-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KY8iP8fx2EW9+A6BBO32Ugj49SGOrky1iYBiRKfA1OMAKPK6rRsqNZQErmxWuKAr uOVJaS1pGz8MhiyVB2Gylg== 0000950115-97-000021.txt : 19970108 0000950115-97-000021.hdr.sgml : 19970108 ACCESSION NUMBER: 0000950115-97-000021 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19970107 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECOLOGY PURE AIR INTERNATIONAL INC CENTRAL INDEX KEY: 0000847389 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 760265439 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-27623 FILM NUMBER: 97501775 BUSINESS ADDRESS: STREET 1: 45 ROCKEFELLER PLAZA STREET 2: SUITE 2000 CITY: NEW YORK STATE: NY ZIP: 10111 BUSINESS PHONE: 7059459700 MAIL ADDRESS: STREET 1: 500 BAY STREET STREET 2: BOX 23110 SAULT STE CITY: MARIE ONTARIO CANADA STATE: A6 FORMER COMPANY: FORMER CONFORMED NAME: MARK FOUR RESOURCES INC /DE/ DATE OF NAME CHANGE: 19950726 10QSB 1 QUARTERLY REPORT 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__ 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 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 ] - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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
July 31, 1996 1996 $ $ - ------------------------------------------------------------------------------------------------- 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 =================================================================================================
- -------------------------------------------------------------------------------- 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
1996 1995 $ $ - ------------------------------------------------------------------------------------------------- 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 =================================================================================================
- -------------------------------------------------------------------------------- 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
1996 1995 $ $ - ------------------------------------------------------------------------------------------------- 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 =================================================================================================
- -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 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 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 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 3-MOS JUL-31-1996 AUG-01-1996 OCT-31-1996 419 0 239 0 0 658 388 100 1146 1643 0 0 0 30 (497) 1146 0 0 0 0 1065 0 0 (1065) 0 (1065) 0 0 0 (1065) (.02) 0
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