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 June 30, 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 July 21, 1998, there were outstanding 144,323,804 shares of the registrant's
common stock.
Page 1 of 37 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
FORM 10-Q
INDEX
June 30, 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 37 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
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $83,235 $138,173
Prepaid expenses and advances - 9,154
------- --------
Total Current Assets 83,235 147,327
------- --------
FIXED ASSETS
Office equipment 4,318 2,301
Furniture and fixtures 6,307 6,307
------- --------
10,625 8,608
Less accumulated depreciation (1,848) (340)
------- --------
8,777 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) 405 2,477
-------- --------
$141,364 $207,019
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 3 of 37 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
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 496,678 $ 517,011
Accrued liabilities 243,136 222,060
Notes payable (Note 10) 310,491 354,115
---------- ----------
Total Current Liabilities 1,050,305 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 12,423,842 12,188,909
Accrued stock option compensation - -
Deficit accumulated during development stage (13,447,107) (13,217,678)
---------- ---------
Total Stockholders' Deficiency (908,941) (886,167)
-------- -------
$141,364 $207,019
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 4 of 37 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
From the Date
For the Six Months For the Three Months of Inception
Ended June 30, Ended June 30, (Jan. 31, 1986)
---------------------------- ------------------------- through
1998 1997 1998 1997 June 30, 1998
------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Sales $ -0- $ -0- $ -0- $ -0- $ 133,349
------------ ------------ ------------ ------------ ---------------
Costs and expenses:
Costs of sales -0- -0- -0- -0- 103,790
Research and development
expenses 8,209 106,000 159 106,000 2,327,844
General and administrative
expenses 238,201 548,048 82,508 353,469 9,955,922
Compensation under
stock options -0- -0- -0- -0- 872,894
Interest expense 13,439 14,335 6,608 7,255 787,105
Other income and expense, net (420) -0- (16) -0- (19,780)
----------- ----------- ------------ ------------ ---------------
Total Costs & Expenses 259,429 668,383 82,259 466,724 14,027,775
----------- ----------- ------------ ------------ ---------------
Net loss before extraordinary
gain on minority interest (259,429) (668,383) (82,259) (466,724) (13,894,426)
Extraordinary gain on sale of
investment in subsidiary (Note 1) -0- -0- -0- -0- 100,000
---------------
Net loss before minority interest (259,429) (668,383) (82,259) (466,724) (13,794,426)
Minority interest in loss -0- -0- -0- -0- 26,091
Prior period adjustment (Note 11) -0- -0- -0- -0- 291,228
----------- ----------- ------------ ------------ ---------------
Net loss $(259,429) $(668,383) $(82,259) $466,724) $(13,477,107)
=========== =========== ============ ============ ===============
Weighted average number of
shares outstanding 140,606,000 133,406,000 144,324,000 133,406,000 86,997,000
=========== =========== =========== =========== ===============
Loss per share $0.00 $0.00 $0.00 $0.00 $(0.15)
=========== =========== =========== =========== ===============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 5 of 37 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 June 30, 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)
(Continued on next page)
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
Page 6 of 37 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 June 30, 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)
(Continued on next page)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 7 of 37 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 June 30, 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 37 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 June 30, 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>
(Continued on next page)
The accompanying notes are an integral part
of these consolidated financial statements.
Page 9 of 37 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 June 30, 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>
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/share) (13,118,619) (13,119) (800,248)
Shares issued for
services from $.10
to $.46/sh.) 5,347,219 5,347 542,859
Shares issued for
cash (from $.15 to
$.20/share) 1,471,666 1,472 269,528
Shares subscribed $2,619 259,296
Net/(loss) for the
year ended
December 31, 1993 (1,598,342)
------------ ------------ ---------- ------------ ------------ -------------
Balance,
December 31, 1993 88,648,902 88,649 2,619 6,279,884 (9,196,610)
Shares issued for
services ($.10 per
share) 1,431,590 1,431 141,727
Shares subscribed
($.10 per share) 9,552 945,682
Shares subscribed
for cancellation of
indebtedness ($.10
per share) 417 41,234
Shares subscribed
for cancellation of
indebtedness to
former management
($.18 per share) 11,250 2,022,379
</TABLE>
(Continued on next page)
The accompanying notes are an integral part
of these consolidated financial statements.
Page 10 of 37 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 June 30, 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 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 ($.10/share) 2,050,000 2,050 202,950
Issuance of
subscribed stock 17,524,860 17,524 (17,524)
Cancelled shares
previously issued
to former
management (1,242,727) (1,242) (70,563)
Shares subscribed
($.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 $10,554,674 - (11,112,724)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 11 of 37 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Interim Consolidated Statements of Changes in Stockholders' Equity
From the Date of Inception (January 31, 1986) through June 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Accrued During
Common Stock Paid-in Stock Option Development
Shares Amount Subscribed Capital Compensation Stage
------------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued for
cash ($.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 37 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 June 30, 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/sh) 864,746 865 42,373
Sale of subsidiary's
stock 133,417
Net (loss) for the
six months ended
June 30, 1998 ($259,429)
----------- --------- --------- --------- -------------- --------------
Balance
June 30, 1998 144,323,804 $144,324 $-0- $12,423,842 $-0- $(13,477,107)
=========== ======== ======= =========== ========= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 13 of 37 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 Six Months Ended (Jan. 31, 1986)
June 30, through
1998 1997 June 30, 1998
---- ---- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(259,429) $(668,383) $(13,477,107)
Prior period adjustment - - -
Adjustments to reconcile
net loss to cash used in
operating activities:
Issuance of stock for
accrued interest 3,238 - 3,238
Issuance of stock for
services - 361,918 1,687,525
Stock subscription for
services - - 13,380
Compensation- stock options - - 924,975
Write-off of license
agreement - - 2
Write-off of patent - - 693,750
Depreciation and
amortization 1,508 1,356 24,288
Minority interest in loss - - (26,091)
Changes in assets and
liabilities:
Current and other assets 9,154 6,776 (48,947)
Accounts payable (20,333) 160,109 702,867
Accrued liabilities 21,076 100,497 299,921
-------- -------- ---------
Net Cash Used in Operating
Activities (244,786) (37,727) (9,202,199)
--------- -------- ----------
INVESTMENT ACTIVITIES
Additions to organization
costs - - ( 8,904)
(Additions)/deletions to
fixed assets (2,017) 6,562 (24,159)
(Additions)/deletions to
deposits 2,072 5,998 ( 405)
--------- -------- ---------
Net Cash Used in Investment
Activities 55 12,560 (33,468)
--------- -------- ---------
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 133,417 - 555,264
Proceeds of long-term debt - - 191,657
Proceeds of notes payable - - 283,665
Payment of notes payable (3,624) - (192,774)
Redeemable common stock - - 40,000
Increase in minority
interest - - 14,470
Common stock subscribed - - 5,204,515
Increase in notes and loans
payable - 21,800 606,196
------- ------ -------
Cash Provided by Financing
Activities 189,793 21,800 9,318,902
------- ------ ---------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 14 of 37 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 Six Months Ended (Jan. 31, 1986)
June 30, through
1998 1997 June 30, 1998
---- ---- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $(54,938) $(3,367) $83,235
Cash and cash equivalents,
beginning of period 138,173 3,579 -
---------- -------- -------
Cash and cash equivalents,
end of period $ 83,235 $ (212) $83,235
========== ======= =======
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 37 Pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
1. NATURE OF THE BUSINESS
Background
Medizone International, Inc., a Delaware corporation (Medizone-Delaware) was
formed on January 31, 1986. Medizone International, Inc. (the Company) was
organized under the laws of the State of Nevada on August 27, 1984 as Madison
Funding, Inc. (Madison) for the purposes of investing in, acquiring, operating
and disposing of businesses or assets of any nature. On March 26, 1986, control
of Madison was acquired by the stockholders of Medizone-Delaware and Madison
changed its name to Medizone International, Inc. The substance of this
transaction was the acquisition of the net monetary assets of Madison in
exchange for the equity of Medizone-Delaware. As a result of this transaction,
the stockholders of Medizone-Delaware acquired 87.2% of Madison. Therefore, the
transaction was accounted for as a pooling of interests.
On November 18, 1987, Medizone Canada Ltd. (MedCan) was incorporated under the
laws of the Province of British Columbia with authorized capital of 25,000,000
common shares without par value. Shortly thereafter, MedCan entered into a
license agreement with the Company wherein the Company transferred to MedCan
the licenses and rights necessary to permit MedCan to hold substantially the
same rights with respect to the medical applications of ozone in Canada as the
Company does in the United States. As consideration for the transfer, the
Company received 3,000,000 shares of MedCan and, in addition, purchased 1 share
for the sum of $l.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.
In June 1998, the Company sold 24,319,921 shares of MCL stock, representing
its entire remaining holdings, for cash in the amount of $125,000.
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. During the period covered by this report, the Directors of
MNZ were Solomon and Milton Adair, the company's former President and Chief
Executive Officer and a Director. Mr. Adair resigned as a Director on July
28, 1998.
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 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
1. NATURE OF THE BUSINESS (continued)
Formation of Joint Venture Subsidiary (continued)
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:
<TABLE>
<CAPTION>
Medizone
Medizone New Zealand
International, Inc. Limited
------------------- ------------
<S> <C> <C>
Initial license 50% 50%
Subsequent license
fees up to $500,000 50% 50%
Subsequent license fees
between $500,000 and $750,000 75% 25%
Subsequent license fees in
excess of $750,000 85% 15%
</TABLE>
MNZ and the Company will also divide any net royalties paid to the Company
pursuant to any license obtained pursuant to the Managing Agent Agreement,
with MNZ being paid 10% of the net royalties and the Company receiving 90% of
the net royalties.
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 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
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 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 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
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 a 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 a Phase III human clinical trials and submission of
the data for approval to the Italian Ministry of Health.
Page 18 of 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
2. CHANGES IN MANAGEMENT CONTROL AND LITIGATION AGAINST FORMER MANAGEMENT
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 Hitt to the Company's Board of Directors, with Marshall being named
Chairman. Contemporaneously thereto, John Pealer ("Pealer") resigned as a
director, and Gropper 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 G. 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.
Milton G. Adair resigned as President and Chief Executive Officer as well
as Director on April 10, 1998.
On April 15, 1998, the Board of Directors appointed its Chairman, Edwin G.
Marshall, as Chief Executive Officer and Gerard V. Sunnen, M.D., a Director
and Company Secretary, as President.
Page 19 of 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
2. CHANGES IN MANAGEMENT CONTROL AND LITIGATION AGAINST FORMER MANAGEMENT
(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 amount of additional funds to complete the development of its
products, to establish manufacturing facilities, to build a sales and marketing
organization and to fund additional losses which the Company expects to incur
over the next several years.
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 required to submit a New Drug Application
("NDA") for review by the FDA and provide medical and scientific evidence
Page 20 of 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
3. GOING CONCERN (continued)
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 1) 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
through June 1998, which was a 66.6% owned subsidiary until its sale by the
Company, 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 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
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 Assumptions
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 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
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 was 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 retained an investor relations firm which acted as the Company's
liaison with the brokerage community through April 1998. The agreement was for
a period of one year, but could be extended by the parties for additional one
year periods. It received 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. The agreement was
terminated by the Company in April 1998.
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 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
6. COMMITMENTS AND CONTINGENCIES (See also Note 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 relocated its headquarters to California in April 1998. The Company
negotiated with the landlord to eliminate its future obligation under the
lease by applying its lease deposit to rent in exchange for cancellation of the
remainder of the lease term.
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
meruit for recovery of unpaid legal fees allegedly due plaintiff by the Company
in the amount of $67,864. The remaining claims are for fraud, wrongful
termination, sexual discrimination, defamation, tortious interference with
contract and intentional infliction of emotional distress. With respect to
each of these causes of action, plaintiff 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 meruit. By decision and order dated February 14,
1995, the Court dismissed all of the plaintiff's claims except for breach of
contract and for an account stated;
Page 24 of 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
6. COMMITMENTS AND CONTINGENCIES (See also Note 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:
<TABLE>
<S> <C>
November 15, 1995 $20,000
December 15, 1995 5,000
January 15, 1996 5,000
February 15, 1996 5,000
March 15, 1996 5,000
April 15, 1996 5,000
May 15, 1996 5,000
June 15, 1996 5,000
July 15, 1996 6,000
---------
Total 61,000
=========
</TABLE>
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
Page 25 of 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
7. ISSUANCE OF COMMON STOCK AND WARRANTS (continued)
issued 7,814,600 shares of new common stock. In January 1987, an additional
2,600 shares were issued in exchange for warrants and cash of $259.
In March 1987, the Company issued 1,000,000 shares of common stock in
exchange for a patent (see Note 5).
In June 1987, the Company issued 950,000 shares to individuals in private
transactions for aggregate proceeds of $150,000.
During the period from June 1987 through July 1987, the Company issued
203,167 shares of common stock to various vendors and individuals for services
rendered in 1986 and 1987.
On August 26, 1987, an officer of the Company exercised options to purchase
250,000 shares of common stock. In January 1988, two holders exercised their
options and acquired an aggregate of 200,000 shares of common stock.
On September 26, 1988, the Company sold, in a private placement, 1,000,000
shares of common stock at $0.08 per share to an individual.
During 1988, the Company issued a total of 35,000 shares of common stock for
services.
During 1989, the Company issued 261,889 shares of common stock to various
vendors and individuals for services rendered in 1988 and 1989.
During 1989, the Company issued 5,790,000 shares to individuals in private
transactions for aggregate proceeds of $291,500.
Also during 1989, the Company satisfied obligations for notes payable to and
accrued interest due to unrelated individuals totaling $377,539 by the issuance
of 3,899,532 shares of common stock. The Company issued 250,000 shares of
common stock to an officer and 600,000 shares of common stock 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 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
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 stock, $.001
par value, at a per share price of $.10 to a director pursuant to the
Page 27 of 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
7. ISSUANCE OF COMMON STOCK AND WARRANTS (continued)
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 six months 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 it Scientific Advisory Board a nonqualified
option to purchase 325,000 shares of common stock of the Company at an exercise
price of $.001 per share. This option was exercised in 1989.
During 1990, in consideration for services rendered over the prior four years,
the Company granted to a member of its Scientific Advisory Board a nonqualified
option to purchase 150,000 shares of common stock of the Company at an initial
exercise price of $.10 per share. This option was exercised in 1991.
All options were exercisable for a period of five years beginning one year
from the date of grant. Compensation expense, measured as to the excess of the
estimated fair value over the exercise price, was accrued over the service
period. If, on the date of exercise, the estimated fair value of a share of the
Company's common stock exceeded the exercise price, the exercise price was
decreased by a like amount (but not below the par value of $.001). At the end
of each fiscal period, total accrued compensation was recorded as the
difference between the adjusted exercise price and the fair market value at
the end of the period for all exercisable shares. The total accrued
compensation was adjusted each year for changes in the fair market value of
the Company's stock and for option exercises and cancellations. The shares
issued in connection with the exercise of the options were restricted shares
to be held for investment purposes only.
In 1995, as part the their employment agreements, the Company's president and
chief executive officer, and vice-president and chief financial officer and
treasurer, were granted options to purchase an aggregate of 4,500,000
Page 28 of 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
===========================================================================
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:
<TABLE>
<CAPTION>
Weighted Average
Fixed Options Shares Exercise Price
- ------------- ------------ ----------------
<S> <C> <C>
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
Weighted Average $ -
============
</TABLE>
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
------------------ ----------- ----------- -------------- ----------- --------------
<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:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
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)
</TABLE>
Page 29 of 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
=============================================================================
9. MINORITY INTEREST
In June 1988, MCL issued 2,000,000 units consisting of one share of common
stock and two warrants which allowed the holder to purchase one share of
common stock per warrant. The warrants were 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,
1997, at which time they expired. In 1998, 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.
In June 1998, the Company sold its entire remaining holdings of MCL for
$125,000 cash. Accordingly, the remaining balance in minority interest of
$8,417 was restated to additional paid-in capital.
10. NOTES PAYABLE
Short-term debt at December 31, 1997 and June 30, 1998, consisted of the
following:
<TABLE>
<CAPTION>
December 31, June 30
1997 1998
------------ ------------
<S> <C> <C>
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 former 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 former directors and a family member of a former
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. 216,300 212,676
</TABLE>
Page 30 of 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
10. NOTES PAYABLE (continued)
<TABLE>
<S> <C> <C>
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 $310,491
=========== ===========
</TABLE>
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
================= ============= ============= ================ ================
These restatements do not affect previously reported loss per share because of rounding.
</TABLE>
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 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
=============================================================================
12. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
From the Date of Inception
(January 31, 1986), through
December 31, 1997
1997 1996 1995 (Cumulative)
---------- ---------- ---------- ---------------------------
<S> <C> <C> <C> <C>
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 - - - -
----------- ---------- ---------- ------------
$ - $ - $ - $ -
=========== ========== ========== ============
</TABLE>
At December 31, 1997 and 1996, deferred tax assets (liabilities) consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Current deferred tax liabilities $ - $ -
Noncurrent deferred tax liabilities - -
Current deferred tax assets 1,748,419 1,651,738
Noncurrent deferred tax assets - -
Valuation allowance (1,748,419) $1,651,738
----------- -----------
$ - $ -
=========== ===========
</TABLE>
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 SIOCK
On February 12, 1993, per a settlement agreement (Agreement), the Company
issued 200,000.00 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 include such shares in the
registration statement. If all, or any portion of the shares have not been
Page 32 of 37 pages
<PAGE>
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIA}HES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
=============================================================================
13. REDEEMABLE COMMON STOCK (continued)
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 amounts 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:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Assets:
Cash $ 83,235 $ 83,235
Receivables from affiliate 48,947 48,947
Liabilities:
Accounts payable and liabilities 739,814 739,814
Short-term debt 310,491 310,491
</TABLE>
Cash, receivable from affiliate and accounts payable. The carrying value of
such items approximates their fair value at June 30, 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 37 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 $2,327,844 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 37 pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd.)
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.
Six-month periods ended June 30, 1998, and June 30, 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.
During the 1998 period, the Company issued 847,143 shares of its common stock
for cash at $.07 per share for gross proceeds of $60,000 and issued
864,746 shares of its common stock in exchange for $40,000 of notes payable,
plus accrued interest at $.05 per share. Expenditures for research and
development during the 1998 period were $8,209 and were $106,000 during the
1997 period.
General and administrative expenses were $238,201 in the 1998 period as
compared to $548,048 in the 1997 period.
Interest expense was $13,439 in the 1998 period compared to $14,335 in the
1997 period and was accrued regarding notes payable to former Company
directors.
Net cash used in operating activites was $244,786 in the 1998 period as
compared to $37,727 in the 1997 period. The increase was due primarily to
increased revenues from the sale of stock, sale of subsidiary's stock, and
payment of current operating expenses and a reduction in accounts payable.
Cash provided by financing activities increased in the 1998 period by
$167,993. The increase was due primarily to sales of the Company's and its
subsidiary's stock.
Six-month periods ended June 30, 1997, and June 30, 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.
Page 35 of 37 pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd.)
During the 1997 period, the Company issued 1,000,000 shares of its common
stock at $.10 per share and paid $6,000 for research and development.
There were no expenditures for research and development during the 1996
period.
General and administrative expenses were $548,048 in the 1997 period as
compared to $558,007 in the 1996 period.
Interest expense increased from 1996 to 1997 by approximately $8,600 to
$14,335 due to the increase in notes payable to Company directors.
Net cash used in operating activities was $37,727 in the 1997 period as
compared to $615,115 in the 1996 period. The decrease was due primarily to
decreased revenues from the sale of stock and stock subscriptions and
accounts payable and accrued expenses.
Cash provided by financing activities decreased in the 1997 period by
$610,616. The decrease was due primarily to common stock subscriptions
received which were $585,416 in the 1996 period and $-0- in the 1997
period.
Liquidity and Capital Resources
At June 30, 1998, the Company had a working capital deficiency of $967,070
and stockholders' deficiency of $908,941. 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 37 pages
<PAGE>
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule for June 30, 1998
Form 10-QSB
(b) A report on Form 8-K was filed during the quarter for which
this report is filed to report the resignation of Milton A.
Adair as President and C.E.O. and a member of the Board. It
also reported that Chairman of the Board, Edwin G. Marshall,
had been appointed C.E.O. and that Board member and Director
of Science, Gerard V. Sunnen, M.D., had been appointed
Company President. Additionally, the Company reported it was
relocating its corporate offices from Salt Lake City, Utah,
to Stinson Beach, California.
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
July 29, 1998
Page 37 of 37 pages
<PAGE>
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<PERIOD-START> JAN-01-1998
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