-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BP5zc5dH9J17PRvockoRzVBjtobJrl7WPfe19cEMSb1hKt2pKbvAjauayH4c2sgb kKBO58Rsr36l2uR1nMlTQQ== 0001010924-98-000047.txt : 19980817 0001010924-98-000047.hdr.sgml : 19980817 ACCESSION NUMBER: 0001010924-98-000047 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIZONE INTERNATIONAL INC CENTRAL INDEX KEY: 0000753772 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 870412648 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-93277-D FILM NUMBER: 98687279 BUSINESS ADDRESS: STREET 1: 144 BUENA VISTA CITY: STINSON BEACH STATE: CA ZIP: 94970 BUSINESS PHONE: 4158680300 MAIL ADDRESS: STREET 1: P.O. BOX 742 CITY: STINSON BEACH STATE: CA ZIP: 94970 FORMER COMPANY: FORMER CONFORMED NAME: MADISON FUNDING INC DATE OF NAME CHANGE: 19860413 10-Q 1 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 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 PART I - FINANCIAL INFORMATION Item 1. - Financial Statements MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES (A Development Stage Company) Interim Consolidated Balance Sheets (unaudited) ASSETS
June 30, December 31, 1998 1997 --------- ------------ 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 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page 3 of 37 Pages 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
June 30, December 31, 1998 1997 ----------- ------------ 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 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page 4 of 37 Pages MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES (A Development Stage Company) Interim Consolidated Statements of Operations (unaudited)
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 ------------ ------------ ------------ ------------ --------------- 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) =========== =========== =========== =========== ===============
The accompanying notes are an integral part of these consolidated financial statements. Page 5 of 37 Pages 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)
Deficit Accumulated Additional Accrued During Common Stock Paid-in Stock Option Development Shares Amount Capital Compensation Stage ------------ ------------ ------------ ------------ ------------ 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.
Page 6 of 37 Pages 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)
Deficit Accumulated Additional Accrued During Common Stock Paid-in Stock Option Development Shares Amount Capital Compensation Stage ------------ ----------- ------------ ------------- -------------- 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)
The accompanying notes are an integral part of these consolidated financial statements. Page 7 of 37 Pages 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)
Deficit Accumulated Additional Accrued During Common Stock Paid-in Stock Option Development Shares Amount Capital Compensation Stage ------------ ------------ ------------ -------------- ------------- 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)
The accompanying notes are an integral part of these consolidated financial statements. Page 8 of 37 Pages 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)
Deficit Accumulated Additional Accrued During Common Stock Paid-in Stock Option Development Shares Amount Capital Compensation Stage ------------ ------------ ------------ -------------- ------------- 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)
(Continued on next page) The accompanying notes are an integral part of these consolidated financial statements. Page 9 of 37 Pages 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)
Deficit Accumulated Additional Accrued During Common Stock Paid-in Stock Option Development Shares Amount Subscribed Capital Compensation Stage ------------ ------------ ---------- ------------ ------------ ------------- 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
(Continued on next page) The accompanying notes are an integral part of these consolidated financial statements. Page 10 of 37 pages 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)
Deficit Accumulated Additional Accrued During Common Stock Paid-in Stock Option Development Shares Amount Subscribed Capital Compensation Stage ------------ ------------ ---------- ------------ ------------ ------------ 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 $10,554,674 - (11,112,724)
The accompanying notes are an integral part of these consolidated financial statements. Page 11 of 37 Pages MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES (A Development Stage Company) Interim Consolidated Statements of Changes in Stockholders' Equity From the Date of Inception (January 31, 1986) through June 30, 1998 (unaudited)
Deficit Accumulated Additional Accrued During Common Stock Paid-in Stock Option Development Shares Amount Subscribed Capital Compensation Stage ------------ ------------ ---------- ------------ ------------ ------------ Shares issued for cash ($.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) =========== ============ ====== =========== ====== =============
The accompanying notes are an integral part of these consolidated financial statements. Page 12 of 37 Pages 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)
Deficit Accumulated Additional Accrued During Common Stock Paid-in Stock Option Development Shares Amount Subscribed Capital Compensation Stage -------- --------- ------------ --------------- -------------- -------------- 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) =========== ======== ======= =========== ========= =============
The accompanying notes are an integral part of these consolidated financial statements. Page 13 of 37 Pages MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS
From the Date of Inception For the Six Months Ended (Jan. 31, 1986) June 30, through 1998 1997 June 30, 1998 ---- ---- -------------- 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 ------- ------ ---------
The accompanying notes are an integral part of these consolidated financial statements. Page 14 of 37 Pages MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS
From the Date of Inception For the Six Months Ended (Jan. 31, 1986) June 30, through 1998 1997 June 30, 1998 ---- ---- -------------- 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
The accompanying notes are an integral part of these consolidated financial statements. Page 15 of 37 Pages 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 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:
Medizone Medizone New Zealand International, Inc. Limited ------------------- ------------ Initial license 50% 50% Subsequent license fees up to $500,000 50% 50% Subsequent license fees between $500,000 and $750,000 75% 25% Subsequent license fees in excess of $750,000 85% 15%
MNZ and the Company will also divide any net royalties paid to the Company pursuant to any license obtained pursuant to the Managing Agent Agreement, with MNZ being paid 10% of the net royalties and the Company receiving 90% of the net royalties. The Managing Agent Agreement shall expire on the termination or expiration of the last of the licenses obtained pursuant thereto, subject to earlier termination by the Company upon an occurrence of certain events. Pursuant to Emerging Issues Task Force Statement No. 89-7, the Company recognized a $100,000 gain on the sale of MNZ to Solwin. Page 17 of 37 pages 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 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 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 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 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 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 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 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: 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 =========
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 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 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 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 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:
Weighted Average Fixed Options Shares Exercise Price - ------------- ------------ ---------------- Balance - January 1, 1996 4,500,000 $ .20 Granted - Employees - - Exercised - - Forfeited - - ------------ Balance - December 31, 1996 4,500,000 - Granted - Employees - - Exercised - - Forfeited (3,000,000) - ------------ Balance - December 31, 1997 1,500,000 .20 ============ Exercisable at December 31, 1997 1,500,000 ============ Weighted-average fair value of options granted during the year Weighted Average $ - ============
The following table summarizes information about fixed stock options outstanding at December 31, 1997:
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 ------------------ ----------- ----------- -------------- ----------- -------------- $.20 1,500,000 3 years $.20 1,500,000 $.20
If the Company had used the fair value based method of accounting for its employee stock option plan, as prescribed by Statement of Financial Accounting Standard No. 123, compensation cost in net loss for the year ended December 31, 1997 and 1996 would have increased by $72,338 and $242,387, respectively, and the Company's net loss and loss per share would have been reduced to the pro forma amounts indicated below:
1997 1996 ---------- ---------- Net loss As reported $775,559 $1,329,395 Pro forma $703,221 $1,571,782 Net loss per share As reported $(.01) $(.01) Pro forma $(.01) $(.01)
Page 29 of 37 pages 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:
December 31, June 30 1997 1998 ------------ ------------ Notes payable to ten stockholders, due on demand, plus interest at 10% per annum (in arrears). The Company is obligated to accept the rate at face value plus accrued interest as partial payment for shares the lender may purchase from the Company upon exercise of the lender's option to acquire shares from the Company. $60,815 $60,815 Notes payable to 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
Page 30 of 37 pages MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ================================================================================ 10. NOTES PAYABLE (continued) Note payable to individual, due on December 2, 1996 (principal and accrued interest in arrears as of report date), plus interest at 6.07% per annum. The Company has the right, on or after the payment due date, to repay the loan with restricted shares valued at $.05 per share. 40,000 -0- ----------- ----------- Total short-term debt $354,115 $310,491 =========== ===========
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:
Three Months Ended ------------------------------------------------------------------------------------------------- December 31, 1991 March 31, 1992 June 30, 1992 September 30, 1992 December 31, 1992 ------------------ -------------- ------------- ------------------ ----------------- 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.
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 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:
From the Date of Inception (January 31, 1986), through December 31, 1997 1997 1996 1995 (Cumulative) ---------- ---------- ---------- --------------------------- Current tax expense $ - $ - $ - $ - Deferred tax expense - - - - ----------- ---------- ---------- ----------- Income tax expense $ - $ - $ - =========== ========== ========== A reconciliation of the consolidated income tax expense on income per the U.S. Federal Statutory rate to reported income tax follows: 1997 1996 1995 (Cumulative) ---------- ---------- ---------- ------------ Taxes at U. S. Federal $ - $ - $ - $ - Statutory Rate State income taxes - - - - ----------- ---------- ---------- ------------ $ - $ - $ - $ - =========== ========== ========== ============
At December 31, 1997 and 1996, deferred tax assets (liabilities) consisted of the following:
1997 1996 ----------- ---------- Current deferred tax liabilities $ - $ - Noncurrent deferred tax liabilities - - Current deferred tax assets 1,748,419 1,651,738 Noncurrent deferred tax assets - - Valuation allowance (1,748,419) $1,651,738 ----------- ----------- $ - $ - =========== ===========
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 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:
Carrying Fair Amount Value ---------- ---------- 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
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 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 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 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 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 EX-27 2
5 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 83,235 0 0 0 0 83,235 10,625 1,848 141,364 1,050,305 0 0 0 144,324 (1,053,265) 141,364 0 0 0 0 245,990 0 13,439 (259,429) 0 (259,429) 0 0 0 (259,429) 0 0
-----END PRIVACY-ENHANCED MESSAGE-----