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 April 30, 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 July 7, 1997 there were 44,496,896 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 April 30, 1997 (Unaudited)
and July 31, 1996 1
Interim Consolidated Statement of Operations
and Deficit for the nine months ended
April 30, 1997 and 1996 (Unaudited) 2
Interim Consolidated Statement of
Cash Flows for the nine months ended
April 30, 1997 and 1996 (Unaudited) 3
Notes to Interim Consolidated
Financial Statements 5
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote
of Security Holders 14
Item 5. Other Events 14
Item 6. Exhibits and Reports on Form 8-K 14
ii
<PAGE>
INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
[in U.S. dollars]
ECOLOGY PURE AIR
INTERNATIONAL, INC.
Unaudited
April 30, 1997
<PAGE>
Ecology Pure Air International, Inc.
Incorporated under the laws of the state of Delaware
INTERIM CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
As at April 30 Unaudited
July 31,
1997 1996
$ $
- ----------------------------------------------------------------------------------------
[in U.S. dollars]
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents 17,711 2,341,449
Prepaid expenses and other receivables 86,596 89,830
Inventory 74,654 --
- ----------------------------------------------------------------------------------------
Total current assets 178,961 2,431,279
- ----------------------------------------------------------------------------------------
Deferred charges 100,000 100,000
Fixed assets 376,180 92,792
- ----------------------------------------------------------------------------------------
655,141 2,624,071
========================================================================================
LIABILITIES, CAPITAL STOCK AND SHAREHOLDERS'
DEFICIENCY
Current
Accounts payable 1,345,667 378,888
Employee related liabilities -- 316,410
Convertible debenture [note 3] 100,000 --
Due to related parties 1,101,869 1,361,258
- ----------------------------------------------------------------------------------------
Total current liabilities 2,547,536 2,056,556
- ----------------------------------------------------------------------------------------
Capital stock and shareholders' deficiency
Capital stock [note 4]
Common shares, $.001 par value, 100,000,000
shares authorized; 44,871,896
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 (7,879,838) (5,094,928)
- ----------------------------------------------------------------------------------------
Total capital stock and shareholders' deficiency (1,892,395) 567,515
- ----------------------------------------------------------------------------------------
655,141 2,624,071
========================================================================================
</TABLE>
See accompanying notes
<PAGE>
Ecology Pure Air International, Inc.
INTERIM CONSOLIDATED STATEMENT OF
OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
Period ended April 30, 1997 Unaudited
3 months 9 months
$ $
- ----------------------------------------------------------------------------------------
[in U.S. dollars]
<S> <C> <C>
EXPENSES
Accounting and legal 11,420 234,670
Consulting fees -- 8,550
Depreciation 33,025 88,275
Equipment rental 613 6,025
Insurance -- 6,437
Interest and bank charges 5,371 12,148
Marketing expenses 237,008 1,023,055
Office and miscellaneous 7,185 31,034
Rent 73,216 166,626
Research and development 22,467 70,245
Telephone 11,290 40,743
Travel and promotion 57,769 284,935
Wages and benefits 124,251 812,167
- ----------------------------------------------------------------------------------------
Loss for period 583,615 2,784,910
Deficit, beginning of period 7,296,223 5,094,928
- ----------------------------------------------------------------------------------------
Deficit, end of period 7,879,838 7,879,838
========================================================================================
Loss per share (0.01) (0.06)
========================================================================================
Weighted average number of common shares and
share equivalents 44,796,063 44,796,063
========================================================================================
</TABLE>
See accompanying notes
<PAGE>
Ecology Pure Air International, Inc.
INTERIM CONSOLIDATED STATEMENT OF
OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
Period ended April 30, 1996 Unaudited
3 months 9 months
$ $
- --------------------------------------------------------------------------------------------------
[in U.S. dollars]
<S> <C> <C>
EXPENSES
Accounting and legal 86,051 200,457
Consulting fees 51,650 130,863
Depreciation 315 3,112
Insurance 7,121 15,921
Interest and bank charges 2,222 7,569
Office and miscellaneous 34,786 61,049
Rent 39,629 160,267
Research and development 146,817 173,975
Telephone 18,961 52,069
Travel and promotion 117,441 436,889
Wages and benefits 379,762 443,383
- --------------------------------------------------------------------------------------------------
Loss for period 884,755 1,685,554
Deficit, beginning of period 2,702,524 1,901,725
- --------------------------------------------------------------------------------------------------
Deficit, end of period 3,587,279 3,587,279
==================================================================================================
Loss per share (0.02) (0.04)
==================================================================================================
Weighted average number of common shares and
share equivalents 42,575,000 42,575,000
==================================================================================================
</TABLE>
See accompanying notes
<PAGE>
Ecology Pure Air International, Inc.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended April 30 Unaudited
1997 1996
$ $
- -----------------------------------------------------------------------------------------
[in U.S. dollars]
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the period (2,784,910) (1,685,554)
Add depreciation which does not involve cash 88,275 3,112
Changes in components of working capital 578,949 281,703
- -----------------------------------------------------------------------------------------
Cash used in operating activities (2,117,686) (1,400,739)
- -----------------------------------------------------------------------------------------
INVESTING ACTIVITY
Fixed asset additions (371,663) (14,385)
- -----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Note payable -- 824,990
Subscription receivable -- 8,000
Increase in contributed surplus due to share conversion 324,870 --
Advances from related parties (259,389) (488,351)
Issue of convertible debenture 100,000 --
Issue of common shares 130 4,900,000
Increase in bank loan -- 500,000
Payment of deferred financing fee -- (100,000)
- -----------------------------------------------------------------------------------------
Cash provided by financing activities 165,611 5,644,639
- -----------------------------------------------------------------------------------------
Increase (decrease) in cash (2,323,738) 4,229,515
Cash, beginning of period 2,341,449 8,044
- -----------------------------------------------------------------------------------------
Cash, end of period 17,711 4,237,559
=========================================================================================
</TABLE>
See accompanying notes
<PAGE>
Ecology Pure Air International, Inc.
NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
[in U.S. dollars]
April 30, 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.
5
<PAGE>
Ecology Pure Air International, Inc.
NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
[in U.S. dollars]
April 30, 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.
6
<PAGE>
Ecology Pure Air International, Inc.
NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
[in U.S. dollars]
April 30, 1997 Unaudited
It is the intention of EPA to continue the development of the C.E.M. catalyst
and other technologies. No revenues have been earned to date from technologies
under development. It will be necessary for EPA to obtain additional financing
in the coming year, in order to fund the continuing development of its
technologies. 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. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
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.
7
<PAGE>
Ecology Pure Air International, Inc.
NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
[in U.S. dollars]
April 30, 1997 Unaudited
[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.
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.
On June 13, 1997, this minority shareholder filed a Notice of Abandonment of the
Appeal, thereby allowing management to proceed with the finalization of the
transaction. Management is currently undertaking the steps necessary to complete
the transaction.
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.
8
<PAGE>
Ecology Pure Air International, Inc.
NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
[in U.S. dollars]
April 30, 1997 Unaudited
5. WARRANTS
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.
9
<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
different 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,
10
<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). On June 13, 1997, the minority shareholder filed a Notice of
Abandonment of the Appeal, thereby allowing management to proceed with the
finalization of the Plan of Arrangement. Management is currently undertaking the
steps necessary to complete the transactions contemplated by the Plan of
Arrangement.
11
<PAGE>
Results of Operations
For the quarter ended April 30, 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 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 April 30, 1997, the Company incurred a net loss of
$583,615. This compares to a net loss of $884,755 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,
assuming it remains as a going concern, 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 April 30, 1997. As of April
30, 1997, the Company had a net deficit of approximately $1.9 million. Proceeds
from the infusion of net proceeds of
12
<PAGE>
$4,900,000 from a private placement which was completed on March 26, 1996
and proceeds from the issuance of convertible debentures during 1996 have been
depleted through operations.
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 April 30, 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 operating 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 continued inability to
secure additional sources of capital for more than the short-term will likely
subject the Company to the risk that it will be unable to continue its
operations as a going concern.
13
<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
On June 16, 1997, the Board of Directors of the Company accepted the
resignation of Teodosio Pangia. Mr. Pangia resigned as Chairman and Chief
Executive Officer of the Company and E.P.A. Enterprises Inc. Mr. Pangia will
remain solely as a director of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
14
<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: July 14, 1997 By: /s/ Gianni D'Alessandro
----------------------------
Gianni D'Alessandro
President
By: /s/ Paul Mazza
----------------------------
Paul Mazza
Principal Accounting
Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
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