Items 6, 7 and 8, Part II were the subjects of
a Form 12b-25 and have been included in this
report.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1935
For the fiscal year ended December 31, 1996
Commission File Number: 33-16757-D
MEDIZONE CANADA LIMITED (originally KPC Investments, Inc.)
- ---------------------------------------------------------------
(Exact name of Registrant as stated in its corporate charter)
Utah 87-0431771
- --------------------------------------------------------------
(state of incorporation) (I.R.S. Employer I.D. Number)
4505 South Wasatch Boulevard, Suite 210, Salt Lake City 84124
- --------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (801) 274-8400
--------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: None
----
The Registrant has (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes No X
---- -----
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained herein, and will be contained in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment hereto. Yes No X
----- -----
The aggregate market value of voting common stock held by non-affiliates of the
Registrant was $282,159 on December 29, 1997, based on the average bid and asked
prices of such stock as reported on the NASD OTC Bulletin Board.
According to information received from Registrant's transfer agent, as of
December 31, 1997, Registrant had 36,493,333 shares outstanding (of which
26,115,242 were restricted).
DOCUMENTS INCORPORATED BY REFERENCE: None
SUPPLEMENTAL INFORMATION: The Registrant intends to furnish its shareholders
with an annual report for 1996 and a shareholder information statement
subsequent to the filing of the 10-K.
<PAGE>
TABLE OF CONTENTS
PART I
Page
Item 1. Business............................................................ 3
Item 2. Properties.......................................................... 10
Item 3. Legal Proceedings................................................... 10
Item 4. Submission of Matters to a Vote of Security
Holders............................................................. 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................. 11
Item 6. Selected Financial Data............................................. 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 12
Item 8. Financial Statements and Supplementary Data......................... 14
Item 9. Changes in and Disagreements with Accountants on
Auditing and Financial Disclosure................................... 14
PART III
Item 10. Directors and Executive Officers.................................... 14
Item 11. Executive Compensation.............................................. 17
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................................... 19
Item 13. Certain Relationships and Related Transactions...................... 20
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................................. 20
Signatures.......................................................... 21
Exhibits Index..................................................... E-1
Financial Statements................................................F-1
<PAGE>
PART I
Item 1. Business
General
Medizone Canada Limited, a Utah corporation (the "Company" or the
"Registrant") organized in 1987, is a development stage company, which is a
majority owned subsidiary of Medizone International, Inc. ("MII"). MII is a
Nevada corporation, organized in 1986. MII is itself a development stage company
whose objective is to (i) gain regulatory approval for its drug, a precise
mixture of ozone and oxygen called MEDIZNE(R), and its process of inactivating
lipid enveloped viruses for the intended purpose of decontaminating blood and
blood products and assisting in the treatment of certain diseases; and (ii)
develop the related technology and equipment for the medical application of its
products, including its drug production and delivery system (the "Medizone
Technology"). MEDIZNE(R) is one of two registered trademarks of MII. Throughout
this report, whether or not the trademark symbol is used, the phrase "Medizone
(the drug)" is intended to have the same effect as if the trademark symbol had
been used.
Medizone (the drug) is intended to be used as a therapeutic drug in humans
to inactivate certain viruses, and thereby afford a treatment for certain
virally-based diseases (including Human Immunodeficiency Virus ["HIV"], the AIDS
related virus, Hepatitis B, Epstein-Barr, herpes, and cytomegalovirus), and to
decontaminate blood and blood products, applications which are covered under the
Company's patent (Patent No. 4,632,980). The Medizone Technology was developed
for the production of Medizone (the drug), and has led to the design of
equipment for which a patent has been issued in the United States (Patent No.
5,052,382). Patents based on each of these patents have been obtained in various
foreign countries. See "Patents".
The Company's objective is to gain regulatory approval in Canada for
Medizone (the drug) and to assist in the development of the Medizone Technology.
The Company's Canadian activities are carried on by its wholly owned subsidiary,
MCL Medizone Canada Ltd., a corporation organized under the laws of the Province
of British Columbia ("MedCan").
The Company's principal asset is the license granted to it and MedCan by
MII, which covers the use of MII's Canadian presently held patent and any other
patents based on the Medizone Technology which it may acquire, pursuant to a
license agreement between MII and MedCan, dated November 30, 1987 (the "License
Agreement"). See "Patents" and "License Agreement".
-3-
<PAGE>
Patents
The proprietary scope of MII is covered under a United States process
patent (U.S. Patent No. 4,632,980) entitled, "Ozone Decontamination of Blood and
Blood Products" (the "Patent") and a related United States equipment patent
(U.S. Patent No. 5,052,382) entitled "Approaches for the Control Generation and
Administration of Ozone" (the "Equipment Patent").
The Patent, which covers a procedure for ozone decontamination of blood and
blood products through the treatment of blood and blood components, is MII's
principal asset.
The method covered by the Patent is the principal use of ozone under study
by MII and the Company and is the method incorporated in MII's and the Company's
regulatory applications. (See "Governmental Regulation" below.) In June 1990,
pursuant to MII's request for re-examination of the Patent, the U.S. Patent
Office issued a re-examination certificate, confirming the patentability of the
claims covered by the Patent. MII's United States patent protection for the
Patent will expire in 2003, subject to extension based upon the length of time
required to bring the Patent to commercial fruition. MII was granted a patent
(based on the Patent) in Canada in 1990. This Canadian patent will expire in
2007.
The Equipment Patent, which covers apparatus for the controlled generation,
monitoring and dosage of a precise admixture of ozone and oxygen (Medizone, the
drug), was developed by a consultant engineer to MII and issued and assigned to
MII in 1991. The Equipment Patent was developed to provide the physical means to
deploy the Patent. MII has an application pending in Canada for a patent based
upon the Equipment Patent.
In late 1996, MII became aware that a United States patent has been issued
to a Canadian corporation which MII and the Company believe infringes on the
Patent. MII has consulted its patent counsel and intends to take the appropriate
steps to protect its rights with respect to the Patent. However, at the present
time, the nature of any action to be taken by MII would be limited by the lack
of funding.
The License Agreement
By agreement dated November 30, 1987, MII granted to MedCan the exclusive
right in Canada, under the patent issued in Canada based upon the Patent and any
other patent thereafter issued in Canada relating to the Patent, the Equipment
Patent or the Medizone Technology, to make, use and sell Medizone (the drug) and
any therapy embodied in the Canadian patents. MedCan is required, pursuant to
the License Agreement, without cost or expense to MII, to implement or cause the
implementation of, research studies, to test the efficacy of Medizone (the drug)
and the Medizone Technology in the treatment of Hepatitis B, various animal
viruses and other viruses, diseases and conditions existing in Canada. The
License Agreement shall remain in effect until the expiration of the last patent
licensed thereunder, subject to early termination by either party in the event
of a material default. The License Agreement does not provide for the payment of
a royalty to MII.
-4-
<PAGE>
Research and Development
Neither the Company nor MII maintain laboratories or other clinical
research or testing facilities. MII's research and development activities have
been conducted by utilizing contract laboratories and clinicians. The research
and development activities have been directed by MII's Scientific Advisory
Board, whose sole member since June 1997 has been Dr. Gerard V. Sunnen, MII's
Director of Science.
Pre-clinical Studies
Pre-clinical Studies are defined as non-human studies. Since 1988, MII has
both sponsored and been the beneficiary of research to determine, among other
things, (i) whether the use of ozone, either alone or with other modalities, is
efficacious in the treatment of certain diseases and (ii) to establish
additional scientific evidence that ozone, through the use of the patents and/or
applications of scientific methodologies of a similar nature can decontaminate
blood of lipid enveloped viruses and thereby significantly diminish the degree
of transfusion related disease.
Pre-clinical projects sponsored by MII to date include: (1) studies to test
ozone's ability to inactivate HIV, conducted at the State University of New York
("SUNY") Health Science Center at Syracuse; (2) a pilot animal study of the
potential toxicity of ozone, conducted by the Arnold & Marie Schwartz College of
Pharmacy and Health Science at Long Island University; and (3) studies
investigating the effects of ozone/oxygen admixtures on human peripheral blood,
including whole blood, serum and plasma, conducted by the Blood Bank of Mt.
Sinai Medical Center, New York City.
In 1990, the Canadian Blood Forces Program (under the aegis of the Canadian
Department of Defense and Agriculture and the Canadian Red Cross) requested that
MII add the Medizone Technology to the other proprietary technology being
investigated as an experimental arm of an ozone-based blood sterilization
investigative program. The program was an attempt to develop an effective
technology for sterilizing whole blood and blood products. This program, which
was to study the Medizone Technology as it relates to the inactivation of Simian
Immunodeficiency Virus ("SIV"), included a live primate model. The program
continued until 1994, completing two out of the three proposed stages, when the
funding arm of the Canadian Blood Forces Program discontinued funding the
program. MII's current management learned in late 1997 that the program, as it
involves the Medizone Technology, was stopped primarily due to an equipment
failure and the generation of erroneous data due to the equipment failure. The
third stage of the study was resumed in May 1996, but did not utilize the
Medizone Technology.
(Balance of page intentionally left blank.)
-5-
<PAGE>
Governmental Regulation
Medizone (the drug), the Medizone Technology and any related products
derived therefrom are regulated in the United States under the Federal Food,
Drug and Cosmetic Act and the regulations promulgated thereunder (the "FDC Act")
and are regulated by the Food and Drug Administration (the "FDA") and, in
Canada, are regulated by the Canadian Department of Health and Welfare (the
"CDHW"). The FDA and the CDHW exercise broad and extensive authority in
regulating the development, production, importation, distribution and promotion
of "new drug" products and "investigational devices".
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 pursuant to the License Agreement until after CDHW approval has been
granted. In order to obtain CDHW approval, the Company will be required to
submit medical and scientific evidence sufficient to demonstrate that Medizone
(the drug) and the Medizone Technology has been successfully used in
pre-clinical studies followed by well-controlled clinical studies using human
volunteer subjects. The CDHW will not grant its approval unless it receives
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.
In order to commence human trials, the Company will be required to submit
an application to the CDHW which contains adequate information to satisfy the
CDHW that known clinical studies can be conducted without exposing the volunteer
subjects to an unreasonable risk of illness or injury while indicating some
potential for clinical efficacy.
The Company has submitted an application to the CDHW to commence human
clinical trials, which was placed on clinical hold pending further studies on
animal toxicity and other studies. The Company's ability to commence such
additional studies is dependent on it receiving additional funding.
In obtaining regulatory approval in Canada, the Company will be provided
with all information developed by MII and, accordingly, will be assisted by
steps taken by MII to obtain regulatory approval in the United States. In that
regard, MII will be required to obtain regulatory approval from the Federal Food
and Drug Administration (the "FDA"), which regulates the development,
production, importation, distribution and promotion of "drug" products and
"investigational devices" pursuant to the FDC Act.
To obtain FDA approval, MII will be required to submit a New Drug
Application ("NDA") to the FDA which will have to continue evidence that
Medizone (the drug) and the Medizone Technology have been successfully used in
human clinical studies. Historically, the FDA has held a strong bias against
treating humans with ozone due largely to issues of safety.
In order to initiate the first phase (i.e., Phase I) of human clinical
studies required as part of an NDA, an applicant must submit to the FDA an
application for an Investigational New Drug Exemption ("IND"), which contains
adequate information to satisfy the FDA that human clinical studies can be
conducted without exposing the volunteer human subjects to an unreasonable risk
of illness or injury. MII submitted an IND application (assigned to the
Registrant by its former president) to the FDA on October 6, 1985, and requested
FDA approval to commence human clinical trials using ozone-oxygen to inactivate
-6-
<PAGE>
HIV. The FDA deemed the IND application to be incomplete, and required MII 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 MII, the FDA inactivated MII's IND. MII 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
MII's IND application will ever be re-opened. Until an NDA has been granted to
MII, 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 European Union (the "EU") is more accepting of human clinical trials
of ozone therapies being conducted than is the United States. Accordingly, MII's
management believes that MII should pursue the option of conducting human
clinical trials in Europe, using stringent protocols that will meet EU
standards, with a view to utilizing the results of such trials in an effort to
obtain EU approval and to re-open MII's FDA file.
Clinical Studies
Overview
--------
To date MII has not performed any human clinical studies.
The Italian Initiative
----------------------
In late 1992, the Italian Ministry of Health suspended the clinical use of
ozone until such time as sufficient scientific evidence was available to support
its use as a human therapeutic treatment. In this regard, the Italian Ministry
of Health designated the Italian Scientific Society for Ozone-Oxygen Therapy in
Bergamo, Italy ("ISSOT") as the agency to select those treatment protocols
utilizing ozone as worthy of investigation and to provide those protocols to the
Italian Ministry of Health for review and approval. By letter agreement dated
March 23, 1993, with ISSOT, MII 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
MII on a site by site basis. The ISSOT letter agreement requires MII 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 MII's efforts to re-open the FDA
IND (see "Governmental Regulation").
On May 16, 1994, MII announced that human trials were to commence at the
University of Naples ("Naples"). However, after the termination of Joseph S.
Latino's employment with MII, MII's inquiry into the conduct of its operations
during Dr. Latino's tenure as its Chairman, President and Chief of Research
disclosed that human trials of MII'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. MII 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
-7-
<PAGE>
MII to conduct Phase II trials, they would require MII to have either completed
a large animal study and Phase I trials or to have these requirements waived.
MII has never performed a large animal study or Phase I clinical trials and does
not possess the necessary data with respect to its ozone therapy to commence
Phase II study. However, there does exist a broad use and understanding of ozone
therapy throughout Europe and there have been numerous scientific articles
published in European medical journals describing the use of ozone on humans.
MII has held discussions with an Italian Contract Research Organization (the
"ICRO") with a view to having the ICRO act as an intermediary on behalf of MII
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 MII's ozone
technology on humans in lieu of having MII perform a large annual study and
possibly even a Phase I clinical study. The ICRO would also design a research
program and protocols for clinical trials which would meet the standards of the
EU and FDA, monitor the clinical terms and collect and prepare analyses of the
data produced by the trials. MII will not be able to enter into a formal
contract with ICRO unless it obtains additional funding. If the Italian Ministry
of Health does not accept the published evidence on the use of ozone therapy on
humans, MII will be required to perform its own Phase I clinical trials and
possibly a large animal study. In late 1997, MII entered into a discussions with
Italian and Belgium clinicians with regard to them performing Phase I clinical
studies. However, assuming the Italian Ministry of Health did not grant MII's
request for a waiver, no formal agreements with these clinicians would be signed
and the studies would not begin until MII obtains additional funding. MII
estimates that it would require an infusion of approximately $1.5 million to
advance the above-described research initiatives through the completion of a
Phase III study and submission of the data for approval to the Italian Ministry
of Health.
The Company's ability to commercially market products is dependent on
obtaining CDHW approval. The Company believes that, at least even if CDHW
approval was obtained, the process will encompass several years. In addition,
the Company believes that research costs incident to obtaining CDHW approval
will be significant and will require the Company to obtain additional infusions
of capital.
Instrument Development
On October 17, 1996, MII executed an agreement with Multiossigen, S.r.L.,
an Italian corporation located in Bergamo, Italy (the "Manufacturer"), dated as
of September 13, 1996 (the "Equipment Contract"), providing for the manufacture
of ozone generating devices to be used in the human trials to be commenced
pursuant to MII's letter agreement with the ISSOT, as trials are approved by the
Italian Ministry of Health.
Pursuant to the Equipment Contract, the Manufacturer has produced a working
prototype of ozone generating devices dedicated to the use of hollow fibers or
similar gas exchange technology covered under MII's patents, satisfactory to MII
(the "Equipment"), and will make all data generated from the use of the
Equipment available to MII. The Equipment Contract calls for the Manufacturer to
manufacture twenty pieces of the Equipment at a purchase price of $9,000 per
unit, for an aggregate of $180,000, payable as follows:
(a) $25,000, paid upon approval of the prototype;
(b) $55,000, payable in fifteen installments of $3,667 with five such
installments ($18,335) being paid on each delivery of five units of
the Equipment; and
(c) one million shares of MII's common stock, bearing a restrictive
legend, 500,000 shares of which were issued on the date the Equipment
Agreement was executed with the remaining 500,000 shares issued on
March 16, 1997.
Pursuant to the Equipment Agreement, MII granted to the Manufacturer a
license to use MII's patents in Europe, subject to the regulations of all
documents necessary to protect MII s rights in and to the patents, and appointed
-8-
<PAGE>
the Manufacturer as MII's exclusive manufacturer and distributor of the
Equipment in Europe. Notwithstanding the forgoing, the present distribution of
the Equipment shall be limited to Italy, but such distribution will be expanded
to the rest of Europe upon the mutual agreement of the parties.
The Equipment Agreement (together with its grants of license and
distribution described above) will terminate on September 13, 1998 and may be
renewed by mutual agreement of the partners at least thirty days prior to the
end of its term.
Units of Equipment shall be delivered in lots of five units and shall be
deliverable to the appropriate hospital site within 60 days of the written
request by the Company, based upon such hospital's ethics committee granting
approval to committee trials at a particular site.
Since its organization, the Company has attributed $29,554 as expenditures
for research and development, including $0 in 1996.
Common Stock Purchase Warrants
Four million redeemable common stock purchase warrants, each exercisable to
purchase one share of the common stock of the Company for $.125, are
publicly-held. The Company's warrants originally had a nine-month exercise
period, but the expiration date was extended numerous times until December 31,
1997.
Competition
The area in which the Mill and the Company seeks to do business is
extremely competitive. The Company is aware of a number of domestic companies
that have commenced research into the use of ozone as a virucide in the
treatment of HIV and other diseases, or have announced the intention to do so.
Other companies, foundations, research laboratories or institutions may also be
conducting similar investigations into the use of ozone as a virucide or as a
decontaminant for blood or blood products. The Company is also aware that
another company has provided ozone-generating equipment to departments of the
Canadian government conducting studies in Canada for the purposes of comparison
of technologies. In addition, as reported in scientific journals and newspapers,
there are many commercial, not-for-profit and governmental agencies
investigating possible treatments for HIV and other viral diseases, as well as a
variety of methodologies aimed toward blood fractionate decontamination.
Employees and Consultants
The Company has three employees, its President, its Vice-President/Chief
Financial Officer and a Vice President of Operations (who is not an officer of
the Company). These individuals serve in the same capacities for MII.
MII has established a Scientific Advisory Board, which also serves the
Company, which suggests and formulates avenues of research and reviews research
in progress. As of December 31, 1996 the Scientific Advisory Board was comprised
of two members, Joseph S. Latino, Ph.D., then the Company's President and Chief
Executive Officer, and Bernard J. Poiesz, M.D., Head, Regional Oncology Center,
S.U.N.Y. at Syracuse, Syracuse, New York. The Scientific Advisory Board met
three times in 1996. Dr. Poiesz was not compensated by the Company or MII for
his services on the Scientific Advisory Board, although he has applied for
research grants in connection with MII's and the Company's research and
development efforts. Dr. Poiesz became a member of the Scientific Advisory Board
in 1987. From 1989 to 1995, Fred Quimby, D.V.M., Ph.D., Chairman, Animal
Research Institute, New York State School of Veterinarian Medicine, Cornell
-9-
<PAGE>
University, was a member of the Scientific Advisory Board, but resigned when he
became the sole principal investigator for the SIV Study being conducted under
the auspices of the Canadian Blood Forces Program. See "Research and
Development".
In June 1997, the Scientific Advisory Board was reorganized. It currently
has one member, Dr. Gerard V. Sunnen, who serves as MII's Director of Science.
Insurance
The Company presently has no product liability insurance, since none of its
products are in clinical use. MII paid an annual premium of approximately
$64,000 for a $1,000,000 policy of officers and directors liability insurance,
which also covered the Company's directors and officers in 1996. There is
presently no officers and directors liability insurance in effect for either of
MII or the Company's officers and directors.
Item 2. Properties.
----------
The Company's offices are provided by MII at no charge.
Item 3. Legal Proceedings.
-----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted to a vote of securities holders during the fourth
quarter of the year ending December 31, 1996.
Certain Business Risks Associated with the Company
Development Stage Company/Net Losses
------------------------------------
Although the Company was incorporated in 1987, it is still in the
development stage and has not yet commenced full operations, nor has it earned
any revenues. No assurance can be given that its business activities will ever
result in profitable operations generate revenues. As indicated in the Company's
financial statements, it has experienced substantial losses throughout its
history. Such losses can be expected to continue for the foreseeable future.
No Revenues/Need for Additional Financing by Parent
---------------------------------------------------
The Company has generated no revenues, and is dependent upon the results of
MII's research. MII similarly has had no revenues and has had no source of funds
other than through the sale of its common stock and will require substantial
additional capital, which will most likely be obtained through sales of its
common stock, in order to continue the research program. No assurances can be
given that MII will be able to obtain sufficient additional capital for it to
continue its research program, or that any additional financing will be
sufficient to satisfy MII's administrative and operating expenses for any
significant period of time.
Status of MII's Research
------------------------
MII's research has not progressed to a point where it would be appropriate
to predict when, if ever, Medizone (the drug) and the Medizone Technology would
have commercial application or be marketable.
-10-
<PAGE>
Forward-Looking Information May Prove Inaccurate
This Form 10K/A contains forward-looking statements and information that
are based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate," "believe," "estimate," and "expert," and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
Company's current views with respect to future events and are subject to certain
risks, uncertainties and assumptions, including the specific risk factors
described above. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements and information.
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.
-----------------------------------------
Prices/Trading Market Information
The Company's shares are traded in the over-the-counter market, with price
quotes listed on the NASD Electronic Bulletin Board under the trading symbol
"MZNC," and in the "pink sheets" published by the National Quotation Bureau.
On December 29, 1997, according to the NGB Non-NASDQ Price Report furnished
by the National Quotation Bureau, there was one marketmaker submitting
quotations in the Company's shares, and the average of the high and low bids for
the shares was $.0238. Such prices reflect interdealer prices without retail
markup, markdown or commission; are not necessarily representative of actual
transactions, or of the value of the Company's securities; and are, in all
likelihood, not based upon any recognized criteria of securities valuation as
used in the investment banking community.
Shown below is information obtained from the National Quotation Bureau,
indicating the high bid and low bid prices for a share of the Company's common
stock at the end of each of the four calendar quarters of fiscal 1995 and 1996,
representing prices between dealers which do not include retail markup, markdown
or commission. They do not reflect actual transactions.
Bid Price
---------
Calendar Period High Low
--------------- ---- ---
1995 First Quarter .08 .01
Second Quarter .04 .01
Third Quarter .035 .01
Fourth Quarter .04 .01
1996 First Quarter .02 .02
Second Quarter .05 .03
Third Quarter .04 .02
Fourth Quarter .025 .02
Number of Holders
On December 31, 1997, according to the Company's transfer agent, there were
210 holders of record of the Company's par value $.001 common stock.
-11-
<PAGE>
Dividends
The Company has never paid cash dividends on its common stock. Payment of
cash dividends is subject to the discretion of the Board of Directors and is
dependent upon various factors, including the Company's earnings, capital needs
and general financial condition. The Company does not believe that it has any
immediate prospect of earnings. However, the Company anticipates that in the
foreseeable future, it will follow a policy of retaining earnings, if any, in
order to finance research and development.
Item 6. Selected Financial Data.
-----------------------
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations Data:
Revenues $ - 0 - $ -0- $ -0- $ -0- $ -0-
Net (loss) (3,301) (3,553) (3,617) (32,357) (8,334)
Net loss) - 0 - -0- -0- -0- -0-
per common share
Weighted average 36,493,000 36,493,000 36,493,000 36,493,000 36,493,000
common shares out-
standing
Balance Sheet
Data:
Working capital $ (11,498) $(11,498) $ (13,498) $ (21,919) $ (15,498)
(deficiency)
Total assets - 0 - -0- -0- -0- -0-
Long-term - 0 - -0- -0- -0- -0-
liabilities
Accumulated (221,444) (218,143) (214,590) (210,973) (178,616)
(deficit)
Stockholders' (11,498) (11,498) (13,498) (21,919) (15,498)
equity
(deficiency)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-------------------------------------------------
Results of Operations
Registrant's financial statements in prior years reflected advances to its
parent company (MII) in the amount of $142,287 as bad debt expense because of
the uncertainty of repayment of those advances. After consideration of the facts
surrounding the advances, the Registrant restated its financial statements to
reverse the bad debt expense and to reflect the financial statements as though
the transaction was an equity investment rather than a loan arrangement.
The effect of this restatement was to decrease additional paid-in capital
and the deficit accumulated during development stage.
-12-
<PAGE>
Years ended December 31, 1996 and December 31, 1995.
----------------------------------------------------
Research and development expenses in 1996 were $-0- and were $-0- in 1995.
General and administrative expenses in 1996 consisted of accounting fees of
$2,000, legal fees of $652 and other miscellaneous expenses of $649.
General and administrative expenses in 1995 consisted of accounting fees of
$2,000 and other miscellaneous expenses of $1,553.
Net cash used in operating activities was $3,301 in 1996 as compared to
$5,553 in 1994. The decrease was due to decreased general and administrative
expenses.
Cash provided by funding activities decreased in 1996 to $3,301 as compared
to $5,553 in 1995. These amounts represent capital received from the parent
company, MII.
Years ended December 31, 1995 and December 31, 1994.
----------------------------------------------------
Research and development expenses in 1995 were $-0- and were $-0- in 1994.
General and administrative expenses in 1995 consisted of accounting fees of
$2,000 and other miscellaneous expenses of $1,553.
General and administrative expenses in 1994 consisted of accounting fees of
$3,342 and other miscellaneous expenses of $275.
Net cash used in operating activities was $5,553 in 1995 as compared to
$12,038 in 1994. The decrease was due to decreased general and administrative
expenses.
Cash provided by funding activities decreased in 1995 to $5,553 as compared
to $12,038 in 1994. These amounts represent capital received from the parent
company, MII.
Years Ended December 31, 1994 and December 31, 1993.
----------------------------------------------------
Research and development expenses in 1994 were $-0- and were $896 in 1993.
General and administrative expenses in 1994 consisted of accounting fees of
$3,342 and other miscellaneous expenses of $275.
General and administrative expenses in 1993 consisted of public relations,
$15,400; travel, $8,926; accounting fees, $6,000; and other miscellaneous
expenses of $1,135.
Net cash used in operating activities was $12,038 in 1994 as compared to
$25,936 in 1993. The decrease was due to decreased general and administrative
expenses.
Cash provided by financing activities decreased in 1994 to $12,038 as
compared to $25,936 in 1993. These amounts represent capital received from the
parent company, MII.
Years Ended December 31, 1993 and December 31, 1992.
----------------------------------------------------
Liquidity and Capital Resources
At December 31, 1996, Registrant had a working capital deficiency of
$11,498 and a stockholders' deficiency of $11,498. At December 31, 1995,
Registrant had a working capital deficiency of $11,498 and a stockholders'
-13-
<PAGE>
deficiency of $11,498. At December 31, 1994, Registrant had a working capital
deficiency of $13,498 and a stockholders' deficiency of $13,498.
Registrant will continue to require additional capital in order to gain
the necessary regulatory approvals. There is no assurance that such capital will
be raised. If adequate funding cannot be obtained, Registrant may be required to
substantially reduce or cease operations.
Registrant has outstanding warrants to purchase 4,000,000 shares of common
stock at $.125 per share; however, there can be no assurance that any of the
warrants will be exercised, or that Registrant will be able to fulfill its
obligation to file a post-effective amendment to its registration statement in
order to register the shares it would issue upon any exercise of warrants. The
expiration date of the warrants was extended to December 31, 1997.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
The financial statements and supplementary data are listed under Item 14 in
this Annual Report and commence on page F-1.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
------------------------------------------------
None.
PART III
Item 10. Directors and Executive Officers of Registrant.
----------------------------------------------
On July 7, 1996, at the Company's annual meeting, Joseph S. Latino, George
Handel and John D. Pealer were elected to the Company's Board of Directors.
The following table sets forth certain information concerning the
Registrant's directors and officers, as of December 31, 1996.
Director Officer
Name Age since since Positions with Registrant
Joseph S. Latino 39 1993 1992 President; Chief Executive
Officer and Director
Arthur P. Bergeron 47 1992 Vice President, Treasurer and
Chief Financial Officer
George Handel 69 1992 1993 Secretary and Director
John D. Pealer 77 1992 Director
There are no family relationships among the above noted officers and
directors.
Joseph S. Latino, Ph.D., was appointed President and Chief Operating
Officer of the Company in November 1992 and was elected to the Board of
Directors on September 21, 1993. He was named Chief Executive Officer of the
Company in March 1995. He holds the same positions with MII. His affiliation
with MII dates from 1986, when he was named its Director of Research. Dr. Latino
-14-
<PAGE>
received a Bachelor of Science degree in 1978 from Brooklyn College of the City
University of New York in Biology and Chemistry. He received his Doctor of
Philosophy in Biochemistry in 1984 from the City University of New York. Dr.
Latino became Director of Special Hematology/Oncology Laboratory at The Brooklyn
Hospital Center, Brooklyn, New York in 1984, where he was employed until he went
on sabbatical in December 1994. In 1994, Dr. Latino was designated as the Basic
Science Research Coordinator for The Brooklyn Hospital Center and is a member in
Investigational/Institutional Review Board of that institution. In 1986, Dr.
Latino became an Assistant Professor of Medicine, Division of Hematology at the
Health Science Center at Brooklyn, State University of New York, as well as Ad
Hoc Research Advisor for The Brooklyn Hospital Center. In 1987 he became a
Research Educator for the Hematology/Oncology Fellowship Program at the Brooklyn
Hospital Center.
George Handel became a director of the Company in November 1992 and has
served as the Company's Secretary, since November 24, 1993. He holds the same
positions with MII. Mr. Handel, who attempted Temple University, is President of
Hantex Mills, a dry goods firm established in 1975, and vice-president of Handel
& Co., a wholesale dry goods firm established in 1923.
John D. Pealer became a director of the Company in November 1992. He is
also a director of MII. Mr. Pealer has been the President and Chief Executive
Officer of Pealer's Inc., a family owned corporation engaged in the business of
real estate development since 1949.
Arthur P. Bergeron became Vice President, Treasurer and Chief Financial
Officer of the Company in 1992. He holds these same positions with MII. He
received a Bachelor of Science in Accounting from Bentley College in Waltham,
Massachusetts in 1973 and a Master of Science in Taxation from Bentley College
in 1980. Mr. Bergeron is a certified public accountant and is the principal of
Arthur P. Bergeron & Co., P.C., in Wellesley, Massachusetts, a public accounting
firm which he founded in 1978. Mr. Bergeron does not devote his full time to the
affairs of the Company.
On May 14, 1997, MII's Board of Directors terminated the employment of
Joseph L. Latino ("Latino") as MII's President and Chairman after the discovery
of a pattern of unaccounted for expenditures of the MII's funds. MII is
investigating the purposes, nature and extent of such expenditures. Dr. Latino
remained a Director of MII and the Company until he resigned from these
positions in July 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, MII 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, MII's Board of Directors appointed Marshall, Adair,
Sunnen and Hitt, to MII's Board of Directors, with Marshall being named
Chairman. Contemporaneously thereto, John Pealer ("Pealer") resigned as a
Director, and Gropper resigned as President. The Board thereupon made the
following appointments to the following positions:
President and
Chief Executive
Officer - Adair
-15-
<PAGE>
Chief Operating
Officer - Gropper
Secretary - Sunnen
The Board also named an Executive Committee, composed of Marshall, Adair,
Gropper, Sunnen and Hitt. The remaining Directors were Latino and Handel;
however, during the Board meeting, Handel resigned from the Board, effective
June 13, 1997 and Latino subsequently resigned from the Board of MII and the
Company in July 1997.
On December 8, 1997, the Company's Board of Directors appointed Adair as a
Director. Following this action, John D. Pealer resigned as a Director and
Marshall was appointed a Director. On January 5, 1998, Handel resigned as a
Director and Sunnen was named to replace him. Contemporaneously with these
events, Adair was named President and Chief Executive Officer of the Company.
The following table sets forth certain information concerning the Registrant's
directors and officers, as of December 31, 1997.
Director Officer Positions with
Name Age Since Since Registrant
- ---- --- -------- ------- --------------
Edwin G. Marshall 55 1997 Director
Milton G. Adair 65 1997 1997 President, Chief
Executive Officer and
Director
Gerard V. Sunnen 55 1997 1997 Secretary and Director
Arthur P. Bergeron 47 1992 Vice President, Treasurer
and Chief Financial
Officer
Edwin G. Marshall became a Director of the Company in December 1997. He's
Chairman of the Company's parent, MII. He attended Santa Rosa Junior College and
the College of Marin, in California, studying Business and Fire Science.
Marshall served for 17 years in the fire service, rising to become Captain of
the Richmond, California Fire Department. He left the fire service in 1979 to
enter the real estate business. He participated in the real estate business as
the owner of Smith, Smith & Associates, in Truckee, California, from 1979 to
1984, and as a broker with TRI Realtors, in the San Francisco Bay Area, from
1987 to 1990. Marshall was employed by Future Technology Marketing, Inc., of
Truckee, California, in sales and training from 1985 to 1987. In 1989, Marshall
co-founded The Marin Car Company, which was in the automobile and truck sales
and leasing business, in Novato and Petaluma, California. In 1992, Marshall left
The Marin Car Company. He is currently employed as a private investor and is
also the general partner of Sand Dollar.
Milton G. Adair became the Company's President, Chief Executive Officer and
a Director in December 1997. He holds the same positions with MII. He received a
Bachelor of Arts degree in Business Administration and Psychology from The
College of the Pacific in 1955. After employment by Shell Oil Company and
Pittsburgh Des Moines Steel from 1955 to 1963, Mr. Adair was employed by Pfizer
Incorporated from 1963 to 1978 in several capacities, culminating in his
position as Director of Sales for the Pfizer Diagnostics division. From 1978 to
1979, Mr. Adair was employed as Vice President-Sales/Marketing for the Becton
Dickinson Immunodiagnostics division of Becton Dickinson Corporation ("BD") in
Orangeburg, New York. Thereafter, until 1983, he was Vice-President and General
Manager of Becton Dickinson Automated Immunochemistry division of BD in Salt
Late City, Utah. From 1983 to 1984, Mr. Adair was President of Orbit Medical
-16-
<PAGE>
Systems, Inc., a Salt Lake City venture capital company in the immunochemistry
field. Mr. Adair was President, Chief Executive Officer and a Director of
Mountain Medical Equipment, Inc., in Littleton, Colorado, whose stock was traded
on the American Trade Exchange (the "AMEX"), from 1984 to 1991. In 1991, he
became President and Chief Executive Officer of Gull Laboratories, Inc. ("Gull
Labs"), in Salt Lake, and whose stock trades on the AMEX, and which is in the
business of supplying diagnostic kits and automated equipment in the infectious
disease and autoimmune markets. He remained at Gull Labs until 1995 and became
President and Director of Biomune Systems, Inc. ("Biomune") until 1997. Biomune,
whose stock is traded on the NASDAC system, is a bio-technology company that is
developing pharmaceutical products for the treatment of cryptosporidioses and E.
Coli.
Gerard V. Sunnen, M.D. became Secretary and a Director of the Company in
January 1998. He holds the same positions with MII. He graduated from Rutgers
University in 1963 and from the medical school of the State University of New
York, Downstate, in 1967. Dr. Sunnen has practiced psychiatric medicine since
his graduation from medical school and has taught clinical psychiatry at New
York University Medical Center since 1977, where he is now an Associate Clinical
Professor of Psychiatry. He is currently a consultant to several organizations
and companies, including the Institute for Behavior Therapy and the Training
Institute for Mental Health Practitioners in New York. He is a member of the
American Psychiatric Association, the American Society of Clinical Hypnosis, the
International Association of Emergency Psychiatry, of which he is Honorary
President, and the World Psychiatric Association, where he is currently Vice
President of the Section for Emergency Psychiatry. He received the Chevalier de
l'Ordre du Merite from the French government in 1990 for his work in assisting
members of the French community in New York. Dr. Sunnen has written and lectured
extensively on psychiatric medicine and medical hypnosis. He have also written
on the medical applications of ozone.
Item 11. Executive Compensation.
----------------------
Directors Compensation
None of the directors received any compensation for serving as a director
in 1996.
Executive Compensation
The officers of the Company do not receive any compensation from the
Company. Its president, vice president/chief financial officer and secretary are
compensated by MII. The following table sets forth the compensation paid by MII
to Joseph S. Latino, the Company's past President and Chief Executive Officer
and Arthur P. Bergeron, the Company's Vice-President, Treasurer and Chief
Financial Officer for the 1994, 1995 and 1996 fiscal years.
(Remainder of page intentionally left blank.)
-17-
<PAGE>
Summary Compensation Table
--------------------------
Fiscal Year ended Annual Compensation Long Term
-------------------
December 31, 1996 Compensation
------------
Name and Principal Other Annual
Position Year Salary(1) Bonus Compensation Options #
- -------- ---- --------- ----- ------------ ---------
Joseph S. Latino, Ph.D., 1996 $180,000 -0- 2
President and Chief 1995 $180,000 -0- (2) 3,000,000
Executive Officer 1994 $ 72,000 $17,800 (2)
Arthur P. Bergeron, Vice 1996 $ 72,0003 - 0 - 5
President, Treasurer and 1995 $ 72,000 - 0 - (5) (6)
Chief Financial Officer 1994 $ 36,0004 - 0 - (5)
Fiscal Year ended
December 31, 1997
- -----------------
Milton G. Adair, 1997 $200,000 -0- -0- 3,000,000(6)
President and Chief
Executive Officer
- -------------
(1) In 1994, Dr. Latino and Mr. Bergeron were not paid on a salaried basis, but
were paid as consultants.
(2) In 1994, 1995 and 1996, Dr. Latino was reimbursed for certain automobile
expenses and other business expenses, in the amounts of $21,324, $33,222
and $45,642, respectively. In 1995 and 1996, MII provided Dr. Latino with
health insurance, paying premiums in the amounts of $9,438 and $10,380,
respectively.
(3) In 1996, due to MII's financial condition, Mr. Bergeron received only
$36,000 of his salary.
(4) From July 1, 1993 through December 31, 1994, Arthur P. Bergeron & Co.,
P.C., the accounting firm of which Mr. Bergeron is the sole shareholder,
received an aggregate of $64,825 as professional fees for support services
rendered in connection with MII's 1992 audit, the engagement of Coopers &
Lybrand and for investigative services rendered in connection with certain
litigation engaged in by MII. He also received 500,000 shares of MII's
common stock for his services through December 31, 1994.
(5) In 1995 and 1996, MII provided Mr. Bergeron with health insurance, paying
premiums of $9,438 and $10,380, respectively.
(6) On December 16, 1997, Mr. Adair was granted options to purchase 3,000,000
shares of MII's Common Stock pursuant to the MII's 1997 Qualified Stock
Option Plan (the "Option Plan"). The options vest at the rate of 500,000
shares every six months and, once vested, may be exercised over a period of
ten years at a price equal to the Common Stock's market value at the date
of grant ($.06). The Option Plan will be submitted to a shareholder vote at
MII's 1997 annual meeting.
-18-
<PAGE>
Arthur P. Bergeron, Vice 1997 $ 72,000(7) -0- (8)
President, Treasurer and
Chief Financial Officer
Dr. Gerard V. Sunnen, 1997 -0- -0- (9)
Secretary, and Director of
Science
Employment Agreements
The Company does not have employment agreements with its officers. MII has
employment agreements with Dr. Latino and Mr. Bergeron pursuant to which they
are to serve as officers of the Company without additional compensation. Dr.
Latino's employment agreement was terminated for cause in May 1997.
Compensation Committee and Insider Participation
The Company does not have a compensation committee. Matters concerning the
compensation of executive officers are determined by the Company's Board of
Directors. Dr. Latino, who is an executive officer of the Company, is also a
member of the Company's Board of Directors and will participate in deliberations
concerning executive officer compensation, but will not vote on his own
individual compensation. However, his participation in such deliberations gives
rise to a conflict of interest which could affect his compensation.
BOARD OF DIRECTORS
------------------
Edwin G. Marshall
Milton G. Adair
Dr. Gerard V. Sunnen
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
---------------------------------------------------
The following table sets forth certain information as of January 28, 1998,
pertaining to the beneficial ownership of Common Stock, by (i) persons known to
the Company to own 5% or more of the outstanding Common Stock, (ii) each
director and executive officer of the Company as of December 1996 and January
28, 1998, and (iii) present directors and executive officers of the Company as a
group.
- ------------------
(7) Due to the MII's financial condition, Mr. Bergeron has not received payment
of his salary in 1997.
(8) In 1997, MII provided Mr. Bergeron with health insurance, paying premiums
of $2,595 (through April 18, 1987 when MII's group health insurance plan
was cancelled.
(9) Dr. Sunnen received a grant of (i) options to purchase 300,000 shares of
MII's common stock pursuant to the Option Plan for serving as MII's
Secretary and as its Director of Science; and (ii) 100,000 shares of MII's
common stock for serving as Director of Science.
-19-
<PAGE>
Number of Shares Percentage of
Name and Address Beneficially Owned Total Outstanding
Medizone International, Inc. 24,304,560 66.6%
4505 South Wasatch Boulevard
Suite 210
Salt Lake City, Utah 84124
Joseph S. Latino, Ph.D. -0-
690 East 19th Street
Brooklyn, NY 11230
George Handel -0-
1408 Melrose Avenue
Melrose Park, PA 19126
John D. Pealer 285,100 (*)
355 N. 21st Street
Camp Hill, PA 17011
Arthur P. Bergeron -0-
4505 South Wasatch Boulevard
Suite 210
Salt Lake City, Utah 84124
Edwin G. Marshall -0-
4505 South Wasatch Boulevard
Suite 210
Salt Lake City, Utah 84124
Milton G. Adair -0-
4505 South Wasatch Boulevard
Suite 210
Salt Lake City, Utah 84124
Dr. Gerard V. Sunnen 333,333 (*)
4505 South Wasatch Boulevard
Suite 210
Salt Lake City, Utah 84124
All present directors 333,333 (*)
and executive officers
as a group (4 persons)
- ------------
(*) Indicates less than 1%.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8-K.
------------------------------------------------------------
(a) See Index to Consolidated Financial Statements and Schedules on
Page F-1.
(b) None.
-20-
<PAGE>
(c) See Index to Exhibits on page E-1.
(d) None.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MEDIZONE CANADA LIMITED
By: s\Milton G. Adair
-----------------------
Milton G. Adair
President
Date: February 10, 1998
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Annual Report has been signed below by the following
persons on behalf of the Registrant, in the capacities shown and on the date
indicated:
Date: February 10, 1998 s\Milton G. Adair
------------------------------------
Milton G. Adair, President
Chief Executive Officer
and Director
Date: February 10, 1998 s\Arthur P. Bergeron
------------------------------------
Arthur P. Bergeron,
Vice President, Treasurer and
Chief Financial Officer
Date: February 10, 1998 s\Edwin G. Marshall
------------------------------------
Edwin G. Marshall, Director
Date: February 10, 1998 s\Gerard V. Sunnen
------------------------------------
Gerard V. Sunnen, Director
21
<PAGE>
Exhibits and Financial Statement Schedules
------------------------------------------
The following Exhibits form a part of this Annual Report on Form 10-K:
Exhibit
Number Description of Exhibit
- ------ ----------------------
2 Agreement and Plan of Reorganization dated December 23, 1988.1
3(a) Articles of Incorporation of Registrant.2
3(b) By-laws of Registrant.2
3(c) Articles of Amendment to Registrant's Articles of Incorporation.1
10(a) Agreement made and entered into as of November 30, 1987 between
Medizone International, Inc. and MCL Medizone Canada Ltd.2
10(b) Agreement made as of May 18, 1994, among Medizone International,
Inc., Medizone Canada Ltd., John M. Kells, George Handel, John
Pealer, Joseph S. Latino, Terrence O. McGrath and Philip J.
Watrous3.
16 Letters re: change in certifying accountants.3
- ----------------------
(1) Incorporated by reference to the Registrant's current report on Form 8K,
reporting an event that occurred on December 23, 1988
(2) Incorporated by reference to an exhibit filed as Registrant's registration
statement on Form S-18, effective December 14, 1987
(2) Incorporated by reference to the Registrant's annual report on Form 10-K
for the period ended December 31, 1994.
E-1
<PAGE>
MEDIZONE CANADA LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Andersen, Andersen and Strong, L.C.,
Independent Certified Public Accountants.................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Changes in Stockholders' Equity ................. F-5
Consolidated Statements of Cash Flows....................................... F-9
Notes to Consolidated Financial Statements .................................F-10
INDEX TO SCHEDULES
None Required
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Medizone Canada Limited
We have audited the consolidated balance sheets of Medizone Canada Limited and
subsidiary (a development stage company) as of December 31, 1996 and 1995, and
the related statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1996, 1995 and 1994, and the period November 18,
1987 (date of inception) through December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medizone Canada Limited and
subsidiary as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the years ended December 31, 1996, 1995 and 1994, and the
period November 18, 1987 (date of inception) through December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, since its inception (November 18, 1987), the Company has
been in the development stage and has suffered recurring losses from operations
and is dependent on its majority stockholder to provide funds to continue
operations, the continuation of the majority stockholder as a going concern is
dependent upon the majority stockholder obtaining additional capital. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Salt Lake City, Utah
November 14, 1997
Andersen Andersen and Strong, L.C.
F-2
<PAGE>
MEDIZONE CANADA LIMITED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
================================================================================
1996 1995
---- ----
CURRENT ASSETS
Cash $ - $ -
--------- ---------
Total Current Assets $ - $ -
--------- ---------
OTHER ASSETS
License agreement $ - $ -
--------- ---------
Organization costs (net of
accumulated amortization of $5,520) $ - $ -
--------- ---------
$ - $ -
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 9,498 $ 9,498
Accrued expenses 2,000 2,000
------- -------
Total Current Liabilities 11,498 11,498
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 5)
STOCKHOLDERS' DEFICIENCY (Note 6)
Common stock, authorized 100,000,000
shares, par value $.001 per share;
issued and outstanding 36,493,333 in
1996 and 1995, respectively 36,493 36,493
Additional paid-in capital 173,453 170,152
Deficit accumulated during development stage (218,143) (218,143)
-------- ---------
Total Stockholders' Deficiency (11, 498) (11,498)
---------- ---------
$ - $ -
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
MEDIZONE CANADA LIMITED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
From the Date
of Inception
(November 18,
For the Years Ended December 31, 1987) through
-------------------------------------
December 31,
1996 1995 1994 1996
-------- -------- ----------- -------------
<S> <C> <C> <C> <C>
SALE $ - $ - $ - $ -
---------- ---------- ---------- ---------
COSTS AND EXPENSES
Research and development expenses - - - 29,554
General and administrative expenses 3,301 3,553 3,617 191,890
---------- ---------- ---------- ----------
Total Costs and Expenses 3,301 3,553 3,617 221,444
---------- ---------- ---------- ----------
Net loss $ 3,301 $ 3,553 $ 3,617 $(221,444)
========== ========= ========== =========
Weighted average number of shares
outstanding 36,493,333 36,493,333 36,493,333 33,106,154
========== ========== ========== ========== ==========
Loss per share $ - $ - $ - $ -
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
MEDIZONE CANADA LIMITED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From the Date of Inception (November 18, 1987)
through December 31, 1996 (restated)
================================================================================
<TABLE>
<CAPTION>
Deficit Accumulated During Medizone Common Stock Additional
------------
Canada Ltd.-Development Shares to Paid-in
Canadian Stage Shares Amount be Issued Capital
- ----------------------------------- ------ ------ --------- -------
<S> <C> <C> <C> <C>
Initial issuance of shares exchanged
for license agreement, November 1987
($.0000003 per share) 3,000,000 $ 1 - $ -
Share issued for cash, November 1987
($1 per share) 1 1 - $ -
Net loss for the year ended
December 31, 1987 - - - (1,000)
----------- -------- -----------
Balance, December 31, 1987 3,000,001 2 - (1,000)
Sale of shares for cash ($.7692 per
share, no par value) 130,000 100,000 - -
--------- -------- ----------- -----------
3,130,001 $ 100,002 - $ -
========= ======== =========== ==========
KPC Investments
Initial capitalization of KPC
Investments ($.001 par value), July
1984 ($.003 per share) 590,000 $ 590 - $ 910
Shared issued for cash, April 1985
($.003 per share) 3,000,000 3,000 - 6,819
Shares and warrants issued for
cash, June 1988 2,000,000 2,000 - 82,089
--------- -------- ----------- --------
5,590,000 $ 5,590 - $ 89,818
========= ======== =========== ========
Medizone Canada Ltd.-Utah
Existing shares of MCL - Utah
(formerly KPC Investments) 5,590,000 $ 5,590 - $ 89,818
Exchange of 3,130,001 shares of
Medizone Canada Ltd. - Canadian for
shares of MCL - Utah resulting in a
reverse merger, December 1988 27,132,000 27,132 - 66,551
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
MEDIZONE CANADA LIMITED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
From the Date of Inception (November 18, 1987)
through December 31, 1996 (restated)
================================================================================
<TABLE>
<CAPTION>
Deficit Accumulated During Medizone Common Stock Additional
------------
Canada Ltd.-Development Shares to Paid-in
Canadian Stage Shares Amount be Issued Capital
- ----------------------------------- ------ ------ --------- -------
<S> <C> <C> <C> <C>
Shares reserved for issuance to
minority shareholder (1,126,888) $(1,127) 1,127 $ -
Share issued for services ($.005
per share) 1,938,000 1,938 - $ 8,062
Return of capital to majority
shareholder - - - (50,851)
Net loss for the year ended
December 31, 1988 - - - (107,392)
----------- -------- --------- ----------
Balance, December 31, 1988 33,533,112 33,533 1,127 113,580
Return of capital to majority
shareholder - - - (58,056)
Net loss for the year ended
December 31, 1988 - - - (26,179)
----------- -------- --------- ----------
Balance, December 31, 1989 33,533,112 33,533 1,127 55,524
Sale of shares for cash (from
$.05 to $.075 per share) 983,333 983 - 56,517
Shared issued for services
($.05 per share) 850,000 850 - 41,650
Shares issued to minority
shareholder which had been
previously reserved 1,126,888 1,127 (1,127) -
Net loss for the year ended
December 31, 1990 - - - -
----------- -------- --------- ----------
Balance, December 31, 1990 36,493,333 36,493 - 111,211
Capital received from majority
shareholder - - - 9,100
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
MEDIZONE CANADA LIMITED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
From the Date of Inception (November 18, 1987)
through December 31, 1996 (restated)
================================================================================
<TABLE>
<CAPTION>
Deficit Accumulated During Medizone Common Stock Additional
------------
Canada Ltd.-Development Shares to Paid-in
Canadian Stage Shares Amount be Issued Capital
- ----------------------------------- ------ ------ --------- -------
<S> <C> <C> <C> <C>
Net loss for the year ended
December 31, 1991 - $ - - $
----------- -------- -----------
Balance, December 31, 1991 36,493,333 36,493 - 120,311
Capital received from majority
shareholder - - - 6,314
Net loss for the year ended
December 31, 1992 - - - -
----------- -------- ----------- --------
Balance, December 31, 1992 36,493,333 36,493 - 126,625
Capital received from majority
shareholder - - - 25,936
Net loss for the year ended
December 31, 1993 - - - -
----------- -------- ----------- --------
Balance, December 31, 1993 36,493,333 36,493 - 152,561
Capital received from majority
shareholder
Net loss for the year ended
December 31, 1994 - - - -
----------- -------- ----------- --------
Balance, December 31, 1994 36,493,333 36,493 - 164,599
Contributed capital from majority
shareholder - - - 5,553
Net Loss for the year ended
December 31, 1995 - - - -
----------- -------- ----------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
MEDIZONE CANADA LIMITED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
From the Date of Inception (November 18, 1987)
through December 31, 1996 (restated)
================================================================================
<TABLE>
<CAPTION>
Deficit Accumulated During Medizone Common Stock Additional
------------
Canada Ltd.-Development Shares to Paid-in
Canadian Stage Shares Amount be Issued Capital
- ----------------------------------- ------ ------ --------- -------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 36,493,333 $ 36,493 - $ 170,152
Capital received from majority
shareholder - - - 3,301
Net loss for the year ended
December 31, 1992 - - - 3,301
----------- ----------- ----------- ---------
Balance, December 31, 1996 36,493,333 $ 36,493 - $ 173,453
=========== ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
<PAGE>
MEDIZONE CANADA LIMITED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From the Date
of Inception
(November 18,
For the Years Ended December 31, 1987) through
----------------------------------
December 31,
1996 1995 1994 1996
-------- -------- ---------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,301) $ (3,553) $ (3,617) $(221,444)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Issuance of stock for services -- -- -- 52,500
Amortization -- -- -- 5,520
Write-off of prior year payables -- -- -- (25,261)
Write-off of license agreement -- -- -- 1
Changes in assets and liabilities:
Accounts payable and accrued
expenses -- (2,000) (8,421) 36,759
--------- --------- --------- ---------
Net Cash Used in Operating Activities (3,301) (5,553) (12,038) (151,925)
--------- --------- --------- ---------
General and administrative expenses
INVESTING ACTIVITIES
Organization costs -- -- -- (5,520)
--------- --------- --------- ---------
Net Cash Used in Investing Activities -- -- -- (5,520)
--------- --------- --------- ---------
outstanding
FINANCING ACTIVITIES
Issuance of stock for cash -- -- -- 246,590
Cash received from (advanced to) 3,301 5,553 12,038 (89,145)
--------- --------- --------- ---------
majority stockholder
Net Cash Provided by Financing 3,301 5,553 12,038 157,445
--------- --------- --------- ---------
Activities
DECREASE IN CASH -- -- -- --
Cash, beginning of year -- -- -- --
--------- --------- --------- ---------
Cash, end of year $ -- $ -- $ -- $ --
========= ========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Issuance of stock for license agreement $ - $ - $ - $ 1
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
MEDIZONE CANADA LIMITED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. NATURE OF THE BUSINESS
Background
- ----------
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 Medizone International, Inc., a Nevada corporation (the
Stockholder) wherein the Stockholder 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 Stockholder holds
in the United States. As consideration for the transfer, the Stockholder
received 3,000,000 shares of MedCan and, in addition, purchased 1 common share
for the sum of $1.00. Under a separate agreement among the Stockholder, MedCan
and International Blue Sun Resource Corporation (formerly Australian Gold Mines
Corporation (AGMC)), 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 Stockholder owned 25,029,921
shares of KPC, representing 72% of the then outstanding shares. KPC then changed
its name to Medizone Canada Limited. MedCan acquired all of the assets of
Medizone Canada Limited, consisting solely of cash of approximately $89,000.
Medizone Canada Limited and its subsidiary MedCan are hereinafter referred to as
the Company.
Initially, AGMC did not exchange its shares of MedCan for shares of KPC; however
in August 1990, the shares were exchanged. Shares to be issued to AGMC have been
reserved in the accompanying financial statements and are shown separately prior
to the exchange.
Business Activities
- -------------------
The business of the Company is the exploration of the efficacy of using ozone to
inactivate certain viruses and assist in the treatment of certain diseases. If
the Company is successful in proving the medical efficacy of ozone, it intends
to lease and promote the use of ozone-generating devices and related products
for medical purposes in Canada.
The Company has also agreed to pay the Stockholder a royalty of 3% of the net
receipts received by the Company in connection with the sale of any product,
device, or apparatus which embodies the Stockholder's patent covering a
procedure for ozone decontamination of blood and blood products through the
treatment of stored blood and blood components.
F-10
<PAGE>
MEDIZONE CANADA LIMITED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
2. GOING CONCERN
Continuation of the Company as a going concern is dependent upon the Company
obtaining additional capital and the requisite approvals from the Canadian
Health and Welfare authorities for the marketing of its products, and
ultimately, upon the Company attaining profitable operations. The Company may
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.
The Company believes that the Stockholder will provide funds or undertake such
actions as are necessary to continue operations. The Company also believes it
has no continuing financial commitments and it has estimated that expenditures
for the next twelve months will consist only of the costs of continuing its bare
legal existence.
Management's Plan
- -----------------
There can be no assurances that the Stockholder will be able to provide such
funds or take action necessary to continue operations since continuation of the
Stockholder as a going concern is dependent upon the Stockholder obtaining
additional capital.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
At December 31, 1996 and 1995, the Company is a 66.6% owned subsidiary of
Medizone International, Inc. The consolidated financial statements include the
accounts of Medizone Canada Limited and MedCan. 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.
Other Assets - Organization Costs
- ---------------------------------
Organization costs were capitalized and amortized over a 60 month period on a
straight-line basis.
Loss per Share
- --------------
The computation of loss per common share is based on the weighted average number
of shares outstanding during the period.
F-11
<PAGE>
MEDIZONE CANADA LIMITED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)-
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, and the
reported revenues and expenses. Actual results could vary from the estimates
that were assumed in preparing the financial statements.
Fair Values of Financial Instruments
- ------------------------------------
The Company estimates that the fair value of all financial instruments at
December 31, 1996 and 1995 does not differ materially from the aggregate
carrying values of its financial instruments recorded in the accompanying
balance sheets.
4. ISSUANCES OF COMMON STOCK AND WARRANTS
Unless otherwise stated, all transactions shown below were with unrelated
parties and the securities issued were restricted:
In July 1984, KPC initially issued 590,000 shares in a private transaction to
shareholders no longer affiliated with the Company for proceeds of $1,500.
In April 1985, KPC issued 3,000,000 shares of common stock in a public offering
for net proceeds after offering costs of $9,819.
In June 1988, KPC issued 2,000,000 units consisting of one share of common stock
and two warrants which allow the holder to purchase one share of common stock
per warrant. The warrants were exercisable at $.125 per share and expired on
December 31, 1997. The net proceeds of this offering were $84,089.
In December 1988, KPC reserved 27,200,000 shares for issuance to the
stockholders of MedCan in exchange for all the shares of MedCan. Of this amount,
26,005,112 shares were so exchanged and 1,126,888 shares were reserved. Also
during 1988, 1,938,000 shares were issued to a consultant for services rendered
with a value of $10,000.
In 1990, the Company issued 983,333 shares of common stock at prices ranging
from $.05 to $.075 in private offerings to two individuals unrelated to the
Company for proceeds of $57,400. The Company also issued, for services rendered,
850,000 shares to five individuals, 550,000 shares to the three directors of the
Company, 50,000 shares to an employee, and 250,000 shares to a consultant, to
which it assigned the value of $.05 per share for an aggregate of $42,500.
During 1990, the 1,126,888 shares reserved in December 1988 for issuance to the
remaining stockholder of MedCan in exchange for the shares of MedCan were
issued.
F-12
<PAGE>
MEDIZONE CANADA LIMITED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
5. INCOME TAXES
At December 31, 1996, the Company had a net operating loss (NOL) carryforward
totaling approximately $23,000 that may be offset against future taxable income
in varying amounts through 2005. MedCan, which was incorporated under the laws
of the Province of British Columbia and, accordingly, files tax returns in
Canada, had a NOL carryforward of approximately $177,000. No benefit has been
reported in the 1996 and 1995 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.
6. RESTATEMENT OF PRIOR PERIODS (unaudited)
During 1990, 1989 and 1988, the Company advanced $42,480, $58,056 and $50,851,
respectively, to the Stockholder for the operations of the Stockholder. During
1994, 1993, 1992 and 1991, the Stockholder advanced $12,038, $25,936, $6,314 and
$9,100, respectively, to the Company for the operations of the Company. These
transactions have been accounted for as infusions of capital in the restated
financial statements.
In prior years' financial statements, such stockholders' advances were
incorrectly accounted for as accounts receivable and were written off at the end
of each year as uncollectible. The following table describes the effect of these
restatements on the net loss of the Company:
1991 1990 1989 1988
---- ---- ---- ----
Net income (loss), as previously $ 950 $(71,041) $(84,235) $(157,243)
stated
Net (loss), as restated (8,150) (28,561) (26,179) (106,392)
The effect of restatement on loss per share is immaterial.
7. TRANSACTIONS WITH RELATED PARTIES
The Company's officers, who also serve as officers of the Stockholder, are not
compensated for their services. The Stockholder also makes the services of
certain of its consultants available to the Company without charge. The Company
also shares office space with the Stockholder and is not charged rent by the
Stockholder.
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contains summary financial information extracted from (A)
Interim Consolidated Balance Sheets, Statements of Operations, Change in
Stockholders Equity and Cash Flows and is qualified in its entirety by reference
to such (B) annual report on Form 10K/A for the year ended December 31, 1996)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 11,498
<BONDS> 0
0
0
<COMMON> 36,493
<OTHER-SE> (47,991)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,301
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,301)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,301)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
