SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the fiscal year ended June 30, 1996, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the transition period from ________ to ________
Commission file number 0-17454
NOXSO CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1118334
---------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2414 Lytle Road
Bethel Park, PA 15102
--------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (412) 854-1200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class
- - ----------------------------
Common stock, $.01 par value
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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
--- ---
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant at September 30, 1996: $38,138,300.
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 September 30, 1996
- - ---------------------------- ---------------------------------
Common stock, $.01 par value 9,656,611
Documents Incorporated by Reference: None
<PAGE>
PART I
Item 1. Business
Background
NOXSO Corporation (the "Company") is a development stage company
incorporated in Virginia on August 28, 1979. The Company is principally engaged
in developing, testing, and marketing a process that is a dry post-combustion
emission control technology which uses a regenerable sorbent to remove a high
percentage of the pollutants which cause "acid rain" and ground level ozone from
flue gas generated by burning fossil fuel (the "NOXSO Process"). See "The NOXSO
Process" in this Item 1.
From 1980 until 1984, the Company devoted all of its efforts and resources
to identifying a test site to conduct basic research on the NOXSO Process and to
designing, constructing and operating a mobile pre-pilot testing apparatus. The
Company installed the pre-pilot apparatus (at a facility having the equivalent
of approximately 1/60 megawatts in electrical generating capacity) on a
coal-fired utility boiler at the Tennessee Valley Authority's Shawnee Steam
Plant in Paducah, Kentucky. From 1982 to 1984, the Company operated this
apparatus, developed two separate experimental systems as part of the apparatus
and obtained the performance data needed to advance the Company's development
program.
From March 1985 to July 1986, the Company designed, built and operated a
pre-pilot plant demonstration of the NOXSO Process at the Pittsburgh Energy
Technology Center operated by the U.S. Department of Energy ("DOE") under a
Cooperative Agreement with the DOE. The objectives of this Cooperative Agreement
were to establish a workable system on a larger pre-pilot scale plant that was
cost effective and to confirm the operating performance and life of the NOXSO
sorbent. Under the Cooperative Agreement, the DOE modified an existing pre-pilot
plant and provided the equipment and operating personnel for the pre-pilot plant
test.
From 1988 to 1993, the Company, W. R. Grace & Co. ("Grace") and MK-Ferguson
Company ("MK-Ferguson") prepared proposals, designed, constructed, operated and
compiled and analyzed results for a pilot-scale demonstration plant utilizing
the NOXSO Process (the "Pilot-Scale Facility") at an Ohio Edison power plant in
Toronto, Ohio under a grant from the DOE and the Ohio Coal Development Office
supplemented by funds from the Company and Grace. The project entailed the
construction, operation and evaluation of the first larger-scale
fully-integrated NOXSO Process treatment system, treating flue gas generated
from approximately 5 megawatts of electrical generating capacity. The Company
operated the test program at the Pilot-Scale Facility from July 1991 to August
1993. The test program was successfully performed and the results submitted to
and approved by the DOE in 1993.
In 1989, the Company, MK-Ferguson and Grace submitted a proposal on behalf
of the Company to the DOE to secure government funding to commence the
development of a full-scale
2
<PAGE>
commercial demonstration of the NOXSO Process (the "Full-Scale Commercial
Demonstration") at a facility that had approximately 100 megawatts of electrical
generating capacity. In December 1989, the Federal government's Clean Coal III
Technology Program selected the Company's proposal for a Full-Scale Commercial
Demonstration. In March 1991, the DOE entered into a Clean Coal Technology
Cooperative Agreement with MK-Ferguson (the "Cooperative Agreement") to provide
funding for one-half of the then-estimated $66 million cost of the project. In
September 1994, the Cooperative Agreement was amended and novated to NOXSO by
MK-Ferguson.
The site originally proposed for the construction of the Full-Scale
Commercial Demonstration was the Niles generating station of Ohio Edison.
However, during the course of the Company's preliminary design engineering at
this site, the Company discovered that the plant's unique boiler design as well
as geological factors would necessitate costly and time consuming modifications
to the plant and adaptations to the NOXSO Process, which were also likely to
cause the NOXSO Process to operate less effectively. In addition, Ohio Edison
expressed a reluctance to purchase the process plant following the conclusion of
the Full-Scale Commercial Demonstration. Accordingly, the Company determined not
to proceed with the project at this site.
In August 1994, following its search for an alternative site to operate a
Full-Scale Commercial Demonstration, the Company entered into a Project
Agreement (the "Alcoa Project Agreement") with Alcoa Generating Corporation
("Alcoa") for the design, construction, and operation of a proposed
demonstration facility (the "NOXSO Commercial Demonstration Facility") at
Alcoa's Warrick Generating Station in Newburgh, Indiana (the "Alcoa Project").
The project definition and design phases of the Alcoa Project 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 DOE to proceed to complete the
Alcoa 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. See "The Alcoa
Project" in this Item 1.
In April 1995, the Company entered into a License, Construction, Lease and
Sulfur Supply Agreement (the "Olin Agreement") with Olin Corporation ("Olin").
Under the Olin Agreement, the Company is constructing a complementary facility
(the "Olin Facility") at Olin's plant in Charleston, Tennessee that is to
convert elemental sulfur which, after the Alcoa Project is completed, is to be
generated as a by-product of the Alcoa Project, into liquid sulfur dioxide (the
"Olin Project"). See "The Olin Project" in this Item 1.
The Company is also engaged in utilizing its engineering expertise to
develop other technologies, processes, sorbents 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. See "Other Business" in
this Item 1. In addition, the Company is offering construction management
services to others through its 70%-owned subsidiary, PROJEX, Inc. See
"Construction Management Services" in this Item 1.
3
<PAGE>
The NOXSO Process
The NOXSO Process is a process developed by the Company to remove a high
percentage of those pollutants which cause "acid rain" and ground level ozone
from flue gas generated by burning fossil fuel. The NOXSO Process is
distinguishable from current conventional flue gas desulfurization processes in
that it does not use liquids or slurries in a "scrubber" and does not generate
quantities of solid waste requiring disposal. More importantly, it captures and
removes nitrogen oxides as well as sulfur oxides while conventional "scrubbers"
capture and remove sulfur oxides only. The NOXSO Process uses sodium (deposited
by a patented process which is part of the NOXSO Process technology) on porous
spheres of alumina (aluminum oxide), to capture both sulfur oxides and nitrogen
oxides contained in the flue gas.
The capture of both sulfur oxides and nitrogen oxides, referred to as
sorption, is carried out by contacting the flue gas with the NOXSO Process
sorbent (sodium on alumina) as the flue gas exits the boilers, just before it is
discharged to the power plant chimney. The flue gas leaving the NOXSO Process
sorption vessel contains small amounts of residual sulfur oxides and nitrogen
oxides as well as fine particles of coal ash and minor amounts of sorbent
"fines." A filtering system is used to remove this particulate matter prior to
release to the power plant chimney. The sorbent material, now holding the
chemically-bound sulfur oxides and nitrogen oxides is removed from the sorption
vessel and conveyed to the regeneration portion of the NOXSO Process system. In
the regeneration section, the sorbent is heated and treated using any number of
reducing agents to form sulfur oxides and hydrogen sulfides which are further
processed to produce elemental sulfur. The nitrogen oxides released when the
sorbent is heated to regeneration temperature are returned with air to the coal
combustor. In the combustor, the nitrogen oxides are reduced to nitrogen and
oxygen which are released to the atmosphere. The hot combustion air returned to
the combustor by the NOXSO Process results in a heat credit which is used to
offset process operating costs. The sulfur is recovered (and can be sold), and
the nitrogen is released into the atmosphere. The sorbent, now regenerated and
able to collect more sulfur oxides and nitrogen oxides, is cooled and returned
to the sorption vessel. In demonstrations conducted to date, between 70% and 95%
of the nitrogen oxide emissions and in excess of 95% of the sulfur oxide
emissions were simultaneously removed.
Regulatory Background
The burning of coal, oil and gas as fuel for electric power generation in
power plants results in gases being released into the earth's atmosphere. This
gaseous emission is commonly referred to as "flue gas." Certain of the chemicals
and particles contained in flue gas have been found to be harmful to man, other
animals, plants, lakes, forests and streams and to cause damage to paint, cloth,
building materials and other substances. These harmful chemicals and particles,
commonly referred to as air pollutants, are the source of acid rain and ground
level ozone and have been the subject of much investigation by the scientific
community and, since the passage of the Clean Air Act, the object of federal
government regulation through the actions of the United States Environmental
Protection Agency (the "EPA"). Of the many potential air pollutants contained in
flue gas from a coal-fired power plant, only sulfur dioxides ("SO2"), nitrogen
oxides ("NOx") and particulate matter have been
4
<PAGE>
regulated through imposition of emission limitations, i.e., a limitation on the
amount of each pollutant that the source (in this case, a power plant) may
release into the atmosphere. Until recently, Federal regulation of these
emissions applied only to new power plants that commenced operations after
September 1978.
The Clean Air Act, when enacted into law in 1979, established new source
performance standards that required the removal of a minimum of 70% of the
sulfur dioxide when uncontrolled emissions are less than 0.6 pounds of sulfur
dioxide per million Btu and a minimum of 90% of the sulfur dioxide when
uncontrolled emissions are greater than or equal to 1.2 pounds of sulfur dioxide
per million Btu. When uncontrolled emissions are between 0.6 and 1.2 pounds
(inclusive) of SO2, the minimum percentage removed is computed on a sliding
scale and falls between 70% and 90%. With respect to power plants for which
construction was commenced between August 1971 and September 1978, the Clean Air
Act limited sulfur dioxide emissions to an absolute limit of 1.2 pounds of
sulfur dioxide per million Btu through the use of either low-sulfur coal or
scrubbers, as selected by the plant operator.
In 1990, amendments to the Clean Air Act were enacted into law that require
the utility industry to reduce emissions of sulfur and nitrogen oxides from
existing fossil-fuel-fired power plants. This legislation regulates all utility
power plants having a generating capacity of at least 25 megawatts regardless of
when placed into service. The amendments will force drastic cuts in SO2
emissions and place caps on nationwide SO2 and NOx emissions from fossil-fuel
boilers. The 1990 Clean Air Act amendments and regulations thereunder establish
a "market-based" system, rather than the "command-and-control" system previously
used to control SO2.
The law provides for a two-phased program to reduce SO2 emissions
nationwide by 10 million tons from 1980 levels. When fully implemented, the
amendments will limit additional annual emissions of SO2 to 8.9 million tons.
Once reduced to this level, electricity generators will be required to maintain
the level indefinitely, regardless of capacity additions. Phase I, which went
into effect in 1995, affects 261 boilers at 110 power plants which have been
identified by EPA as having the highest emissions. Phase II, which begins
January 1, 2000, will require the large generators to reduce emissions by an
additional 50% and expand the program to essentially all fossil-fuel utility
boilers with generating capacity of 25 megawatts or more, of which there are
approximately 2,000. Industrial units such as the ones owned by Alcoa may become
part of the program through certain "opt-in" provisions of the regulations. In
July, 1996, Alcoa opted into the program with respect to Unit 2 (the unit at
which the NOXSO Commercial Demonstration Facility is to be built) at its Warrick
Power Plant in Newburgh, Indiana.
The NOx emission provisions of the amendments are not nearly as well
defined as the SO2 provisions. Initial NOx reduction levels are to be
established by the EPA by January 1, 1997. Thereafter, the EPA is to adopt a
program for NOx reduction. The EPA has indicated that it is considering creating
a NOx allowance program similar to the SO2 allowance Program, but there can be
no assurance such a program will be implemented.
5
<PAGE>
Under the SO2 allowance program, each generator receives SO2 Allowances
("Allowances") at the beginning of each year that, when used, allows it to
generate one ton of SO2 emissions during the year of use. To the extent a
generator does not expend Allowances in a year, they can be banked. Banked
Allowances can be applied to future use, thus enabling facilities to execute
their compliance and allowance strategies according to individual plant
reduction requirements, system-wide planning cycles, and pollutant-reduction
requirements throughout their entire system. Allowances can also be sold for use
by others to enable them to emit SO2.
The standards set by the 1990 amendments, as they relate to sulfur oxide
emissions, are unlikely to be met without the use of flue gas desulfurization
("FGD") systems or certain advanced coal technologies now under development such
as the NOXSO Process. Available FGD systems, commonly called "scrubbers,"
present operational problems, consume energy and, except for a few "regenerable"
processes, generate large volumes of solid waste material which must be disposed
of in an environmentally acceptable manner.
The Alcoa Project
Under the Alcoa Project Agreement, the proposed NOXSO Commercial
Demonstration Facility is to be built to treat a flue gas stream from Alcoa's
Warrick Power Plant Unit Number 2, a 150 megawatt electrical generating
facility. The projected cost of designing and constructing the Alcoa Project is
estimated to be $52 million of which approximately $9.8 million has been
expended as of September 30, 1996. In addition, as described below under "The
Olin Project" in this Item 1, the Company is constructing the complementary Olin
Facility for an estimated cost of $11 million. The DOE has agreed to provide up
to $41.1 million to pay 50% of the costs incurred by the Company to design and
construct the NOXSO Commercial Demonstration Facility and the Olin Facility and
to pay for certain operating costs of the Alcoa Project during its first two
years of operation (the "Demonstration Period"). The Company must provide or
arrange for the balance of the funding. Through September 30, 1996 the DOE had
provided approximately $9 million to the Company in connection with the Alcoa
Project and Olin Project and approximately $9 million had been provided by the
Company from its capital resources and the loans from Olin and Praxair, Inc.
described below.
The Alcoa Project Agreement provides for the two-year Demonstration Period
to be followed by an 11-year operating period ending no later than August 31,
2011 during which period the Company is to own and operate the proposed facility
(the "Operating Period").
All conditions precedent to the Alcoa Project Agreement have been satisfied
with one exception. On or before October 31, 1996, NOXSO must present to Alcoa
evidence that it has 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. As described below, NOXSO will seek
to satisfy the condition through the sale during October 1996 of $40 million of
revenue bonds issued by the Indiana Development Financing Authority, the
proceeds of which are to be used to finance the Alcoa Project.
6
<PAGE>
Under the Alcoa Project Agreement, the Company is to receive approximately
17,000 Allowances per year, the actual amount varying depending upon the removal
efficiency of the NOXSO Commercial Demonstration Project. The Company believes
that the NOXSO Process will work in a manner that will permit it to receive the
maximum number of Allowances available under the Alcoa Project Agreement,
although there can be no assurance that it will receive the maximum number of
Allowances.
As discussed above, the 1990 amendments to the Clean Air Act and subsequent
regulations promulgated pursuant to those amendments have created a market-based
system for reducing SO2 emissions. Under that system, which began to be
phased-in in 1995, electric utility generators receive Allowances at the
beginning of each year. Each allowance permits the generator to emit one ton of
SO2 in a year. Generators can bank Allowances not used in a year or sell them to
other electricity generators to be applied to permit them to emit additional
SO2. The Company believes that the revenue it will receive from the sale of
Allowances, together with revenue it receives under the Olin Agreement described
below will be adequate to pay all costs of operating those projects and of the
related Bond financing described below. However, because the Allowances program
is the result of the 1990 amendments to the Clean Air Act and the regulations
thereunder, some of which were not promulgated until 1995, and because the
emission restrictions began to be phased-in in 1995, it is not possible to
predict with any certainty the value of the Allowances NOXSO is to receive from
Alcoa.
The Alcoa Project Agreement also provides that if a system similar to the
SO2 allowance system is developed during the life of the Alcoa Project Agreement
that awards Alcoa allowances for reductions in NOx emissions effected by the
NOXSO Commercial Demonstration Facility, the parties are to revise the Alcoa
Project Agreement to provide that, under mutually agreeable conditions, the
Company will receive the incremental economic benefit of the nitrogen oxide
allowances received as a result of the NOXSO Process after accounting for
economic burdens, if any, imposed on Alcoa to comply with the NOx allowance
program. The amendments to the 1990 Clean Air Act mandate reductions in nitrogen
oxide emissions, but do not create an allowance program for those emissions.
Although some states, including California, have adopted nitrogen oxide
allowance programs, and the U.S. EPA is considering adoption of such a program
to implement the NOx provisions of the 1990 amendments to the Clean Air Act,
neither Indiana nor the U.S. government has adopted such a program and there can
be no assurance that such a program will be created or implemented during the
life of the Alcoa Project Agreement or that there will be any incremental
benefit available to the Company as a result of any such program.
The Company will not receive any other payments or revenues under the Alcoa
Project Agreement. The Company is required under the Alcoa Project Agreement to
pay the costs of operating the NOXSO Commercial Demonstration Facility during
the 11-year Operating Period. Alcoa is to pay certain of such costs during the
two-year Demonstration Period (with the remainder being paid by NOXSO).
7
<PAGE>
If the NOXSO Process does not work as expected or, in certain other
instances, including if there is a cessation in the Allowance program or some
other legislative change or event that results in a substantial reduction in the
Allowances available to Alcoa, Alcoa has the right to terminate the Alcoa
Project Agreement. Alcoa also has the right, subject to certain conditions, to
terminate the agreement if it ceases to operate the unit at its Newburgh,
Indiana plant (Unit Number 2) that is to provide the flue gas stream to be
treated at the NOXSO Commercial Demonstration Facility. Under certain
circumstances, the Company has the right to treat the flue gas from a different
unit at Alcoa's Newburgh plant if Alcoa ceases to operate Unit Number 2.
During the term of the Alcoa Project Agreement, until the end of the
Operating Period, the Company will own the NOXSO Commercial Demonstration
Facility. At the end of the operating period, at the option of Alcoa, in
consideration of the payment of $500, the Company is required to deliver title
to the NOXSO Commercial Demonstration Facility to Alcoa.
The Olin Project
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
$11 million, of which approximately $8.2 million has been expended to date.
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 to the Company $3.4
million annually which amount is subject to adjustment after six years to
account for changes in the Company's cost of producing elemental sulfur at the
Alcoa Project, and the Company is to deliver to Olin 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 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. See "Forward
Looking Statements" in this Item 1.
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 (exclusive of the cost of
transportation) 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 thereafter
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.
8
<PAGE>
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 NOXSO will
meet the foregoing schedule.
In the event that sulfur dioxide produced by the Olin Facility does not
meet the specifications set forth in the Olin Agreement, Olin will have no
obligation to make any payments to the Company. There can be no assurance that
the Olin Facility will produce sulfur dioxide meeting the specifications until
it has been tested. Testing will not commence until the facility is
substantially completed.
Under the Olin Agreement, Olin is responsible for operating and paying the
costs of operation of the Olin Facility other than the cost of replacing capital
items, which costs are to be paid by the Company on a pro rata basis based on
the number of years during the term that remain at the time of the replacement.
Olin and the Company are presently in the process of negotiating an
amendment to the Olin Agreement. Under the amendment, if it is executed, the
annual amount required to be paid by Olin under the Olin Agreement will be
reduced to $3 million annually (subject to adjustment after six years to account
for changes in the Company's cost of producing elemental sulfur at the Alcoa
Project). At the end of the initial 10-year term, Olin would have an option to
purchase the Olin Facility for $2.2 million which purchase price would be
reduced by $250,000 per year over the four years thereafter. In addition, Olin
would agree to purchase at the option of the Company the lesser of (i) its
requirements of elemental sulfur or (ii) 16,000 short tons per year of elemental
sulfur at competitive prices for elemental sulfur established on a yearly basis
during the four-year period after the expiration of the initial 10-year term of
the sulfur purchase portion of the Olin Agreement, plus an additional $1.2
million per year until Olin purchases the Olin Facility.
The Olin Facility consists of an air separation plant that is being
supplied to the Company by Praxair, Inc. and a sulfur dioxide conversion
facility that was to be manufactured and supplied by Calabrian Corporation
("Calabrian") under a Purchase Agreement and License Agreement with the Company.
In May 1996, Calabrian abandoned its portion of the Olin Facility and, as a
result, the Company was forced to assume responsibility for completing the
design and construction of that portion of the project which was abandoned.
Calabrian and the Company are currently engaged in litigation regarding the
abandonment of the project by Calabrian. See Item 3.
Financing
The funds needed, in addition to those available from the DOE, to complete
the Alcoa project are expected to be provided from the proceeds of $40 million
Indiana Development Finance Authority Taxable Clean Coal Technology Variable
Rate Demand Revenue Bonds (the "Bonds"). In March 1995, the legislature of
Indiana passed a bill establishing a state sponsored program under which the
9
<PAGE>
State of Indiana was authorized to support the Bonds with the moral obligation
guarantee described below. On September 16, 1996, the Indiana Development
Finance Authority (the "Authority") adopted resolutions approving the issuance
of the Bonds. However, the Company is still seeking to resolve certain concerns
of representatives of the Authority and 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. In addition, in order to satisfy the conditions to the
issuance of the Bonds, among other things (i) the Company must obtain additional
equity capital of approximately $5 million during October 1996, $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 outstanding loans made
to the Company by Olin and Praxair described below, and (ii) the County of
Warrick, Indiana must fund or irrevocably commit to fund, in cash or by causing
a letter of credit or its equivalent to be issued, $2.5 million to fund the
other half of the supplemental reserve.
The Company intends to raise the required equity capital through a private
placement of its common stock, the terms of which placement are presently being
negotiated and are contingent upon the satisfactory completion of due diligence
and other conditions. Any shares issued in the private placement 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. Some, but not all, required approvals have been obtained in
order for Warrick County to commit to fund its portion of the supplemental
reserve fund.
Accordingly, there can be no assurance that either condition to the
issuance of the Bonds can be satisfied prior to October 31, 1996, the date by
which the Alcoa Agreement 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, to terminate its obligations under the Alcoa Project
Agreement.
As approved by the Authority, the Bonds are to have a 15-year term and are
to bear interest at a rate that will be set by Bear, Stearns & Co. as
remarketing agent (the "Remarketing Agent") on a weekly basis. The rate is to be
the lowest rate (not in excess of 12%) at which the Remarketing Agent, in its
judgment based on prevailing financial market conditions, believes the Bonds
could be sold at a price equal to 100% of the principal amount thereof, plus
accrued interest, on the date of each determination. In the event the
Remarketing Agent fails at any time to set or announce a rate in accordance with
the Bond documents, the rate is to be equal to 101% of the 30-day Federal
Reserve AA composite index rate.
Holders of the Bonds are entitled to tender the Bonds at any time by giving
at least seven days prior notice at a price equal to 100% of the principal
amount thereof, plus unpaid and accrued interest thereon. In such case, the
Remarketing Agent is to use its best efforts to remarket the Bonds. If it is
unable to do so, the letter of credit bank must then purchase the Bonds through
a draw on the letter of credit, in which case the Company will have obligations
with respect to the draw, as described below.
10
<PAGE>
The Bonds are to be subject to mandatory sinking fund redemption
requirements on September 1 of each year. In addition, the Bonds are to be
subject to mandatory redemption upon the expiration of the letter of credit
without extension or in certain other events, and the Company is to have the
right to redeem the Bonds at par at any time.
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, as agent for itself and
other banks. Under the terms being discussed, draws on the letter of credit that
are not repaid within certain time periods are converted into five-year term
loans. Term loans that result from a termination or non-renewal of a letter of
credit are to bear interest at a rate equal to LIBOR plus 1% per annum. Term
loans that result from draws to purchase bonds tendered and not remarketed that
are not reimbursed within 60 days are to bear interest at a rate equal to LIBOR
plus 2.25% per annum. In addition, the default rate is equal to LIBOR plus 2.25%
per annum.
The letter of credit banks are also to receive letter of credit fees equal
to 1.10% during construction of the Alcoa Project and 1% per annum thereafter,
as well as certain other administrative fees. The Company's obligations under
the reimbursement agreement proposed and with respect to repayment of the Bonds
is to be secured by a pledge of all revenues relating to the Alcoa Project and
the Olin Project (collectively, the "Projects"), which revenues are to be held
in trust by a trustee for the letter of credit bank and for the Authority. As a
result, 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.
As a part of the inducement to the letter of credit banks to issue the
letter of credit, the Authority is also to agree to a contractual "moral"
obligation under which, in certain events, it will request an appropriation from
the Indiana General Assembly to provide funds to replenish debt reserves or to
repay the Bonds in full. This contractual moral obligation is not intended to,
and will not, create a debtor liability of the State of Indiana to make any
appropriation or payment to or for the use of the Authority, and the Authority
does not have the power to compel the Indiana General Assembly to appropriate
monies upon request. In certain instances, as a result of appropriations with
respect to the contractual moral obligation, if they are made, the Authority may
purchase the rights of the letter of credit banks under the reimbursement
agreement with the Company. In such cases, the Company would be obligated to the
Authority in the same manner as it is obligated to the letter of credit banks.
In order to provide for construction of the Olin Facility, the Company
obtained a loan from Olin in the amount of $1.874 million that, since April 12,
1996, has borne interest at a rate of 10% per annum. In August 1996, the Company
also obtained the agreement of Praxair to defer payment of the $2.7 million
balance owed for the air separation plant until completion of the bond financing
but no later than September 30,1996. As of October 14, 1996 Praxair was
continuing to perform
11
<PAGE>
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 agreements regarding the Olin loan provide that the loan is to be
repaid on demand, but in no event later than October 31, 1996. The loan is
secured by a security interest in all of the Company's personal property. The
loan proceeds have been or are being used to complete construction of the Olin
Facility.
The Olin loan and the Company's obligations to Praxair are expected to be
repaid with funds available to the Company from the proceeds of the equity
investment described above.
Business Strategy
The principal focus of the Company in the near term will be to finance and
complete the construction of the Alcoa Project. The Company's long-term goals
are to derive revenues from licensing the NOXSO Process to engineering firms
which specialize in construction of pollution control systems, from sublicensing
fees payable on units those firms sell to others, and from royalties on the sale
by suppliers of sorbent sold to users of the NOXSO Process. The Company may also
directly sell the technology to end users in return for licensing fees. If the
NOXSO Process is successfully commercialized, the Company expects that it will
also receive revenue from the provision of technical assistance and process
engineering services and that it will continue to improve and refine the NOXSO
Process.
The Company also intends to utilize its engineering expertise to develop
other technologies, processes, substances and facilities to assist others to
comply with environmental laws and regulations and to perform research and
development projects for others. See "Other Business" in this Item 1.
Markets for the NOXSO Process
The Company believes that the size of the potential market for NOXSO
Process treatment plants will depend on a number of factors. The acid rain
provisions of the amendments to the Clean Air Act passed by Congress in 1990
impose additional restrictions on NOx and SO2 emissions at coal-fired power
plants. Facilities regulated under the law were required to comply with the
Phase I levels by 1995 and Phase II levels by the year 2000. The Company
believes this legislation will increase demand for the NOXSO Process and
competitive processes in and after the year 2000.
According to the DOE, in 1994, 52% of all electricity generated in the
United States was generated by coal-burning power plants. Although concerns over
air quality impose limitations on the use of coal rather than cleaner burning
oil and gas, the Company believes that the increasing dependency of the United
States on foreign oil and limited known domestic reserves of oil and gas,
together with the increase in energy demand, may result in coal playing an
increasing role in
12
<PAGE>
electrical power generation. To the Company's knowledge, there are several new
coal-burning power plants planned for start-up within the next five to 10 years.
However, to the extent existing alternative energy sources become more
attractive or new energy sources are developed and prove to be economically
feasible, the use of coal as an energy source may decrease. This would
materially reduce the potential market for the NOXSO Process.
In addition, the Company believes that, although earlier sales of
commercial NOXSO Process units are possible, for the most part the utility
industry will require commercial-scale demonstration of the NOXSO Process prior
to committing to the installation of such a system to prove the technical and
economic viability of the process. The Company's efforts over the next
approximately two years will be concentrated on establishing a viable full-scale
commercial demonstration of the NOXSO Commercial Demonstration Facility. See
"The Alcoa Project" in this Item 1.
If the NOXSO Process proves successful, the Company intends to license the
NOXSO technology to engineering firms that specialize in the design,
construction and installation of pollution control systems on new and existing
power plants in exchange for a license fee to the Company and sublicense fees
from purchasers of facilities and the Company anticipates receiving royalties
from the sale of sorbent. The Company also intends to promote the NOXSO Process
directly to the utility and independent power producing industries. The Company
expects that there will be a significant educational process required in the
initial marketing of the NOXSO Process. To begin this process, during the past
three fiscal years, the Company established a marketing program by hiring two
senior professional sales engineers who are highly experienced in the utility
industry. The focus of this marketing activity has been to identify a host site
for the Full-Scale Commercial Demonstration and to pursue other opportunities
for future sales of the NOXSO Process. The Company also hopes to secure license
fees from sales in other countries under the FLS License Agreement described
below.
It is anticipated that, if the NOXSO Process is successful, the Company's
revenues will be derived principally from technology license fees and royalties
on the sale of sorbent and, to a lesser extent, by developing other technologies
and performing research and development projects for others and providing
construction management services. See "Construction Management Services" and
"Other Business" in this Item 1.
Competition
The market for pollution control equipment is directly impacted by
environmental laws and regulations. Federal, state, and local governments have
enacted laws which set required reductions in pollutant emissions levels for
certain industries or a specific source category within an industry by specific
dates. The market for the NOXSO Process and the competition for a share of the
market is, therefore, dependent upon deadlines set by regulators and the
commercial readiness of the NOXSO system.
The pollution control business is highly competitive. Numerous companies
are engaged in the construction of flue gas desulfurization systems, and there
are a few companies now engaged in
13
<PAGE>
the development of regenerable systems (systems which, like the NOXSO Process,
do not produce sludge for disposal). At this time, however, the market is
dominated by companies marketing lime and limestone systems (sludge producing
systems).
Many of the companies engaged in the development or construction of flue
gas emission control systems are well-established in this field. The dominant
companies in the United States include General Electric, Babcock & Wilcox
Company, Asea Brown Boveri, Wheelabrator, Joy Bischoff and Pure Air. The Company
does not intend to construct pollution control facilities itself, but will seek
to license the technology to major engineering firms engaged in the design and
construction of pollution control equipment.
Clean coal technologies can be generally grouped into two categories: (i)
retrofitting, which can be used on existing plants to reduce emissions, and (ii)
repowering, which replaces a significant portion of the original power plant and
often increases capacity while reducing emissions. The retrofitting technologies
include lime/limestone scrubbing, limestone injection multi-stage burner, spray
drying, sorbent duct injection and advanced flue gas clean-up, the use of
electron beam radiation to simultaneously remove both sulfur oxides and nitrogen
oxides, the use of metal oxides such as copper for sulfur dioxide control and
selective catalytic reduction of nitrogen oxides by ammonia. The major
repowering technologies include integrated gasification/combined cycle ("IGCC")
and fluidized-bed combustion ("FBC"). IGCC is a power generating process in
which coal is gasified and the sulfur compounds are removed. During this
process, the gas produced is used to fuel a gas turbine and subsequently to
generate steam to operate a steam turbine. FBC is a process of burning coal
while it is in a fluidized or suspended mixture of air and limestone. FBC
extracts sulfur during combustion rather than cleansing the flue gas. Other
clean coal technologies include advanced coal cleaning, modification of the
combustion process to reduce nitrogen oxide production, coal liquefaction and
coal gasification.
At present, the Company is aware of only one commercially available
approach to control both sulfur and nitrogen oxides. Flue gas desulfurization
coupled with selective catalytic reduction of nitrogen oxide is currently being
used in Germany and Japan, where strict regulations governing their emissions
are already in force. This approach uses two separate systems and equipment for
removing sulfur dioxide and nitrogen oxide. The Company estimates, based on its
pilot test results, that the combined cost of using these two methods is greater
than using a NOXSO Process treatment plant for a major utility. In addition, the
Company believes that the NOXSO Process will be more cost-efficient on an
operating basis. At this time, the Company is aware of a limited number of
sulfur oxide/nitrogen oxide control technologies being developed. To the
Company's knowledge, the level at which these technologies are being tested
ranges from the laboratory bench-scale to pilot demonstrations.
The Company believes that where high removal levels of both sulfur and
nitrogen oxides are required (currently the Northeast United States) and where
there is a premium on minimizing solid waste, the NOXSO Process provides
advantages over other competing systems, either currently in commercial use or
under development, for the following reasons:
14
<PAGE>
o The NOXSO Process is a completely dry process and does not generate
any solid waste material that must be disposed of, whereas certain
other systems create toxic substances as a by-product of the reaction
process, as well as quantities of non-toxic substances, both of which
must be removed and disposed of in an environmentally acceptable
manner.
o The NOXSO Process captures and removes a high percentage (70-90%) of
the nitrogen oxides as well as a high percentage (in excess of 90%) of
the sulfur oxides simultaneously in a single reaction, whereas
conventional scrubbers remove only the sulfur oxides and must be
combined with a second system to control nitrogen oxides.
o The NOXSO Process removes sulfur oxides and nitrogen oxides at
moderate temperatures (250[degree] F), which enables the process to be
placed in the power plant at practically any point in the flue gas
train and does not require reheat or special lined stacks. This should
be especially important in retrofit applications, where space is a
significant concern.
o Cost estimates for the NOXSO Process developed by the Electric Power
Research Institute indicate that the cost of building and operating
the NOXSO Process compares favorably to other processes under
development that remove nitrogen and sulfur oxides in a single
process.
o The NOXSO Process requires no modification to the coal combustor,
which enables power generation to continue unabated until the fully
operational flue gas treatment system is integrated into the flue gas
train.
The Company believes that the NOXSO Process may provide a competitive
advantage over other competing systems where high removal levels of SO2, and NOx
are required. In addition, the NOXSO Process has been judged by the Electric
Power Research Institute to be economically competitive with other simultaneous
SO2/NOx control technologies. However, various factors may favor other
technologies or solutions to satisfy the requirements of the Clean Air Act. It
is not clear how or to what levels NOx emissions will be required to be reduced
under the Clean Air Act. In addition, in order to comply with the Clean Air Act,
utilities may opt to burn low-sulfur coal, switch from coal to oil and gas,
purchase Allowances on the open market from other utilities whose actual
emissions are lower than their allowable levels, retire capacity, or purchase
other types of flue gas treatment systems.
Furthermore, the NOXSO Process involves the circulation of a large quantity
of sorbent in the system which creates substantial material-handling issues
which must be addressed in the construction and operation of a facility. In
addition, the sorbent containing the adsorbed sulfur tends to be corrosive at
high temperatures. Thus, corrosion-resistant materials are required in parts of
the system. The NOXSO Process also requires a significant initial capital
expenditure which, in some instances, may exceed installation costs for
alternative processes.
15
<PAGE>
In addition to direct competition from other companies engaged in
development of flue gas desulfurization systems, the Company's process, because
it relates to coal and high sulfur oil is in competition with other available
energy sources such as gas, nuclear energy and solar, geo thermal and wind
power. To the extent that any of these energy sources become more desirable or
that coal becomes less desirable as an energy source, for political,
environmental, economic or other reasons, the ability of the NOXSO Process to
compete effectively may be adversely affected.
Accordingly, the NOXSO Process will compete with a number of different
technologies on the basis of technical and economic viability. In addition to
being able to meet any required emission standards on an operating basis, the
NOXSO Process treatment facility must be operationally cost efficient compared
to alternative technologies.
Certain License Agreements
Agreements with Grace
Since March 1982, Grace, which as of September 30, 1996 owned approximately
21% of the Company's Common Stock, has provided technical personnel and
financial support to the Company in its effort to develop the sorbent for the
NOXSO Process. Grace has provided different versions of the sorbent to the
Company for testing during this period. In 1987, the Company and Grace entered
into a series of agreements intended to advance the development of the NOXSO
Process, including a research agreement (the "Research Agreement"), which has
expired, under which Grace provided funding of $400,000 for testing and
development of the NOXSO Process, and a license and supply agreement (the "Grace
License Agreement"), which continues in effect, relating to sorbent technology.
Grace has no continuing obligation with respect to the development of the NOXSO
Process or to provide funding to the Company.
The Grace License Agreement provides, inter alia, that Grace will pay to
the Company a commission based on any sales by Grace or suppliers licensed by
Grace of sorbent to the users of the NOXSO Process at a negotiated rate of
between 6% and 10% of the net sales price of the sorbent. In addition, the Grace
License Agreement provides that Grace will receive a royalty based on its
licensees' sales of sorbent to the users of the NOXSO Process. The License and
Supply Agreement expires on September 11, 2007 unless Grace exercises its right
to earlier terminate the agreement upon four months advance notice. In the event
of such early termination, Grace has agreed to grant to the Company a
royalty-free exclusive license for certain sorbent technology relating to the
removal and/or recovery of sulfur oxides and nitrogen oxides from stationary
flue gas sources developed by the parties under the Research Agreement.
Agreements with FLS
In March 1992, the Company entered into a license agreement (the "FLS
License Agreement") with FLS miljo a/s ("FLS"), a Danish corporation engaged in
the construction and design of utility power plants. The FLS License Agreement
authorizes FLS to market, sell, design,
16
<PAGE>
and construct NOXSO Process facilities in 33 countries throughout Europe, parts
of Asia and the Confederation of Independent States (formerly the USSR). Upon
entering into the FLS License Agreement, FLS purchased 266,666 shares of common
stock and a warrant to purchase 133,334 additional shares (which warrant has
expired without being exercised) in consideration of $2 million.
Under the FLS License Agreement, FLS must install the NOXSO Process on at
least 500 megawatts of coal-fired electric generating capacity annually
commencing in 1997 in order to maintain its license. FLS is required to pay to
the Company royalties of (i) 3% of the installed cost of the NOXSO Process and
5% of associated engineering fees if the system installed is completely of the
Company's design, or (ii) 2% of the installed cost of the NOXSO Process and 5%
of associated engineering fees if the system installed is modified with FLS
technology.
In March 1993, FLS entered into an agreement with ELKRAFT, a Danish
utility, for FLS to design and construct a demonstration plant of a seven
megawatt facility in Denmark. The construction of the project was completed in
1994 and the demonstration is expected to be completed by the Summer of 1997 To
the Company's knowledge, the demonstration is on schedule and, to date, has met
expectations as to SO2 and NOx removal rates. The Company is not a party to this
agreement and has no role in the funding or operation of the project. Since the
installation of the demonstration facility, FLS has submitted three bids for
NOXSO Process systems to be installed in Europe. The Company does not presently
expect to receive any royalty income on the foreign license before 1997.
Construction Management Services
The Company's 70%-owned PROJEX, Inc. ("PROJEX") subsidiary was formed in
November 1995 to conduct a business utilizing the construction management
expertise available to the Company in its development and demonstration of the
NOXSO Process. PROJEX provides construction management support services to the
steel, public housing, utility and chemical industries, as well as providing
construction management services to engineering firms working for a wide variety
of businesses.
Robert L. Raymond serves as PROJEX's President and owns 15% of its capital
stock. Mr. Raymond has 24 years of experience in construction and project
management, contract administration, planning, cost control, construction
supervision and field experience for public and industrial projects ranging in
size from $10 million to $500 million. Patricia M. Conrad serves as a Vice
President of PROJEX and owns 15% of its capital stock. Ms. Conrad has 17 years
of experience in planning, scheduling, cost control and document control on
construction projects. As of September 30, 1996, PROJEX had a total of five
full-time and two part-time employees.
In November 1995, the Company engaged PROJEX to supervise the construction
of the NOXSO Process systems at the NOXSO Commercial Demonstration Facility and
to supervise construction of the Olin Project. Under its agreement, the Company
pays PROJEX for services
17
<PAGE>
on an hourly basis which the Company believes are consistent with rates it would
pay for such services in arm's length transactions with unaffiliated parties. It
is estimated that PROJEX will receive $2.5 million under the agreement. Through
September 30, 1996, the Company had paid PROJEX $659,500 for its services.
PROJEX has since its incorporation has entered into seven agreements with
parties other than the Company having an aggregate estimated contract price of
$165,000.
Other Business
The Company is presently engaged in several early-stage developmental
projects that are intended to utilize its engineering expertise to develop other
technologies, processes, sorbent and facilities to assist others to comply with
environmental laws. These include the development of a low cost, high
performance sorbent for controlling emissions of volatile organic compounds,
which are widely used as solvents in many industries and the development of a
new plasma/thermal process for controlling NOx emissions from small combusters
that burn fossil fuel. There can be no assurance it will be able to successfully
develop or commercialize any such technologies, processes, sorbents, or
facilities. The Company also from time to time on a contract basis performs
research and development projects for others.
Patents
The Company has eight United States patents, one covering a method for the
removal of nitrogen oxides from a gas such as a flue gas, two covering a
regenerable attrition resistant sorbent and related adsorption processes useful
for the removal of nitrogen oxides, sulfur oxides, and hydrogen sulfide from
waste gas streams such as a flue gas, and one covering a process for the removal
of nitrogen oxides and/or sulfur oxides from a gas containing nitrogen oxides
and/or sulfur oxides such as a flue gas. The Company also was granted a United
States Patent covering its process for regenerating sorbent by removing nitrogen
oxides and sulfur oxides contained by the sorbent, two United States patents
covering removal of nitrogen and sulfur oxides from a flue gas using a transport
line absorber and a United States patent covering a down comer and flapper valve
used to transport sorbent through a multistage fluid bed adsorber.
The Company holds one British patent covering both a regenerable attrition
resistant sorbent useful for the removal of nitrogen oxides, sulfur oxides and
hydrogen sulfide from waste gas streams such as a flue gas and a process for the
removal of nitrogen oxides, sulfur oxides, hydrogen sulfide or a mixture of one
or more thereof from a gas such as a flue gas. The Company holds one Canadian
patent covering both a regenerable attrition resistant sorbent useful for the
removal of nitrogen oxides, sulfur oxides and hydrogen sulfide from waste gas
streams such as a flue gas, and a process for the removal of nitrogen oxides,
sulfur oxides, hydrogen sulfide or a mixture of one or more thereof from a gas
such as a flue gas. The Company holds one Mexican patent covering sorbent and
processes for removing nitrogen oxides, sulfur oxides and hydrogen sulfide from
gas streams, and one German patent covering the same invention disclosed in the
Mexican Patent.
18
<PAGE>
The Company also has two United States patent applications pending which
cover improvements to the NOXSO Process that were demonstrated at the
Pilot-Scale Facility. In August 1996, the European Patent Office approved the
Company's application for a patent covering the removal of nitrogen oxides and
sulfur oxides from flue gas using a transport line adsorber. The Company is
proceeding to register or validate this patent in Belgium, Germany, Denmark,
Spain, and the United Kingdom.
Employees
The Company currently has 20 full-time employees, exclusive of the persons
employed by PROJEX. These employees are responsible for managing the Company and
the continued development of the NOXSO Process and the management and analysis
of the results of the various tests being performed. The Company believes that
the further development of the NOXSO Process will not require the Company to
employ and retain a significant number of employees.
Although there is competition for qualified personnel in the area of flue
gas desulfurization systems, the Company does not anticipate any significant
problems recruiting and retaining qualified personnel. Nevertheless, if any of
the Company's key personnel leave its employ, the development, testing and
commercialization of the NOXSO Process may be adversely affected. The Company is
not a party to any collective bargaining agreement and believes that it has a
favorable relationship with its employees.
Forward Looking and Other Statements
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 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 $3.2 million annually and (ii) the sale of Allowances earned
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 Agreement or which could result in a
termination by Alcoa of the Alcoa Agreement. A substantial reduction in the
number of Allowances that the Company receives under the Alcoa Agreement could
have a material impact on the cash flows that the Company intends to use to
service the Bonds. Termination of the Alcoa 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, and would in addition in
19
<PAGE>
all likelihood make it impossible for the Company to market or sell the NOXSO
Process 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 those 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.
In addition, the market for Allowances is not well-developed, having
developed since the implementation of the amendments to the 1990 Clean Air Act
in 1995, and there can be no certainty that the market price for Allowances will
be in accordance with Company expectations. 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.
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 $3.2 million annually for 16,000 short
tons of elemental sulfur, which will most likely make it impossible for the
Company to service the Bonds.
The Company must resolve certain concerns of representatives of the
Authority prior to the issuance of the Bonds. 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. In addition, in order to satisfy conditions to the
issuance of the Bonds, among other things, (i) the Company must obtain
additional equity capital of approximately $5 million during October 1996, $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 outstanding
loans of the Company to Olin and Praxair and (ii) the County of Warrick, Indiana
must fund or irrevocably commit to fund, in cash or by causing a letter of
credit or its equivalent to be issued, $2.5 million to fund the other half of
the supplemental reserve.
The Company intends to seek to raise the required equity capital through a
private placement of its common stock, the terms of which placement are
presently being negotiated and are contingent upon the satisfactory completion
of due diligence and other conditions. Any shares issued in the private
placement 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. Some, but not all, required approvals
have been obtained in order for Warrick County to commit to fund its portion of
the supplemental debt reserve fund.
20
<PAGE>
Accordingly, there can be no assurance that either condition to the
issuance of the Bonds can be satisfied prior to October 31, 1996, the date by
which the Alcoa Agreement 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 the
provided by the DOE. If such financing is not in hand by that date, Alcoa has
the right, at its option, to terminate its obligations under the Alcoa Project
Agreement.
Although 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, it does not expect to pay for elemental
sulfur after said month. 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. 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% to 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.
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 Project. 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 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 be unable to
generate revenues to meet its other needs or, ultimately, to establish the NOXSO
Process as a viable competitor in the marketplace. See in particular
"Competition" in this Item 1.
Item 2. Properties
The Company leases approximately 4,170 square feet of office,
administrative and research space in Bethel Park, Pennsylvania. The lease term
extends from June 1992 through May 1999. The Company also leases approximately
6,400 square feet of laboratory space in Clairton, Pennsylvania. The lease terms
extends from August 1994 through July 1998.
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
21
<PAGE>
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 (see "The
Olin Project" in Item 1). The Olin Facility will convert elemental sulfur into
liquid sulfur dioxide for use by Olin under the Olin Agreement (as described
under "The Olin Project" in Item 1). 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, until any amounts due and payable to Calabrian under
its agreements with the Company are paid, a temporary and permanent injunction
enjoining the Company from using Calabrian's technology and from disclosing it
to third parties.
The Company's Counsel has advised that it believes the causes of action in
Calabrian's complaint are without merit and that the Company has the basis for
filing a counterclaim against Calabrian for breach of contract as a result of
Calabrian's abandonment of its contract with the Company without cause or
justification. The Company intends to deny the substantive allegations of the
complaint, to vigorously defend the action, and to file a counterclaim seeking
payment of (i) all costs incurred by the Company to complete the portion of the
Olin Facility abandoned by Calabrian in excess of the fixed price established in
the Company's Purchase Agreement, (ii) 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.
The Company has removed the action to the United States District Court for
the Eastern District of Texas, Beaumont Division. On September 30, 1996, the
Company served a motion to dismiss all equitable claims for failure to state
claims upon which relief can be granted and requested an expedited hearing on
its motion because of concerns that the presence of injunctive claims threatens
the bond financing described above. Calabrian was required to respond to the
Company's motion on or before October 10, 1996, and the Company hopes that the
Court will rule on its motion shortly thereafter, although there can be no
assurance that it will do so. The Company has also served counsel for Calabrian
with a copy of a Motion for Rule 11 Sanctions it intends to file and vigorously
pursue against such counsel if the Court rules in favor of its motion to
dismiss.
Item 4. Submission of Matters to a Vote of Security Holders
None.
22
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
- - ------------------------------------------------------------------------------
Matters
- - -------
Market Information
The Company's common stock is traded on the over-the-counter market and is
currently traded in the Nasdaq Small Cap Market System under the symbol "NOXSO".
The following table sets forth the range of high and low closing bid quotations
of the common stock as reported by Nasdaq for each fiscal quarter within the two
most recent fiscal years. The quotations represent prices between dealers
without adjustment for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Quarter Ended Bid Prices $
1995 High Low
---- ----- ------
<S> <C> <C> <C>
September 30, 1994 (First Quarter) 5.375 2.875
December 31, 1994 (Second Quarter) 4.750 2.125
March 31, 1995 (Third Quarter) 5.250 2.750
June 30, 1995 (Fourth Quarter) 5.500 2.750
1996
----
September 30, 1995 (First Quarter) 8.375 3.063
December 31, 1995 (Second Quarter) 6.750 4.625
March 31, 1996 (Third Quarter) 5.625 3.875
June 30, 1996 (Fourth Quarter) 5.875 3.875
1997
----
September 30, 1996 (First Quarter) 5.875 5.375
</TABLE>
---------------------------------
The closing price of the Company's common stock as reported by
Nasdaq was $5.125 on October 10, 1996.
Holders of the Company's Common Stock
As of each of June 30, 1996 and September 30, 1996 there were
approximately 830 record holders of the Company's common stock.
23
<PAGE>
Dividends
The Company has never paid cash dividends on its common stock. Payment of
dividends will be at the discretion of the Company's Board of Directors and will
depend, among other factors, upon earnings, capital requirements and the
operating and financial condition of the Company. The Company does not
anticipate paying cash dividends for the foreseeable future.
Item 6. Selected Financial Data
The following selected financial data is qualified in its entirety by
reference to the Company's Consolidated Financial Statements and Notes thereto
appearing elsewhere herein. The selected financial data for the five years ended
June 30, 1996, has been derived from the Company's audited financial statements.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Costs and Expenses $488,132 $2,648,842 $3,125,312 $4,222,034 $3,190,022
Net Loss (326,269) (1,760,658) (1,931,657) (2,292,197) (2,223,382)
Per Share Data:
Net Loss Per Share (0.04) (0.20) (0.22) (0.30) (0.33)
Weighted Average
Number of Shares
Outstanding (in 000's) 9,308 8,777 8,645 7,723 6,657
Financial Position June 30,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Working Capital $(4,333,882) $583,359 $1,808,399 $3,578,616 $2,193,442
Total Assets 11,199,396 3,423,873 3,690,130 4,964,195 3,264,951
Long-Term Debt -- -- -- -- --
Total Stockholders'
Equity 3,172,454 1,510,629 1,914,415 3,708,560 2,670,026
</TABLE>
24
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Overview
The Company is a development stage company principally engaged in
developing, testing, and marketing of 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 the Alcoa Project
Agreement for the design, construction, and operation of 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 Company has received all necessary approvals from the DOE to proceed to
complete the Alcoa Project. As a part of the approval, the DOE increased the
funding for its share of costs for the project from $33 million to $41.4
million. See "The Alcoa Project" in Item 1.
In April 1995, the Company entered into the Olin Agreement to construct the
complementary 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, 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 $3.2 million annually, and the
Company is to deliver to Olin 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. See "The Olin Project" in Item 1.
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. See "Other
Business" in Item 1. The Company has also licensed the NOXSO Process for
distribution internationally, testing of which is being conducted by its
licensee in Europe. See "Certain License Agreements" in Item 1. In addition, the
Company is offering construction management services to others through its
70%-owned PROJEX subsidiary. See "Construction Management Services" in Item 1.
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 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
25
<PAGE>
common stock in both public and private offerings, government grants, research
contracts and cooperative research activities. The total of capital raised from
inception through June 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 test
continued through June of 1989. This development program was followed by a
Pilot-Scale Facility at the Ohio Edison power plan located at Toronto, Ohio.
This Pilot-Scale Project was completed in August of 1993 with over 10,000 hours
of testing. The Company is constructing a Full-Scale Commercial Demonstration of
the NOXSO Process for Alcoa. See "The Alcoa Project" in Item 1. It is also
constructing a complementary plant at Olin Corporation's plant in Charleston,
Tennessee. The plant will convert elemental sulfur into liquid sulfur dioxide.
See "The Olin Project" in Item 1.
During fiscal 1996, the increase in cash and equivalents and certificates
of deposit was the net result of several transactions. The major cash inflows
were proceeds of $1.9 million from private placement offerings, net borrowing on
the line of credit of $755,000 and net borrowings on the Alcoa and Olin loans of
$1.2 million. These funds have been used during the year to pay expenses of
operating the Company as well as cover the costs associated with the building of
the NOXSO Commercial Demonstration Facility and the Olin Facility. The Company's
current ratio decreased from 1.3:1 at June 30,1995 to 0.45:1 at June 30, 1996.
This decrease is the result of costs of the NOXSO Commercial Demonstration
Facility and the Olin Facility exceeding the funds received by the Company. As
of June 30, 1996, the Company had working capital of ($4.4 million) as compared
to $583,000 at June 30, 1995. 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 is increased as a result of the increased
borrowing on the line of credit and the Olin loan.
The funds needed, in addition to those available from the DOE, to complete
the Alcoa project are to be provided from the proceeds of $40 million in Bonds.
On September 16, 1996, the Authority adopted resolutions approving the issuance
of the Bonds. However, the Company is still seeking to resolve certain concerns
of representatives of the Authority. 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. In addition, in order to satisfy conditions to the
issuance of the Bonds, among other things, (i) the Company must obtain
additional equity capital of approximately $5 million during October 1996, $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 outstanding
loans of the Company to Olin and Praxair and (ii) the County of Warrick, Indiana
must fund or irrevocably commit to fund, in cash or by causing a letter of
credit or its equivalent to be issued, $2.5 million to fund the other half of
the supplemental reserve.
26
<PAGE>
The Company intends to seek to raise the required equity capital through a
private placement of its common stock, the terms of which placement are
presently being negotiated and are contingent upon the satisfactory completion
of due diligence and other conditions. Any shares issued in the private
placement 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. Some, but not all required approvals
have been obtained in order for Warrick County to commit to fund its portion of
the supplemental reserve fund.
Accordingly, there can be no assurance that either condition to the
issuance of the Bonds can be satisfied prior to October 31, 1996, the date by
which the Alcoa Agreement 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 the
provided by the DOE. If such financing is not in hand by that date, Alcoa has
the right, at its option, to terminate its obligations under the Alcoa Project
Agreement.
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 $3.2 million annually and (ii) the sale of Allowances earned
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 Agreement or which could result in a
termination by Alcoa of the Alcoa Agreement. A substantial reduction in the
number of Allowances that the Company receives under the Alcoa Agreement could
have a material impact on the cash flows that the Company intends to use to
service the Bonds. Termination of the Alcoa 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, and would in addition in all
likelihood make it impossible for the Company to market or sell the NOXSO
Process 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.
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 expects to lose
the DOE's funding. If the
27
<PAGE>
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 this
funding would require that greater emphasis be placed upon the test results of
the Company's pilot plant conducted at Toronto, Ohio and on the 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 $3.2 million annually for 16,000 short
tons of elemental sulfur, which will most likely make it impossible for the
Company service the Bonds.
Although 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, it does not expect to pay for elemental
sulfur after said month. 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. 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 of the amendments to the 1990 Clean Air Act
in 1995, 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 Project. 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 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 be unable
28
<PAGE>
to generate revenues to meet its other needs or, ultimately, to establish the
NOXSO Process as a viable competitor in the marketplace. See "Competition" in
Item 1.
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 in
order to comply on a timely basis with Phase II 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
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 $8.3 million
through June 30, 1996. As a result of the significant expenses incurred from
inception through June 1995 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 $11.9 million
at June 30, 1996. Since inception through June 30, 1996, the Company's total
costs and expenses were $20.2 million including $7.6 million relating to
salaries and benefits.
Total funding, interest income and reimbursement of project costs for the
fiscal years ended June 30, 1996, 1995 and 1994 were $0.2 million, $0.9 million
and $1.2 million respectively, while total costs and expenses for the same
periods were $0.6 million, $2.6 million and $3.1 million, respectively. The
decrease in revenues from fiscal 1994 to fiscal 1995 and again to fiscal 1996 is
due to the fact that the Company has begun capitalizing their costs related to
the NOXSO Commercial Demonstration Facility and the Olin Facility and the DOE's
portion of the costs and revenues are being offset against the
construction-in-progress. Decreased costs and expenses from fiscal 1994 to
fiscal 1995 and again to fiscal 1996 were also due to the fact that the Company
has begun capitalizing their costs related to the NOXSO Commercial Demonstration
Facility and the Olin Facility and the DOE's portion of the costs and revenues
are being offset against the construction-in-progress.
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 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
29
<PAGE>
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.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that carrying value
of long-lived operating assets, when determined to be impaired, be adjusted so
as not to exceed the estimated undiscounted cash flows provided by such asset.
SFAS No. 121 also addresses the accounting for long-lived assets that are
expected to be disposed of in future periods.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 recommends, but does not require, that companies
change their method of accounting for stock-based compensation plans to one that
attributes compensation costs equal to the fair market value of a stock-based
compensation arrangement over the periods in which service is rendered.
Companies not electing to change their method of accounting are required, among
other things, to provide additional disclosures which in effect restate a
company's results for comparative periods as if the new method of accounting had
been adopted.
The Company will be subject to the provisions of SFAS No. 121 and No. 123
in fiscal 1997. At the present time, the Company does not believe that the
adoption of either of these accounting pronouncements will have a material
effect on its financial position or results of operations.
30
<PAGE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
NOXSO CORPORATION
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Report of Independent Public Accountants
Financial Statements:
Consolidated Balance Sheets June 30, 1996 and 1995
Consolidated Statements of Operations for the Cumulative Period from
Inception to June 30, 1996, and for the Years Ended June 30, 1996, 1995 and
1994
Consolidated Statements of Changes in Stockholders' Equity for the Cumulative
Period from Inception to June 30, 1996, and for the Years Ended June 30,
1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Cumulative Period from
Inception to June 30, 1996, and for the Years Ended
June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
All other schedules have been omitted because the required information is not
applicable or the information is included in the financial statements or notes
thereto.
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
To the Board of Directors of
NOXSO Corporation
We have audited the accompanying consolidated balance sheets of NOXSO
Corporation (a Virginia corporation in the development stage) and subsidiary as
of June 30, 1996 and 1995, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NOXSO Corporation
and subsidiary as of June 30, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 8 to the
consolidated financial statements, the Company is seeking funding of $40 million
to complete the Full-Scale Demonstration Facility and seeking funding to repay
the amounts due Olin Corporation and Praxair, Inc. of $1,874,000 and $2,700,000,
respectively. At October 11, 1996 negotiations regarding funding which
management believes will be successful, 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 Corporation and Praxair, Inc. This
matter raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to this matter are also described in
Note 8. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
September 6, 1996, (except with respect to the matters
discussed in Note 8, as to which the date is October 11, 1996)
32
<PAGE>
NOXSO Corporation
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------------
ASSETS 1996 1995
--------------- ----------------
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 464,723 $ 461,360
Bank certificate of deposit 1,000,000 1,000,000
Accounts receivable 2,163,420 1,014,631
Prepaid expenses and other current assets 38,136 20,612
------------ ------------
Total Current Assets 3,666,279 2,496,603
------------ ------------
PROPERTY AND EQUIPMENT:
Equipment 341,936 341,936
Furniture and Fixtures 111,661 95,314
Leasehold improvements 16,646 16,646
Construction in progress 7,469,545 847,955
------------ ------------
7,939,788 1,301,851
Less: Accumulated depreciation 412,151 378,889
------------ ------------
Net Property and Equipment 7,527,637 922,962
------------ ------------
Other Assets 1,172 --
Deposits 4,308 4,308
------------ ------------
Total Assets $ 11,199,396 $ 3,423,873
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 2,874,000 $ 915,000
Accounts payable 3,424,692 693,426
Accrued compensation 98,975 28,259
Advanced Billings 1,379,549 194,575
Other current liabilities 290,945 81,984
------------ ------------
Total Current Liabilities 8,068,161 1,913,244
------------ ------------
OTHER LIABILITIES:
Minority interest in consolidated subsidiary 26,781 --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: Authorized,
20,000,000 shares. Issued 9,652,096 shares and
9,098,810 shares, respectively 96,523 90,988
Paid-in capital 14,914,953 12,932,394
Deficit accumulated during the development stage (11,882,022) (11,487,753)
------------ ------------
3,129,454 1,535,629
Less: Cost of 2,985 shares of common stock
held in treasury (25,000) (25,000)
------------ ------------
Total Stockholders' Equity 3,104,454 1,510,629
------------ ------------
Total Liabilities and Stockholders Equity $ 11,199,396 $ 3,423,873
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
<TABLE>
<CAPTION>
NOXSO Corporation
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
Date of Inception, Fiscal Year
August 28, 1979, Ended June 30,
-----------------------------------------
to June 30, 1996 1996 1995 1994
------------ ------------ -------------- ---------
(Not covered by
COSTS AND EXPENSES: auditor's report)
<S> <C> <C> <C> <C>
Purchase of NOXSO Process $ 260,625 $ -- $ -- $ --
Contract development - concept testing 1,169,759 -- -- --
Contract development - demonstration testing 1,727,715 -- 767,387 368,508
Designing, drafting and consulting 1,107,291 4,750 38,679 103,112
Supplies, instruments and equipment 1,954,044 19,520 83,102 143,537
Depreciation and amortization 532,933 33,101 32,440 65,417
Other research and development 386,309 -- 43,969 48,022
Salaries and benefits 7,614,918 175,633 1,108,250 1,500,811
Professional fees 1,581,794 33,323 194,023 230,556
Rent 519,583 33,501 125,628 105,157
Income tax expense 33,181 33,181 -- --
Other general and administrative 3,295,805 223,123 255,364 560,192
---------- ----------- ----------- -----------
TOTAL COSTS AND EXPENSES 20,183,957 556,132 2,648,842 3,125,312
---------- ----------- ----------- -----------
LESS FUNDING AND OTHER:
Funding of research agreement 1,200,000 -- -- --
Reimbursement of project costs 4,899,972 45,782 793,086 1,134,396
Government grants 1,128,020 -- 39,863 10,064
Interest income 1,038,322 81,560 55,235 49,195
Other 63,267 61,002 -- --
----------- ----------- ----------- -----------
TOTAL FUNDING AND OTHER 8,329,581 188,344 888,184 1,193,655
----------- ----------- ----------- -----------
MINORITY INTEREST IN NET INCOME
OF CONSOLIDATED SUBSIDIARY 26,481 26,481 -- --
----------- ----------- ----------- -----------
NET LOSS $ 11,880,857 ($ 394,269) ($1,760,658) ($1,931,657)
============ =========== =========== ===========
LOSS PER COMMON SHARE ($ 0.04) ($ 0.20)
AVERAGE NUMBER OF SHARES
OUTSTANDING 9,308,394 8,776,817 8,645,000
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<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 JUNE 30, 1996 (continued)
Stockholders' Equity
-------------------------------------------------------------------------------
Deficit Accumu- Notes
Consideration Common Stock lated During Receivable
Per Shares Par Paid-in Development Treasury for Purchase of
Share Total Issued Value Capital Stage Stock Common Stock Total
-------- --------- -------- -------- --------- ------------ -------- ---------------- -----
AUGUST 28, 1979 (INCEPTION)
TO JUNE 30, 1991 (not covered by auditor's report):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1979 - Issuance of Common Stock$ .005 $ 600(1) 120,000 $ 1,200 $ (600) $ - $ - $ - $ 600
1980 - Issuance of Common Stock .563 956,250(2) 1,700,000 17,000 791,382 - - - 808,382
1980 - Issuance of Warrants - 850(3) - - 850 - - - 850
1983 - Issuance of Common Stock .2813 28,125(4) 100,000 1,000 27,125 - - - 28,125
1986 - Issuance of Common Stock .125 155,000(1) 1,240,000 12,400 142,600 - - - 155,000
1986 - Issuance of Common Stock .125 32,500(5) 260,000 2,600 29,900 - - - 32,500
1987 - Issuance of Common Stock .50 134,000(1) 268,000 2,680 131,320 - - - 134,000
1987 - Issuance of Common Stock .50 42,900(5) 85,800 858 42,042 - - - 42,900
1988 - Issuance of Stock Option 250,000(6) - - 250,000 - - - 250,000
1989 - Issuance of Common Stock .675 27,000(7) 40,000 400 26,600 - - (27,000) -
1989 - Issuance of Common Stock .50 147,500(8) 295,000 2,950 144,550 - - (30,000) 117,500
1989 - Issuance of Common Stock 2.50 4,000,000(2) 1,600,000 16,000 3,174,721 - - - 3,190,721
1989 - Issuance of Warrants 80(3) - - 80 - - - 80
1991 - Issuance of Common Stock 1.129 569,464(9) 504,620 5,046 564,418 - - - 569,464
1991 - Issuance of Common Stock .675 27,000(7) 40,000 400 26,600 - - (27,000) -
1991 - Issuance of Common Stock .675 27,000(9) 40,000 400 26,600 - - - 27,000
Net loss - - - (3,278,694) - 3,278,694)
------------------- ----------- ------------ - ---------- --------------
BALANCE, JUNE 30, 1991 6,293,420 $ 62,934 $ 5,378,188 $(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.
35
<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 JUNE 30, 1996 (continued)
Stockholders' Equity
-------------------------------------------------------------------------------
Consideration Common Stock lated During Receivable
Per Shares Par Paid-in Development Treasury for Purchase of
Share Total Issued Value Capital Stage Stock Common Stock Total
-------- --------- -------- -------- --------- ------------ -------- ---------------- -----
YEAR ENDED JUNE 30, 1992: (not covered in auditor's report)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock $ 1.129 $ 683,356(9) 605,544 $ 6,056 $ 677,300 $ - $ - $ - $ 683,356
Issuance of Common Stock 7.50 2,000,000(1) 266,666 2,666 1,997,334 - - - 2,000,000
Issuance of Common Stock 2.75 5,500(9) 2,000 20 5,480 - - - 5,500
Issuance of Common Stock 2.00 69,124(10) 34,562 346 68,778 - - - 69,124
Issuance of Common Stock (11) 116,500 1,165 - (1,165) - - -
Satisfaction of notes - - - - - 57,000(12) 57,000
receivable \Net loss - - - (2,223,382) - - (2,223,382)
----------- -------- ---------- ----------- ------ -------- -----------
BALANCE, JUNE 30, 1992 7,318,692 73,187 8,127,080 (5,503,241) - (27,000) 2,670,026
YEAR ENDED JUNE 30, 1993: (not covered in auditor's report)
Issuance of Common Stock 1.129 683,35(9) 605,544 6,056 677,300 - - - 683,356
Issuance of Common Stock 2.04 26,260(9) 12,866 129 26,131 - - - 26,260
Issuance of Common Stock .50 50,000 500 24,500 - - (25,000) -
Acquisition of Common Stock - - - - - 25,000(15) 25,000(15) -
Satisfaction of notes - - - - - 27,000(14) 27,000
receivable Issuance of 5.00 2,594,115(16) 571,250 5,712 2,588,403 - - - 2,594,115
Common Stock
Net loss - - - (2,292,197) - - (2,292,197)
----------- -------- ---------- ----------- ------ -------- ---------
BALANCE, JUNE 30, 1993 8,558,352 85,584 11,443,414 (7,795,438) (25,000) - 3,708,560
YEAR ENDED JUNE 30, 1994:
Issuance of Common Stock 1.129 113,888(9) 100,920 1,009 112,879 - - - 113,888
Issuance of Common Stock 2.00 23,624 (13) 11,812 118 23,506 - - - 23,624
Net loss - - - (1,931,657) - - (1,931,657)
----------- -------- ---------- ----------- ------ -------- -----------
BALANCE, JUNE 30, 1994 8,671,084 $86,711 $11,579,799 $(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.
36
<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 JUNE 30, 1996 (continued)
Stockholders' Equity
-------------------------------------------------------------------------------
Deficit Accumu- Notes
Consideration Common Stock lated During Receivable
Per Shares Par Paid-in Development Treasury for Purchase of
Share Total Issued Value Capital Stage Stock Common Stock Total
-------- --------- -------- -------- --------- ------------ -------- ---------------- -----
YEAR ENDED JUNE 30, 1992: (not covered in auditor's report)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1995:
Issuance of Common Stock 2.00 47,252(10) 23,626 236 47,016 - - - 47,252
Issuance of Common Stock 2.75 11,000 (9) 4,000 40 10,960 - - - 11,000
Issuance of Common Stock 3.85 497,500(16) 150,000 1,500 496,000 - - - 497,500
Issuance of Common Stock 3.56 800,795(16) 250,000 2,500 798,295 - - - 800,795
Issuance of Common Stock 3.25 325(17) 100 1 324 - - - 325
Net loss - - - (1,931,657) - - (1,760,658)
--------- -------- ----------- -------------- ------------ ----- ------------
BALANCE, JUNE 30, 1995 9,098,810 $ 90,988 $12,932,394 $(11,487,753) $ (25,000) $ - $ 1,510,629
========= ========= =========== ============= ============ ===== ============
YEAR ENDED JUNE 30, 1996:
Issuance of Common Stock 3.25 81,250 (9) 25,000 250 81,000 - - - 81,250
Issuance of Common Stock 1.91 19,063 (9) 10,000 100 18,963 - - - 19,063
Issuance of Common Stock 3.625 5,438 (9) 1,500 15 5,423 - - - 5,438
Issuance of Common Stock 3.625 1,813 (9) 500 5 1,808 - - - 1,813
Issuance of Common Stock 4.55 409,725(16) 100,000 1,000 408,725 - - - 409,725
Issuance of Common Stock 4.54 408,375(16) 100,000 1,000 407,375 - - - 408,375
Issuance of Common Stock 4.56 45,626(9) 10,000 100 45,526 - - - 45,626
Issuance of Common Stock 3.625 9,063(9) 2,500 25 9,038 - - - 9,063
Issuance of Common Stock 3.625 2,719(9) 750 8 2,711 - - - 2,719
Issuance of Common Stock 3.625 1,812(9) 500 5 1,807 - - - 1,812
Issuance of Common Stock 3.21 503,209(16) 156,763 1,569 501,640 - - - 503,209
Issuance of Common Stock 3.425 500,003(16) 145,773 1,458 498,543 - - - 500,001
Net loss - - (394,269) - - (394,269)
--------- -------- ----------- -------------- ------------ ----- ------------
BALANCE, JUNE 30, 1996 9,652,096 $ 96,523 $14,914,953 $(11,882,022) $(25,000) $ - $ 3,104,454
========= ========= =========== ========================== ===== ============
</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.
37
<PAGE>
<TABLE>
<CAPTION>
NOXSO Corporation
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Date of Inception,
August 28, 1979, Fiscal Year Ended June 30,
-----------------------------------------
to June 30, 1996 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES: (Unaudited)
<S> <C> <C> <C> <C>
Net loss ($11,880,857) ($ 394,269) ($1,760,658) ($1,931,657)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Depreciation and amortization 527,514 33,101 32,440 65,417
Minority Interest 26,781 26,781 -- --
Loss on disposal of property and equipment 5,752 -- -- 5,752
Issuance of common stock for compensation and other 75,725 -- 325 --
Issuance of common stock for purchase of NOXSO Process 28,125 -- -- --
Compensation in satisfaction of notes receivable 57,000 -- -- --
Changes in operating assets and liabilities:
Accounts receivable (2,163,420) (1,148,789) 472,193 (471,585)
Prepaid expenses and other current assets (34,533) (18,851) 1,319 16,517
Deposits (4,308) -- -- --
Accounts payable 3,424,692 2,731,266 601,309 43,459
Accrued compensation 98,975 70,716 (50,589) 1,314
Advanced Billings 1,379,549 1,184,974 194,575 --
Accrued Expenses -- -- (159,736) 159,736
Other current liabilities 290,945 208,961 67,357 (154,429)
---------------------------------------------------------
Net cash flows (used in) from operating activities ($ 8,168,060) $ 2,693,890 $ (601,465) $(2,265,476)
----------- ----------- ----------- ------------
CASH FLOWS (USED IN) INVESTING ACTIVITIES:
Acquisition of and deposits for property and equipment (8,065,295) (6,637,621) (853,694) (47,241)
Bank certificate of deposit (1,000,000) -- 29,157 --
Proceeds from the sale of property and equipment 4,546 -- -- --
Net cash flows (used in) investing activities ($ 9,060,749) ($6,637,621) ($ 824,537) ($ 47,241)
---------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement offering 5,713,720 1,821,310 1,298,295 --
Proceeds from line of credit 3,025,000 1,525,000 970,000 470,000
Payments of line of credit (2,025,000) (770,000) (1,195,000) --
Proceeds from issuance of common stock 7,760,647 -- -- --
Proceeds from sales of common stock
options and warrants 1,323,095 166,784 58,252 137,512
Proceeds from satisfaction of notes receivable 27,000 -- -- --
Proceeds from ACOA and Olin loans 2,874,000 2,204,000 670,000 --
Payment of ACOA loan (1,000,000) (1,000,000) -- --
Net loans to stockholders and officers (4,930) -- -- --
Net cash flows from financing activities $ 17,693,532 $ 3,947,094 $ 1,801,547 $ 607,512
---------------------------------------------------------
NET INCREASE (DECREASE), CASH AND EQUIVALENTS 464,723 3,363 375,545 (1,705,205)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD -- 461,360 85,815 1,791,020
---------------------------------------------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 464,723 $ 464,723 $ 461,360 $ 85,815
=========== =========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 207,289 $ 130,126 $ 70,890 $ 4,720
=========== =========== =========== ============
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 consolidated financial statements.
38
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Business and Principles of Consolidation:
NOXSO Corporation was incorporated in the Commonwealth of Virginia on
August 28, 1979, to engage in developing, testing and marketing a process
capable of removing certain emissions from the flue gas generated by the
burning of coal. The Company is in the development stage and has not yet
commenced commercial operation.
The financial statements include accounts of NOXSO Corporation and its
majority-owned subsidiary. All intercompany transactions have been
eliminated in consolidation. NOXSO Corporation and/or NOXSO Corporation
together with its subsidiary are hereafter referred to as (the "Company").
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 - Summary of Significant Accounting Policies:
Cash Equivalents - The Company considers certificates of deposit, money
market funds and all other highly liquid debt instruments, with a maturity
of three months or less when purchased, to be cash equivalents.
Property and Equipment - Property and equipment are stated at cost. The
Company provides for depreciation using various methods over the estimated
useful lives of 3 to 5 years for machinery and equipment, 5 to 7 years for
office furniture and fixtures, and the lease term or useful life, whichever
is shorter, for leasehold improvements.
Construction-in-Process - During the fourth quarter of 1995, the Company
began to capitalize its share of costs associated with the Full-Scale
Demonstration Facility. Funds received from the U.S. Department of Energy
("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 project costs. Management believes that
undiscounted future cash flows from the project will exceed the carrying
amount of the asset.
Patents - Patent costs are expensed as incurred.
Income Taxes - Under the Financial Accounting Standards Board ("FASB")
Statement No. 109, "Accounting for Income Taxes" (SFAS No. 109), deferred
tax assets or liabilities are computed based on the difference between the
financial statement and income tax basis of assets and
39
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
liabilities using the enacted marginal tax rate. Deferred income taxes or
credits are based on the changes in the asset or liability from period to
period. There were no material temporary differences at June 30, 1996. At
June 30, 1996, the Company had tax loss carryforwards of approximately
$11,400,000 which expire beginning in 1997. The deferred tax assets related
to these net operating losses were entirely offset by a valuation allowance
at June 30, 1996.
The income tax expense recorded relates entirely to Projex, Inc., the
Company's 70% owned subsidiary which files separate tax returns.
Other Postretirement and Postemployment Benefits - In December 1990, the
FASB issued SFAS No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions". SFAS No. 106 requires the accrual of the cost of
postretirement benefits during the years that the employees render service
rather than recognizing such benefits when paid. The Company presently has
no benefit plans which would be subject to this standard. In November 1992,
the FASB issued SFAS No. 112 "Employers' Accounting for Postemployment
Benefits". SFAS No. 112 establishes accounting standards for employers who
provide benefits to former or inactive employees after employment but
before retirement, such as severance benefits, workers' compensation
benefits, continuance of health care benefits and life insurance coverage.
Compliance with SFAS No. 112 did not have a material impact on the Company.
Advanced Billings - The advanced billing account is part of the DOE funding
mechanism. Under the terms of the contract with the DOE, the Company bills
estimated costs one month in advance of actual costs incurred.
Loss per Common Share - Loss per common share is based upon the weighted
average number of shares and equivalents outstanding during each year.
Common share equivalents consist of outstanding warrants and options using
the treasury stock method. Common share equivalents are not included in the
computation of average shares outstanding for the years ended June 30,
1996, 1995, and 1994 because their inclusion would be antidilutive.
Note 3 - Agreements and Commitments:
A) Agreements with W.R. Grace & Co. ("Grace") - In September 1987, the
Company entered into three agreements with Grace. The Research
Agreement and Option Agreement have expired. A License and Supply
Agreement expiring in September 2007 provides that the Company will
notify any prospective user of the NOXSO Process that the Company has
approved Grace as a supplier of sorbent beads. Other terms of the
license agreement include provisions for licensing other sorbent
suppliers, a commission that may become payable to the Company based
on sales of sorbent to users of the NOXSO Process and royalties that
Grace will receive based on its licensees' sales of
40
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
sorbent to users of the NOXSO Process. Grace has the right to
terminate this agreement at any time with four months notice.
B) Agreements with MK-Ferguson Company and Morrison Knudsen Corporation
("MK") - The Company entered into agreements with MK-Ferguson Company
and MK.
(1) Cooperative Agreement - Novation - On August 31, 1994, the
Company entered into a series of agreements with MK and, in
certain circumstances, other parties which resulted in the
Company assuming MK's role as the primary contractor for the
commercial demonstration of the NOXSO Process under the
Cooperative Agreement dated March 11, 1991 by and between MK and
the DOE. The DOE's acknowledgment of the Novation Agreement and
the ancillary agreements is evidenced by Modification No. 5 to
the Cooperative Agreement, which the Company received from the
DOE on September 26, 1994. Certain of these agreements are
retroactively effective to March 1, 1992, the date renegotiation
began on restructuring the Cooperative Agreement. Certain of
these agreements are described below.
(2) Novation Agreement - Pursuant to the Novation Agreement by and
among the Company, MK and the DOE dated as of March 1, 1992, MK
has transferred to the Company all of MK's rights and duties
under the Cooperative Agreement. The Novation Agreement provides
that MK will no longer be a "participant" (as that term is
defined in the Cooperative Agreement) in the development of the
NOXSO Process nor will MK have any ownership interest in the
NOXSO Process. Pursuant to the Novation Agreement, the Company
has assumed the duties of MK under the Cooperative Agreement. In
addition, MK and the Company have agreed to terminate the
subcontract agreement between them dated March 11, 1991 (the
"1991 Subcontract"), and in its place substitute a new
Subcontract Agreement (described below) which designates the
Company as the prime contractor for the design and construction
of the commercial demonstration facility of the NOXSO Process.
(3) Subcontract Agreement - With the termination of the 1991
Subcontract, the Company will be paid for all work under the
terms of such subcontract up to the date of termination in
accordance with its terms, and the Company agreed that it will
not be entitled to any payments for costs incurred thereafter,
including any administrative costs of termination.
Under the new subcontract agreement between the Company and MK
dated as of March 1, 1992 (the "1992 Subcontract"), MK will
remain responsible for the
41
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
design and construction of the commercial demonstration facility
under the Cooperative Agreement. MK has agreed to certain
standards with respect to the schedule of performance, the scope
of its work and the fee structure as subcontractor. MK will
perform the design of the commercial demonstration facility on a
cost plus fixed fee basis according to the fee structure in the
1992 Subcontract. At the conclusion of the final design of the
facility, MK and the Company will establish a mutually agreeable
fixed price for construction of the facility. MK has the
responsibility for obtaining, maintaining and paying workmen's
compensation insurance as well as other general liability
insurance in connection with the Cooperative Agreement. The term
of the 1992 Subcontract shall be coincident with that of the
Cooperative Agreement.
In the event that the DOE terminates the Cooperative Agreement in
its entirety, then the 1992 Subcontract may be terminated by the
Company. Additional terms for termination allow the Company to
terminate the 1992 Subcontract for convenience.
(4) Assignment Agreement - Pursuant to the Assignment Agreement, MK
assigned to the Company all of MK's rights, interests and
obligations in the NOXSO Process and the Cooperative Agreement.
In the Assignment Agreement, the Company has agreed to indemnify
MK from claims and costs arising out of the Novation Agreement
and Cooperative Agreement, and the Company has agreed to defend
MK against any claims or suits arising therefrom.
(5) NOXSO Process License Termination - Under this License
Termination, MK and the Company have terminated the License
Agreement dated January 21, 1992 in which MK had been granted
rights to the patents and technical information relating to the
NOXSO Process. The License Termination is effective upon the
effectiveness of the Novation Agreement. In the License
Termination, each of the Company and MK have mutually released
the other with respect to any claims arising under the License
Agreement. MK has agreed to disclaim and assign to the Company
all rights to any inventions or technology developed by MK
relating to the NOXSO Process during the term of the License
Agreement.
(6) First Amendment to Project Support Agreement - With the execution
of the Novation Agreement, MK, the Company and Grace have amended
the NOXSO Demonstration Plant Project Support Agreement and side
letter executed among them ("Project Support Agreement").
Pursuant to this amendment, the Company and Grace have released
MK from its obligations under the Project Support Agreement, and
MK has assigned to the Company and Grace, respectively, any
42
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ownership interest MK may have acquired under the Project Support
Agreement form the Company and Grace, respectively.
(7) Cancellation of Repayment Agreement - Under the Cancellation of
Repayment Agreement, the DOE has released MK's obligations to the
DOE under the Repayment Agreement and MK's repayment obligations
to the DOE under the Cooperative Agreement. The Company has
negotiated a Repayment Agreement with the DOE which provides for
the Company's payment to the DOE of certain royalties commencing
after the third commercial installation of the NOXSO Process.
The above agreements have resulted in the Cooperative Agreement now
being between the Company and the DOE. Additionally, the Company
utilizes MK in a subcontractor capacity on the Full-Scale
Demonstration Facility.
C) Agreements with Alcoa Generating Corporation ("Alcoa") - Following the
decision not to use the Niles generating station of Ohio Edison as the
commercial demonstration site, the Company sought a satisfactory
alternate demonstration site. This effort has resulted in the
execution on August 30, 1994, of a Project Agreement between the
Company and Alcoa for the design, construction, and operation of a
proposed facility at Alcoa's Warrick Generating Station in Newburgh,
Indiana.
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 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 $40
million Indiana Development Finance Authority Taxable Clean Coal
Technology Variable Rate Demand Revenue Bonds, Series 1999 (the
"Bonds"). See further discussion in Note 8.
Alcoa assisted in the procurement by the Company of a $1,000,000 loan
from Aluminum Company of America ("ACOA"), Alcoa's parent, at an
interest rate of 8.75%, payable quarterly in arrears. As additional
consideration for the loan, the Company granted ACOA a warrant to
purchase 60,000 shares of the Company's common stock between December
1, 1994 to December 1, 1996 at a price per share equal to the August
29, 1994 closing price ($3.75 per share). This price represented the
market value of the Company's stock on the date of issuance. On August
29, 1994, the date of issuance, the Company had not yet
43
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
obtained a commitment from the State of Indiana to guarantee the bonds
required to finance the Company's portion of the project costs.
Accordingly, given the uncertainties regarding project financing at
that time, the Company did not attribute any fair value to the
warrants at their issuance date. The loan proceeds were used towards
meeting the initial needs in establishing the proposed facility.
The Project Agreement provides for a two year Demonstration Period to
be followed by an 11 year operating period ending no later than August
31, 2011 during which the Company would operate the proposed facility
and would obtain emission allowances from Alcoa for sale in the
marketplace to provide part of the funds necessary to cover the
operating costs and repay the debt to be issued to finance
construction of the proposed facility. Alcoa may take title to the
facility by notice to the Company by the end of the 11-year operating
period, or upon earlier termination of the Project Agreement.
D) Agreement with Olin Corporation ("Olin") - 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
$11 million, of which approximately $8.2 million has been expended to
date. 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 to the Company $3,200,000 annually, which amount
is subject to adjustment after six years to account 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 assuarance 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.
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.
The Company has accrued $68,000 in other general and administrative
expenses in the accompanying Consolidated Statement of Operations,
which represents $17,000 per month from September 1996 through
December 1996 for the purchase of sulfur dioxide.
44
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
E) Other Agreements - During fiscal 1992, the Company entered into two
agreements with the DOE and the Pennsylvania Energy Development
Authority ("PEDA") for research projects intended to accelerate the
development and commercialization of the NOXSO Process.
At June 30, 1996 the Company had incurred costs totaling $1,112,835 of
which $891,409 was reimbursed in connection with these projects.
F) Patent License Agreement - On September 5, 1991, the Company entered
into an exclusive license agreement with the DOE expiring November 7,
2006. The license agreement relates to a U.S. Patent that pertains to
methods for removing nitrogen oxides from waste streams.
The Company paid an initial royalty fee of $10,000 and will pay the
DOE royalties equal to $75 per megawatt rating at each licensed
facility designed or built by MK-Ferguson Company or a sublicensee of
MK-Ferguson Company. Such royalties at no time are to exceed five
percent of the revenues received by the Company.
G) License Agreement - On March 24, 1992, the Company entered into an
agreement with FLS miljo a/s ("FLS"), a Danish corporation. The
Company sold FLS 266,666 shares of its common stock for $2,000,000 and
granted FLS a warrant to purchase 133,334 shares of its common stock
at an exercise price of $7.50 per share, which expired unexercised on
March 24, 1994. On March 24, 1992 the Company granted to FLS an
exclusive license to enable FLS to design, construct, market and sell
the NOXSO Process in Europe and Asia.
H) Employment Agreements - Two employment agreements expired in April
1994. Minimum compensation under those contracts aggregated $240,000
per annum. The terms of these contracts will remain in effect until
new agreements have been executed.
Note 4 - Capitalization of Full-Scale Demonstration Facility
The Company believes that the costs being capitalized for the Full Scale
Demonstration Facility at Alcoa and the SO2 plant at Olin will be
recoverable in the future as revenues related to sulfur dioxide sales and
air pollution control credits, which it is entitled to under the terms of
its contracts with Alcoa and Olin, are realized. Any significant future set
back in the Company's attempt to market the bonds will be evaluated in
order to measure the impairment of its investment in construction in
progress.
45
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides supplemental information about the type and
amount of costs which have been capitalized for the years ended June 30,
1996 and 1995:
Year Ended Year Ended
June 30, 1996 June 30, 1995
------------- -------------
Subcontractor Costs $5,255,419 $ 455,883
Salaries and Benefits 824,379 135,770
Other Direct Costs 1,031,986 199,322
Other General and
Administrative 357,761 56,980
---------- ----------
$7,469,545 $ 847,955
========== ==========
To date, the Company has completed all engineering drawings for the
Warrick, Indiana project and also for the project under construction in
Charleston, Tennessee. Grading and pouring of a foundation for a warehouse
storage facility has been performed at the Indiana Project. Additionally,
the Company has completed construction of an air separation plant, sulfur
storage tanks, railcar handling facilities and a heat exchanger at the Olin
Corporation location in Tennessee. Further, the Company estimates it is 95%
complete with construction of a sulfur dioxide plant at the Tennessee
location. The majority of costs capitalized to date relate to the Olin
facility.
All of the costs indicated above represent direct costs and overhead
allocations. The size of the Company and its current focus on the full
scale demonstration project have resulted in additional cost capitalization
relative to prior years.
Note 5 - Formation of Construction Management Company
During 1995 the Company formed a new subsidiary, Projex, Inc. ("Projex").
The Company holds 70% of the stock in Projex, while the management of
Projex holds the remaining 30% of such stock. The Company will obtain the
majority of its future revenues through license fees and royalties, but it
hopes to participate in future construction management activities at plants
which use its technology as well as other facilities, through Projex. The
first contract obtained by Projex was a $2,500,000 contract to perform the
construction management on the NOXSO Full-Scale Demonstration Facility.
Because the Company's majority ownership of Projex, it is consolidated
herein since the date of inception. There is no related party relationship
between the minority shareholders and the Company, its employees or
directors.
Note 6 - Notes Payable
46
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a line of credit with a bank which expires October 15,
1996, pursuant to which borrowings can be made up to an aggregate of
$1,000,000. Borrowings bear interest at prime and are collateralized by a
$1,000,000 certificate of deposit. Borrowings under the line of credit at
June 30, 1996 and 1995 were $1,000,000 and $245,000, respectively.
In conjunction with the Project Agreement, Alcoa assisted the Company in
the procurement of a $1,000,000 loan from the ACOA at an interest rate of
8.75% payable quarterly in arrears. The outstanding borrowings at June 30,
1996 and 1995 were $0 and $670,000, respectively. The loan was repaid in
April 1996.
In April 1996, Olin granted the Company a loan in the amount of $1,874,000
to be repaid on or before October 31, 1996. The loan bears interest at a
rate of 10%. The outstanding borrowings at June 30, 1996 were $1,874,000.
These funds are being used to pay the Company's share of construction costs
on the proposed demonstration facility.
The weighted average interest rate for total notes payable as of June 30,
1996 and 1995 was 9.4% and 8.3%, respectively.
Note 7 - Future Minimum Lease Payments:
The following is a schedule of future minimum rental payments required
under the Company's noncancellable operating leases which have remaining
lease terms in excess of one year at June 30, 1996.
Year Ending June 30,
--------------------
1997 157,000
1998 161,000
1999 118,000
2000 10,000
2001 1,000
-----
$447,000
========
Note 8 - Financing
The funds needed, in excess of those available from the DOE, to complete
the proposed demonstration facility are to be provided from the proceeds of
the $40 million Bonds. On September 16, 1996, the Indiana Development
Finance Authority (the "Authority") adopted resolutions approving the
issuance of the Bonds. However, the Company is still seeking to resolve
certain concerns of representatives of the Authority and the Company has
not entered into a final agreement with the issuer of a direct-pay letter
of credit
47
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
required to support and secure the Bonds. In addition, in order to satisfy
the conditions to the issuance of the Bonds, among other things (i) the
Company must obtain additional equity capital of approximately $5 million
during October 1996, $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 outstanding loans made to the Company by Olin and
Praxair, Inc. described below, and (ii) the County of Warrick, Indiana must
fund or irrevocably commit to fund, in cash or by causing a letter of
credit or its equivalent to be issued, $2.5 million to fund the other half
of the supplemental reserve.
The Company intends to raise the required equity capital through a private
placement of its common stock, the terms of which placement are presently
being negotiated and are contingent upon the satisfactory completion of due
diligence and other conditions. Any shares issued in the private placement
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. Some, but not all required
approvals have been obtained in order for Warrick County to commit to fund
its portion of the supplemental reserve fund.
There can be no assurance that either condition to the issuance of the
Bonds can be satisfied prior to October 31, 1996, the date by which the
Alcoa Agreement 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, 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, as agent for
itself and other banks. Under the terms being discussed, draws on the
letter of credit that are not repaid within certain time periods are
converted into five-year term loans. Term loans that result from a
termination or non-renewal of a letter of credit are to bear interest at a
rate equal to LIBOR plus 1% per annum. Term loans that result from draws to
purchase bonds tendered and not remarketed that are not reimbursed within
60 days are to bear interest at a rate equal to LIBOR plus 2.25% per annum.
In addition, the default rate is equal to LIBOR plus 2.25% per annum.
The letter of credit banks are also to receive letter of credit fees equal
to 1.10% during construction of the Alcoa Project and 1% per annum
thereafter, as well as certain other administrative fees. The Company's
obligations under the reimbursement agreement proposed to be entered into
with the letter of credit banks and with respect to repayment of the Bonds
is to be secured by a pledge of all revenues relating to the Alcoa Project
and the Olin Project (collectively, the "Projects"), which revenues are to
be held in trust by a trustee for the letter of
48
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
credit bank and for the Authority. As a result, 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 6. 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 October 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 agreements regarding the Olin loan provide that the loan is to be
repaid on demand, but in no event later than October 31, 1996. The loan is
secured by a security interest in all of the Company's personal property. A
portion of the proceeds of the Olin loans were used to repay, in April
1995, a $1 million loan from ACOA. The balance of the loan proceeds have
been or are being used to complete construction of the Olin Facility.
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. They will evaluate this
cash flow analysis quarterly as the project proceeds.
At October 11, 1996 negotiations regarding funding, which management
believes will be successful, 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.
In management's opinion, the Company will complete the Bond sale and raise
the equity required to complete the proposed demonstration facility and to
retire the Olin and Praxair debts. Management anticipates that funds will
be available shortly after the date of this report. The Company will file a
revised Form 10-K immediately upon obtaining the funding required to
complete the proposed demonstration facility.
Note 9 - Private Placement Offerings:
On April 28, 1995, the Company conducted two private placement offerings to
foreign investors. The first offering was for 150,000 shares of common
stock at a price of $3.85 per share. The
49
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
second offering was for 250,000 shares of common stock at a price of $3.56
per share. The $1,298,295 in net proceeds after transactions costs have
been used to fund the ongoing operations of the Company. On October 17,
1995, the Company conducted two private placement offerings to accredited
investors. The first offering was for 100,000 share of common stock at a
price of $4.55 per share. The second offering was for 100,000 shares of
common stock at a price of $4.54 per share. The $818,000 in net proceeds
after transaction costs have been used to fund the ongoing operations of
the Company.
On April 15, 1996, the Company sold in a private placement offering to
accredited investors 156,763 shares at a price of $3.21 per share. The
$503,209 in net proceeds after transactions costs have been used to fund
the ongoing operations of the Company.
On June 26, 1996, the Company sold in a private placement offering to
accredited investors 145,773 shares at a price of $3.43 per share. The
$500,001 in net proceeds after transaction costs have been used to fund the
ongoing operations of the Company.
The shareholder's who purchased the above shares under private placements
have been granted registration rights or piggyback registration rights by
the Company.
Note 10 - Common Stock, Options and Warrants:
The 1990 Stock Option Plan - On April 18, 1990 the Board of Directors of
the Company adopted, and in March 1991 the Company's stockholders approved,
the 1990 Stock Option Plan (the "1990 Plan"). The 1990 Plan as amended
authorizes the granting of either "incentive stock options," as defined in
Section 422 of the Internal Revenue Code or "non-qualified stock options,"
to acquire 1,000,000 shares of the Company's common stock. Incentive stock
options may be granted only to employees. Nonqualified stock options may be
granted to employees, non-employee directors and consultants. The exercise
price shall be such price as is determined by the Stock Option Committee or
the Board of Directors. In addition, incentive stock options granted
pursuant to the 1990 Plan as amended must have an exercise price equal to
fair market value of the Company's common stock at the time the option is
granted, except that the price shall be at least 110% of the fair market
value when the option is granted to an employee who owns more than ten
percent of the combined voting power of all classes of the Company's voting
stock at the date of grant. The aggregate fair market value of the stock
with respect to which incentive stock options are exercisable for the first
time by any individual during any calendar year shall not exceed $100,000.
The Stock Option Committee will determine the term of the options but no
option may be exercised after ten years from the date of grant. No
incentive stock option granted to an employee who owns more than ten
percent of the combined voting power
50
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of all the outstanding classes of stock in the Company may be exercised
after five years from the date of the grant.
Transactions in stock options under the 1990 Plan as amended for fiscal
1996, 1995, and 1994 are as follows:
1996 1995 1994
---- ---- ----
Options outstanding July 1 621,500 543,500 422,000
Granted 90,000 328,500 129,000
Exercised (50,750) (4,000) -
Canceled (6,000) (246,500) (7,500)
Options outstanding at June 30, 654,750 621,500 543,500
Option price range at June 30, $1.91 to $1.91 to $1.91 to
$12.25 $12.25 $12.25
Options exercisable at June 30, 609,750 576,500 543,000
Options available for grant at June 30, 345,250 378,500 500
On August 15, 1994, the Company canceled incentive stock options to
purchase 63,500 shares of common stock issued to certain employees and on
such date new stock options were issued to purchase 63,500 shares of common
stock at $3.625 per share, the market price on the date of grant.
On August 30, 1994, the Company canceled stock options to purchase 50,000
shares of common stock issued (in connection with employment agreements) to
L.G. Neal and John Haslbeck, executive officers of the Company, and on such
date new stock options were issued to purchase 50,000 shares of common
stock at $3.25 per share, the closing sale price of the common stock on
August 29, 1994. As with the canceled options, options to purchase 25,000
shares were granted to Dr. Neal and options covering 25,000 shares were
granted to Mr. Haslbeck.
On August 30, 1994, the Company canceled with respect to each of the
Company's outside directors, Messrs. Long, Michael, Stoeckert, Toedtman and
Voss, respectively, options to purchase 25,000 shares of common stock
previously granted to such persons under the 1990 Plan. On such date, each
of such persons were granted options to purchase 25,000 shares of common
stock at an exercise price of $3.25 per share, the closing sale price of
the common stock on August 29, 1994.
51
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 17, 1995, the President, Vice President and outside Directors of
the Board were granted options to purchase 25,000, 15,000 and 10,000 shares
of the Company's common stock, respectively on an annual basis. These
grants would vest 50% immediately and 50% on the anniversary date of the
issuance. The grants would be effective on the third Friday of March, and
the option price will be equal to the quoted market price as listed on
NASDAQ, for each grant.
Warrants - The following warrants were outstanding and exercisable to
purchase the Company's stock at June 30, 1996 and 1995:
Aggregate Number
of Shares Subject Price
Year End to Warrant Per Share Expiration Date
-------- ---------- --------- ---------------
June 30, 1995 60,000 $3.75 February 24, 1997
June 30, 1996 60,000 $3.75 February 24, 1997
156,763 $4.28 April 12, 1999
10,000 $6.00 October 27, 2000
Note 11 - 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 the
Company's conduct, and, until any amounts due and payable to Calabrian
under its agreements with the Company are paid, a temporary and permanent
injunction enjoining the Company from using Calabrian's technology and from
disclosing it to third parties.
52
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's Counsel has advised that it believes the causes of action in
Calabrian's complaint are without merit and that the Company has a basis
for filing a counterclaim against Calabrian for breach of contract as a
result of Calabrian's abandonment of its contract with the Company without
cause or justification. The Company intends to deny the substantive
allegations of the complaint, to vigorously defend the action, and to file
a counterclaim seeking payment of (i) all costs incurred by the Company to
complete the portion of the Olin Facility abandoned by Calabrian in excess
of the fixed price established in the Company's Purchase Agreement, (ii)
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.
Note 12 - Credit Concentration:
The Company maintains its cash balances in a financial institution which is
insured by the Federal Deposit Insurance Corporation.
Note 13 - New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121. "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that carrying
value of long-lived operating assets, when determined to be impaired, be
adjusted so as not to exceed the estimated undiscounted cash flows provided
by such asset. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of in future periods.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", SFAS No. l23 recommends, but does not require, that
companies change their method of accounting for stock-based compensation
plans to one that attributes compensation costs equal to the fair market
value of a stock-based compensation arrangement over the periods in which
service is rendered. Companies not electing to change their method of
accounting are required, among other things, to provide additional
disclosures which in effect restate a company's results for comparative
periods as if the new method of accounting had been adopted.
The Company will be subject to the provisions of SFAS NO. 121 and No. 123
in fiscal 1997. At the present time, the Company does not believe that the
adoption of either of these accounting annuncements will have a material
effect on its financial position or results of operations.
53
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
54
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are listed in the table
below and brief summaries of their business experience are also set forth.
Position with Company
Name Age or Principal Occupation
---- --- ------------------------
Lewis G. Neal 63 President, Director
John L. Haslbeck 47 Vice President, Treasurer, Director
Robert M. Long 37 Secretary, Director
John H. Michael 53 Director
George I. Stoeckert 48 Director
John R Toedtman 51 Director
Stephen C. Voss 48 Director
Dr. Lewis G. Neal is a founder of the Company and has been a member of the
Board of Directors since November 1979 and was the President and Treasurer of
the Company from November 1982 until May 1985. From May 1985 until April 1987.
Dr. Neal served as a consultant to the Company. In addition, from October 1985
until April 1986, Dr. Neal was the General manager of the San Francisco office
of G&E Engineering, Inc. G&E is an engineering company involved in hazardous
waste clean-up. In April 1987, Dr. Neal rejoined the Company as its President
and Treasurer and was appointed Secretary in November 1989 and served in such
position until March, 1991. Dr. Neal serves on the Company's stock option
committee. Dr. Neal held several management positions with Teknekron, Inc., an
environmental engineering and consulting firm from January 1977 through November
1980. From November 1980 until November 1982, he was a private consultant to
various entities, including the Company. Prior to 1977, Dr. Neal was assistant
general manager of the environmental engineering division of TRW, Inc., a
multi-division corporation involved in electronics, defense contracting,
communications energy and environmental engineering, manufacturing auto
replacement parts and credit reporting. Dr. Neal has over thirty years of
experience teaching chemical engineering and conducting research. Dr. Neal's
research and consulting have been directed toward environmental problems since
1970. Dr. Neal acquired his Ph.D. from Northwestern University in 1962.
John L. Haslbeck is the Vice President and Treasurer of the Company. He is
also a member of the Company's Board of Directors. Mr. Haslbeck joined the
Company in 198l. He is a co-inventor of the NOXSO Process and holds numerous
patents related to the NOXSO technology. Mr Haslbeck has more than 22 years of
experience in evaluating, designing, building and testing air pollution control
equipment. He has a B.S. in Chemical Engineering from the University of Delaware
(1972). He has
55
<PAGE>
been involved in every aspect of the NOXSO Process research and development
program. He served as a senior project engineer on the first test of the NOXSO
Process on flue gas at the TVA's Shawnee Steam Plant. He managed tests of the
NOXSO Process at a scale of 0.06 and 0.75 megawatts at the DOE's Pittsburgh
Energy Technology Center and managed the pilot test of the NOXSO Process at Ohio
Edison's Toronto Power Plant. Prior to 1981, Mr. Haslbeck held management
positions with Teknekron, Inc., TRW, Inc., and Stauffer Chemical Co. working on
all aspects of air pollution measurement and control.
Robert M. Long has been a member of the Board of Directors since November
1988. Mr. Long was appointed Secretary in March of 1993. Mr. Long has been
self-employed as a financial consultant throughout his business career. Mr. Long
is a member of the Board of Directors of Denning Mobile Robotics Corp. Mr. Long
graduated from the University of the South (B.A. - Economics) in 1981 and from
the College of William and Mary (MBA) in 1983. Mr. Long serves on the Company's
compensation, stock option and shareholder relations committees.
John H. Michael has been a member of the Board of Directors of the Company
since November 1984. He served as Chairman of the Board and Chief Executive
Officer from September 1985 to March 1991. Mr. Michael has been Chairman of the
Board since June 1986, and President and Chief Executive Officer since November
1986, of Personal Diagnostics, Incorporated, engaged in the development of
medical devices and the engineering and assembly of precision products and
systems for high-technology industries, including the medical device field. Mr.
Michael graduated from Georgetown University School of Foreign Service in 1964
(BSFS) and Harvard Business School (MBA) in 1969. Mr. Michael serves on the
Company's compensation, executive, shareholder relations, and legislative
efforts committees.
George I. Stoeckert is a founder of the Company and was a member of the
Board of Directors from November 1979 to July 1985. Mr. Stoeckert rejoined the
Board of Directors in July 1991. Mr. Stoeckert is a Division President and
Corporate Vice President of Automatic Data Processing, Inc., Roseland, New
Jersey. ADP is a New York Stock Exchange listed company and is one of the
world's largest companies dedicated to providing computerized transaction
processing, data communications and information services. Mr. Stoeckert held
various general management, financial and planning positions with Ryder System,
Inc., one of the world's largest transportation service companies from 1974 to
1991 including President of the Insurance Management Services Division, Senior
Vice President of Development, President of Financial & Communication Services
Division. Mr. Stoeckert graduated from the University of Miami (B.A.) in 1970
and from the University of Miami Graduate School of Business (M.B.A.) in 1972.
Mr. Stoeckert serves on the Company's executive committee.
John R. Toedtman has been a member of the Board of Directors since July
1986. Since January 1990, Mr. Toedtman has been Chairman of GEN/Rx, Inc. From
November 1987 through January 1990, Mr. Toedtman was self-employed. From April
1986 until November 1987, he was Director of Corporate Finance at F.N. Wolf &
Co. Inc., the underwriter of the Company's most recent public offering. From
1981 to 1986, he was Chairman and Chief Executive Officer of Personal
Diagnostics, Incorporated. Mr. Toedtman is a director of Vital Signs, Inc. Mr.
Toedtman serves on the Company's stock option, shareholder relations,
legislative efforts and executive committees.
56
<PAGE>
Stephen C. Voss is a founder of the Company and has been a Director since
1979. Mr. Voss serves on the Company's executive, compensation, stock option and
legislative efforts committees. Mr. Voss held the position of Vice President of
the Company from August 1979 to March 1992. Mr. Voss is also President of Voss &
Co. Inc., a stock brokerage firm which he founded more than twenty years ago.
Board members are elected annually by the shareholders and the officers are
appointed annually by the Board of Directors.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and Nasdaq. Officers,
directors and greater than 10% percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on review of the copies of such forms furnished, the Company
believes that Lewis G. Neal, a director and officer of the Company, John L.
Haslbeck, a director and officer of the Company, Robert M. Long, a director of
the Company, John H. Michael, a director of the Company, George I. Stoeckert, a
director of the Company, John R. Toedtman, a director of the Company, and
Stephen C. Voss, a director of the Company, each inadvertently failed one time
to timely file Form 4s reporting their receipt of options in March 1996 due to a
misunderstanding regarding the filing requirements under Section 16(a). This
failure to timely file has been or is in the process of being corrected.
57
<PAGE>
Item 11. Executive Compensation
The following table sets forth a summary for the fiscal years ended June
30, 1996, 1995 and 1994, respectively, of the cash and non-cash compensation
awarded, paid or accrued, by the Company to the President and to each other
person who was an executive officer of the Company whose salary and bonus
exceeded $100,000 during fiscal 1996 (the "named executive officers").
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Name and Fiscal All Other
Principal Position Year Salary Bonus Options/SARs (#) Compensation
- - ------------------ ---- ------ ----- ------------ ----------------
<S> <C> <C> <C> <C>
Lewis G. Neal 1996 $150,000 $37,500 25,000(1) $ --
President
1995 156,932 30,000 50,000(2) --
1994 148,846 -- 15,000(3) --
John L. Haslbeck 1996 90,385 -- 15,000(4) --
Vice President and
Treasurer 1995 94,385 -- 40,000(5) --
1994 89,077 -- 12,000(6) --
</TABLE>
(1) The options shown are incentive stock options granted under the Company's
1990 Stock Option Plan, as amended, to purchase the Company's Common Stock
at an exercise price of $4.75 per share. These options terminate on March
15, 2006, subject to early termination upon cessation of an officer's
employment with the Company. They were exercisable with respect to one-half
of the shares on March 15, 1996, the date of grant. They will be vested
with respect to the balance on the first anniversary of their granting.
(2) The options shown are incentive stock options granted under the Company's
1990 Stock Option Plan, as amended, to purchase 25,000 shares of the
Company's Common Stock at an exercise price of $5.25 per share and 25,000
shares of the Company's Common Stock at an exercise price of $3.25 per
share. The options having an exercise price of $5.25 per share terminate on
March 16, 2005, and the options having an exercise price of $3.25 terminate
on August 29, 2004, subject to early termination upon cessation of an
officer's employment with the Company. The options having an exercise price
of $3.25 per share were issued in connection with the cancellation of
options to purchase 25,000 shares of the Company's Common Stock at a higher
price which were issued in prior fiscal years.
(3) The options shown are incentive stock options granted under the Company's
1990 Stock Option Plan, as amended, to purchase the Company's Common Stock
at an exercise price of $5.00 per share. These options terminate on June 1,
2004, subject to early termination upon cessation of an officer's
employment with the Company.
58
<PAGE>
(4) The options shown are incentive stock options granted under the Company's
1990 Stock Option Plan, as amended, to purchase the Company's Common Stock
at an exercise price of $4.75 per share. These options terminate on March
15, 2006, subject to early termination upon cessation of an officer's
employment with the Company. They were exercisable with respect to one-half
of the shares on March 15, 1996, the date of grant. They will be vested
with respect to the balance on the first anniversary of their granting.
(5) The options shown are incentive stock options granted under the Company's
1990 Stock Option Plan, as amended, to purchase 15,000 shares of the
Company's Common Stock at an exercise price of $5.25 per share and 25,000
shares of the Company's Common Stock at an exercise price of $3.25 per
share. The options having an exercise price of $5.25 per share terminate on
March 16, 2005, and the options having an exercise price of $3.25 terminate
on August 29, 2004, subject to early termination upon cessation of an
officer's employment with the Company. The options having an exercise price
of $3.25 per share were issued in connection with the cancellation of
options to purchase 25,000 shares of the Company's Common Stock at a higher
price which were issued in prior fiscal years.
(6) The options shown are incentive stock options granted under the Company's
1990 Stock Option Plan, as amended, to purchase the Company's Common Stock
at an exercise price of $5.00 per share. These options terminate on June 1,
2004, subject to early termination upon cessation of an officer's
employment with the Company.
The Company has not had and does not have any annuity, retirement, pension,
deferred or incentive compensation plan or arrangement under which any executive
officers are entitled to benefits, nor does the Company have any long-term
incentive plan pursuant to which performance units or other forms of
compensation are paid. Executive officers who qualify to participate in the
Company's 1990 Stock Option Plan. See "Stock Options" in this Item 11. Executive
officers participate in group life, health and hospitalization plans which are
available generally to all employees.
In January 1992, the Company instituted a simplified employee pension -
Individual Retirement Account ("IRA") for the employees under Section 408(k) of
the Internal Revenue Code. The plan allows each employee to contribute up to 15%
or $8,994, whichever is less, of his or her salary to an IRA. This plan is being
sponsored by the Company, but the Company has not in the past and does not
presently intend to make contributions to the plan.
Stock Options
The Company's 1990 Stock Option Plan, as amended (the "1990 Plan"),
authorizes the granting of either "incentive stock options" as defined in
Section 422 of the Internal Revenue Code of 1986, as amended, or "non-qualified
stock options" to acquire the Company's common stock. The Plan does not provide
for the issuance of stock appreciation rights. The purpose of the Plan is to
advance the interests of the Company and its shareholders by providing
additional incentives
59
<PAGE>
to the Company's management, including members of the Company's Board of
Directors, to accelerate development of the NOXSO Process and to reward
achievement of corporate goals. The Plan authorizes the issuance of options to
purchase up to 1,000,000 shares of common stock. The Company's stock option
committee consists of John R. Toedtman, Stephen C. Voss and Robert M. Long.
On March 17, 1995 the Board of Directors resolved that options be issued
each year to officers and directors of the Company in the following manner:
President 25,000 shares
Vice President(s) 15,000 shares
Directors 10,000 shares
These grants vest 50% immediately and 50% on the first (lst) anniversary of
the issuance. The grants are effective on the third (3rd) Friday of March, and
are at an option price equal to the market price of the Company's common stock
at close of market on that day as quoted on Nasdaq.
Option Awards
The following table sets forth information concerning options to purchase
the Company's Common Stock or stock appreciation rights ("SARs") with respect to
the Company's Common Stock granted to named executive officer in 1996.
<TABLE>
Option/SAR Grants in Fiscal Year 1996
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term2
- - ---------------------------------------------------------------------------- ----------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Name Option/SARs Employees or Base Price Expiration
Granted (#)1 in Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- - ---------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
L.G. Neal 25,000 62.5% $4.75 March 15, 2006 $74,681 $189,253
John Haslbeck 15,000 37.5% $4.75 March 15, 2006 44,809 113,554
</TABLE>
1/ The options shown are incentive stock options to purchase the Company's
Common Stock at a price of $4.75 per share. The options were granted under the
Company's 1990 Stock Option Plan, as amended. The options were 50% vested in
March 15, 1996, the date of grant. The options vest with respect to the
remaining shares on the first anniversary of their granting and terminate
60
<PAGE>
on March 15, 2006, subject to earlier termination upon cessation of an officer's
employment with the Company.
2/ The potential realizable value shown is calculated based upon appreciation of
the Common Stock issuable under options, calculated over the full term of the
options assuming 5% and 10% annual appreciation in the value of the Company's
Common Stock from the date of grant, net of the exercise price of the options.
Option Exercises and Holdings
The following table sets forth information with respect to the named
executive officers, concerning the exercises of options during fiscal year 1996
and the number and value of unexercised options held as of the end of fiscal
year 1996.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<CAPTION>
No. of Securities
Underlying Value of Unexercised
No. of Value Unexercised Options/ In-the-Money Options/SARs
Shares Realized SARs at Fiscal Year-End at Fiscal Year-End (2)
Acquired on -------- ----------------------- -------------------------
Name Exercise (1) Exercisable Unexercisable Exercisable Unexercisable
---- -------- --- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lewis G. Neal -- -- 112,500 12,500 $85,625 $4,687
John L Haslbeck -- -- 74,500 7,500 $83,375 $2,811
</TABLE>
(1) Value realized is calculated to equal the market price of the common
stock at the exercise date less the exercise price.
(2) Based on $5.125 market price of the common stock on June 30, 1996
(fiscal year end) and the exercise price of the option, multiplied by
the number of options for each respective person named.
Employment Agreements Which Have Expired but the Terms of Which are Still in
Effect
Dr. Neal and Mr. Haslbeck are presently employed pursuant to the terms of
employment agreements effective as of April 22 and April 29, 1992, which had
initial terms of two years and which continue to govern their employment. The
agreement with Dr. Neal provides that Dr. Neal will serve as the President, at
an annual base salary of $150,000 with additional increases to be determined by
the Board of Directors and certain bonuses payable upon the achievement of
certain corporate goals. The agreement requires that Dr. Neal devote his full
business time to the operations of the Company and also contains certain
covenants not to compete with the Company in exchange for payment of one year's
salary to Dr. Neal following termination of the agreement
61
<PAGE>
if Dr. Neal has complied with such covenants. The agreement is terminable by Dr.
Neal under various conditions including a change in control of the Company, in
which case Dr. Neal is entitled to a lump sum payment equal to the greater of
his then annual compensation, or the remaining total compensation payable to him
for the unexpired term of the agreement. Additionally, the agreement requires
that all ideas, inventions, discoveries, developments or improvements conceived
by Dr. Neal which are within the scope of the Company's business (whether or not
patentable), are and shall remain the exclusive property of the Company. Until a
new employment agreement is reached, the terms of this employment agreement will
remain in effect.
The agreement executed with Mr. Haslbeck provides that Mr. Haslbeck will
serve as the Vice President, at an annual base salary of $90,000 with additional
increases to be determined by the Board of Directors. The agreement requires
that Mr. Haslbeck devote his full business time to the operations of the Company
and also contains certain covenants not to compete with the Company in exchange
for payment of one year's salary to Mr. Haslbeck following termination of the
agreement if Mr. Haslbeck has complied with such covenants. The agreement is
terminable by Mr. Haslbeck under various conditions including a change in
control of the Company, in which case Mr. Haslbeck is entitled to a lump sum
payment equal to the greater of his then annual compensation, or the remaining
total compensation payable to him for the unexpired term of the agreement.
Additionally, the agreement requires that all ideas, inventions, discoveries,
developments or improvements conceived by Mr. Haslbeck which are within the
scope of the Company's business (whether or not patentable), are and shall
remain the exclusive property of the Company. Until a new employment agreement
is reached, the terms of this employment agreement will remain in effect.
Compensation Committee Interlock and Insider Participation
During fiscal 1996, Robert M. Long, John H. Michael and Stephen H. Voss
served on the Company's Compensation Committee. Mr. Long is the Secretary of the
Company. Mr. Michael was its Chairman and Chief Executive Officer from September
1985 to March 1991. Mr. Voss was Vice President of the Company from August 1979
to March 1992. There are no interlocking relationships, within the meaning of
such term under the regulations of the Securities and Exchange Commission,
involving any of these individuals or other executive officers of the Company.
Directors Compensation
The Company's outside directors (Messrs. Michael, Stoeckert, Toedtman and
Voss) receive an annual fee of $30,000 for serving as members of the Board of
Directors and members of the Executive Committee, and, in addition, they are
reimbursed for their expenses in connection with attendance at each Board
Meeting. The Board agreed to defer indefinitely payment of the annual fee for
fiscal 1996 and accordingly did not receive such fee during fiscal 1996.
62
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of September 30, 1996, there were 9,656,611 shares of the Company's
Common Stock outstanding. Set forth below is information concerning stock
ownership of all persons known by the Company to own beneficially 5% or more of
the Company's common stock, of each executive officer, of each director and of
all directors and executive officers of the Company as a group (7 persons),
based upon the number of shares of common stock outstanding on September 30,
1996. Unless otherwise stated, each person so named exercises sole voting and
investment powers to the shares of Common Stock so indicated.
Name and Address of Amount and Nature
Beneficial Owner of Beneficial Ownership(1) Percentage
- - ---------------- -------------------------- ----------
W.R. Grace & Co.-Conn. 2,005,494 20.76%
1114 Avenue of the Americas
New York, NY
Stephen C. Voss 828,415(2) 8.52%
8415 Willow Forge Road
Springfield, VA
Lewis G. Neal 278,500(3) 2.85%
2414 Lytle Road
Bethel Park, PA
John L. Haslbeck 189,575(4) 1.95%
2414 Lytle Road
Bethel Park, PA
George I. Stoeckert 180,000(5) 1.85%
One ADP Blvd.
Roseland, NJ
Robert M. Long 110,000(6) 1.13%
44 Lake Road
Short Hills, NJ
John R. Toedtman 70,000(7) *
I 1 Birch Drive
Basking Ridge, NJ
63
<PAGE>
John H. Michael 25,000(8) *
1810 24th Street
Washington, DC
All officers and
directors as a
group (7 persons) 1,681,490(9) 16.96%
* less than 1%
(1) For purposes of this table, shares are beneficially owned if the person
directly or indirectly has the sole or shared power to vote or direct the
voting of the securities or the sole or shared power to dispose of or
direct the disposition of the securities. A person also is considered to
beneficially own shares if such person has a right to acquire them within
60 days, and options exercisable within such period are referred to herein
as "currently exercisable."
(2) The shares beneficially owned by Mr. Voss include 171,800 shares held by
Voss & Co., Inc., a stock brokerage firm of which Mr. Voss is President and
sole stockholder and include 70,000 shares issuable to him upon the
exercise of currently exercisable options awarded under the 1990 Plan as
follows: for 5,000 shares at an exercise price of $4.75 per share that
expires on March 15, 2006; for 10,000 shares at an exercise price of $5.25
per share that expires on March 16, 2005; for 25,000 shares at an exercise
price of $3.25 per share that expires on August 29, 2004; for 20,000 shares
at an exercise price of $4.5625 per share that expires on December 8, 2001;
and for 10,000 shares at an exercise price of $1.9063 per share that
expires on April 17, 2000.
(3) The shares beneficially owned by Mr. Neal include 112,500 shares issuable
to him upon the exercise of currently exercisable options awarded to him
under the 1990 Plan as follows: for 12,500 shares at an exercise price of
$4.75 per share that expires on March 15, 2006; for 25,000 shares at an
exercise price of $5.25 per share that expires on March 16, 2005; for
25,000 shares at an exercise price of $3.25 per share that expires on
August 29, 2004; for 15,000 shares at an exercise price of $5.00 per share
that expires on June 1, 2004; for 25,000 shares at an exercise price of
$11.25 per share that expires April 1, 2002; and for 10,000 shares at an
exercise price of $1.9063 per share that expires on April 17, 2000.
(4) The shares beneficially owned by Mr. Haslbeck include 74,500 shares
issuable to him upon the exercise of currently exercisable options awarded
to him under the 1990 Plan as follows: for 7,500 shares at an exercise
price of $4.75 per share that expires on March 15, 2006; for 15,000 shares
at an exercise price of $5.25 per share that expires on March 16, 2005; for
25,000 shares at an exercise price of $3.25 per share that expires on
August 29, 2004; for 12,000 shares at an exercise price of $5.00 per shares
that expires on June 1, 2004; for 5,000 shares at an exercise price of
$12.25 per share that expires on April 28, 2002; and for 10,000 shares at
an exercise price of $1.9063 per share that expires on April 17, 2000.
64
<PAGE>
(5) The shares beneficially owned by Mr. Stoeckert include 60,000 shares
issuable to him upon the exercise of currently exercisable options awarded
under the 1990 Plan as follows: for 5,000 shares at an exercise price of
$4.75 per share that expires on March 15, 2006; for 10,000 shares at an
exercise price of $5.25 per share that expires on March 16, 2005; for
25,000 shares at an exercise price of $3.25 per share that expires on
August 29, 2004; and for 20,000 shares at an exercise price of $4.5625 per
share that expires on December 8, 2001.
(6) The shares beneficially owned by Mr. Long consist of 110,000 shares
issuable to him upon the exercise of currently exercisable options awarded
under the 1990 Plan as follows: for 5,000 shares at an exercise price of
$4.75 per share that expires on March 15, 2006; for 10,000 shares at an
exercise price of $5.25 per share that expires on March 16, 2005; for
25,000 shares at an exercise price of $3.25 per share that expires on
August 29, 2004; for 20,000 shares at an exercise price of $4.5625 per
share that expires on December 8, 2001; and for 50,000 shares at an
exercise price of $1.9063 per share that expires on April 17, 2000.
(7) The shares beneficially owned by Mr. Toedtman consist of 70,000 shares
issuable to him upon the exercise of currently exercisable options awarded
under the 1990 Plan as follows: for 5,000 shares at an exercise price of
$4.75 per share that expires on March 15, 2006; for 10,000 shares at an
exercise price of $5.25 per share that expires on March 16, 2005; for
25,000 shares at an exercise price of $3.25 per share that expires on
August 29, 2004; for 20,000 shares at an exercise price of $4.5625 per
share that expires on December 8, 2001; and for 10,000 shares at an
exercise price of $1.9063 per share that expires on April 17, 2000.
(8) The shares beneficially owned by Mr. Michael consist of 25,000 shares
issuable to him upon the exercise of currently exercisable options awarded
under the 1990 Plan as follows: for 5,000 shares at an exercise price of
$4.75 per share that expires on March 15, 2006; for 10,000 shares at an
exercise price of $5.25 per share that expires on March 16, 2005; and for
10,000 shares at an exercise price of $4.5625 per share that expires on
December 8, 2001.
(9) The shares beneficially owned by all directors and executive officers as a
group includes shares owned of record as well as shares issuable to the
beneficial owners upon the exercise of options awarded under the Company's
1990 Stock Option Plan, which options are exercisable currently or within
sixty (60) days.
65
<PAGE>
Item 13. Certain Relationships and Related Transactions
Grace and the Company are parties to the Grace License Agreement described
in "Certain License Agreements" in Item 1.
66
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Consolidated Financial Statements
A list of financial statements filed as a part of the Company's
Annual Report on Form 10-K is set forth at page ___ hereof.
(a)(2) Inapplicable
(a)(3) List of Exhibits
The following exhibits are included as a part of this Annual Report
on Form 10-K or incorported herein by reference.
Exhibit No. Document Description
----------- --------------------
3.1/1 Articles of Incorporation, as amended.
3.2/1 Amended and Restated By-Laws.
10.1/2 License and Supply Agreement between W.R. Grace & Co. and the
Company, dated September 11, 1987.
10.2/3 Cooperative Research Agreement between the United States
Department of Energy's Pittsburgh Energy Technology Center and
the Company, dated February 15, 1985, as amended September 27,
1988.
10.3/4 Amended and Restated Lease, executed May 1990 between WPC
Associates and the Company
10.4/4 1990 Stock Option Plan
10.5/5 License Agreement, executed March 24, 1992 between FLS and the
Company.
10.6/6 Novation Agreement, dated as of March 1, 1992 by and among the
Company, the United States Department of Energy and Morrison
Knudsen Corporation, effective March 1, 1992.
10.7/6 Assignment Agreement by and between the Company and Morrison
Knudsen Corporation, effective March 1, 1992.
67
<PAGE>
10.8/6 Modification No. 5 to Cooperative Agreement No. DE-FC22-91PC90549
(Amendment No. M005) and accompanying letter from the DOE.
10.9/6 Project Agreement, dated August 30, 1994 by and between the
Company and Alcoa Generating Corporation.
10.10/6 License, Construction, Lease and Sulfur Supply Agreement, dated
April 26, 1995 between the Company and Olin Corporation.
23 Consent of Arthur Andersen LLP.
Notes
- - -----
1. Incorporated by reference to the Company's Registration Statement on Form
S-1 filed with the Commission on January 13, 1989, file No. 33-2654l.
2. Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission on December 28, 1987.
3. Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission on September 28, 1988.
4. Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission on September 28, 1990.
5. Incorporated by reference to the Company's Annual Report on Form 8-K filed
with the Commission on March 24, 1992.
6. Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission in September 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed
during the last quarter of fiscal 1996
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NOXSO CORPORATION
Date: October 14, 1996 By: /s/ Lewis G. Neal
------------------------------
Lewis G. Neal, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report is signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ Lewis G. Neal President, Director October 14, 1996
- - ------------------------ (Principal Executive and
Lewis G. Neal Accounting Officer)
/s/ John L. Haslbeck Vice President, Treasurer, Director October 14, 1996
- - ------------------------
John L. Haslbeck
/s/ Robert M. Long Secretary, Director October 14,1996
- - ------------------------
Robert M. Long
/s/ John H. Michael Director October 14, 1996
- - ------------------------
John H. Michael
/s/ George I. Stoeckert Director October 14, 1996
- - ------------------------
George I. Stoeckert
/s/ John R. Toedtman Director October 14, 1996
- - ------------------------
John R. Toedtman
/s/ Stephen C. Voss Director October 14, 1996
- - ------------------------
Stephen C. Voss
69
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
registration statement on Form S-8, Registration No. 33-94710, relating to the
Company's 1990 Stock Option Plan. It should be noted that we have not audited
any financial statements of the Company subsequent to June 30, 1996, or
performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
October 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K FOR THE
YEAR ENDED JUNE 30 1996 AND IS QUALIFIED IN IT S ENTIRETY BY REFERNCE TO SUCH
FORM 10-K.
</LEGEND>
<CIK> 0000314307
<NAME> NOXSO CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1,000
<CASH> 465
<SECURITIES> 1,000
<RECEIVABLES> 2,163
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,666
<PP&E> 7,940
<DEPRECIATION> 412
<TOTAL-ASSETS> 11,199
<CURRENT-LIABILITIES> 8,000
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 3,101
<TOTAL-LIABILITY-AND-EQUITY> 11,199
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 488
<TOTAL-COSTS> 488
<OTHER-EXPENSES> (107)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (82)
<INCOME-PRETAX> (326)
<INCOME-TAX> 0
<INCOME-CONTINUING> (326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (326)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
