SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-17454
NOXSO CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1118334
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
2424 Lytle Road 15102
Bethel Park, PA Zip Code
Address of principal executive offices
Registrant's telephone number, including area code: (412) 854-1200
Not Applicable
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1996
Common stock, $.01 par value 9,656,611
1
<PAGE>
NOXSO CORPORATION
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1996 and
June 30, 1996
Consolidated Statements of Operations for the Cumulative
Period from Inception to September 30, 1979 and for the
three months ended September 30, 1996
Consolidated Statements of Changes in Stockholders' Equity for
the Cumulative Period from Inception to September 30, 1996
Consolidated Statements of Cash Flows for the Cumulative
Period from Inception and for the three months
ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
<TABLE>
<CAPTION>
NOXSO Corporation
(A Development Stage Enterprise)
BALANCE SHEETS
September 30,
1996 June 30,
ASSETS (Unaudited) 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 1,199,498 $ 464,723
Bank certificate of deposit 1,000,000 1,000,000
Accounts receivable 697,548 2,163,420
Prepaid expenses and other current assets 28,255 38,136
------------ ------------
Total Current Assets 2,925,301 3,666,279
------------ ------------
PROPERTY AND EQUIPMENT:
Equipment 341,936 341,936
Furniture and Fixtures 149,796 111,661
Leasehold improvements 16,646 16,646
Construction in progress 9,509,814 7,469,545
------------ ------------
10,018,192 7,939,788
Less: Accumulated depreciation (425,242) 412,151
------------ ------------
9,592,950 7,527,637
------------ ------------
Other assets 1,097 1,172
Deposits 4,308 4,308
------------ ------------
Total Assets $ 12,523,656 $ 11,199,396
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 3,124,000 $ 2,874,000
Accounts payable 5,176,549 3,424,692
Accrued compensation 88,499 98,975
Advanced billings 753,424 1,379,549
Other current liabilities 362,361 290,945
------------ ------------
Total Current Liabilities 9,504,833 8,068,161
------------ ------------
OTHER LIABILITIES:
Minority interest in consolidated subsidiary 29,844 26,781
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: Authorized,
20,000,000 shares. Issued 9,659,596 shares and
9,652,096 shares, respectively 96,598 96,523
Paid-in capital 14,942,066 14,914,953
Deficit accumulated during the development stage (12,024,685) (11,882,022)
------------ ------------
3,013,979 3,129,454
Less: Cost of 2,985 shares of common stock held in treasury (25,000) (25,000)
------------ ------------
Total Stockholders' Equity 2,988,979 3,104,454
------------ ------------
Total Liabilities and Stockholders' Equity $ 12,523,656 $ 11,199,396
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
NOXSO Corporation
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
-----------------------
Date of Inception, Three Months
August 28, 1979, Ended September 30,
to Sept. 30, 1996 1996 1995
---------------------- ------------ ------------
(Not covered by (Unaudited) (Unaudited)
COSTS AND EXPENSES: auditor's report)
<S> <C> <C> <C>
Purchase of NOXSO Process $ 260,625 $ -- --
Contract development - concept testing 1,169,759 -- --
Contract development - demonstration testing 1,727,715 -- --
Designing, drafting and consulting 1,109,406 2,115 4,353
Supplies, instruments and equipment 1,961,800 7,756 3,189
Depreciation and amortization 545,891 12,958 5,820
Other research and development 386,309 -- --
Salaries and benefits 7,707,567 92,649 25,454
Professional fees 1,596,616 14,822 14,254
Rent 543,720 24,137 8,538
Income tax expense 80,046 46,865 --
Other general administrative 3,440,927 145,122 33,564
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 20,530,381 346,424 95,172
LESS FUNDING AND OTHER:
Funding of research agreement 1,200,000 -- --
Reimbursement of project costs 4,971,087 71,115 --
Government grant 1,128,020 -- --
Interest income 1,057,215 18,893 18,957
Other 179,783 116,516 --
------------ ------------ ------------
TOTAL FUNDING AND OTHER 8,536,105 206,524 18,957
Minority interest in net income of
consolidated subsidiary 29,244 2,763 --
------------ ------------ ------------
NET LOSS $(12,023,520) $ (142,663) $ (76,215)
============ ============ ============
LOSS PER COMMON SHARE $ (0.01) $ (0.01)
AVERAGE NUMBER OF SHARES
OUTSTANDING $ 9,652,453 $ 9,102,000
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION, TO SEPTEMBER 30, 1996
Stockholders' Equity
<TABLE>
<CAPTION>
Stockholders' Equity
-------------------------------------------
Consideration Common Stock
--------------------------- -----------------------
Per Shares Par Paid-in
Share Total Issued Value Capital
-------- ------------- ---------- ---------- ----------
AUGUST 28, 1979 (INCEPTION)
TO JUNE 30, 1991 (not covered by auditor's report):
<S> <C> <C> <C> <C> <C>
1979 - Issuance of Common Stock $ .005 $ 600(1) 120,000 $ 1,200 $ (600)
1980 - Issuance of Common Stock .563 956,250(2) 1,700,000 17,000 791,382
1980 - Issuance of Warrants -- 850(3) -- -- 850
1983 - Issuance of Common Stock .2813 28,125(4) 100,000 1,000 27,125
1986 - Issuance of Common Stock .125 155,000(1) 1,240,000 12,400 142,600
1986 - Issuance of Common Stock .125 32,500(5) 260,000 2,600 29,900
1987 - Issuance of Common Stock .50 134,000(1) 268,000 2,680 131,320
1987 - Issuance of Common Stock .50 42,900(5) 85,800 858 42,042
1988 - Issuance of Stock Option -- 250,000(6) -- -- 250,000
1989 - Issuance of Common Stock .675 27,000(7) 40,000 400 26,600
1989 - Issuance of Common Stock .50 147,500(8) 295,000 2,950 144,550
1989 - Issuance of Common Stock 2.50 4,000,000(2) 1,600,000 16,000 3,174,721
1989 - Issuance of Warrants -- 80(3) -- -- 80
1991 - Issuance of Common Stock 1.129 569,464(9) 504,620 5,046 564,418
1991 - Issuance of Common Stock .675 27,000(7) 40,000 400 26,600
1991 - Issuance of Common Stock .675 27,000(9) 40,000 400 26,600
Net loss -- -- --
----------- ------- ----------
BALANCE, JUNE 30, 1991 6,293,420 $62,934 $5,378,188
<CAPTION>
Stockholders' Equity
---------------------------------------------------------------------------
Deficit Accumu- Notes
lated During Receivable
Development Treasury for Purchase o
Stage Stock Common Stock Total
----------- --------- --------------- -------------
<S> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION)
TO JUNE 30, 1991 (not covered by
auditor's report):
1979 - Issuance of Common Stock $ -- $ -- $ -- $ 600
1980 - Issuance of Common Stock -- -- -- 808,382
1980 - Issuance of Warrants -- -- -- 850
1983 - Issuance of Common Stock -- -- -- 28,125
1986 - Issuance of Common Stock -- -- -- 155,000
1986 - Issuance of Common Stock -- -- -- 32,500
1987 - Issuance of Common Stock -- -- -- 134,000
1987 - Issuance of Common Stock -- -- -- 42,900
1988 - Issuance of Stock Option -- -- -- 250,000
1989 - Issuance of Common Stock -- -- (27,000) --
1989 - Issuance of Common Stock -- -- (30,000) 117,500
1989 - Issuance of Common Stock -- -- -- 3,190,721
1989 - Issuance of Warrants -- -- -- 80
1991 - Issuance of Common Stock -- -- -- 569,464
1991 - Issuance of Common Stock -- -- (27,000) --
1991 - Issuance of Common Stock -- -- -- 27,000
Net loss (3,278,694) -- -- (3,278,694)
----------- --------- ----------- -----------
BALANCE, JUNE 30, 1991 $(3,278,694) $ -- $ (84,000) $ 2,078,428
</TABLE>
(1) Sale of common stock for cash.
(2) Proceeds of public offering.
(3) Sale of warrants for cash.
(4) Value assigned to common stock issued in connection with purchase of NOXSO
Process.
(5) Value assigned to common stock issued for compensation and services.
(6) Sale of common stock option.
(7) Stock issued in connection with exercise of common stock warrants and
options for notes receivable.
(8) Stock issued in connection with exercise of common stock purchase warrants
for $117,500 cash and a $30,000 note receivable.
(9) Stock issued in connection with exercise of common stock option agreements.
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION, TO SEPTEMBER 30, 1996 (continued)
Stockholders' Equity
-------------------------------------------
Consideration Common Stock
--------------------------- -----------------------
Per Shares Par Paid-in
Share Total Issued Value Capital
-------- ------------- ---------- ---------- ----------
YEAR ENDED JUNE 30, 1992: (not
covered in auditor's report)
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock $1.129 $ 683,356(9) 605,544 $ 6,056 $ 677,300
Issuance of Common Stock 7.50 2,000,000(1) 266,666 2,666 1,997,334
Issuance of Common Stock 2.75 5,500(9) 2,000 20 5,480
Issuance of Common Stock 2.00 69,12(10) 34,562 346 68,778
Issuance of Common Stock (11) 116,500 1,165 --
Satisfaction of notes receivable -- -- --
Net loss -- -- --
--------- ---------- -----------
BALANCE, JUNE 30, 1992 7,318,692 73,187 8,127,080
YEAR ENDED JUNE 30, 1993: (not
covered in auditor's report)
Issuance of Common Stock 1.129 683,356(9) 605,544 6,056 677,300
Issuance of Common Stock 2.04 26,260(9) 12,866 129 26,131
Issuance of Common Stock .50 50,000 500 24,500
Acquisition of Common Stock
for treasury -- -- --
Satisfaction of notes receivable -- -- --
Issuance of Common Stock 5.00 2,594,115(16) 571,250 5,712 2,588,403
Net loss -- -- --
--------- ---------- -----------
BALANCE, JUNE 30, 1993 8,558,352 85,584 11,443,414
YEAR ENDED JUNE 30, 1994:
Issuance of Common Stock 1.129 113,888(9) 100,920 1,009 112,879
Issuance of Common Stock 2.00 23,624(13) 11,812 118 23,506
Net loss -- -- --
--------- ---------- -----------
BALANCE, JUNE 30, 1994 8,671,084 $86,711 $11,579,799
<CAPTION>
Stockholders' Equity
----------------------------------------------------------------
Deficit Accumu- Notes
lated During Receivable
Development Treasury for Purchase of
Stage Stock Common Stock Total
-------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1992: (not
covered in auditor's report)
Issuance of Common Stock $ -- $ -- $ -- $ 683,356
Issuance of Common Stock -- -- -- 2,000,000
Issuance of Common Stock -- -- -- 5,500
Issuance of Common Stock -- -- -- 69,124
Issuance of Common Stock (1,165) -- -- --
Satisfaction of notes receivable -- -- 57,000(12) 57,000
Net loss (2,223,382) -- -- (2,223,382)
----------- --------- --------- -----------
BALANCE, JUNE 30, 1992 (5,503,241) -- (27,000) 2,670,026
YEAR ENDED JUNE 30, 1993:
(not covered in auditor's report)
Issuance of Common Stock -- -- -- 683,356
Issuance of Common Stock -- -- -- 26,260
Issuance of Common Stock -- -- (25,000) --
Acquisition of Common Stock
for treasury -- 25,000(15) 25,000(15) --
Satisfaction of notes receivable -- -- 27,000(14) 27,000
Issuance of Common Stock -- -- -- 2,594,115
Net loss (2,292,197) -- -- (2,292,197)
----------- --------- --------- -----------
BALANCE, JUNE 30, 1993 (7,795,438) (25,000) 3,708,560
YEAR ENDED JUNE 30, 1994:
Issuance of Common Stock -- -- -- 113,888
Issuance of Common Stock -- -- -- 23,624
Net loss (1,931,657) -- -- (1,931,657)
----------- --------- --------- -----------
BALANCE, JUNE 30, 1994 $(9,727,095) $ (25,000) $ -- $ 1,914,415
----------- --------- --------- -----------
</TABLE>
(1) Sale of common stock for cash.
(9) Stock issued in connection with exercise of common stock option
agreements.
(10) Stock issued in connection with exercise of common stock warrant
agreements.
(11) Stock issued in exchange for warrant.
(12) Compensation in satisfaction of notes receivable.
(13) Stock issued in connection with exercise of common stock warrants.
(14) Payment in satisfaction of note receivable.
(15) Acquisition of 2,985 shares of treasury stock in satisfaction of notes
receivable.
(16) Stock issued in connection with private placement.
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION, TO SEPTEMBER 30, 1996
Stockholders' Equity
---------------------------------------
Consideration Common Stock
--------------------------- -----------------------
Per Shares Par Paid-in
Share Total Issued Value Capital
-------- ------------- ---------- ---------- ----------
YEAR ENDED JUNE 30, 1995:
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock 2.00 47,252(10) 23,626 236 47,016
Issuance of Common Stock 2.75 11,000(9) 4,000 40 10,960
Issuance of Common Stock 3.85 497,500(16) 150,000 1,500 496,000
Issuance of Common Stock 3.56 800,795(16) 250,000 2,500 798,295
Issuance of Common Stock 3.25 325(17) 100 1 324
Net loss -- -- --
----------- ----------- -----------
BALANCE, JUNE 30, 1995 9,098,810 $ 90,988 $12,932,394
=========== =========== ===========
YEAR ENDED JUNE 30, 1996:
Issuance of Common Stock 3.25 81,250(9) 25,000 250 81,000
Issuance of Common Stock 1.91 19,063(9) 10,000 100 18,963
Issuance of Common Stock 3.62 5,438(9) 1,500 15 5,423
Issuance of Common Stock 3.62 1,813(9) 500 5 1,808
Issuance of Common Stock 4.55 409,725(16) 100,000 1,000 408,725
Issuance of Common Stock 4.54 408,375(16) 100,000 1,000 407,375
Issuance of Common Stock 4.56 45,626(9) 10,000 100 45,526
Issuance of Common Stock 3.62 9,063(9) 2,500 25 9,038
Issuance of Common Stock 3.62 2,719(9) 750 8 2,711
Issuance of Common Stock 3.62 1,812(9) 500 5 1,807
Issuance of Common Stock 3.21 503,209(16) 156,763 1,569 501,640
Issuance of Common Stock 3.42 500,003(16) 145,773 1,458 498,543
Net loss -- -- --
----------- ----------- -----------
BALANCE, JUNE 30, 1996 9,652,096 $ 96,523 $14,914,953
=========== =========== ===========
THREE MONTHS ENDED SEPTEMBER 30, 1996:
Issuance of Common Stock 3.63 27,188(9) 7500 75 27,113
Net Loss -- -- -
----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1996 9,659,596 $ 96,598 $14,942,066
=========== =========== ===========
<CAPTION>
Stockholders' Equity
----------------------------------------------------------
Deficit Accumu- Notes
lated During Receivable
Development Treasury for Purchase of
Stage Stock Common Stock Total
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1995:
Issuance of Common Stock -- -- -- 47,252
Issuance of Common Stock -- -- -- 11,000
Issuance of Common Stock -- -- -- 497,500
Issuance of Common Stock -- -- -- 800,795
Issuance of Common Stock -- -- -- 325
Net loss (1,931,657) -- -- (1,760,658)
------------ ------------ ----------- ------------
BALANCE, JUNE 30, 1995 $(11,487,753) $ (25,000) $ -- $ 1,510,629
============ ============ =========== ============
YEAR ENDED JUNE 30, 1996:
Issuance of Common Stock -- -- -- 81,250
Issuance of Common Stock -- -- -- 19,063
Issuance of Common Stock -- -- -- 5,438
Issuance of Common Stock -- -- -- 1,813
Issuance of Common Stock -- -- -- 409,725
Issuance of Common Stock -- -- -- 408,375
Issuance of Common Stock -- -- -- 45,626
Issuance of Common Stock -- -- -- 9,063
Issuance of Common Stock -- -- -- 2,719
Issuance of Common Stock -- -- -- 1,812
Issuance of Common Stock -- -- -- 503,209
Issuance of Common Stock -- -- -- 500,001
Net loss (394,269) -- -- (394,269)
------------ ------------ ----------- ------------
BALANCE, JUNE 30, 1996 $(11,882,022) $ (25,000) $ -- $ 3,104,454
============ ============ =========== ============
THREE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED):
Issuance of Common Stock -- -- -- 27,188
Net Loss (142,663) -- -- (142,663)
------------ ------------ ----------- ------------
BALANCE, SEPTEMBER 30, 1996 (UNAUDITED) $(12,024,685) $ (25,000) $ -- $ 2,988,979
============ ============ =========== ============
</TABLE>
(9) Stock issued in connection with exercise of common stock option agreements.
(10) Stock issued in connection with exercise of common stock warrant
agreements.
(16) Stock issued in connection with private placement.
(17) Stock issued as contribution.
See accompanying notes to consolidated financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
NOXSO Corporation
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
Three Months
Date of Inception, Ended September 30,
August 28, 1979, --------------------------------
to Sept. 30, 1996 1996 1995
------------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,023,520) $ (142,663) $ (76,215)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Depreciation and amortizations 540,472 12,958 5,820
Minority interest 29,844 3,063 --
Loss on disposal of property and equipment 5,752 -- --
Issuance of common stock for compensation and
other 75,725 -- --
Issuance of common stock for purchase of
NOXSO Process 28,125 -- --
Compensation in satisfaction of notes receivable 57,000 -- --
Changes in operating assets and liabilities:
Accounts receivable (697,547) 1,465,873 (303,642)
Prepaid expenses and other assets (24,578) 9,955 3,848
Deposits (4,308) -- --
Accounts payable 5,176,549 1,751,857 (12,403)
Accrued compensation 88,499 (10,476) (9,201)
Advanced billings 753,424 (626,125) 656,159
Other current liabilities 362,361 71,416 (54,166)
------------ ------------ ------------
Net cash flows from operating activities $ (5,632,202) $ 2,535,858 $ 210,200
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of and deposits for property and equipment (10,143,566) (2,078,271) (797,570)
Bank certificate of deposit (1,000,000) --
Proceeds from the sale of property and equipment 4,546 --
------------ ------------ ------------
Net cash flows from investing activities $(11,139,020) $ (2,078,271) $ (797,570)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement offering 5,713,720 -- --
Proceeds from line of credit 3,025,000 -- 335,000
Payments of line of credit (2,025,000) -- --
Proceeds from commercial loan 250,000 250,000 --
Proceeds from issuance of common stock 7,760,647 -- --
Proceeds from sales of common stock
options and warrants 1,350,283 27,188 105,751
Proceeds from satisfaction of notes receivable 27,000 -- --
Proceeds from ACOA and Olin loans 2,874,000 -- 330,000
Payment of ACOA loan (1,000,000)
Net loans to stockholders and officers (4,930) -- --
------------ ------------ ------------
Net cash flows from financing activities $ 17,970,720 $ 277,188 $ 770,751
------------ ------------ ------------
NET INCREASE IN CASH AND
EQUIVALENTS $ 1,199,498 734,775 183,381
CASH AND EQUIVALENTS, BEGINNING OF
PERIOD -- 464,723 461,360
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,199,498 $ 1,199,498 $ 644,741
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 229,413 $ 22,124 $ 25,233
============ ============ ============
NONCASH FINANCING ACTIVITIES:
Issuance of common stock for notes receivable $ 84,000 $ -- $ --
Acquisition of common stock into treasury to satisfy
notes receivable $ (25,000) $ -- $ --
============ ============ ============
Issuance of common stock in exchange for warrant $ 1,165 $ -- $ --
============ ============ ============
Compensation in satisfaction of notes receivable $ 57,000 $ -- $ --
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
The balance sheet at the end of the preceding fiscal year has been derived
from the audited balance sheet contained in the Company's Form 10-K and is
presented for comparative purposes. All other financial statements are
unaudited. In the opinion of management, all adjustments which include only
normal recurring adjustments necessary to present fairly the financial position,
results of operations, changes in stockholders' equity and cash flows for all
periods presented, have been made. The results of operations for interim periods
are not necessarily indicative of the operating results for the full year.
Footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted in
accordance with the published rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Form
10-K for the most recent fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of the contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 2 - Full Scale Commercial Demonstration:
On August 30, 1994, a Project Agreement between the Company and Alcoa
Generating Company ("Alcoa") was executed for the design, construction, and
operation of a proposed demonstration facility at Alcoa's Warrick Generating
Station in Newburgh, Indiana, upon satisfaction of certain conditions. The
project definition and design phases of the proposed demonstration facility have
been completed by the Company in accordance with the terms of the Cooperative
Agreement, and the construction phase was commenced in June 1995. The Company
has received all necessary approvals from the U.S. Department of Energy ("DOE")
to proceed to complete the project. As a part of the approval, the DOE increased
the funding for its share of costs for the project from $33 million to $41.1
million. The funds needed, in excess of those available for the DOE to complete
the proposed demonstration facility are to be provided from the proceeds of the
Indiana Development Finance Authority Taxable Clean Coal Technology Variable
Rate Demand Revenue Bonds, Series 1996 (the "Bonds"). See further discussion in
Note 4.
The cost of the proposed demonstration facility through construction is
currently estimated at $82,813,000. Of this amount, $26,868,000 has been spent
as of September 30, 1996, leaving $55,945,000 as the estimate to complete
construction. Of the funds expended to date, $13,434,000 have been provided by
the DOE, and NOXSO has provided the
9
<PAGE>
remaining $13,434,000 through equity financing, in kind contributions of
$735,000, a $1,000,000 borrowing under the Company's line of credit, and loans
totaling $2,874,000 from Olin Corporation from Aluminum Corporation of America
("ACOA") which has been repaid. The funds currently anticipated to be needed for
completion of the construction of the facility are $27,973,000 from the DOE and
NOXSO expects to obtain equity capital and sell revenue bonds to pay for its
share. NOXSO had expected that $40,000,000 of revenue bonds would be sold.
However, to satisfy concerns of the issuer of the bonds, management now expects
that it will be necessary to obtain some additional equity capital and lower the
amount of bonds sold. See further discussion in Note 4. This is the amount
necessary to match the amount provided by the DOE, plus cover the estimated
financing costs and cash reserves required by the bond issue.
Note 3 - Olin Facility and Loan:
Under the Olin Agreement, the Company is constructing the Olin Facility at
Olin's plant in Charleston, Tennessee. The Olin Facility will convert elemental
sulfur into liquid sulfur dioxide. The estimated cost of the Olin Facility is
$12 million, of which approximately $9.6 million has been expended to date.
Provided that the Olin Facility produces sulfur dioxide in accordance with
specifications set forth in the Olin Agreement (as amended by an amendment the
parties are in the process of executing), Olin is required, for a 10-year period
after the Olin Facility is operational, to pay to the Company $3,030,000
annually, as adjusted after the sixth year for changes in the Company's cost of
producing elemental sulfur at the Alcoa Project, and the Company is to deliver
16,000 short tons per year of elemental sulfur. Once the Alcoa Project is
operational, it is anticipated that all or virtually all of the 16,000 short
tons of elemental sulfur will be produced by the Alcoa Project. Until that date,
the Company will have to pay the costs of purchasing elemental sulfur from
suppliers. Based on historical pricing, it is anticipated that the cost of
elemental sulfur purchased in the open market will be approximately 12% to 25%
of the consideration the Company is to receive from Olin under the Olin
Agreement, although there can be no assurance that the cost will not be greater.
The Company presently believes that it will be able to complete the Alcoa
Project so that it is operational and producing elemental sulfur by April 1998.
There can, of course, be no assurance that the Alcoa Project will be completed
by such date, if at all.
Under the terms of the Olin Agreement, the Company's failure to complete
the Olin Facility by September 1, 1996 entitled Olin to require that the Company
pay to Olin the amount by which (i) the costs Olin incurs to purchase up to
2,667 short tons of sulfur dioxide per month until the Olin Project is
operational exceeds (ii) the cost of such amount of sulfur dioxide at a price of
$130 per short ton. The Company owes approximately $17,000 to Olin for September
1996 and anticipates that it will be required to pay Olin no more than $70,000
per month with respect to sulfur dioxide purchases by Olin thereafter until the
Olin Project is operational, although there can be no assurance that the cost to
the Company will not be greater. The Company has accrued approximately $68,000
in the September 30, 1996 balance sheet in connection with sulfur dioxide
purchases by Olin.
In addition, if the Company fails to substantially complete the Olin
Facility by April 1, 1997, Olin will have the right to terminate the Olin
Agreement. The Company is in the process of completing construction of the Olin
Facility and anticipates that it will be substantially completed by December,
1996 and operational by January, 1997. There can be no assurance that the
Company will meet the foregoing schedule.
10
<PAGE>
In April, 1996 the Company obtained from Olin Corporation a loan in the
amount of $1,874,000 that bears interest at the rate of 10% per annum. The loan
agreement, as amended, provides for a due date of November 30, 1996. These funds
are being used to pay the Company's share of construction costs on the proposed
demonstration facility.
Note 4 - Financing
The Alcoa Project Agreement requires that the Company have in hand by a
designated date financial resources available for the performance of its
obligations under the Alcoa Project Agreement of at least $35 million in
addition to funds provided by the DOE. If such financing is not in hand by the
designated date, Alcoa has the right, at its option, to terminate its
obligations under the Alcoa Project Agreement. The designated date under the
Alcoa Project Agreement has recently been extended by Alcoa to January 31, 1997.
The Company does not believe that Alcoa will extend the date beyond January 31,
1997.
The funds needed, in excess of those available from the DOE, to complete
the proposed demonstration facility are to be provided from equity capital and
the proceeds of the Bonds. On September 16, 1996, the Indiana Development
Finance Authority (the "Authority") adopted resolutions approving the issuance
of $40 million of Bonds to fund the Alcoa Project. The Company has not entered
into a final agreement with the issuer of a direct-pay letter of credit required
to support and secure the Bonds. The Company is also still seeking to resolve
certain concerns of representatives of the Authority and has been informed by
those representatives that the Authority intends to perform additional due
diligence regarding the Company and its ability to repay the Bonds should
project revenues be insufficient to fully repay the Bonds.
In order to satisfy conditions to the issuance of the Bonds, among other
things the Company must obtain additional equity capital of approximately $5
million prior to January 31, 1997, $2.5 million of which is to be used to fund
one-half of a supplemental reserve to secure the Bonds and the remainder of
which is to be used to repay an outstanding loan made to the Company by Olin and
to pay certain payables incurred in connection with the Olin Project. In
addition to the equity capital required to satisfy conditions to the issuance of
the Bonds, the Company expects it will be necessary to raise additional equity
capital, which it will use to pay the costs of the NOXSO Commercial
Demonstration Facility, enabling it to lower the amount of Bonds that the
Authority must issue to finance the NOXSO Commercial Demonstration Facility. The
Company believes that by raising such capital and lowering the amount of Bonds
that must be issued by the Authority, it will be able to satisfy the concerns of
the Authority.
The Company intends to seek to raise the required $5 million of equity
capital and additional equity capital through private placements of its common
stock and/or subordinated debt securities that are convertible into common
stock, the terms of which placements are presently being negotiated and are
contingent upon the satisfactory completion of due diligence and other
conditions. Any shares issued in the private placement or upon conversion of
subordinated debt securities are expected to contain restrictions on resale in
accordance with Federal securities laws and, thus, are expected to be sold at a
discount to the market price of freely tradeable shares.
The other half of the supplemental reserve is to be provided by the County
of Warrick, Indiana either in cash or by causing a letter of credit or its
equivalent to be issued. During October 1996 the Warrick County Council, upon
the recommendation of the Warrick County Commissioners, approved supporting the
project by the issuance of debt surety insurance. Arrangements for the issuance
of such surety insurance have not been formalized and its terms have not been
approved by the Authority and the issuer of the direct-pay letter of credit that
is to support the Bonds.
11
<PAGE>
There can be no assurance that the Company can raise the required or
additional equity capital or that the Bonds can be sold prior to January 31,
1997, the date by which the Alcoa Agreement, as amended, presently requires that
the Company have in hand financial resources available for the performance of
its obligations under the Alcoa Project Agreement of at least $35 million in
addition to funds to be provided by the DOE. If such financing is not in hand by
that date, Alcoa has the right, at its option, which the Company expects it to
exercise, to terminate its obligations under the Alcoa Project Agreement.
The Company is in the process of negotiating the terms of a reimbursement
agreement pursuant to which a letter of credit to support and secure the Bonds
would be issued by Canadian Imperial Bank of Commerce ("CIBC"), as agent for
itself and other banks. It is anticipated that repayment of the Bonds will be
secured by a pledge of all revenues relating to the Alcoa Project and the Olin
Project (collectively, the "Projects"), which revenues would be held in trust by
a trustee for the letter of credit bank and for the Authority. In such case,
until the Bonds are paid in full, revenues from the Projects will be available
only to secure and repay the Bonds and will not be available to the Company for
any other purposes. In addition, the Bonds will be secured by the collateral
assignment of all agreements of the Company relating to the Projects, including
the Alcoa Agreement and the Olin Agreement.
In order to provide for construction of the Olin facility prior to
receiving the proceeds of the Bonds, the Company obtained a loan from Olin in
the amount of $1,874,000 as discussed in Note 3. In August 1996, the Company
also obtained the agreement of Praxair Inc. ("Praxair"), an air products
company, to defer payment of the $2,700,000 balance owed for the air separation
plant until completion of the bond financing but no later than September 30,
1996. As of November 11, 1996, Praxair was continuing to perform work on its
portion of the Olin Project. In connection with said agreement with Praxair, the
Company agreed to pay late charges of .3% per week from the date of each
outstanding invoice and to assign revenues it is entitled to receive under the
Olin Agreement to Praxair until the Company's obligations to Praxair are paid in
full.
The Olin loan and the Company's obligations to Praxair are expected to be
repaid with the funds available to the Company from the proceeds of the equity
investment described above.
The Company anticipates that revenues from its contractual right to a
portion of sulfur dioxide sales and the anticipated value of air pollution
control credits will be sufficient to pay principal and interest on the Bonds it
intends to issue and to record a profit.
At November 11, 1996 negotiations regarding funding are in process. If such
funding is not secured, the Company may not be able to complete the Full-Scale
Demonstration Facility and repay the amounts due Olin and Praxair. This matter
raises substantial doubt about the Company's ability to continue as a going
concern. If the Company is unable to continue as a going concern, the Company's
ability to recover its construction in progress in the accompanying consolidated
balance sheet is uncertain.
12
<PAGE>
In addition, on September 23, 1996, the Company obtained a short term
commercial loan in the amount of $250,000 at a rate of 9.75%. The loan proceeds
will be used to satisfy costs incurred related to obtaining the CIBC letter of
credit. This loan matured on October 30, 1996. The lender has orally agreed to
extend the terms of this loan to January 31, 1997.
Note 5 - Formation of Construction Management Company:
During November 1995, the Company formed a new subsidiary called Projex,
Inc. The Company holds 70% of the stock in Projex while two managing principles
of Projex hold the remaining 30% of such stock. Projex was capitalized with
contributions of $1,000. Projex was formed to perform construction management
services. The first contract obtained by Projex is a $2,500,000 contract to
perform the construction management on the NOXSO full- scale demonstration
facility. Because of the Company's majority ownership of Projex, Projex's
financial statements are consolidated herein. There is no related party
relationship between the minority shareholders and the Company, its employees or
Directors.
Note 6 - Contingencies:
In late August 1996 a Complaint was filed against the Company in the
District Court of Jefferson County, Texas, by Calabrian Corporation
("Calabrian") relating to a Purchase Agreement dated October 16, 1995 between
the Company and Calabrian and a related License Agreement, dated effective as of
September 1, 1995, between the Company and Calabrian. The complaint alleges that
the Company took over direction and supervision of Calabrian's subcontract
relating to the construction of components of the Olin Facility, disrupting
Calabrian's plans with respect to the facility and constituting an unlawful
interference with Calabrian's contractual relationships with its subcontractors,
and that the Company defaulted in certain payment obligations to Calabrian under
the Purchase Agreement. The complaint requests damages in the amount of
$665,000, representing the balance of the fee allegedly owed to Calabrian under
the Purchase Agreement, unspecified damages caused Calabrian as a result of the
alleged interference with contract, any additional damages caused Calabrian by
13
<PAGE>
the Company's conduct, and an order prohibiting the Company from disclosing to
any third party, other than Olin, any confidential and proprietary information
of Calabrian. The Company has removed the action to the United States District
Court for the Eastern District of Texas, Beaumont Division.
In October 1996, Calabrian amended its complaint to withdraw its request
for a temporary and permanent injunction enjoining the Company from using
Calabrian's technology.
The Company's Counsel has advised that it believes the causes of action in
Calabrian's complaint are without merit. The Company has filed an answer and
counterclaim denying the substantive allegations of the complaint and requesting
(i) actual damages caused the Company by Calabrian's abandonment and resulting
breach of its contract with the Company without cause or justification and for
tortious interference with its contract with Olin (ii) exemplary damages as a
result of its tortious interference with the Olin contract, (iii) the Company's
legal fees and costs, and (iii) any and all other damages caused the Company by
Calabrian's filing of an action against the Company that is without merit.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
NOXSO Corporation (the "Company") is a development stage company
principally engaged in developing, testing, and marketing of a process (the
"NOXSO Process") to remove a high percentage of the pollutants which cause "acid
rain" from flue gas generated by burning fossil fuel. In August 1994, the
Company entered into a Project Agreement (the "Alcoa Project Agreement") with
Alcoa Generating Corporation ("Alcoa") for the design, construction, and
operation of the first commercial-size demonstration of the NOXSO Process (the
"NOXSO Commercial Demonstration Facility") at Alcoa's Warrick Generating Station
in Newburgh, Indiana. The project definition and design phases of the Alcoa
Project have been completed by the Company and the construction phase was
commenced in June 1995. The United States Department of Energy (the "DOE") has
agreed to fund one-half of the costs of the Alcoa Project and the related
project at a facility owned by Olin Corporation that is described below, up to
$41.1 million. The Company has received all necessary approvals from the DOE to
proceed to complete the Alcoa Project.
In April 1995, the Company entered into a License, Construction, Lease and
Sulfur Supply Agreement (the "Olin Agreement") with Olin Corporation ("Olin") to
construct a complementary facility (the "Olin Facility") in Charleston,
Tennessee to convert elemental sulfur which, after the Alcoa Project is
completed, is to be generated as a by-product of the Alcoa Project, into sulfur
dioxide. Under the Olin Agreement, as amended by an amendment that the parties
are in the process of executing, provided that the Olin Facility produces sulfur
dioxide in accordance with specifications set forth in the Olin Agreement, Olin
is required for a 10-year period after the Olin Facility is operational, to pay
the Company $3 million annually, and the Company is to deliver to Olin 16,000
short tons per year of elemental sulfur.
14
<PAGE>
The Company is in the process of completing construction of the Olin
Facility and anticipates that it will be substantially completed by December
1996 and operational by January 1997. There can be no assurance that the Company
will meet the foregoing schedule. Once the Alcoa Project is operational, it is
anticipated that all or virtually all of the 16,000 short tons of elemental
sulfur that is required to be supplied to the Olin Facility will be produced by
the Alcoa Project. Unless and until the Alcoa Project becomes operational, the
Company will have to pay the costs of purchasing elemental sulfur from
suppliers.
The Company is also engaged in utilizing its engineering expertise to
develop other technologies, processes, substances and facilities that can be
used to assist in complying with environmental laws, although all such efforts
are at this time developmental in nature. The Company also from time to time
performs research and development for others on a project basis. The Company has
also licensed the NOXSO Process for distribution in Europe and Asia under a
License Agreement with FLS miljo a/s, a Danish corporation engaged in the
construction and design of utility power plants ("FLS"). In addition, the
Company is offering construction management services to others through its
70%-owned subsidiary, PROJEX, Inc.
Liquidity and Capital Resources
The Company is a development stage company engaged in developing and
testing the NOXSO Process. Since inception, the Company has dedicated
substantially all of its resources to the acquisition, development and testing
of the NOXSO Process. Since its inception, the Company's capital resources have
been derived from various sources including the sale of the Company's common
stock in both public and private offerings, government grants, research
contracts and cooperative research activities. The total of capital raised from
inception through September 30, 1996 was approximately $18.2 million.
The Company's resources have been used to conduct a series of test programs
which provided the data necessary to bring the NOXSO Process to its present
state of development. The first of these programs began in 1980 in Paducah,
Kentucky, at the TVA Shawnee Steam Plan. The next phase of development began in
1985, after a move to DOE's Pittsburgh Energy Technology Center, and these tests
continued through June of 1989. This development program was followed by a
pilot-scale facility at the Ohio Edison power plant located at Toronto, Ohio.
This pilot-scale project facility was completed in August of 1993 with over
10,000 hours of testing. The Company is constructing the NOXSO Commercial
Demonstration Facility for Alcoa. It is also constructing a complementary plant
at Olin's plant in Charleston, Tennessee. The plant will convert elemental
sulfur into liquid sulfur dioxide.
During the three months ended September 30, 1996, the increase in cash and
equivalents was the net result of several transactions. The major cash inflows
were proceeds of $250,000 from a commercial loan and $3.0 million in collection
of accounts receivable from advance billings on the full-scale demonstration
facility. These funds have been used during the first quarter to pay expenses of
operating the Company as well as to cover the costs associated with the building
of the NOXSO Commercial Demonstration Facility and the Olin Facility. The
Company's current ratio decreased from 0.45:1 at June 30, 1996 to 0.31:1 at
September 30, 1996. This decrease is the result of costs of the NOXSO Commercial
15
<PAGE>
Demonstration Facility and the Olin Facility exceeding the funds received by the
Company. As of September 30, 1996, the Company had working capital of ($6.6
million) as compared to ($4.4 million) at June 30, 1996. This decrease is the
result of the increased activity in the construction of the NOXSO Commercial
Demonstration Facility and the Olin Facility. The notes payable has increased as
a result of the increased borrowing on a commercial loan.
The Alcoa Project Agreement requires that the Company have in hand by a
designated date financial resources available for the performance of its
obligations under the Alcoa Project Agreement of at least $35 million in
addition to funds to be provided by the DOE. If such financing is not in hand by
the designated date, Alcoa has the right, at its option, to terminate its
obligations under the Alcoa Project Agreement. The designated date under the
Alcoa Project Agreement has recently been extended by Alcoa to January 31, 1997.
The Company does not believe that Alcoa will extend the date beyond January 31,
1997.
The funds needed, in addition to those available from the DOE, to satisfy
the requirements of the Alcoa Project Agreement and to complete the Alcoa
project are to be provided from equity capital and the proceeds of Bonds. On
September 16, 1996, the Indiana Development Financing Authority (the
"Authority") adopted resolutions approving the issuance of $40 million in
Indiana State Revenue Bonds to fund costs of the Alcoa Project. The Company has
not entered into a final agreement with the issuer of a direct-pay letter of
credit required to support and secure the Bonds. The Company is also still
seeking to resolve certain concerns of representatives of the Authority and has
been informed by those representatives that the Authority intends to perform
additional due diligence regarding the Company and its ability to repay the
Bonds should expected project revenues be insufficient to fully repay the Bonds.
In order to satisfy conditions to the issuance of the Bonds, among other
things the Company must obtain additional equity capital of approximately $5
million prior to January 31, 1997, $2.5 million of which is to be used to fund
one-half of a supplemental reserve to secure the Bonds and the remainder of
which is to be used to repay an outstanding loan made to the Company by Olin and
to pay certain payables incurred in connection with the Olin Project. In
addition to the equity capital required to satisfy conditions to the issuance of
the Bonds, the Company expects it will be necessary to raise additional equity
capital, which it will use to pay the costs of the NOXSO Commercial
Demonstration Facility, enabling it to lower the amount of Bonds that the
Authority must issue to finance the NOXSO Commercial Demonstration Facility. The
Company believes that by raising such capital and lowering the amount of Bonds
that must be issued by the Authority, it will be able to satisfy the concerns of
the Authority. There can, however, be no assurance that the Company can raise
additional equity capital to further reduce the amount of Bonds that the
Authority must issue to finance the Project or that the Company will otherwise
be able to satisfy the concerns of the Authority.
The Company intends to seek to raise the required $5 million of equity
capital and additional equity capital through private placements of its common
stock and/or subordinated debt securities that are convertible into common
stock, the terms of which placements are
16
<PAGE>
presently being negotiated and are contingent upon the satisfactory completion
of due diligence and other conditions. Any shares issued in the private
placement or upon conversion of subordinated debt securities are expected to
contain restrictions on resale in accordance with Federal securities laws and,
thus, are expected to be sold at a discount to the market price of freely
tradeable shares.
The other half of the supplemental reserve is to be provided by the County
of Warrick, Indiana either in cash or by causing a letter of credit or its
equivalent to be issued. During October 1996 the Warrick County Council, upon
the recommendation of the Warrick County Commissioners, approved supporting the
project by the issuance of debt surety insurance. Arrangements for the issuance
of such surety insurance have not been formalized and its terms have not been
approved by the Authority and the issuer of the direct-pay letter of credit that
is to support the Bonds.
The statements above and elsewhere in this Report that suggest that the
Company is likely to, or will, meet its various objectives (including that the
Company expects to sell the Bonds, obtain equity capital and successfully
complete the Alcoa Project and the Olin Project) are forward looking statements.
Various factors could prevent the Company from realizing these objectives,
including the following:
The Company expects to service the Bonds from (i) payments from Olin to the
Company pursuant to the Olin Agreement to purchase elemental sulfur in the
aggregate amount of $3 million annually and (ii) the sale of SO2 Allowances
("Allowances") the Company is to receive under the Alcoa Project Agreement.
The Alcoa Project represents the first Full-Scale Commercial Demonstration
of the NOXSO Process. As such, it is possible that it will not perform as
expected, which could substantially reduce the number of Allowances that the
Company receives under the Alcoa Project Agreement or which could result in a
termination by Alcoa of the Alcoa Project Agreement. A substantial reduction in
the number of Allowances that the Company receives under the Alcoa Project
Agreement could have a material impact on the cash flows that the Company
intends to use to service the Bonds. Termination of the Alcoa Project Agreement
would in all likelihood result in acceleration of the Company's obligations with
respect to the Bonds, which the Company would likely be unable to pay. In
addition, in such case the Company would in all likelihood not have the
resources to commercially demonstrate the NOXSO Project or to market or sell it
to other parties.
Because the Alcoa Project represents the first Full-Scale Commercial
Demonstration of the NOXSO Process, expenses to operate and maintain the project
may exceed the Company's expectations even if the project otherwise performs in
accordance with the Company's expectations. In such event, the Company would
have to use cash generated from other operations to fund those expenses. The
Company, as a development-stage company, does not at this time have other
significant operations that would provide such cash flow, and unless it develops
such operations and/or is able to effectively market the NOXSO Process (which
may not be possible if, as a result of the additional expense of operation, the
NOXSO Process fails to operate effectively and economically as compared to
competing technologies), the Company may be unable to generate revenues to fund
such costs.
17
<PAGE>
In addition, in the event that the Company is unable to fund its share of
project costs or timely complete the Alcoa Project, the Company could lose the
DOE's funding. If the Company loses its DOE funding, it does not expect to be
able to complete a Full-Scale Commercial Demonstration of the NOXSO Process.
This loss of funding would require that greater emphasis be placed upon the test
results of the Company's pilot plant conducted at Toronto, Ohio and on a
demonstration currently being conducted by FLS in Denmark. Because of the
reluctance of regulated utilities to purchase process technology which has not
been tested on a commercial scale, due to the uncertainty of cost
considerations, the Company believes that it would be much more difficult to
secure sales of the NOXSO Process to public utilities in the United States if
the Alcoa Project is not funded and completed.
If the Olin Facility fails to perform and provide Olin with sulfur dioxide
in accordance with the specifications set forth in the Olin Agreement, Olin will
not be required to pay to the Company $3 million annually for 16,000 short tons
of elemental sulfur, which will most likely make it impossible for the Company
to service the Bonds.
Because of the many conditions to the issuance of the Bonds that have not
been satisfied, there can be no assurance that the Bonds will be issued on or
before January 31, 1997. If those conditions are not satisfied by that date, the
Company anticipates that Alcoa will terminate the Alcoa Project Agreement.
Under the Olin Agreement, once the Olin Facility is operational, the
Company is to supply to Olin 16,000 short tons of elemental sulfur per year. The
Company expects to pay for elemental sulfur to satisfy its obligations under the
Olin Agreement until April 1998, the month that the Alcoa Project is scheduled
to be operational. If the NOXSO Commercial Demonstration Facility fails to
produce elemental sulfur commencing in May 1998 in such quantities as will
enable it to be used to satisfy the Company's obligation to deliver to Olin
16,000 short tons of elemental sulfur per year pursuant to the Olin Agreement,
the Company will be required to purchase additional elemental sulfur for
delivery to Olin thereafter. Based on historical prices for elemental sulfur, it
is anticipated that the cost of elemental sulfur purchased in the open market
will be approximately 12%-25% of the consideration the Company is to receive
from Olin under the Olin Agreement. Such an expenditure, if required for any
significant period of time after April 1998, could have a material adverse
impact on the cash flows that the Company intends to use to service the Bonds.
Furthermore, the market for Allowances is not well-developed, having
developed since the implementation in 1990 of the amendments to the Clean Air
Act, and there can be no certainty that the market price for Allowances will
remain at current levels. In such event, the funds that the Company currently
expects to receive from the sale of earned Allowances will not be available to
service the Bonds.
Revenues from the NOXSO Commercial Demonstration Facility and the Olin
Facility are required to be held in trust to secure repayment of the Bonds until
they are paid in full in the year 2011. Accordingly, those revenues will not be
available to the Company to pay its ordinary operating expenses and to provide
for cash flow needs, other than those specifically related to the Alcoa Project
or the Olin Facility. As a result, the Company will have to find other sources
of funds to provide for its ordinary operating and cash flow needs.
Consequently, even if the NOXSO Commercial Demonstration Facility operates
sufficiently
18
<PAGE>
well to enable the Company to service the Bonds, if it fails to meet the
expectations of the Company's prospective customers or to operate effectively
and economically as compared to competing technologies, the Company may not be
able to establish the NOXSO Process as a viable competitor in the marketplace
and thus may not be able to generate revenues to meet its other needs.
Further, the inability of the Company to fund and timely complete the Alcoa
Project could result in the loss of revenues from utilities which retrofit prior
to the year 2000 in order to comply with requirements of the 1990 amendments to
the Clean Air Act. In such event, the Company customer base could be limited
principally to those power stations having the ability to postpone compliance
beyond the year 2000 by accumulating or purchasing Allowances.
Results of Operations
Inception to September 30, 1996
To date, the Company has not derived any revenues from operations. All
revenues to date have consisted of research funding, government grants,
reimbursement of project costs and interest income, aggregating $8.5 million
through September 30, 1996. As a result of the significant expenses incurred
from inception through September 30, 1996 in connection with the acquisition,
development and testing of the NOXSO Process, as well as general and
administrative expenses that have been incurred, the Company had an accumulated
deficit of $12.0 million at September 30, 1996. Since inception through
September 30, 1996, the Company's total costs and expenses were $20.5 million,
including $7.7 million relating to salaries and benefits.
Three Months Ended September 30, 1996 Compared to the Three
Months Ended September 30, 1995
Total funding, interest income and reimbursement of project costs for the
three months ended September 30, 1996 and 1995, respectively, were $206,524 and
$18,957 while total costs and expenses for the same periods were $346,424 and
$95,172, respectively. The increase in revenues for the three month period ended
September 30, 1996 compared to September 30, 1995 is due to an increase in
grants received compared to the same period last year and the inclusion of
revenues from PROJEX, which began operations in November 1995. The increase in
costs and expenses for the three months ended September 30, 1996 compared to
September 30, 1995 is due to the Company capitalizing proportionately less costs
related to the NOXSO Commercial Demonstration Facility and the Olin Facility
compared to the same period a year ago.
During the fourth quarter of 1995, the Company began to capitalize its
share of costs associated with the NOXSO Commercial Demonstration Facility and
the Olin Facility. As indicated above, the Alcoa Project Agreement between the
Company and Alcoa was executed for the design, construction and operation of a
demonstration facility. This agreement included a number of conditions, all of
which have been met by the Company, with the exception of obtaining financing of
its share of the facility. As discussed above, the Indiana legislature
19
<PAGE>
passed a bill which established a state sponsored program whereby the state
could provide a guarantee for the repayment of revenue bonds for clean coal
projects. Approvals for issuance of such guarantee have been obtained although
as described above a number of matters must be resolved and conditions must be
satisfied prior to issuance of the Bonds. In addition, the DOE has approved the
Company's Continuation Application through the construction phase. Given the
current status of the project and the nature of the costs being incurred,
management believes it is appropriate to begin to capitalize the cost of the
NOXSO Commercial Demonstration Facility and the Olin Facility as
construction-in-progress. Future funds received by the DOE will be used to
offset total costs incurred on the project with the result that net costs
capitalized on the balance sheet will reflect the Company's portion of the
projects costs.
20
<PAGE>
PART II - OTHER INFORMATION
Item 3. Legal Proceedings.
In late August 1996 a Complaint was filed against the Company in the
District Court of Jefferson County, Texas, by Calabrian Corporation
("Calabrian") relating to a Purchase Agreement dated October 16, 1995 between
the Company and Calabrian (the "Purchase Agreement") and a related License
Agreement, dated effective as of September 1, 1995, between the Company and
Calabrian. Under the agreements, Calabrian agreed to supply to the Company for a
fixed price a portion of the Olin Facility to be constructed by the Company for
Olin Corporation. The Olin Facility will convert elemental sulfur into liquid
sulfur dioxide for use by Olin under the Olin Agreement. The complaint alleges
that the Company took over direction and supervision of Calabrian's subcontract
relating to the construction of components of the Olin Facility, disrupting
Calabrian's plans with respect to the facility and constituting an unlawful
interference with Calabrian's contractual relationships with its subcontractors,
and that the Company defaulted in certain payment obligations to Calabrian under
the Purchase Agreement. The complaint requests damages in the amount of
$665,000, representing the balance of the fee allegedly owed to Calabrian under
the Purchase Agreement, unspecified damages caused Calabrian as a result of the
alleged interference with contract, any additional damages caused Calabrian by
the Company's conduct and an order prohibiting the Company from disclosing to
any third party, other than Olin, any confidential and proprietary information
of Calabrian. The Company has removed the action to the United States District
Court for the Eastern District of Texas, Beaumont Division.
In October 1996, Calabrian amended its Complaint to withdraw its request
for a temporary and permanent injunction enjoining the Company from using
Calabrian's technology.
The Company's Counsel has advised that it believes the causes of action in
Calabrian's complaint are without merit. The Company has filed an answer and
counterclaim denying the substantive allegations of the complaint and requesting
(i) actual damages caused the Company by Calabrian's abandonment and resulting
breach of its contracts with the Company without cause or justification and for
tortious interference with its contract with Olin, (ii) exemplary damages as a
result of its tortious interference with the Olin contract, (iii) the Company's
legal fees and costs, and (iv) any and all other damages caused the Company by
Calabrian's filing of an action against the Company that is without merit.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) No reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1996.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
NOXSO CORPORATION
----------------------
Registrant
Dated: November 13, 1996 L. G. NEAL
----------------------
President
JOHN L. HASLBECK
----------------------
Vice President
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,199
<SECURITIES> 1,000
<RECEIVABLES> 698
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,925
<PP&E> 10,018
<DEPRECIATION> 425
<TOTAL-ASSETS> 12,524
<CURRENT-LIABILITIES> 9,505
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 2,892
<TOTAL-LIABILITY-AND-EQUITY> 12,524
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 346
<OTHER-EXPENSES> (207)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (143)
<INCOME-TAX> 0
<INCOME-CONTINUING> (143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (143)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
