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, 1998
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)
144 Buena Vista
P.O. Box 742
Stinson Beach, CA 94970
(Address of principal executive offices, zip code)
(415) 868-0300
(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 11, 1998, there were outstanding 144,323,804 shares of the registrant's
common stock.
Page 1 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
FORM 10-Q
INDEX
March 31, 1998
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
Unaudited Interim Consolidated Balance Sheets 3-4
Unaudited Interim Consolidated Statements of Operations 5
Unaudited Interim Consolidated Statements of Changes in
Stockholders' Equity 6-13
Unaudited Interim Consolidated Statements of Cash Flow 14-15
Notes to Unaudited Interim Consolidated Financial
Statements 16-33
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 34-36
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K 37
Signatures 37
Page 2 of 38 Pages
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Balance Sheets
(unaudited)
ASSETS
March 31, December 31,
1998 1997
--------- ------------
CURRENT ASSETS
Cash and cash equivalents $30,339 $138,173
Prepaid expenses and advances 1,960 9,154
------ --------
Total Current Assets 32,299 147,327
------- --------
FIXED ASSETS
Office equipment 2,301 2,301
Furniture and fixtures 6,307 6,307
------- --------
8,608 8,608
Less accumulated depreciation (993) (340)
------- --------
7,615 8,268
------- --------
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 of $5,520 and $5,520,
respectively) - -
Deposits (Note 6) 2,477 2,477
------- --------
$91,338 $207,019
======= ========
The accompanying notes are an integral part
of these consolidated financial statements.
Page 3 of 38 Pages
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Balance Sheets
(unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
March 31, December 31,
1998 1997
----------- ------------
CURRENT LIABILITIES
Accounts payable $ 510,418 $ 517,011
Accrued liabilities 219,904 222,060
Notes payable (Note 10) 314,115 354,115
---------- ----------
Total Current Liabilities 1,044,437 1,093,186
---------- ----------
COMMITMENTS AND CONTINGENCIES - -
(Notes 2, 3, 6 and 13)
REDEEMABLE COMMON STOCK (Note 13) - -
MINORITY INTEREST (Note 9) - -
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 144,323,804 and 136,887,629
shares for 1998 and 1997, respectively 144,324 136,888
Common stock subscribed - 5,714
Additional paid-in capital 12,290,425 12,188,909
Accrued stock option compensation - -
Deficit accumulated during development stage (13,387,848) (13,27,678)
---------- ---------
Total Stockholders' Deficiency (953,099) (886,167)
------- -------
$91,338 $207,019
======= ========
The accompanying notes are an integral part
of these consolidated financial statements.
Page 4 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
From the Date
of Inception
(Jan. 31, 1986)
For the Three Months through
Ended March 31, March 31, 1998
1998 1997
SALES $ -0- $ -0- $ 133,349
------- ------ ----------
<S> <C> <C> <C>
COSTS AND EXPENSES:
Costs of sales -0- -0- 103,790
Research and development
expenses 8,050 -0- 2,327,685
General and administrative
expenses 155,693 194,579 9,873,414
Compensation under
stock options (Note 8) -0- -0- 872,894
Interest expense 6,831 7,080 7 80,497
Other (income) and expense, net (404) 201,659 (19,764)
------- ------- ----------
Total Costs and Expenses 170,170 201,659 3,938,516
------- ------- ----------
Net loss before extraordinary
gain or minority interest (170,170) (201,659) (13,805,167)
Extraordinary gain on sale of
investment in subsidiary (Note 1) - - 100,000
-----------
Net loss before minority interest - - (13,705,167)
Minority interest in loss - - 26,091
Prior period adjustment (Note 11) - - 291,228
--------- --------- -----------
Net loss $(170,170) $(201,659) $(13,387,848)
========== ========== ============
Weighted average number of
shares outstanding 138,126,991 130,051,613 85,832,594
=========== =========== ===========
Loss per share $0.00 $0.00 $(0.16)
===== ===== =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 5 of 38 Pages
<PAGE>
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, 1998 (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 per 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)
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
Page 6 of 38 Pages
<PAGE>
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, 1998 (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 per 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>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 7 of 38 Pages
<PAGE>
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, 1998 (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 per 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>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 8 of 38 Pages
<PAGE>
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, 1998 (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 per 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
($.15 per share) 250,000 250 37,250
Shares issued for cash
($.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>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 9 of 38 Pages
<PAGE>
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, 1998 (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>
Balance,
December 31, 1992 94,948,636 $94,949 $6,008,449 - $ (7,598,268)
Cancelled shares
previously issued in settle-
ment of advances from and
amounts due to stockholder
($.062 per share) (13,118,619) (13,119) (800,248)
Shares issued for
services from $.10
to $.46 per share) 5,347,219 5,347 542,859
Shares issued for
cash (from $.15 to
$.20 per 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)
Redeemable shares
converted to common
stock 200,000 200 39,800
Shares issued for
services ($.10 per
share) 2,050,000 2,050 202,950
Issuance of
subscribed stock 17,524,860 17,524 (17,524)
Cancelled shares
previously issued
to former
management (1,242,727) (1,242) (70,563)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 10 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Statements of Changes in Stockholders' Equity
From the Date of Inception (January 31, 1986)
through March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Accrued During
Common Stock Paid-in Stock Option Development
Shares Amount Subscribed Capital Compensation Stage
-------- --------- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Shares subscribed
($.10 per share) 9,118 902,707
Prior period
adjustment 71,806
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 $10,554,674 -- (11,112,724)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 11 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Statements of Changes in Stockholders' Equity
From the Date of Inception (January 31, 1986)
through March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Accrued During
Common Stock Paid-in Stock Option Development
Shares Amount Subscribed Capital Compensation Stage
-------- --------- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Shares issued for
cash ($.10 per
share) 100,000 100 - 9,900 - -
Shares issued for
services ($.10 per
share) 1,415,875 1,416 - 140,171 - -
Issuance of
subscribed stock 8,412,379 8,413 (8,413) - - -
Shares subscribed
($.10 per share) - - 6,456 718,991 - -
Net (loss) for the
year ended December - - - - - -
31, 1996 (1,329,395)
-- -- -- -- -- ----------
Balance, December
31, 1996 130,051,613 130,052 3,090 11,423,736 - (12,442,119)
Issuance of
subscribed stock 3,089,680 3,090 (3,090) - - -
Shares subscribed
($.07 per share) - - 5,714 394,287 - -
Shares issued for
services ($.10 per
share) 3,746,336 3,746 - 370,886 - -
Net (loss) for the
year ended - - - - - (775,559)
December 31, 1997
Balance,
December 31, 1997 136,887,629 $136,888 $5,714 $12,188,909 $ -0- $(13,217,678)
=========== ======== ====== =========== ===== =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 12 of 38 Pages
<PAGE>
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, 1998 (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>
Issuance of
subscribed stock 5,714,286 $5,714 $(5,714)
Shares issued for
cash ($.07 per
share) 857,143 857 $59,143
Shares issued for
notes and accrued
interest ($.05 per
share) 864,746 865 42,373
Net (loss) for the
quarter ended
March 31, 1998 ($170,170)
---------- -------- --------- ----------- -------------- -------------
Balance
March 31, 1998 144,323,804 $144,324 $-0- $12,290,425 $-0- $(13,387,848)
=========== ======== ==== =========== ==== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 13 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
From the Date
of Inception
For the Three Months Ended (Jan. 31, 1986)
March 31, through
1998 1997 March 31, 1998
---- ---- --------------
OPERATING ACTIVITIES
Net loss $(170,170) $(201,659) $(13,387,848)
- - -
Prior period adjustment
Adjustments to reconcile
net loss to cash used in
operating activities:
Issuance of stock for
accrued interest
Issuance of stock for 3,238 - 3,238
services
Stock subscription for - - 1,687,525
services
Compensation- stock options - - 13,380
Write-off of license - - 924,975
agreement - -
Write-off of patent 2
Depreciation and - - 693,750
amortization
Minority interest in loss 653 778 23,433
Changes in assets and - - (26,091)
liabilities:
Current and other assets
Accounts payable 7,194 5,506 (50,907)
Accrued liabilities (6,593) 106,667 716,607
(2,156) 72,728 276,689
------- ------- -------
Net Cash Used in Operating
Activities (167,834) (15,980) (9,125,247)
--------- -------- -----------
INVESTMENT ACTIVITIES
Additions to organization
costs - - (8,904)
Additions to fixed assets - - (22,142)
Additions to deposits - - (2,477)
Net Cash Used in Investment - -
Activities - - (22,142)
(2,477)
FINANCING ACTIVITIES
Issuance of stock for cash 60,000 - 1,937,977
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 - - 283,665
Payment of notes payable - - (189,150)
Redeemable common stock - - 40,000
Increase in minority
interest - - 14,470
Common stock subscribed - - 5,204,515
Increase in notes and loans
payable - 11,800 606,196
------- ------ -------
Cash Provided by Financing
Activities 60,000 11,800 9,189,109
------ ------ ---------
The accompanying notes are an integral part
of these consolidated financial statements.
Page 14 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From the Date
of Inception
For the Three Months Ended (Jan. 31, 1986)
March 31, through
1998 1997 March 31, 1998
---- ---- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $(107,834) $(4,180) $30,339
Cash and cash equivalents,
beginning of period 138,173 3,579 -
---------- -------- -------
Cash and cash equivalents,
end of period $ 30,339 $ (601) $30,339
========= ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for interest - - $ 26,483
SUPPLEMENTAL SCHEDULE OF
NONCASH ACTIVITIES
Conversion of accrued interest
to stock 3,238 - 3,238
Conversion of notes payable to
stock 40,000 - 2,131,980
Conversion of long-term debt to
stock - - 191,658
Conversion of accrued liabilities
to stock - - 258,689
Conversion of accounts payable
to stock - - 4,285
Conversion of due to stockholders
to stock - - 1,103,263
Issuance of stock for license
agreement - - 2
Issuance of stock for patent - - 693,750
Cancellation of stock for reinstate-
ment of due to stockholders - - 813,367
Conversion of redeemable common stock
to common stock - - 40,000
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 15 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
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 1 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, Medizone International, Inc. 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 Milton Adair, the Company's President and Chief
Executive Officer.
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.
Page 16 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS (continued)-
Formation of Joint Venture Subsidiary (continued)
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 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: Autralasia (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:
Medizone
New
Medizone Zealand
International, Inc. Limited
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%
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.
Pursuant to Emerging Issues Task Force Statement No. 89-7, the Company
recognized a $100,000 gain on the sale of MNZ to Solwin.
Page 17 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS (continued)-
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 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 of Health.
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, 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 clinical trials of the Company's ozone therapy
on patients infected with either Acquired Immunedeficiency 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 human clinical trials or to have these requirements waived. The Company
has never performed a large animal study or Phase I human 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 animal
study and possibly even Phase I human clinical trials. The ICRO would also
design a research program and protocols for human clinical trials which would
meet the standards of the European Union ("EU") and Food and Drug Administration
("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 the 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 human
clinical trials and possibly a large animal study. In late 1997, the Company
entered into discussions with Italian and Belgium clinicians with regard to them
performing Phase I human clinical trials. However, assuming the Italian Ministry
of Health did not grant the Company's request for 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 Phase III human clinical trials
and submission of the data for approval to the Italian Ministry of Health.
Page 18 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. CHANGES IN MANAGEMENT CONTROL AND LITIGATION AGAINST FORMER
MANAGEMENT
Changes in Control
In November 1992, four directors resigned from the Board of Directors. 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.
On July 7, 1996, at the Company's annual meeting, Joseph S. Latino, George
Handel, Kenneth Gropper, John D. Pealer 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 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 Hilt to the Company's Board of Directors, with Marshall being named
Chairman. Contemporaneously thereto, John Pealer ("Pealer") resigned as a
director, and Cropper resigned as President. George Handel resigned from the
Board effective June 13, 1997. The Board thereupon made the following
appointments to the following positions:
President and Chief
Executive Officer Milton Adair
Chief Operating Officer Kenneth Gropper
Secretary Gerard V. Sunnen, M.D.
On November 5, 1997, the Board eliminated the position of Chief Operating
Officer. Gropper remains as a Director of the Company.
Page 19 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. CHANGES IN MANAGEMENT CONTROL AND LITIGATION AGAINST FORMER
MANAGEMENT (Continued)-
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 FDA and/or the EU
for the marketing of ozone-related products and equipment, and ultimately, upon
the Company's attaining profitable operations. The Company will require a
substantial mount 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.
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 in
the United States until after FDA approval has been granted. In order to obtain
FDA approval, the Company will be
Page 20 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. GOING CONCERN (continued)-
required to submit a New Drug Application ("NDA") for review by the FDA and
provide 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 three phases of 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 largely to issues
of safety.
In order to initiate the first phase (i.e., Phase I) of human clinical trials
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 trials can be conducted
without exposing the volunteer human subjects to an unreasonable risk of illness
or injury. The Company submitted an IND application (assigned to the Company 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 "Investigational Devices."
Because ozone has been used to treat humans in Europe for at least 30 years, 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 a trial in an effort to obtain EU approval, to market the
product in Europe and to re-open the Company's FDA file.
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.
Page 21 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)-
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.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation.
The Company currently accounts for its stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Since the Company is not required to adopt the
fair value based recognition provisions prescribed under SFAS No. 123, it has
elected to comply with the disclosure requirements set forth in the Statement,
which includes disclosing pro forma net income as if the fair value based method
of accounting had been applied. (See Note 8.)
Estimates and Assumption
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing the financial statements.
5. OTHER ASSETS
Patent
In March 1987, the Company acquired a patent from Immunologics Limited
Partnership 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.
Page 22 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. OTHER ASSETS (continued)-
Patent (continued)
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, Medizone, 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 Notes 7 and 10)
On May 14, 1997, the employment contract of the Company's former President and
Chief Operating Executive Officer was terminated for cause. The Company hired a
new President and Vice President of Operations (who is not a corporate officer)
at annual salaries of $200,000 and $65,000 respectively, who operated the
Company's headquarters in Salt Lake City until their resignations were accepted
effective April 10, 1998, in conjunction with the decision to relocate the
headquarters to California. The Company did not have a written employment
agreement with its President or Vice President of Operations. The employment
contract of the Company's Vice President, Treasurer and Chief Financial Officer
for an annual salary of $72,000 plus expenses has remained unchanged.
In 1997 and 1996, the Company had employment contracts with two officers. The
former President and Chief Operating Officer was paid $180,000 annually and was
reimbursed monthly for expenses related to a leased automobile. The Vice
President, Treasurer and Chief Financial Officer is paid $72,000 annually, plus
expenses.
The Company retains an investor relations firm 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. It receives a
monthly payment of $2,000, plus expenses. As additional compensation in 1996, it
received 250,000 shares of the Company's common stock, restricted under the
federal securities laws.
In 1994, the Company had consulting relations with two officers. The President
and Chief Operating Officer was paid $72,000 annually and was reimbursed monthly
for expenses related to a leased automobile. The Vice President, Treasurer and
Chief Financial Officer was paid $36,000 annually.
Page 23 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES (See also Notes 7 and 10) (continued)-
From November 17, 1992 through December 31, 1994 the Company maintained a
consulting relationship with the Company's Vice President, who is also Treasurer
and Chief Financial Officer, whereby the Company was billed in connection with
accounting services provided by a private company owned by the Company's Vice
President.
For the year ended December 31, 1996, the Company leased from an unaffiliated
party, office space in New York City under a two-year lease expiring on February
28, 1998, at an annual rental of approximately $21,000. The Company terminated
this lease in June 1997 and paid $4,599 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 office
in Salt Lake City at an annual rent of approximately $23,000. The office was
used for executive offices and administrative purposes until the Company
re-located its headquarters to California in April 1998. The Company is
negotiating with the landlord to reduce or eliminate its future obligation under
the lease. Future minimum rental commitments pursuant to this lease are as
follows:
Year Ended
December 31, Amount
1998 $17,410
1999 24,144
2000 18,649
Total $60,203
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. Medizone acknowledged
constructive receipt of the funds by executing stock purchase agreements and the
250,000 shares were subsequently issued in 1993. Since the financing was not
completed and the funds were not returned to the Company, the $50,000 has been
expensed in the Company's financial statements.
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 recruit 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 seeks 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 recruit. 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;
Page 24 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES (See also Notes 7 and 10) (continued)-
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:
November 15, 1995$20,000 December 15, 19955,000 January 15, 19965,000
February 15, 19965,000 March 15, 19965,000
April 15, 1996 5,000
May 15, 1996 5,000
June 15, 1996 5,000
July 15, 1996 6,000
-----
Total $ 61,000
======
As of the date of this report, all payments have been made in full.
On November 10, 1995, the plaintiff executed a release against Medizone
International, Inc., Medizone Canada, Ltd. and Joseph S. Latino.
7. ISSUANCE OF COMMON STOCK AND WARRANTS
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.
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, including two officers and directors, in exchange for all of the
shares of Medizone. 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
Page 25 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ISSUANCE OF COMMON STOCK AND WARRANTS (continued)-
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 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.
Page 26 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ISSUANCE OF COMMON STOCK AND WARRANTS (continued)-
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.
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 1996, the Company received stock subscription agreements for the purchase
of 7,254,470 shares of its common stock, together with proceeds totaling
$725,447 from sales of its securities to non-United States investors, outside of
the United States pursuant to Regulation S promulgated under the Securities Act
of 1993 (the "Securities Act"). Approximately $635,447 of these proceeds were
from the sale of the Company's common stock at a per share price of $.10
(including $37,500 for 375,000 shares from Richard G. Solomon, at the time a
director of the Company). The remaining $90,000 were from the sale of 900,000
Units, each Unit consisting of one share of the Company's common
Page 27 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ISSUANCE OF COMMON STOCK AND WARRANTS (continued)-
stock, $.001 par value, at a per share price of $.10 to a director pursuant to
the non-public offering exemption from registration under the Securities Act. In
May 1996, the Company issued 600,000 shares of its common stock to employees and
250,000 shares of its common stock to its public relations consultant as
additional compensation. The Company also issued 565,875 shares of its common
stock to various consultants for services rendered.
During 1997, the Company issued 3,089,680 previously subscribed shares of its
common stock and also issued 3,746,336 shares of its common stock to various
consultants for services rendered. Also, in 1997, the Company received $400,000
for subscriptions to acquire 5,714,285 shares of its common stock and warrants
to purchase 8,428,571 shares of common stock at $.07 per share, 25,000,000
shares at $.20 per share, and 33,333,333 shares at $. 15 per share.
During the first quarter of 1998, the Company issued 5,714,285 previously
subscribed shares of its common stock and also issued 857,143 additional shares
for aggregate proceeds of $60,000. The Company also issued 864,746 shares of its
common stock in exchange for a note payable in the amount of $40,000 plus
accrued interest of $3,238.
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 1,150,000 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 its 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.
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 of 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
Page 28 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK OPTIONS (continued)-
shares of the Company's common stock at an exercise price of $.20 per share,
which 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. The fair
value of each option grant is estimated on the grant date using an
option-pricing model with the following weighted-average assumptions used for
grants in 1995: risk-free interest rate of 6%, and expected lives of 3 years for
the options.
The following is a summary of option transactions:
Weighted Average
Fixed Options Shares Exercise Price
Balance - January 1, 1996 4,500,000 $ .20
Granted - Employees - -
Exercised - -
Forfeited - -
------------
Balance - December 31, 1996 4,500,000 -
Granted - Employees - -
Exercised - -
Forfeited (3,000,000) -
-----------
Balance - December 31, 1997 1,500,000 .20
==========
Exercisable at December 31, 1997 1,500,000
==========
Weighted-average fair value of options
granted during the year $ -
=======
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
Weighted
Average
Number Remaining Weighted- Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercisable Prices 12/31/97 Life Exercise Price at 12/31/97 Exercise Price
<S> <C> <C> <C> <C> <C> <C>
$.20 1,500,000 3 years $.20 1,500,000 $.20
</TABLE>
If the Company had used the fair value based method of accounting for its
employee stock option plan, as prescribed by Statement of Financial Accounting
Standard No. 123, compensation cost in net loss for the year ended December 31,
1997 and 1996 would have increased by $72,338 and $242,387, respectively, and
the Company's net loss and loss per share would have been reduced to the pro
forma amounts indicated below:
1997 1996
---------- --------
Net loss As reported $775,559 $1,329,395
Pro forma $703,221 $1,571,782
Net loss per share As reported $(.01) $(.01)
Pro forma $(.01) $(.01)
Page 29 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. NOTES PAYABLE
Short-term debt at December 31, 1997 and March 31, 1998, consisted of the
following:
December March
31, 31,
1997 1998
-------- -------
Notes payable to ten stockholders,
due on demand, plus interest at 10% per
annum (in arrears). The Company is obligated
to accept the rate 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. $60,815 $60,815
Notes payable to directors totaling $28,000 and
a note payable to a third party in the amount
of $9,000, due on April 22, 1995 (principal
and accrued interest in arrears as of report
date), plus interest ranging from 8% to 9% per
annum. 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. 37,000 37,000
Notes payable to directors and a family member of
a director, due at various dates in 1995, 1996
and 1997 (principal and accrued interest in
arrears as of report date), plus interest at 8%
per annum. The Company has the right to repay
the loans with restricted stock at $.10 per
share if alternative financings do not
occur. 216,300 216,300
Page 30 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. NOTES PAYABLE (continued)-
Note payable to individual, due on December 2, 1996 (principal and accrued
interest in arrears as of report date), plus interest at 6.07% per annum. The
Company has the right, on or after the payment due date, to repay the loan
with restricted shares valued at $.05 per share.
40,000 -0-
Total short-term debt $354,115 $314,115
======= =======
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.
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 expensed 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.
Page 31 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES
The components of the provision for income taxes are as follows:
From the Date of Inception
(January 31, 1986) through
December 31, 1997
1997 1996 1995 (Cumulative)
---- ---- ---- -------------
Current tax expense $ - $ - $ - $ -
Deferred tax expense - - - -
--- --- --- --
Income tax expense $ - $ - $ - $ -
=== === === ==
A reconciliation of the consolidated income tax expense on income per the U.S.
Federal Statutory rate to reported income tax follows:
1997 1996 1995 Cumulative
---- ---- ---- ----------
Taxes at U.S. Federal Statutory $ - $ - $ - $ -
rate - - - -
--- --- --- --
State Income taxes
$ - $ - $ - $ -
=== === === ==
At December 31, 1997 and 1996, deferred tax assets (liabilities) consisted of
the following:
1997 1996
------ -----
$ - $ -
Current deferred tax liabilities - -
Noncurrent deferred tax liabilities 1,748,419 1,651,738
Current deferred tax assets - -
Noncurrent deferred tax assets (1,748,419) (1,651,738)
----------- -----------
Valuation allowance
$ - $ -
============== ==========
At December 31, 1997, the Company has a net operating loss (NOL) carryforward
totaling approximately $11,275,000 that may be offset against future taxable
income in varying amounts through 2006. No benefit has been reported in the 1997
or 1996 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.
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 specified in the
Agreement. If the Company files a registration statement for an offering of its
securities, it must use its best efforts to
Page 32 of 38 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. REDEEMABLE COMMON STOCK (continued)-
include such shares in the registration statement. If all, or any portion of the
shares have not been purchased by the Company pursuant to the exercise of the
put option described above, or all the shares have not been covered by an
effective registration, then the Company shall be 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.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying mounts reflected in the consolidated balance sheets for cash,
receivable from affiliate, accounts payable and notes payable approximate the
respective values. The estimated fair values have been determined by the Company
using appropriate valuation methodologies and available market information.
Considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value, and, accordingly, the estimates are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. A comparison of the carrying value of those financial
instruments, none of which are held for trading purposes, is as follows:
Carrying Fair
Amount Value
Assets:
Cash $ 30,339 $ 30,339
Receivable from affiliate 48,947 48,947
Liabilities:
Accounts payable and liabilities 730,322 730,322
Short-term debt 314,115 314,115
Cash, receivable from affiliate and accounts payable. The carrying value of such
items approximates their fair value at March 31, 1998.
Short-term debt. Fair value of such debt is based on rates currently available
to the Company for debt of similar terms and remaining maturities. There are no
quoted prices for the debt or similar debt.
Page 33 of 38 Pages
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
From its organization in January 1986, 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
to fund its continuing operations. Since its organization, the Company has
attributed $2,327,685 as expenditures for research and development.
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's efforts to re-open the
FDA IND.
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.
Page 34 of 38 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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, 1998, and March 31, 1997
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 not intend to sell equipment or supplies for
ozone-generating purposes until it receives FDA approval to do so.
Expenditures for research and development during the 1998 period were $8,050 and
were $-0- in the 1997 period.
General and administrative expenses were $155,693 in the 1998 period as compared
to $194,579 in the 1997 period.
Interest expense was $6,831 in the 1998 period compared to $7,080 in the 1997
period and was accrued regarding notes payable to Company directors.
Net cash used in operating activities was $167,834 in the 1998 period as
compared to $15,980 in the 1997 period. The increase was due primarily to
payments of accounts payable and accrued expenses.
Cash provided by financing activities increased in the 1998 period by $48,200.
The increase was due primarily to the sale of common stock during the period.
Three-month periods ended,March 31, 1997, and March 31, 1996
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 not intend to sell equipment or supplies for
ozone-generating purposes until it receives FDA approval to do so.
There were no expenditures for research and development during the 1997 or 1996
period.
Page 35 of 38 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
General and administrative expenses were $194,579 in the 1997 period as compared
to $238,509 in the 1996 period.
Interest expense increased from 1996 to 1997 by approximately $4,000 to $7,000
due to the increase in notes payable to Company directors.
Net cash used in operating activities was $15,980 in the 1997 period as compared
to $268,511 in the 1996 period. The decrease was due primarily to decreased
revenues from the sale of stock and stock subscriptions and increases in
accounts payable and accrued expenses.
Cash provided by financing activities decreased in the 1997 period by $255,482.
The decrease was due primarily to common stock subscriptions received during the
period.
Liquidity and Capital Resources
At March 31, 1998, the Company had a working capital deficiency of $1,012,138
and stockholders' deficiency of $953,099. At December 31, 1997, the Company had
a working capital deficiency of $945,859 and stockholders' deficiency of
$886,167.
The management of the Company has developed a strategy which it believes will
enable it to fund requisite research necessary to gain regulatory approval(s)
and continue operations. The Company has structured a cohesive scientific plan
encompassing a number of research initiatives which it believes may enable it to
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.
Page 36 of 38 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
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 11, 1998
Page 37 of 38 Pages
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contains summary financial information extracted from (A)
Consolidated Balance Sheets, Statements of Operations, Change in Stockholders
Equity and Cash Flows and is qualified in its entirety by reference to such (B)
quarterly report on Form 10-Q for the three months ended March 31, 1998)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-30-1998
<CASH> 30,339
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,298
<PP&E> 8,608
<DEPRECIATION> 993
<TOTAL-ASSETS> 91,338
<CURRENT-LIABILITIES> 1,044,437
<BONDS> 0
0
0
<COMMON> 144,324
<OTHER-SE> (1,097,423)
<TOTAL-LIABILITY-AND-EQUITY> 91,338
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 163,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,831
<INCOME-PRETAX> (170,170)
<INCOME-TAX> 0
<INCOME-CONTINUING> (170,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (170,170)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
