ECOLOGY PURE AIR INTERNATIONAL INC
10QSB, 1997-04-18
TRUCKING (NO LOCAL)
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20540

                                   FORM 10-QSB

[X]               QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

               For the Quarterly Period Ended January 31, 1997 or


[ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

            For the Transition Period From _________ To ____________

                      ECOLOGY PURE AIR INTERNATIONAL, INC.
             -----------------------------------------------------
             (Exact name of registrant as specified in its charter)

        Delaware                  33-27625                    76-0265439
- -----------------------      --------------------         -------------------
(State of Incorporation)     (Commission File No.)          (IRS Employer
                                                           identification No.)

                        45 Rockefeller Plaza, Suite 2000
                            New York, New York 10111
                            -------------------------

Registrant's telephone number: (800) 661-9774

                   -------------------------------------------
                   (Former name, if changed since last report)

Indicate by (X) whether 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 and (2) has been subject to such filing requirements for the
past 90 days.

                 (1)       Yes     __X__         No      _____

                 (2)       Yes     __X__         No      _____


     As of April 10, 1997 there were 44,366,896 shares of Common Stock issued
and outstanding.

Transitional Small Business Disclosure Format:

                           Yes     ____          No      __X__



<PAGE>


              ECOLOGY PURE AIR INTERNATIONAL, INC.

                              INDEX
                              -----

PART I    FINANCIAL INFORMATION                                          PAGE
          ---------------------                                          ----

          Item 1.    Interim Consolidated Balance Sheet
                     at January 31, 1997 (Unaudited)
                     and July 31, 1996                                     1

                     Interim Consolidated Statement of Operations
                     and Deficit for the six months ended
                     January 31, 1997 and 1996 (Unaudited)                 2

                     Interim Consolidated Statement of
                     Cash Flows for the six months ended
                     January 31, 1997 and 1996 (Unaudited)                 3

                     Notes to Interim Consolidated
                     Financial Statements                                  4

          Item 2.    Management's Discussion and
                     Analysis of Financial Condition
                     and Results of Operations                             9

PART II   OTHER INFORMATION
          -----------------

          Item 1.    Legal Proceedings                                    13

          Item 2.    Changes in Securities                                13

          Item 3.    Defaults Upon Senior Securities                      13

          Item 4.    Submission of Matters to a Vote
                     of Security Holders                                  13

          Item 5.    Other Events                                         13

          Item 6.    Exhibits and Reports on Form 8-K                     13


                                       ii

<PAGE>


                                    INTERIM CONSOLIDATED
                                    FINANCIAL STATEMENTS
                                    [in U.S. dollars]

                                    ECOLOGY PURE AIR
                                    INTERNATIONAL, INC.
                                    Unaudited


                                    January 31, 1997



<PAGE>


Ecology Pure Air International, Inc.
Incorporated under the laws of the state of Delaware


                       INTERIM CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>

As at January 31                                                                       Unaudited


                                                                                         July 31,
                                                                          1997             1996
                                                                            $                $
- -------------------------------------------------------------------------------------------------
                                                                             [in U.S. dollars]
<S>                                                                     <C>             <C>      
ASSETS
Current
Cash and cash equivalents                                               46,998          2,341,449
Prepaid expenses and other receivables                                 168,322             89,830
Inventory                                                               42,924                 --
- -------------------------------------------------------------------------------------------------
Total current assets                                                   258,244          2,431,279
- -------------------------------------------------------------------------------------------------
Deferred charges                                                       100,000            100,000
Fixed assets                                                           407,940             92,792
- -------------------------------------------------------------------------------------------------
                                                                       766,184          2,624,071
=================================================================================================

LIABILITIES, CAPITAL STOCK AND SHAREHOLDERS'
  DEFICIENCY
Current
Accounts payable                                                       999,451            378,888
Employee related liabilities                                                --            316,410
Convertible debenture [note 3]                                         100,000                 --
Due to related parties                                                 975,513          1,361,258
- -------------------------------------------------------------------------------------------------
Total current liabilities                                            2,074,964          2,056,556
- -------------------------------------------------------------------------------------------------

Capital stock and shareholders' deficiency
Capital stock [note 4]
  Common shares, $.001 par value, 100,000,000 shares
    authorized; 44,741,667 issued and outstanding                       29,955             26,825
  Preferred shares, Series A convertible preferred
    voting shares, $.001 par value, 5,000,000 shares
    authorized; nil issued and outstanding                                  --              3,000
  Contributed surplus                                                5,957,488          5,632,618
Deficit                                                             (7,296,223)        (5,094,928)
- -------------------------------------------------------------------------------------------------
Total capital stock and shareholders' deficiency                    (1,308,780)           567,515
- -------------------------------------------------------------------------------------------------
                                                                       766,184          2,624,071
=================================================================================================
</TABLE>

See accompanying notes



<PAGE>


Ecology Pure Air International, Inc.


                        INTERIM CONSOLIDATED STATEMENT OF
                             OPERATIONS AND DEFICIT

<TABLE>
<CAPTION>
Period ended January 31, 1997                                                           Unaudited


                                                                      3 months           6 months
                                                                          $                  $
- -------------------------------------------------------------------------------------------------
                                                                             [in U.S. dollars]
<S>                                                                    <C>                <C>    
EXPENSES
Accounting and legal                                                   116,120            223,250
Consulting fees                                                          3,550              8,550
Depreciation                                                            35,189             55,250
Equipment rental                                                         2,832              5,412
Insurance                                                                1,764              6,437
Interest and bank charges                                                4,755              6,777
Marketing expenses                                                     423,552            786,047
Office and miscellaneous                                                12,868             23,849
Rent                                                                    53,894             93,410
Research and development                                                31,256             47,778
Telephone                                                               17,349             29,453
Travel and promotion                                                    96,117            227,166
Wages and benefits                                                     337,177            687,916
- -------------------------------------------------------------------------------------------------
Loss for period                                                      1,136,423          2,201,295

Deficit, beginning of period                                         6,159,800          5,094,928
- -------------------------------------------------------------------------------------------------
Deficit, end of period                                               7,296,223          7,296,223
=================================================================================================

Loss per share                                                           (0.03)             (0.05)
=================================================================================================

Weighted average number of common shares and
 share equivalents                                                  44,580,001         44,580,001
=================================================================================================
</TABLE>

See accompanying notes



<PAGE>


Ecology Pure Air International, Inc.


                        INTERIM CONSOLIDATED STATEMENT OF
                             OPERATIONS AND DEFICIT


<TABLE>
<CAPTION>
Period ended January 31, 1996                                                           Unaudited


                                                                      3 months           6 months
                                                                          $                  $
- -------------------------------------------------------------------------------------------------
                                                                             [in U.S. dollars]
<S>                                                                    <C>                <C>    
EXPENSES
Accounting and legal                                                   104,711            114,406
Business development                                                    16,023             16,023
Consulting fees                                                         12,600             79,213
Depreciation                                                             1,843              2,797
Insurance                                                                7,176              8,800
Interest and bank charges                                                4,341              5,347
Office and miscellaneous                                                20,895             27,872
Rent                                                                    51,091            120,638
Research and development                                                    --             27,158
Telephone                                                                6,280             33,108
Travel and promotion                                                   110,093            301,815
Wages and benefits                                                       4,961             63,621
- -------------------------------------------------------------------------------------------------
Loss for period                                                        340,014            800,798

Deficit, beginning of period                                         2,686,952          2,226,168
- -------------------------------------------------------------------------------------------------
Deficit, end of period                                               3,026,966          3,026,966
=================================================================================================

Loss per share                                                           (0.01)             (0.02)
=================================================================================================

Weighted average number of common shares and
 share equivalents                                                  42,041,666         42,041,666
=================================================================================================
</TABLE>

See accompanying notes



<PAGE>


Ecology Pure Air International, Inc.



                  INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
Six months ended January 31                                                             Unaudited



                                                                          1997               1996
                                                                            $                  $
- -------------------------------------------------------------------------------------------------
                                                                             [in U.S. dollars]
<S>                                                                 <C>                  <C>      
OPERATING ACTIVITIES
Loss for the period                                                 (2,201,295)          (800,798)
Add depreciation which does not involve cash                            55,250             29,955
Changes in components of working capital
  Prepaid expenses and other receivables                               (78,492)                --
  Inventory                                                            (42,924)                --
  Accounts payable                                                     620,563            169,788
  Employee related liabilities                                        (316,410)                --
- -------------------------------------------------------------------------------------------------
Cash used in operating activities                                   (1,963,308)          (601,055)
- -------------------------------------------------------------------------------------------------

INVESTING ACTIVITY
Fixed asset additions                                                 (370,398)           (12,286)
- -------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Note payable                                                                --            700,000
Subscription receivable                                                     --              8,000
Advances from related parties                                          (60,745)                --
Issue of convertible debenture                                         100,000                 --
Payment of deferred financing fee                                           --           (100,000)
- -------------------------------------------------------------------------------------------------
Cash provided by financing activities                                   39,255            608,000
- -------------------------------------------------------------------------------------------------

Decrease in cash                                                    (2,294,451)            (5,341)
Cash, beginning of period                                            2,341,449              8,044
- -------------------------------------------------------------------------------------------------
Cash, end of period                                                     46,998              2,703
=================================================================================================
</TABLE>

See accompanying notes


<PAGE>


Ecology Pure Air International, Inc.


               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                [in U.S. dollars]


January 31, 1997                                                      Unaudited




1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

The unaudited interim financial statements presented herein have been prepared
by management in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB and Rule 10-01
of Regulation S-X (as amended by Regulation S-B). Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying
interim financial statements have not been audited by independent certified
public accountants, but in the opinion of management, such financial statements
include all adjustments consisting only of normal recurring accruals, necessary
to summarize fairly the results of operations, and are not necessarily
indicative of the results to be expected for the full year.

Ecology Pure Air International, Inc. ["EPA"] [formerly known as Mark Four
Resources, Inc.] was incorporated on December 8, 1988 under the laws of the
state of Delaware. The Company was formed for the purpose of implementing an
initial public distribution of its stock, which occurred on April 18, 1989, and
acquiring operating businesses thereafter. From its inception in 1988 through
November 1995, with the exception of a short term venture that was discontinued
in 1993, the Company engaged in no active business operations other than to
attempt to identify business acquisitions that would capitalize on its status as
a public company.

Through a series of transactions on November 17, 1995 [the "Acquisition
Transactions"], control of EPA was transferred to a group of individuals and the
Company secured the worldwide rights [exclusive of Canada] to manufacture, sell
and distribute the Combustion Efficiency Management Catalyst [the "C.E.M.
Catalyst"], a pre-combustion device intended for the purpose of reducing the
emission of pollutants in automobiles, motorcycles, lawn mowers and other
vehicles and machinery.

The Acquisition Transactions consisted of the following:

[a]  EPA acquired the worldwide rights [excluding Canada] to market, sell and
     distribute the C.E.M. Catalyst from a group of 11 individuals [such group,
     which includes members of EPA's current management, to be collectively
     referred to therein as the "Founders"], who had in turn acquired such
     rights from Rotello Technology and Marketing, Inc. ["Rotello"], the
     original developer of the technologies.

     As consideration for these rights, EPA issued to the Founders a controlling
     percentage of the outstanding capital stock of EPA and agreed to pay
     royalties to Rotello.


                                        4
<PAGE>
                                     
                                     
Ecology Pure Air International, Inc. 


               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                [in U.S. dollars]                               
                                                                                
                                                                                
January 31, 1997                                                      Unaudited 
                                                                                
                                                                                
[b]  EPA acquired the worldwide manufacturing rights [except Canada] to the
     C.E.M. Catalyst from E.P.A. Manufacturing, Inc. ["Manufacturing"] [formerly
     known as Ecology Pure Air International, Inc.]. Manufacturing owned the
     worldwide right to manufacture the C.E.M. Catalyst [except Canada]. Certain
     of the Founders owned 100% of Manufacturing.

[c]  EPA agreed to acquire the rights to manufacture, market, sell and
     distribute the C.E.M. Catalyst in Canada by agreeing to acquire all of the
     outstanding capital stock of E.P.A. Enterprises, Inc. ["Enterprises"].
     Certain of the Founders are stockholders, directors and officers of
     Enterprises. This transaction has not yet been completed or included in
     these financial statements [see note 2].

The transaction exchanging the C.E.M. Catalyst technology rights for control of
EPA has been accounted for as a reverse take-over of EPA by the Founders.
Therefore, the transfer of the C.E.M. Catalyst and related rights and
technologies has been reflected in these consolidated financial statements as a
capital transaction with the technology transfer recorded at its carrying value
of nil prior to the Acquisition Transactions.

Each of Rotello, Enterprises and Manufacturing have participated directly in the
development of the Technology, with Enterprises and Manufacturing also
contributing financial support through a series of advances and loans to
Rotello.

Given the relationship between certain of the Founders and Manufacturing, the
assets, liabilities and equity of Manufacturing have been combined on a
retroactive basis with EPA using their carrying values, in a manner similar to a
pooling of interests. All assets, liabilities, capital stock, deficit, revenues
and expenses for periods prior to November 17, 1995, represent the consolidated
assets, liabilities, capital stock, deficit, revenues and expenses of EPA and
Manufacturing as if the companies had been combined at all times during the
periods presented.

Although management is confident that initial testing has successfully evidenced
the chemical and operative properties of the C.E.M. Catalyst, and its
suitability for commercial application, further laboratory and field testing is
being undertaken by the Company in order to secure validation from certain
regulatory agencies.

EPA will continue the development of the C.E.M. catalyst and other technologies.
No revenues have been earned to date from technologies under development. EPA's
ability to realize the carrying value of its assets and discharge its
liabilities is dependent on successfully bringing its new technologies to the
market and achieving future profitable operations, the outcome of which cannot
be predicted at this time. It will be necessary for EPA to obtain additional
financing in the coming year, in order to fund the continuing development of its
technologies.


                                        5
<PAGE>

                                     
Ecology Pure Air International, Inc. 


               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                [in U.S. dollars]                               
                                                                                
                                                                                
January 31, 1997                                                      Unaudited 
                                                                                
                                                                                
2. THE TRANSACTIONS

During the year ended July 31, 1996, the Company completed the following
Transactions:

[a]  Rotello sold the exclusive worldwide rights [excluding Canada] to market,
     sell and manufacture the Technology to the Founders for debt consideration
     plus an annual royalty of 3.5% of the net worldwide sales of products
     manufactured under the agreement.

     The Founders then assigned the rights and royalty obligation of the above
     agreement to EPA in exchange for 3,000,000 preferred shares and 6,000,000
     warrants to purchase common shares. Each preferred share is convertible
     into 10 common shares and has voting rights equal to ten common shares
     ["Preferred Shares"]. Each warrant entitles the holder to acquire one
     common share of the Company at a price of $10 on or prior to September 30,
     1997 ["Warrants"].

[b]  Concurrently, the Company exchanged 200,000 common shares of EPA for all of
     the 100 outstanding shares of Manufacturing held by certain of the
     Founders. In conjunction with the purchase, EPA entered into employment
     contracts with the Manufacturing shareholders which provided for the
     issuance of 375,000 common shares and options to purchase 5,000,000 common
     shares at $5 per share on or before November 17, 2000.

[c]  As consideration for consulting services rendered in connection with the
     above transactions, EPA issued 4,000,000 common shares, 600,000 Preferred
     Shares and 2,000,000 Warrants to certain consultants. These consulting
     services and the compensation arrangements with certain of the Founders
     have been recorded as compensation expense at the par value of EPA shares.

[d]  EPA received $824,990 of advances under 6% convertible promissory notes
     payable to Main Square Ltd. Notes payable totaling $500,000 were converted
     into 666,667 common shares of EPA, representing a non-cash financing
     activity. The balance of the advances due to Main Square Ltd. were
     convertible into common shares at $2.75 per share [see note 4].

In addition, the Company has entered into an agreement to purchase all of the
outstanding shares of Enterprises and its wholly-owned subsidiaries, Trendset
Worldwide Engineering Corp. and Ecology Pure Air Systems, Inc. in exchange for
4,137,224 common shares and 4,137,224 Warrants of EPA, which agreement was
subject to regulatory approval.


                                        6
<PAGE>


                                     
Ecology Pure Air International, Inc. 


               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                [in U.S. dollars]                               
                                                                                
                                                                                
January 31, 1997                                                      Unaudited 
                                                                                
                                                                                
The acquisition of Enterprises and its wholly-owned subsidiaries received
approval of the shareholders of Enterprises on February 23, 1996. The British
Columbia Supreme Court approved the fairness of the transaction. Subsequent to
the Court approval, an appeal was filed by one minority shareholder. Although
the court order permits the acquisition to occur, the Company has temporarily
elected to delay completing the transaction pending the disposition of the
outstanding appeal.

3. CONVERTIBLE DEBENTURE

The Company issued a $100,000 10% convertible debenture maturing June 30, 1997.
The debenture, or any part, is convertible into common shares of the Company at
a conversion price of $2.75 per share.

4. CAPITAL STOCK

[a]  On September 3, 1996, the remaining 3,000,000 Series A convertible
     preferred voting shares were converted into 30,000,000 common shares.

[b]  On November 27, 1996, the holders of the $325,000 6% convertible promissory
     note payable, convertible at $2.75 per share, agreed to convert the note at
     a 10% premium into 130,000 common shares of the Company.

[c]  In December 1996, the consultants [as described in [note 2[c]]] surrendered
     2,000,000 Warrants in exchange for share registration rights.


                                        7
<PAGE>
                                     
                                     
Ecology Pure Air International, Inc. 


               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                [in U.S. dollars]                               
                                                                                
                                                                                
January 31, 1997                                                      Unaudited 
                                                                                
                                                                                
5. SUBSEQUENT EVENT

On March 4, 1997, the Company amended the August 16, 1996 agreement for
investment banking services. Under the amended agreement, the Company has
granted warrants to purchase a total of 1,500,000 common shares at $3.00 per
share, as consideration for the services. The warrants shall vest as follows:

[i]   500,000 upon signing of the agreement

[ii]  500,000 30 days from the date of the agreement

[iii] 500,000 on August 19, 1997

The agreement requires the investment banking services to be performed on the
Company's behalf for a period of 18 months. Either party may terminate the
agreement with 30 days notice, however, any legally vested warrants will remain
with the investment banker.

The warrants and/or underlying shares may be sold at any time after two years
and for a total period of seven years following March 4, 1997 or upon filing of
a registration statement for the underlying shares.



                                        8
<PAGE>


                         PART I - FINANCIAL INFORMATION


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

General

     Ecology Pure Air International, Inc. (the "Company") was incorporated as
"Owl Investment Corp." on December 8, 1988 under the laws of the State of
Delaware. The Company changed its name to Mark Four Resources, Inc. on September
14, 1989. The Company was formed for the purpose of implementing an initial
public distribution of its stock, which occurred on April 18, 1989, and
acquiring operating businesses thereafter. From its inception in 1988 through
November, 1995, with the exception of a short-term venture that was discontinued
in 1993, the Company engaged in no active business operations other than to
attempt to identify business acquisitions that would capitalize on its status as
a public company. Through a series of transactions in November 1995, the Company
secured the worldwide manufacturing and marketing rights (exclusive of Canada)
to the technologies and products relating to the Combustion Efficiency
Management Catalyst (the "C.E.M. Catalyst") - a pre-combustion device intended
for the purpose of reducing the emission of pollutants in automobiles,
motorcycles, lawn mowers and other vehicles and machinery. The Company also
entered into a Plan of Arrangement to acquire the company that has the Canadian
marketing rights to the C.E.M. Catalyst. These transactions and the Plan of
Arrangement, although it remains subject to completion, shall hereafter be
referred to as the "Acquisition Transactions."

     In conjunction with a recapitalization of its Common Stock, on June 18,
1996, the Company changed its name to "Ecology Pure Air International, Inc." to
better reflect the nature of its business operations. The recapitalization
consisted of an increase in the number of shares authorized for issuance from 35
million to 100 million and a 1 for 3 reverse split of all outstanding shares as
of June 18, 1996.

Description of the Acquisition Transactions

     Prior to November 1995, the manufacturing and marketing rights to the
C.E.M. Catalyst technologies and products were segregated and owned by three
difference companies. The purpose of the Acquisition Transactions that occurred
in November 1995 was to consolidate these various rights into one holding
company.

     The first component of the consolidation was completed on November 17, 1995
when the Company acquired all of the world wide marketing rights (exclusive of
Canada) to the C.E.M. Catalyst in exchange for 3 million shares of Series A
Convertible Voting Preferred Stock (the "Preferred Shares") and Common Stock
Purchase Warrants (the "Warrants") to acquire 6 million shares of Common Stock.
These rights were acquired from a group of eleven individuals (the "EPA
Founders") who had in turn acquired such rights from Rotello Technology and
Marketing,



                                       9
<PAGE>

Inc. ("Rotello"), the original developer of these technologies. In
this transaction, the Company also agreed to pay Rotello a 3.5% royalty on all
future sales of the C.E.M. Catalyst.

     The Preferred Shares were each convertible into ten (10) shares of Common
Stock and were subsequently converted by the EPA Founders into an aggregate of
30 million shares of Common Stock during the first quarter of fiscal 1997. The
Warrants are exercisable at $10.00 per share on or before September 30, 1997.

     The second component of the consolidation was also completed on November
17, 1995 when the Company acquired the manufacturing rights to the C.E.M.
Catalyst by acquiring all of the outstanding capital stock of E.P.A.
Manufacturing, Inc., an Indiana company ("EPA Manufacturing") from Teodosio
Pangia and Gianni D'Alessandro, two of the EPA Founders. These rights and the
shares of EPA Manufacturing were acquired in exchange for 200,000 shares of the
Company's Common Stock.

     The Acquisition Transactions resulted in a change of management and share
control of the Company. The EPA Founders received 30,000,000 shares of Common
Stock (including Preferred Shares converted to Common Stock) and 6,000,000
Warrants that (assuming the exercise of such Warrants) reflect 71.5% of the
outstanding Common Stock of the Company. In addition, the Company issued to a
group of five (5) investment banking consultants who were instrumental in
arranging the Acquisition Transactions (collectively referred to as the
"Consultants"), an aggregate of 4 million shares of Common Stock, 600,000
Preferred Shares (that have subsequently been converted into 6 million shares of
Common Stock) and Warrants to purchase 2 million shares, which were subsequently
surrendered to the Company in exchange for certain registration rights.

     The third component of the consolidation involved the planned acquisition
of the Canadian marketing rights from EPA Enterprises Inc. ("Enterprises"), a
British Columbia corporation whose shares were publicly traded on the Vancouver
Stock Exchange through March 1995. Pursuant to a Plan of Arrangement dated
November 17, 1995, the Company agreed to acquire all of the outstanding shares
of Enterprises in exchange for 4,137,224 shares of the Company's Common Stock
and Warrants to acquire 4,137,224 shares.

     Completion of the transactions contemplated within the Plan of Arrangement
was subject to: (i) approval of the shareholders of Enterprises (which was
secured on February 23, 1996); and (ii) approval of the British Columbia Supreme
Court as to the fairness of the entire transaction (which was secured on July
24, 1996). Subsequently, an appeal was filed by one minority shareholder of
Enterprises (the record owner of 1,000 of approximately 9.3 million shares
outstanding). Effectiveness of the Plan of Arrangement has been delayed until
management may either assess the impact, or otherwise dispose of, the
outstanding appeal.

     Results of Operations

     For the quarter ended January 31, 1997, management of the Company continued
to focus its efforts substantially toward organizational and management issues
associated with, among other things: the ongoing development and marketing of
the C.E.M. Catalyst and related



                                       10
<PAGE>

technologies; preparation for the appeal of the British Columbia Supreme
Court ruling on the fairness of the transaction scheduled to be heard in early
1997; and developing and implementing a coordinated plan for financing the
Company's initial and continued anticipated development activities.

     For the quarter ended January 31, 1997, the Company incurred a net loss of
$1,236,423. This compares to a net loss of $340,014 for the equivalent prior
year quarter, restated to reflect the transactions that occurred on November 17,
1995 that have been accounted for as a pooling of interests.

     The Company's loss during the quarter is comprised entirely of operating
and other expenses incurred in connection with product development and marketing
activities, as well as related administrative overhead. The Company however,
remains in the development stage, and during the quarter, notwithstanding such
marketing activities, no revenues were realized by the Company during the
quarter. Based upon its anticipated sales and marketing plans, management does
not expect material revenues will be realized by the Company within the near
term. Accordingly, it is likely that the Company's operating losses will
continue, and that these losses may increase as the Company's manufacturing,
marketing and sales efforts increase.

     Liquidity and Capital Resources

     The Company's plan of operation for the next twelve months and thereafter
is to: (i) conduct sufficient additional testing necessary to evidence
validation of the properties of the C.E.M. Catalyst to certain regulatory
agencies and for certain strategic potential customers; (ii) identify and
establish customer relationships within the retrofit market on a global basis;
in particular, (a) develop distribution and servicing arrangements within North
American chains of automobile parts and service retailers and (b) develop
strategic alliances in foreign markets, particularly Southeast Asia, with
companies and/or governmental entities relating to the sale of the C.E.M.
Catalyst on a wholesale basis; (iii) identify and establish customer
relationships with manufacturers of internal combustion engine powered vehicles
and/or machinery, including automobiles, motorcycles, lawn mowers and tractors,
among others; (iv) develop consumer awareness by promoting the favorable
environmental effects resulting from use of the C.E.M. Catalyst; (v) through
lobbying and consumer awareness programs, encourage the adoption of policies by
domestic and foreign governmental units which would require or provide
incentives for the use of emission controlling devices; and (vi) explore the
adaptation of the C.E.M. Catalyst technology to other uses, particularly in the
fuel refining process.

     The Company remains, however, in the development stage, and has continued
to incur operating losses through the quarter ended January 31, 1997. As of
January 31, 1997, the Company had a net worth of $766,184 which was primarily
due to the infusion of capital of net proceeds of $4,900,000 from a private
placement which was completed on March 26, 1996 and proceeds from the issuance
of convertible debentures during 1996. The Company's liquidity, however, draws
solely from the Company's cash and other liquid instruments which as of January
31, 1997 was limited to $46,998.



                                       11
<PAGE>

     In the absence of revenues, operating expenses will for the foreseeable
future remain a significant draw upon the Company's liquidity and capital
resources. For the quarter ended January 31, 1997, operating expenses were
principally consumed by variable expenses, such as professional fees, business
development, utility costs and travel and promotion. Rental expenses are
expected to remain between $15,000 and $20,000 per month for the short term. The
Company's only long-term commitments requiring the use of significant capital
resources involves the employment of its executive officers, which commitments
were significantly reduced pursuant to amended employment agreements.
Previously, the Company had been incurring expenses of approximately $238,000
per quarter for the employment of its three executive officers. These expenses
have been reduced to $63,000 per quarter pursuant to these amended arrangements.
The amended employment agreements were entered into in an effort to reduce the
Company's capital expenditures until such time as the Company is able to
generate revenues.

     In order to achieve any of its strategic goals, the Company will need to
significantly enhance its liquidity and capital resources. Since material
revenues are not expected within the near term, the Company's principal
short-term objective is to secure funding through financing transactions which
may either involve the sale by the Company of debt or equity securities in
private placement transactions. The proceeds from such transactions would likely
permit the Company to more fully develop its manufacturing facilities, expand
its base of inventories, parts and equipment, continue and expand its scope of
scientific testing and research and development program, hire additional
scientific personnel, as well as implementing its sales and marketing programs
through, among other things, the development of targeted advertising and
marketing programs and the hiring of marketing and sales personnel.

     The Company is currently attempting to secure financing through the private
placement of additional securities to certain select accredited and
sophisticated investors. To date, the Company has received no firm commitment
for the purchase of any such securities, accordingly, there can be no assurance
that such a placement can be undertaken in the near term, if at all. The
placement of additional securities, however, was anticipated to occur during the
first quarter of calendar year 1997. Management attributes delays in the
placement to the delays encountered in attempting to have the Company's common
stock listed for trading on the OTC Bulletin Board. A longer-term inability to
secure adequate sources of capital will likely subject the Company to the risk
that it will be unable to continue its operations as a going concern. Based upon
its present level of operating expenses, the Company's present liquid resources
will only permit continued operations as a going concern for the near term
without the infusion of significant additional proceeds from a financing
transaction.



                                       12
<PAGE>


                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

                  None.

Item 2.  Changes in Securities

                  None.

Item 3.  Defaults Upon Senior Securities

                  None.

Item 4.  Submission of Matters to a Vote of security Holders

                  None.

Item 5.  Other Events

                  None.

Item 6.  Exhibits and Reports on Form 8-K

                  (a)      Exhibits

                           27. Financial Data Schedule.

                  (b)      Reports on Form 8-K

                           None.



                                       13
<PAGE>


                                   SIGNATURES


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.

                                      ECOLOGY PURE AIR INTERNATIONAL, INC.


Date: April 16, 1997                  By: /s/ Teodosio Pangia
                                          --------------------------------
                                          Chief Executive Officer


                                      By: /s/ Paul Douglas Mazza
                                          --------------------------------
                                          Principal Accounting Officer



                                       14

<TABLE> <S> <C>

<ARTICLE>                     5
<MULTIPLIER>                  1,000
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                              JUL-31-1997
<PERIOD-END>                                   JAN-31-1997
<CASH>                                              46,998
<SECURITIES>                                             0
<RECEIVABLES>                                      168,322
<ALLOWANCES>                                             0
<INVENTORY>                                         42,924
<CURRENT-ASSETS>                                   258,244
<PP&E>                                             407,940
<DEPRECIATION>                                     100,000
<TOTAL-ASSETS>                                     766,184
<CURRENT-LIABILITIES>                            2,074,964
<BONDS>                                                  0
                                    0
                                      5,957,488
<COMMON>                                            29,955
<OTHER-SE>                                     (7,296,223)
<TOTAL-LIABILITY-AND-EQUITY>                       766,184
<SALES>                                                  0
<TOTAL-REVENUES>                                         0
<CGS>                                                    0
<TOTAL-COSTS>                                            0
<OTHER-EXPENSES>                                 2,194,518
<LOSS-PROVISION>                                         0
<INTEREST-EXPENSE>                                   6,777
<INCOME-PRETAX>                                (2,201,295)
<INCOME-TAX>                                             0
<INCOME-CONTINUING>                                      0
<DISCONTINUED>                                           0
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                   (2,201,295)
<EPS-PRIMARY>                                        (.05)
<EPS-DILUTED>                                        (.05)
        


</TABLE>


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