increase in the third quarter loss in the amount of
$24,470.
Additionally, the Company sold 100,000 shares of MCL common stock during
1991 through a broker for $5,000, at a per-share price of $.05. This transaction
was also restated in 1992, as an equity transaction, which results in an
increase in the 1991 loss of $5,000.
The restatements do not affect previously reported loss per share because
of rounding.
Years Ended December 31, 1997, and December 31, 1996.
There were no sales during either year. Sales commenced in May 1986 and,
except for incidental items, ceased in October 1987.
Expenditures for research and development, including work performed by
independent contractors was $116,950 in 1997 and $25,000 in 1996.
General and administrative were $633,187 in 1997 as compared with
$1,291,082 in 1996. These expenses include professional fees, payroll, insurance
costs and travel expenses.
Notes payable in 1997 of $354,115 and 1996 of $332,315 have interest
accruing at rates averaging from 6.07% to 8%.
Years Ended December 31, 1996, and December 31, 1995
There were no sales during either year. Sales commenced in May 1986 and,
except for incidental items, ceased in October 1987.
Expenditures for research and development including work performed by
independent contractors were $25,000 in 1996. There were no such expenditures in
1995.
General and administrative expenses were $1,291,082 in 1996 as compared to
$1,170,119 in 1995. These expenses include professional fees, payroll, insurance
costs and travel expenses.
Notes payable in 1996 of $332,315 and $147,815 in 1995 have interest
accruing at rates ranging from 8% to 10%.
Liquidity and Capital Resources
At December 31, 1997, the Registrant had a working capital deficiency of
$945,859 and a stockholders' deficiency of $886,167.
At December 31, 1996, Registrant had a working capital deficiency of
$949,254 and a stockholders' deficiency of $885,241.
-14-
<PAGE>
During 1987, excluding options exercised and shares issued for services,
Registrant sold an aggregate of 950,000 shares to unrelated individuals at
prices ranging from $.10 to $.25 for aggregate proceeds of $150,000 and borrowed
$150,000 which, in 1989, was exchanged for 1,500,000 shares.
During 1988, excluding options exercised and shares issued for services,
Registrant sold 1,000,000 shares to an unrelated individual at $.08 per share,
and borrowed an aggregate of $166,700 which, in 1989, was exchanged for
1,834,000 shares.
During 1989, excluding options exercised and other issuances not for cash,
Registrant sold an aggregate of 5,790,000 shares to unrelated individuals at
prices ranging from $.03-1/3 to $.10 per share, for aggregate proceeds of
$291,500.
During 1990, excluding issuances to settle outstanding obligations and for
services, Registrant sold an aggregate of 4,250,000 shares to unrelated
individuals at prices ranging from $.03 to $.05 per share for aggregate proceeds
of $179,500.
During 1991, excluding options exercised and issuances for services,
Registrant sold an aggregate of 4,366,667 shares to unrelated individuals at
prices ranging from $.036 to $.20 per share, for aggregate proceeds of $310,000.
During 1992, excluding options exercised and issuance of shares for
services, Registrant sold an aggregate of 2,702,335 shares to unrelated
individuals at prices ranging from $.15 to $.20 per share for aggregate proceeds
of $430,350.
During 1993, excluding issuance of shares for services, Registrant sold an
aggregate of 1,471,766 shares to unrelated individuals at prices ranging from
$.15 to $.20 per share for aggregate proceeds of $271,000. Registrant also
received proceeds from stock subscriptions totaling $261,915.
During 1994, excluding issuance of shares for services, Registrant sold an
aggregate of 9,552,340 shares to unrelated individuals at $.10 per share for
aggregate proceeds of $955 234.
During 1995, excluding issuance of shares for services, Registrant sold an
aggregate of 8,984,450 shares to unrelated individuals at $.10 per share for
aggregate proceeds of $898,445.
During 1996, excluding issuance of shares for services, Registrant sold an
aggregate of 7,254,470 shares to unrelated individuals at $.10 per share for
aggregate proceeds of $725,447.
During 1997, excluding issuance of shares for services, Registrant sold
5,714,285 shares to The Sand Dollar Solution, a California limited partnership,
and an affiliate of the Registrant, at $.07 a share for aggregate proceeds of
$400,000.
In connection with certain of the foregoing transactions, the Company has
paid or accrued finders' fees.
Registrant will continue to require additional funding to enable it to fund
research necessary to make the appropriate regulatory application and continue
operations.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
The financial statements and supplementary data are listed under Item 14 in
this Annual Report and commence on page F-1.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
---------------------------------------------
None.
-15-
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant.
----------------------------------------------
On July 7, 1996, at the Company's annual meeting, Joseph S. Latino, George
Handel, Kenneth Gropper, John D. Pealor and Richard G. Solomon were elected to
the Company's Board of Directors. On July 31, 1996, Lawrence I. Sosnow and
Howard L. Feinsand were appointed to the Company's Board of Directors. Mr.
Sosnow resigned and Mr. Feinsand resigned as Directors on October 1, 1996 and
March 26, 1997, respectively. Richard G. Solomon resigned as a Director on
February 27, 1997.
On May 14, 1997, the Company's Board of Directors terminated the employment
of Joseph L. Latino ("Latino") as the Company's President and Chairman after the
discovery of a pattern of unaccounted for expenditures of the Company's funds.
The Company is investigating the purposes, nature and extent of such
expenditures. Dr. Latino remained a Director of the Company until he resigned in
August 1997. George Handel ("Handel") was named President and Chairman and
served as such until May 19, 1997 when Kenneth Gropper ("Gropper") assumed these
positions.
Contemporaneously with the above events, the Company was notified that The
Sand Dollar Solution, a California limited partnership ("Sand Dollar"), whose
general partner is Edwin G. Marshall ("Marshall"), was soliciting shareholder
proxies to vote for Marshall, Milton G. Adair ("Adair"), Gerard V. Sunnen, M.D.
("Sunnen") and William M. Hitt, Ph.D., M.D. ("Hitt") as Directors.
On June 12, 1997, the Company's Board of Directors appointed Marshall,
Adair, Sunnen and Hitt, to the Registrant's Board of Directors, with Marshall
being named Chairman. Contemporaneously thereto, John Pealer ("Pealer") resigned
as a Director, and Gropper resigned as President. The Board thereupon made the
following appointments to the following positions:
President and - Adair
Chief Executive
Officer
Chief Operating
Officer - Gropper
Secretary - Sunnen
The Board also named an Executive Committee, composed of Marshall, Adair,
Gropper, Sunnen and Hitt. The remaining Directors were Latino and Handel;
however, during the Board meeting, Handel resigned from the Board, effective
June 13, 1997 and Latino subsequently resigned from the Board in August 1997.
The Board abolished the position of Chief Executive Officer - Administration,
which had been established on April 30, 1997. The holder of the position, Arthur
P. Bergeron, remains Vice President, Treasurer and Chief Financial Officer of
the Registrant. In November 1997, the Board abolished the position of Chief
Operating Officer, held by Gropper, who remains a Director. The following table
sets forth certain information concerning the Registrant's directors and
officers, as of December 31, 1997.
Director Officer Positions with
Name Age Since Since Registrant
- ---- --- -------- ------- --------------
Edwin G. Marshall 55 1997 Chairman of the Board
Milton G. Adair 65 1997 1997 President, Chief Executive Officer
and Director
Gerard V. Sunnen 55 1997 1997 Secretary and Director
-16-
<PAGE>
Arthur P. Bergeron 47 1992 Vice President, Chief Financial
Officer
William M. Hitt 71 1997 Director
Kenneth Gropper 55 1995 Director
Edwin G. Marshall became the Company's Chairman in June 1997. He attended
Santa Rosa Junior College and the College of Marin, in California, studying
Business and Fire Science. Marshall served for 17 years in the fire service,
rising to become Captain of the Richmond, California Fire Department. He left
the fire service in 1979 to enter the real estate business. He participated in
the real estate business as the owner of Smith, Smith & Associates, in Truckee,
California, from 1979 to 1984, and as a broker with TRI Realtors, in the San
Francisco Bay Area, from 1987 to 1990. Marshall was employed by Future
Technology Marketing, Inc., of Truckee, California, in sales and training from
1985 to 1987. In 1989, Marshall co-founded The Marin Car Company, which was in
the automobile and truck sales and leasing business, in Novato and Petaluma,
California. In 1992, Marshall left The Marin Car Company. He is currently
employed as a private investor and is also the general partner of Sand Dollar.
Milton G. Adair became the Company's President, Chief Executive Officer and
a Director in June 1997. He received a Bachelor of Arts degree in Business
Administration and Psychology from The College of the Pacific in 1955. After
employment by Shell Oil Company and Pittsburgh Des Moines Steel from 1955 to
1963, Mr. Adair was employed by Pfizer Incorporated from 1963 to 1978 in several
capacities, culminating in his position as Director of Sales for the Pfizer
Diagnostics division. From 1978 to 1979, Mr. Adair was employed as Vice
President-Sales/Marketing for the Becton Dickinson Immunodiagnostics division of
Becton Dickinson Corporation ("BD") in Orangeburg, New York. Thereafter, until
1983, he was Vice-President and General Manager of Becton Dickinson Automated
Immunochemistry division of BD in Salt Late City, Utah. From 1983 to 1984, Mr.
Adair was President of Orbit Medical Systems, Inc., a Salt Lake City venture
capital company in the immunochemistry field. Mr. Adair was President, Chief
Executive Officer and a Director of Mountain Medical Equipment, Inc., in
Littleton, Colorado, whose stock was traded on the American Trade Exchange (the
"AMEX"), from 1984 to 1991. In 1991, he became President and Chief Executive
Officer of Gull Laboratories, Inc. ("Gull Labs"), in Salt Lake, and whose stock
trades on the AMEX, and which is in the business of supplying diagnostic kits
and automated equipment in the infectious disease and autoimmune markets. He
remained at Gull Labs until 1995 and became President and Director of Biomune
Systems, Inc. ("Biomune") until 1997. Biomune, whose stock is traded on the
NASDAC system, is a bio-technology company that is developing pharmaceutical
products for the treatment of cryptosporidioses and E. Coli.
Gerard V. Sunnen, M.D. became Secretary and a Director of the Company in
June 1997. He graduated from Rutgers University in 1963 and from the medical
school of the State University of New York, Downstate, in 1967. Dr. Sunnen has
practiced psychiatric medicine since his graduation from medical school and has
taught clinical psychiatry at New York University Medical Center since 1977,
where he is now an Associate Clinical Professor of Psychiatry. He is currently a
consultant to several organizations and companies, including the Institute for
Behavior Therapy and the Training Institute for Mental Health Practitioners in
New York. He is a member of the American Psychiatric Association, the American
Society of Clinical Hypnosis, the International Association of Emergency
Psychiatry, of which he is Honorary President, and the World Psychiatric
Association, where he is currently Vice President of the Section for Emergency
Psychiatry. He received the Chevalier de l'Ordre du Merite from the French
government in 1990 for his work in assisting members of the French community in
New York. Dr. Sunnen has written and lectured extensively on psychiatric
medicine and medical hypnosis. He have also written on the medical applications
of ozone.
-17-
<PAGE>
William M. Hitt became a Director of the Company in June 1997. He received
a Bachelor's of Science degree from the University of Denver in 1946 and a Ph.D.
from Colorado A&M University in 1948. He received a medical degree from the
University of Colorado in 1952 and did post-medical school studies at Duke
University and Washington University School of Medicine. Dr. Hitt has taught and
conducted research at several institutions in the United States and Mexico,
culminating with his work at the World Health Organization in Mexico City from
1989 to 1994. He was the recipient of the Eli Lily Award from the National
Institute of Health in 1953; the Leovenhoek Award in 1960, the Cientifico
Destacado in 1990 and 1992, and the Bioethics International Award of Merit in
1993. Dr. Hitt was a member of the Board of Directors of Physicians Against
Nuclear War, which organization was awarded the Nobel Peace Prize in 1985. Dr.
Hitt is currently the Director of the William Hitt Center, which conducts
clinical immunology and addiction recovery programs, has operated since 1986 and
now has seven locations in Central and South America, with headquarters in
Tijuana, Mexico.
Kenneth Gropper became a director of the Company in September 1995. Mr.
Gropper is the President and Chief Executive Officer of Management Consulting
Group, Inc. of Woburn, Massachusetts, which serves as a consultant to physician
group practices, medical centers, pharmaceutical companies and medical device
manufacturers on regulatory, legislative, administrative, sales, marketing and
other management issues. Mr. Gropper joined Management Consulting Group, Inc. in
1977. Mr. Gropper was a member of the Board of Trustees of the Massachusetts Eye
and Ear Infirmary from 1989 to 1994. Mr. Gropper received a Bachelor of Arts
degree in Economics from Long Island University in 1964 and attended Columbia
University's Graduate School of Business Administration.
Arthur P. Bergeron became Vice President, Treasurer and Chief Financial
Officer of the Company in 1992. He holds these same positions with MCL. He
received a Bachelor of Science in Accounting from Bentley College in Waltham,
Massachusetts in 1973 and a Master of Science in Taxation from Bentley College
in 1980. Mr. Bergeron is a certified public accountant and is the principal of
Arthur P. Bergeron & Co., P.C., in Wellesley, Massachusetts, a public accounting
firm which he founded in 1978. He does not devote his full time to the affairs
of the Company.
Item 11. Executive Compensation.
----------------------
Directors Compensation
None of the directors received any compensation for serving as a director
in 1997.
Executive Compensation
The following table sets forth the compensation paid by the Company for the
1995, 1996 fiscal years to Joseph S. Latino, the Company's President and Chief
Executive Officer, in 1997 to Milton G. Adair, the Company's President and Chief
Executive Officer, and to Arthur Bergeron, the Company's Vice President,
Treasurer and Chief Financial Officer, and to certain others who served as
officers during these periods.
Summary Compensation Table
--------------------------
Long Term
Annual Compensation Compensation
------------------- ------------
Name and Other
Principal Annual
Position Year Salary Bonus Compensation Options #
- -------- ---- ------ ----- ------------ ---------
-18-
<PAGE>
Joseph S. Latino, Ph.D, Pres- 1996 $180,000 - 0 - (1)
ident and Chief Executive 1995 $180,000 - 0 - (1) 3,000,000
Officer
Milton G. Adair, 1997 $200,000 - 0 - - 0 - 3,000,0002
President and
Chief Executive Officer
Arthur P. Bergeron, Vice 1997 $72,000(3) - 0 - (4)
President, Treasurer and 1996 $72,000(3) - 0 - 1,500,000
Chief Financial Officer 1995 $72,000 - 0 -
Dr. Gerard V. Sunnen, 1997 - 0 - - 0 - (5)
Secretary, and Director of
Science
Kenneth Gropper, Chief 1997 - 0 - - 0 - (6)
Operating Officer
George Handel 1997 -0- - 0 - (7)
Secretary
Employment Agreements
- -------------------------------
(1) In 1995 and 1996 Dr. Latino was reimbursed for certain automobile
expenses and other business expenses, in the amounts of $33,222 and
$45,642 respectively. In 1995 and 1996 the Company provided Dr. Latino
with health insurance, paying premiums in the amounts of $9,438 and
$10,380, respectively.
(2) On December 16, 1997, Mr. Adair was granted options to purchase
3,000,000 shares of the Company's Common Stock pursuant to the
Company's 1997 Qualified Stock Option Plan (the "Option Plan"). The
options vest at the rate of 500,00 shares every six months and, once
vested, may be exercised over a period of ten years at a price equal
to the Common Stock's market value at the date of grant ($.06). The
Option Plan will be submitted to a shareholder vote at the Company's
1997 annual meeting.6
(3) In 1996, due to the Company's financial condition, Mr. Bergeron
received only $36,000 to his salary. He has not received payment of
his salary in 1997.
(4) In 1995, 1996 and 1997 the Company provided Mr. Bergeron with health
insurance, paying premiums in the respective amounts of $9,438,
$10,380 and $2,595 (until April 18, 1997, when the Company's group
health plan was cancelled).
(5) Dr. Sunnen received a grant of (i) options to purchase 300,000 shares
of the Company's common stock pursuant to the Option Plan for serving
as the Company's Secretary and as its Director of Science; and (ii)
100,000 shares of the Company's common stock for serving as Director
of Science.
(6) Mr. Groper received an award of 500,000 shares of the Company's Common
Stock and a grant of an option to purchase 100,000 shares of the
Company's Common Stock pursuant to the Option Plan for serving as the
Company's Chief Operating Officer during part of 1997.
(7) George Handel received an income of 750,000 shares by the Company's
Common Stock for serving as the Company's Secretary in 1994, 1995 and
1996.
-19-
<PAGE>
The Company and Joseph S. Latino entered into an employment agreement,
effective January 1, 1995, pursuant to which the Company agreed to employ Dr.
Latino as its Chief Executive Officer and Director of Research, at a salary of
$180,000 per annum, for a one year period; provided, however, that this
agreement shall remain in effect until terminated by either of the parties in
accordance with its terms. Dr. Latino received certain fringe benefits,
including the use of an automobile and health and life insurance and was been
granted an option to purchase 3,000,000 shares of the Company's common stock,
par value $.001, at a per share price of $.20. These options vested in annual
increments of 1,000,000 shares, on and after January 1 of each of 1996, 1997 and
1998, provided that Dr. Latino is still employed by the Company at the time. The
Agreement continued in effect in 1996 but was terminated for cause in May 1997.
The Company agreed to employ Arthur P. Bergeron, effective January 1, 1995,
as its Chief Financial Officer, at a salary of $72,000 per annum, plus monthly
expenses, for a one year period; provided, however, that this agreement shall
remain in effect until terminated by either party in accordance with its terms.
The Agreement continued in effect in 1996 and 1997. Mr. Bergeron's salary may be
increased in the discretion of the Board of Directors. Mr. Bergeron is also to
serve as the Chief Financial Officer of Medizone Canada Limited without
additional compensation. Pursuant to this agreement, Mr. Bergeron is permitted
to continue his private accounting practice. Mr. Bergeron will also receive
health insurance from the Company and has been granted an option to purchase
1,500,000 shares of the Company's common stock, par value $.001, at a per share
price of $.20. These options vest in annual increments of 500,000 shares on and
after January 1 of each of 1996, 1997 and 1998, provided that Mr. Bergeron is
still employed by the Company at that time. The agreement also provides for
certain bonuses to be paid if the Company achieves certain financial results.
The Company does not have a written employment agreement with Milton G.
Adair.
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee. Matters concerning the
compensation of executive officers are determined by the Company's Board of
Directors. Until his termination, Dr. Latino, who was an executive officer of
the Company, was also a member of the Company's Board of Directors and
participated in deliberations concerning executive officer compensation, but did
not vote on his own individual compensation. However, his participation in such
deliberations gave rise to a conflict of interest which could have affected his
compensation. Mr. Adair, who is an executive officer of the Company is also a
member of the Company's Board of Directors and will participate in deliberations
concerning executive offer compensation, but will not vote in his own individual
compensation. However, his participation in such deliberations gives rise to a
conflict of interest which could affect his compensation.
Option Grants in Last Year Pursuant to Employment Agreement
-----------------------------------------------------------
The following table sets forth information as of December 31, 1997
regarding the outstanding options under the Company's employment agreements with
its executive officers.
<TABLE>
<CAPTION>
Potential realizable value at Assumed
Annual Rates of Stock Price Appreciation
for Option.
Percent of Total
Options granted
Number of under
Securities Under Employment Exercise Expiration
Name Option(1) Agreements Price ($/sh) Date 5%($) 10%($)
- ---- ------ ---------- ------------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Joseph S. 3,000,000 66.66% $.20 (1) (1) (1)
Latino
Arthur P. 1,500,000 33.33% $.20 (1) (1) (1)
Bergeron
</TABLE>
-20-
<PAGE>
(1) Options were granted on January 1, 1995 pursuant to the Company's
employment agreements with each of Dr. Latino (options for 3,000,000
shares) and Mr. Bergeron (options for 1,500,000 shares). The exercise price
of the option is $.20. They vest fully on January 1, 1998 over the
following vesting schedule, 33% on January 1, 1996, 33% on January 1, 1997
and 33% on January 1, 1998. They may be exercised for as long as Dr. Latino
and Mr. Bergeron remain employed by the Company and for one year after the
termination of Dr. Latino's and/or Mr. Bergeron's employment with the
Company. As of January 1, 1995 (the date of grant), the average of the high
and low bid price for the Company's common stock was approximately $.14. As
of March , 1998, the average of the high and low bid price for the
Company's common stock was approximately $. .
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
---------------------------------
The following table provides information on the value of the Company's
named executive officers' unexercised options to purchase shares of the
Company's common stock as of December 31, 1997.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at December 31, in-the-money option at
1997 December 31, 1997 ($)(1)
Shares Unex-
Acquired on Value Exer- Unexer- Exerci- erci-
Name Exercise Realized cisable cisable sable sable
- ---- ----------- -------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Joseph S.
Latino(2) -0- -0- 2,000,000 1,000,000 -0- -0-
Arthur P.
Bergeron -0- -0- 1,000,000 500,000 -0- -0-
</TABLE>
(1) Fiscal year ended December 31, 1997. The average high and low bid of the
Company's common stock at March __, 1998 was $_____.
(2) Dr. Latino was terminated for cause on May 14, 1997.
BOARD OF DIRECTORS
------------------
Edwin G. Marshall
Milton Adair
Dr. Gerard V. Sunnen
Dr. William M. Hitt
Kenneth Gropper
Mr. Adair, an executive officer is a member of the Board of Directors and
participates in deliberations concerning executive officer compensation, but
does not vote on his own individual compensation. However, his participation in
these deliberations may give rise to a conflict of interest.
-21-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The following table sets forth certain information as of January 8, 1998,
pertaining to the beneficial ownership of Common Stock, by (i) persons known to
the Company to own 5% or more of the outstanding Common Stock, (ii) each
director and executive officer of the Company as of December 31, 1996 and
December 31, 1997, and (iii) present directors and executive officers of the
Company as a group.
Number of Shares Percentage of
Name and Address Beneficially Owned Total Outstanding
- ---------------- ------------------ -----------------
Arthur P. Bergeron 3,830,334(1) 2.76%
40 Grove Street
Wellesley, MA 02181
Kenneth Gropper 660,0002 0.48%
129 Eagle's Nest Road
Lincoln, NH 03251
Edwin G. Marshall 74,098,3333 36.08%
P.O. Box 342
Stinson Beach, CA 94970
Milton G. Adair - 0 -(4) - 0 -
2401 SouthFoot Hill Drive
Salt Lake City, Utah 04109
Dr. Gerard V. Sunnen 1,500,0005 1.08%
200 East 23rd Street
New York, NY 10016
- ------------------
(1) Includes (i) 544,167 shares held through the Bergeron Profit Sharing Plan;
and (ii) 1,000,000 shares obtainable upon exercise of the option granted in
Mr. Bergeron's employment agreement which vested on January 1, 1996
(500,000 shares) and January 1, 1997 (500,000 shares).
(2) Includes 500,000 shares registered in the name of his wife, but excludes
options to purchase 100,000 shares of the Company's Common Stock granted
pursuant to the Company's Option Plan which will be cancelled if the plan
is not approved by the Company's shareholders.
(3) Includes: (i) an aggregate of 351,000 shares owned by Mr. Marshall's wife,
son and mother; (ii) 6,571,428 shares owned by Sand Dollar, of which Mr.
Marshall is the general partner; and (iii) options to purchase 66,761,905
shares owned by Sand Dollar.
(4) Does not include options to purchase 3,000,000 shares of the Company's
common stock granted pursuant to the Company's Option Plan, which will be
cancelled if the Option Plan is not approved by the shareholders.
(5) Includes 100,000 shares awarded as compensation for serving as Director of
Science which were unissued at December 31, 1997, but does not include
options to purchase 300,000 shares of the Company's common stock granted
pursuant to the Company's Option Plan, which will be cancelled if the
Option Plan is not approved by the shareholders.
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<PAGE>
Number of Shares Percentage of
Name and Address Beneficially Owned Total Outstanding
- ---------------- ------------------ -----------------
Dr. William M. Hitt - 0 - - 0 -
4248 Palm Avenue
San Diego, CA 92154
All present directors 80,088,667 38.97%
and executive officers
as a group (6 persons)
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
Loans from Directors
On August 22, 1994, the Company borrowed $18,000 from George Handel and
$10,000 from John Pealer, two of the Company's directors, and $9,000 from Samuel
Handel, the brother of George Handel. Each of these loans was payable on August
23, 1995 and bears interest at an annual rate of 8%, payable on the maturity of
the loans. The maturity date on these loans has been extended to August 23,
1997. Each of the lenders has the right to require that payment of principal and
interest due on his loan be made in shares of the Company's common stock, at a
per share price equal to that charged by the Company in the most recent private
transaction prior to the maturity of the loans.
On June 4 and June 8, 1995, the Company borrowed $25,000 from George Handel
and $25,000 from Samuel Handel, respectively, payable in June 1996, which date
has been extended to June 1997. These loans bear interest at an annual rate of
9% and have the same conversion terms as the 1994 loans from these individuals.
In February 1996, the Company borrowed $25,000 from Richard G. Solomon,
$12,000 from George Handel and $10,000 from John Pealer, three of the Company's
directors. These loans were payable on June 15, 1996, but payment was thereafter
extended to June 15, 1997. In August 1996, the Company borrowed $32,500 from
George Handel, $15,000 from Samuel Handel and $10,000 from Richard Solomon,
payable in one year. In September 1996, the Company borrowed $10,000 from Howard
Feinsand, at the time a director, payable in ninety days. In November 1996, the
Company borrowed $10,000 from each of John Pealer, George Handel and Richard
Solomon, payable in November 1997. The 1996 loans bear interest at an annual
rate of 8%, payable on the maturity of the loan. The Company has the right to
make payments of principal and interest on these loans in shares of the
Company's common stock, at a per share price equal to that charged by the
Company in its most recent private transaction prior to the maturity of the
loan.
On or about January 31, 1997, the Company borrowed $1,800 from George
Handel. The loan bears interest at 8% per annum and is payable in one year and
has the same conversion terms as the 1996 loans.
In June 1997, in connection with their appointment to the Board, Messrs.
Marshall, Adair, Sunnen and Hitt (collectively, the "New Directors") and Sand
Dollar entered into an agreement in principal (the "Agreement") with Messrs.
Gropper, Handel and Pealer (collectively, the "Old Directors") pursuant to which
the parties agreed, inter alia,
(a) that Messrs. Pealer and Handel resign as Directors;
(b) to cause the election of the New Directors to the
Registrant's Board of Directors and to cause the appointment
of Mr. Marshall as Chairman, Mr. Adair as President, Mr.
Gropper as Chief Operating Officer and Dr. Sunnen as
Secretary;
-23-
<PAGE>
(c) to cause the Registrant to enter into indemnification
agreements with each of the New Directors and Old Directors;
(d) that the New Directors shall not commence or participate in
any legal proceedings, including class actions, against the
Old Directors arising out of the operations of the
Registrant;
(e) to release and hold each other harmless against any claim or
liability of any kind (with the exception of any obligations
under the Agreement); and
(f) to cause the issuance to Sand Dollar of warrants to purchase
an aggregate of 73,333,333 shares of the Registrant's common
stock as described above.
Issuance of Securities
In May 1997, the Company issued 500,000 shares of the Company's common
stock to each of Arthur P. Bergeron and Kenneth Gropper in consideration of
their services as officers of the Company and 750,000 to George Handel in
consideration of his services as the Company's Secretary. In December 1997, the
Company awarded Dr. Gerard Sunnen 100,000 shares of common stock in
consideration of his services as the Company's Director of Science. In December
1997, the Board of Directors voted to establish the Option Plan, which is to be
submitted for shareholders approval at the 1997 annual meeting. Pursuant to the
Option Plan, options to purchase shares of the Company's common stock were
granted to Milton G. Adair (3,000,000 shares), Gerard V. Sunnen (300,000 shares)
and Kenneth Gropper (100,000), which grants will be cancelled if the Option Plan
is not approved by the shareholders. On September 23, 1997, Sand Dollar
purchased 5,714,285 shares of the Company's common stock pursuant to the Sand
Dollar Warrant, at a per share price of $.07, an aggregate of $400,000. On March
___, 1998, Sand Dollar purchased an additional 857,143 shares for $60,000.
-24-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules,
Reports on Form 8-K
----------------------------------------
(a) See Index to Consolidated Financial Statements and Schedules
on Page F-1.
(b) See Index to Exhibits on page E-1.
(c) None.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MEDIZONE INTERNATIONAL, INC.
By: s\Milton G. Adair
-------------------------------------
Milton G. Adair
President and Chief Executive Officer
Date: January 28, 1998
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Annual Report has been signed below by the following
persons on behalf of the Company, in the capacities shown and on the date
indicated:
Date: March 30, 1998 s/Milton G. Adair
------------------------------------
Milton G. Adair, President
Chief Executive Officer and Director
Date: March 30, 1998 s/Arthur P. Bergeron
------------------------------------
Arthur P. Bergeron,
Vice President, Treasurer and
Chief Financial Officer
Date: March 30, 1998 s/Edwin G. Marshall
------------------------------------
Edwin G. Marshall, Director
Date: March 30, 1998 s/Gerard V. Sunnen
------------------------------------
Gerard V. Sunnen, Director
Date: March 30, 1998 s/Kenneth Gropper
------------------------------------
Kenneth Gropper, Director
Date: March 30, 1998 s/William M. Hitt
------------------------------------
William M. Hitt, Director
-25-
<PAGE>
Exhibits and Financial Statement Schedules. The following Exhibits form a part
of this Annual Report on Form 10-K.
Exhibit
Number Description of Exhibit
- ------ ----------------------
2 Agreement and Plan of Reorganization dated March 12, 1986.(2)
3(a) Articles of Incorporation of Registrant.(2)
3(b) By-laws of Registrant.(2)
3(c) Articles of Amendment to Registrant's Articles of Incorporation.(3)
10(a) Patent Agreement, dated February 26, 1987.
10(b) Assignment of Distributor Agreement by Terrence O. McGrath to Medizone
Delaware, dated February 4, 1986, and Distributor Agreement between
Terrence O. McGrath and Dr. J. Hansler GmbH, dated September 25,
1985.(3)
10(c) Letter confirmation and Protocol, dated June 2, 1986, by Registrant
with regard to research to be conducted by the State University of New
York at Syracuse.(2)
10(d) Consulting Agreement between P.J. Watrous & Co., Inc. and the
Registrant.(2)
10(f) Consulting Agreement between Jeffrey Freed, MD, PC and the
Registrant.(2)
10(g) Consulting Agreement between Joseph Latino, PhD and the Registrant.(2)
10(h) Consulting Agreement between Susan Golden, RN and the Registrant.(2)
10(i) Stock Option of Joseph Latino.(2)
10(j) Stock Option of Jeffrey Freed.(2)
10(k) Stock Option of Susan Golden.(2)
10(l) Stock Option of Hubert Weinberg.(2)
10(m) Agreement dated June 16, 1987, between Registrant and Oliver Grace.(5)
10(n) Agreement dated June 26, 1987, between Registrant and John Grace.(5)
10(o) Agreement dated June 26, 1987, between Registrant and Oliver Grace.(5)
10(p) Agreement dated June 30, 1987, by and among Registrant and John C.
Black, Dr. Gerard V. Sunnen and Dr. Priyakant S. Doshi.(5)
10(q) License Agreement with MCL Medizone Canada Ltd. dated November 18,
1987.(5)
10(r) Agreement dated October 1988 by and among Immunologics, Limited
Partnership, John M. Kells, Y. C. Zee, David C. Bolton and Medizone
International, Inc.(6)
10(s) Form of Stock Purchase Agreement between Registrant and individuals
who purchased Shares from Registrant.(7)
10(t) Letter agreement between Registrant and Rebus Oil Co., Ltd. dated
July 28, 1992.(8)
10(u) Letter of understanding between Registrant and the RMB Group of
Boston dated August 10, 1992.(8)
E-1
<PAGE>
10(v) Agreement between Registrant and Rebus Oil Company, Ltd., dated as of
October 20, 1992.(9)
10(w) Letter agreement among Messrs. McGrath, Watrous, Melera, Chou, Kells,
Handel and Pealer, dated as of November 10, 1992.(9)
10(x) Loan agreement with Messrs. McGrath and Watrous dated as of November
16, 1992.(9)
10(y) Settlement agreement with former consultant dated February 12,
1993.(9)
10(z) Consulting Agreement with Joseph S. Latino dated as of January 1,
1993.(9)
10(aa) Consulting Agreement with Arthur P. Bergeron dated as of January 1,
1993.(9)
10(bb) Employment Agreement with Katherine M. Kalinowski dated as of January
1, 1993.(9)
10(cc) Consulting Agreement with Roger Shelley dated as of January 1,
1993.(9)
10(dd) Consulting Agreement with Jeannette Arsenault dated as of January 1,
1993.(9)
10(ee) Loan Agreements between Registrant and John Kells, George Handel and
John Pealer, executed as of June 11, 1993 (and promissory notes).(9)
10(ff) Promissory Note to Joseph S. Latino dated as of October 26, 1993 and
Acceptance Form dated as of November 26, 1993.(9)
10(gg) Letter Agreement dated March 23, 1993 between Registrant and the
Italian Scientific Society.(10)
10(hh) Contract between Registrant and Capmed USA.(10)
10(ii) Agreement made as of May 18, 1994, among Medizone International, Inc.,
Medizone Canada Ltd., John M. Kells, George Handel, John Pealer,
Joseph S. Latino, Terrence O. McGrath and Philip J. Watrous.(11)
10(jj) Agreement made as of January 1, 1995, between Medizone International,
Inc. and Joseph S. Latino.(11)
10(kk) Agreement made as of January 1, 1995 between Medizone International,
Inc. and Arthur P. Bergeron.(11)
10(ll) Agreement made as of January 1, 1995 between Medizone International,
Inc. and Giacomo C. DiGiorgio, M.D.(11)
10(mm) Lease Agreement between Medizone International, Inc. and Benabi
Realty, made on September 27, 1991, as extended, January 17, 1995.(11)
10(nn) Agreement for Sale and Purchase of Shares in Medizone New Zealand
Limited between Richard G. Solomon and Medizone International, Inc.,
dated June 22, 1995.(12)
10(oo) Shareholders' Agreement relating to Medizone New Zealand Limited
between and among Solwin Investments Limited, Medizone International,
Inc. and Medizone New Zealand Limited, dated June 22, 1995.(12)
10(pp) Licensing Agreement between Medizone International, Inc. and Medizone
New Zealand Limited, dated June 22, 1995.(12)
10(qq) Managing Agent Agreement between Medizone International, Inc. and
Medizone New Zealand Limited, dated June 22, 1995.(12)
10(rr) Lease Agreement between Medizone International, Inc. and Linmar L.P.,
dated January 17, 1996.(13)
E-2
<PAGE>
10(ss) Agreement between Medizone International, Inc. and Multiossigen
S.r.l., dated as of September 13, 1996.(14)
10(tt) Agreement between Medizone International, Inc. and JRH Biosciences,
Inc., dated April 17, 1997.(15)
10(uu) Lease Agreement between Medizone International Inc. and Eagle
Overlook, L.C., made on September 23, 1997.(16)
16 Letters re: change in certifying accountants.(11)
- --------------------
(1) Filed herewith.
(2) Incorporated by reference to the Registrant's registration statement
on Form S-18 (Registration No. 2-93277-D), effective May 14, 1985.
(3) Incorporated by reference to the Registrant's annual report on Form
10-K for the period ended December 31, 1986.
(4) Incorporated by reference to the Registrant's current report on Form
8-K, filed March 13, 1987.
(5) Incorporated by reference to the Registrant's annual report on Form
10-K for the period ended December 31, 1987.
(6) Incorporated by reference to the Registrant's annual report on Form
10-K for the period ended December 31, 1988.
(7) Incorporated by reference to the Registrant's annual report on Form
10-K for the period ended December 31, 1989.
(8) Incorporated by reference to the Registrant's annual report on Form
10-K for the period ended December 31, 1990.
(9) Incorporated by reference to the Registrant's annual report on Form
10-K for the period ended December 31, 1992.
(10) Incorporated by reference to the Registrant's current annual report on
Form 8-K dated September 8, 1993.
(11) Incorporated by reference to the Registrant's annual report on Form
10-K for the period ended December 31, 1994.
(12) Incorporated by reference to the Registrant's current annual report on
Form 8-K, dated June 22, 1995.
(13) Incorporated by reference to the Registrant's annual report on Form
10-K for the period ended December 31, 1995.
(14) Incorporated by reference to the Registrant's current report on Form
8-K, dated October 17, 1996.
(15) Incorporated by reference to the Registrant's current report on Form
8-K, dated May 5, 1997.
(16) Incorporated by reference to the Registrant's current report on Form
8-K dated September 24, 1997.
E-3
