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 October 31, 1996 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 December 27, 1996, 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 October 31, 1996 (Unaudited) and July 31, 1996 1
Interim Consolidated Statement of Operations
and Deficit for the three months ended
October 31, 1996 and 1995 (Unaudited) 2
Interim Consolidated Statement of Cash Flow for the
three months ended October 31, 1996 and 1995 (Unaudited) 3
Notes to Interim Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Events 12
Item 6. Exhibits and Reports on Form 8-K 12
ii
<PAGE>
PART I - FINANCIAL INFORMATION
INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
[in U.S. dollars]
ECOLOGY PURE AIR
INTERNATIONAL, INC.
Unaudited - See Notice to Reader
October 31, 1996
[ ERNST & YOUNG LOGO ]
<PAGE>
- --------------------------------------------------------------------------------
NOTICE TO READER
- --------------------------------------------------------------------------------
We have compiled the interim consolidated balance sheet of Ecology Pure Air
International, Inc. as at October 31, 1996 and the interim consolidated
statements of operations and deficit and cash flows for the three months then
ended from information provided by management. We have not audited, reviewed or
otherwise attempted to verify the accuracy or completeness of such information.
Readers are cautioned that these interim consolidated statements may not be
appropriate for their purposes.
/s/ ERNST & YOUNG
Toronto, Canada, ------------------------------
December 18, 1996. Chartered Accountants
<PAGE>
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Ecology Pure Air International, Inc.
Incorporated under the laws of the state of Delaware
INTERIM CONSOLIDATED BALANCE SHEET
[in U.S. dollars]
- --------------------------------------------------------------------------------
As at October 31 Unaudited - See Notice to Reader
<TABLE>
<CAPTION>
July 31,
1996 1996
$ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents 418,612 2,341,449
Prepaid expenses and other receivables 239,144 89,830
- -------------------------------------------------------------------------------------------------
Total current assets 657,756 2,431,279
- -------------------------------------------------------------------------------------------------
Deferred charges 100,000 100,000
Fixed assets 388,100 92,792
- -------------------------------------------------------------------------------------------------
1,145,856 2,624,071
=================================================================================================
LIABILITIES, CAPITAL STOCK AND SHAREHOLDERS'
DEFICIENCY
Current
Accounts payable 427,173 378,888
Employee related liabilities 19,973 316,410
Due to related parties 1,196,067 1,361,258
- -------------------------------------------------------------------------------------------------
Total current liabilities 1,643,213 2,056,556
- -------------------------------------------------------------------------------------------------
Capital stock and shareholders' deficiency
Capital stock
Common shares, $.001 par value, 100,000,000 shares authorized;
44,741,667 and 14,741,667 issued and outstanding at
October 31, 1996 and July 31, 1996, respectively 29,825 26,825
Preferred shares, Series A convertible preferred
voting shares, $.001 par value, 5,000,000 shares authorized;
nil and 3,000,000 issued and outstanding at October 31, 1996
and July 31, 1996, respectively -- 3,000
Contributed surplus 5,632,618 5,632,618
Deficit (6,159,800) (5,094,928)
- -------------------------------------------------------------------------------------------------
Total capital stock and shareholders' deficiency (497,357) 567,515
- -------------------------------------------------------------------------------------------------
1,145,856 2,624,071
=================================================================================================
</TABLE>
<PAGE>
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Ecology Pure Air International, Inc.
INTERIM CONSOLIDATED STATEMENT OF OPERATIONS
AND DEFICIT
[in U.S. dollars]
- --------------------------------------------------------------------------------
Three months ended October 31 Unaudited - See Notice to Reader
<TABLE>
<CAPTION>
1996 1995
$ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
EXPENSES
Accounting and legal 107,130 9,695
Consulting fees 5,000 66,613
Depreciation 20,061 954
Equipment rental 2,580 --
Insurance 4,673 1,624
Interest and bank charges 2,022 998
Marketing expenses 362,495 --
Office and miscellaneous 10,981 6,990
Rent 39,516 69,547
Research and development 16,522 27,158
Telephone 12,104 26,828
Travel and promotion 131,049 191,722
Wages and benefits 350,739 58,655
- -------------------------------------------------------------------------------------------------
Loss for period 1,064,872 460,784
Deficit, beginning of period 5,094,928 2,226,168
- -------------------------------------------------------------------------------------------------
Deficit, end of period 6,159,800 2,686,952
=================================================================================================
Loss per share (0.02) (0.01)
=================================================================================================
Weighted average number of common shares and
share equivalents 44,008,334 41,875,000
=================================================================================================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Ecology Pure Air International, Inc.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
[in U.S. dollars]
- --------------------------------------------------------------------------------
Three months ended October 31 Unaudited - See Notice to Reader
<TABLE>
<CAPTION>
1996 1995
$ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the period (1,064,872) (460,784)
Add depreciation which does not involve cash 20,061 954
- -------------------------------------------------------------------------------------------------
(1,044,811) (459,830)
Changes in components of working capital
providing (utilizing) cash
Prepaid expenses and other receivables (149,314) (226)
Accounts payable 48,285 46,461
Employee related liabilities (296,437) (12,564)
- -------------------------------------------------------------------------------------------------
Cash used in operating activities (1,442,277) (426,159)
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITY
Fixed asset additions (315,369) --
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Loan receivable -- (250,001)
Note payable -- 300,000
Subscription receivable -- 8,000
Advances from related parties -- 445,979
Repayments to related parties (165,191) --
- -------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (165,191) 503,978
- -------------------------------------------------------------------------------------------------
Increase (decrease) in cash (1,922,837) 77,819
Cash, beginning of period 2,341,449 8,044
- -------------------------------------------------------------------------------------------------
Cash, end of period 418,612 85,863
=================================================================================================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Ecology Pure Air International, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars]
- --------------------------------------------------------------------------------
October 31, 1996 Unaudited - See Notice to Reader
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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.
[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].
4
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Ecology Pure Air International, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
[in U.S. dollars]
- --------------------------------------------------------------------------------
October 31, 1996 Unaudited - See Notice to Reader
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.
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.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Ecology Pure Air International, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
[in U.S. dollars]
- --------------------------------------------------------------------------------
October 31, 1996 Unaudited - See Notice to Reader
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. are
convertible into common shares at $2.75 per share.
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.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Ecology Pure Air International, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
[in U.S. dollars]
- --------------------------------------------------------------------------------
October 31, 1996 Unaudited - See Notice to Reader
3. 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 August 16, 1996, the Company contracted for investment banking services
for an 18-month period commencing August 16, 1996. As consideration for
services to be provided, the Company has granted warrants to purchase a
total of 1,500,000 common shares at $6.00 per share. These warrants shall
vest as follows:
[i] 500,000 upon completion of due diligence;
[ii] 500,000 on February 16, 1997; and
[iii] 500,000 on August 16, 1997.
The agreement may be terminated by either party upon providing 30 days
written notice. In the event of termination of the agreement, any warrants
which have not vested shall no longer be eligible to vest.
The warrants and/or underlying shares may be sold at any time after two
years and for a total period of seven years following August 16, 1996 or
upon filing of a registration statement for the underlying shares.
4. SUBSEQUENT EVENT
[a] In December 1996, the consultants [as described in [note 2[c]]]
surrendered 2,000,000 Warrants in exchange for share registration rights.
[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.
- --------------------------------------------------------------------------------
7
<PAGE>
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. Information in this Report relating to shares of the Company's
Common Stock has been adjusted, as appropriate, to give effect to the stock
split.
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,
8
<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 October 31, 1996, 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
9
<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 October 31, 1996, the Company incurred a net loss
of $1,064,872. This compares to a net loss of $460,784 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 October 31, 1996.
As of October 31, 1996, the Company had a net worth of $1,145,856 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.
The Company's liquidity, however, draws solely from the Company's cash
and other liquid instruments which as of October 31, 1996 was limited to
$418,612.
10
<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 October 31, 1996, 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. The Company has
entered into long-term employment agreements with its Chairman and Chief
Executive Officer and its President and Chief Operating Officer. Each of these
contracts requires the payment of approximately $350,000 per annum through
December 1, 2000. In addition, the Company has entered into a long-term
employment agreement with its Chief Financial Officer requiring the payment of
approximately $250,000 per annum until December 1, 2000 and certain consulting
agreements which require varying amounts of payment based upon the degree of
services performed by the consultant.
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 made significant progress in its efforts to enhance its
liquidity and capital resources when on March 26, 1996 it completed a private
placement transaction involving the sale of 6,600,000 shares of its common stock
for total gross proceeds of approximately $5.5 million (net proceeds of $4.9
million). 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
fourth quarter of calendar year 1996. 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.
11
<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
None.
(b) Reports on Form 8-K
None.
12
<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: December 30, 1996 By: /s/ Teodosio Pangia
-----------------------------
Chief Executive Officer
By: /s/ Paul Mazza
-----------------------------
Principal Accounting Officer
13
<TABLE> <S> <C>
<ARTICLE>5
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 419
<SECURITIES> 0
<RECEIVABLES> 239
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 658
<PP&E> 388
<DEPRECIATION> 100
<TOTAL-ASSETS> 1146
<CURRENT-LIABILITIES> 1643
<BONDS> 0
0
0
<COMMON> 30
<OTHER-SE> (497)
<TOTAL-LIABILITY-AND-EQUITY> 1146
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1065)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1065)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1065)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
