SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file No. 0-17454
NOXSO CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1118334
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
2414 Lytle Road 15102
Bethel Park, PA Zip Code
Address of principal executive offices
Registrant's telephone number, including area code: (412) 854-1200
Not Applicable
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 10, 1997
----- --------------------------------
Common stock, $.01 par value 15,299,650
1
<PAGE>
NOXSO CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C>
PART I FINANCIAL INFORMATION.................................................. 3
Item 1. Financial Statements (Unaudited)....................................... 3
Consolidated Balance Sheets as of September 30, 1997 and
June 30, 1997........................................................ 3
Consolidated Statements of Operations for the Cumulative
Period from Inception to September 30, 1979 and for the
three months ended September 30, 1997 and 1996....................... 4
Consolidated Statements of Changes in Stockholders'
Equity for the Cumulative Period from Inception to
September 30, 1997................................................... 5
Consolidated Statements of Cash Flows for the Cumulative
Period from Inception and for the three months
ended September 30, 1997 and 1996.................................... 8
Notes to Consolidated Financial Statements............................. 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 15
PART II. OTHER INFORMATION...................................................... 18
Item 1. Legal Proceedings...................................................... 18
Item 2. Changes in Securities.................................................. 20
Item 6. Exhibits and Reports on Form 8-K....................................... 20
SIGNATURES........................................................................ 21
</TABLE>
2
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1997 1997
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 119,730 $ 47,470
Bank certificate of deposit -- 1,000,000
Accounts receivable 67,211 65,760
Prepaid expenses and other current assets 352,581 99,778
------------ ------------
Total Current Assets 539,522 1,213,008
------------ ------------
PROPERTY AND EQUIPMENT:
Plant 11,532,124 11,532,124
Equipment 339,931 339,931
Furniture and fixtures 108,832 108,832
Leasehold Improvements 16,646 16,646
Construction in progress 44,975 44,975
------------ ------------
12,042,508 12,042,508
Less: Accumulated depreciation (1,417,833) (1,083,038)
------------ ------------
10,624,675 10,959,470
------------ ------------
Other assets -- --
Deposits 4,308 4,308
------------ ------------
Total Assets $ 11,168,505 $ 12,176,786
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE
Notes payable $ 1,919,583 $ 2,922,500
Long-term debt 583,333 --
Accounts payable 5,485,706 5,475,428
Accrued compensation 17,281 26,021
Advanced billings -- --
Deferred income taxes 120,294 120,294
Other current liabilities 531,354 578,055
Minority interest in consolidated subsidiary 24,300 24,300
------------ ------------
Total Liabilities Not Subject to Compromise 8,098,519 9,146,598
------------ ------------
PREPETITION LIABILITIES SUBJECT TO COMPROMISE 3,988,381 4,488,381
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: Authorized,
20,000,000 shares. Issued 14,952,636 shares and
11,264,740 shares, respectively 147,529 110,649
Paid-in capital 16,815,569 16,349,532
Deficit accumulated during the development stage (18,439,826) (17,893,374)
------------ ------------
(1,476,728) (1,433,193)
Less: Cost of 2,985 shares of common stock held in treasury (25,000) (25,000)
------------ ------------
Total Stockholders' Equity (Deficit) (1,501,728) (1,458,193)
------------ ------------
Total Liabilities and Stockholders' Equity $ 11,168,505 $ 12,176,786
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
Date of Inception, September 30,
August 28, 1979, -------------------------------
to Sept. 30, 1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
COSTS AND EXPENSES:
Purchase of NOXSO Process $ 260,625 $ -- $ --
Contract development-concept testing 1,169,759 -- --
Contract development-demonstration plant 1,727,715 -- --
Designing, drafting and consulting 1,122,653 -- 2,115
Supplies, instruments and equipment 1,998,331 6,044 7,756
Depreciation and amortization 1,557,006 334,796 12,958
Other research and development 386,309 -- --
Salaries and benefits 8,599,855 139,329 92,649
Professional fees 1,845,120 -- 14,822
Rent 663,066 38,405 24,137
Income tax expense 116,733 -- 46,865
Other general administrative 3,859,693 65,121 145,122
Sulfur dioxide processing costs 1,739,299 458,767 --
Loss on impairment of asset 1,975,028 478,094 --
ALCOA Project Expense 2,095,124 -- --
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 29,116,316 1,520,555 346,424
------------ ------------ ------------
LESS FUNDING AND OTHER:
Funding of research agreement 1,200,000 -- --
Reimbursement of project costs 5,009,234 17,203 71,115
Government grant 1,128,020 -- --
Sulfur dioxide processing revenue 1,812,250 948,310 --
Interest income 1,104,896 8,590 18,893
Other 446,955 -- 116,516
------------ ------------ ------------
TOTAL FUNDING AND OTHER 10,701,355 974,103 206,524
------------ ------------ ------------
Minority interest in net income of
Consolidated subsidiary 23,700 -- 2,763
NET LOSS $(18,438,661) $ (546,452) $ (142,663)
============ ============ ============
LOSS PER COMMON SHARE $ (.43) $ (.01)
============ ============
AVERAGE NUMBER OF SHARES
OUTSTANDING 12,683,094 9,652,453
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION, TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Stockholders' Equity
-----------------------------------------------------------------------------
Consideration Common Stock
---------------------------- ------------------------
Per Shares Par Paid-in
Share Total Issued Value Capital
------ -------------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994:
1979 - Issuance of Common Stock $ .005 $ 600 (1) 120,000 $ 1,200 $ (600)
1980 - Issuance of Common Stock .563 956,250 (2) 1,700,000 17,000 791,382
1980 - Issuance of Warrants -- 850 (3) - - 850
1983 - Issuance of Common Stock .2813 28,125 (4) 100,000 1,000 27,125
1986 - Issuance of Common Stock .125 155,000 (1) 1,240,000 12,400 142,600
1986 - Issuance of Common Stock .125 32,500 (5) 260,000 2,600 29,900
1987 - Issuance of Common Stock .50 134,000 (1) 268,000 2,680 131,320
1987 - Issuance of Common Stock .50 42,900 (5) 85,800 858 42,042
1988 - Issuance of Stock Option 250,000 (6) - - 250,000
1989 - Issuance of Common Stock .675 27,000 (7) 40,000 400 26,600
1989 - Issuance of Common Stock .50 147,500 (8) 295,000 2,950 144,550
1989 - Issuance of Common Stock 2.50 4,000,000 (2) 1,600,000 16,000 3,174,721
1989 - Issuance of Warrants 80 (3) - - 80
1991 - Issuance of Common Stock 1.129 569,464 (9) 504,620 5,046 564,418
1991 - Issuance of Common Stock .675 27,000 (7) 40,000 400 26,600
1991 - Issuance of Common Stock .675 27,000 (9) 40,000 400 26,600
1992 - Issuance of Common Stock 1.129 683,356 (9) 605,544 6,056 677,300
1992 - Issuance of Common Stock 7.50 2,000,000 (1) 266,666 2,666 1,997,334
1992 - Issuance of Common Stock 2.75 5,500 (9) 2,000 20 5,480
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity
--------------------------------------------------------------------
Deficit Accumu- Notes
lated During Receivable
Development Treasury for Purchase of
Stage Stock Common Stock Total
------------ -------- --------------- -----------
<S> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994:
1979 - Issuance of Common Stock $ -- $ -- $ -- $ 600
1980 - Issuance of Common Stock -- -- -- 808,382
1980 - Issuance of Warrants -- -- -- 850
1983 - Issuance of Common Stock -- -- -- 28,125
1986 - Issuance of Common Stock -- -- -- 155,000
1986 - Issuance of Common Stock -- -- -- 32,500
1987 - Issuance of Common Stock -- -- -- 134,000
1987 - Issuance of Common Stock -- -- -- 42,900
1988 - Issuance of Stock Option -- -- -- 250,000
1989 - Issuance of Common Stock -- -- (27,000) --
1989 - Issuance of Common Stock -- -- (30,000) 117,500
1989 - Issuance of Common Stock -- -- -- 3,190,721
1989 - Issuance of Warrants -- -- -- 80
1991 - Issuance of Common Stock -- -- -- 569,464
1991 - Issuance of Common Stock -- -- (27,000) --
1991 - Issuance of Common Stock -- -- -- 27,000
1992 - Issuance of Common Stock -- -- -- 683,356
1992 - Issuance of Common Stock -- -- -- 2,000,000
1992 - Issuance of Common Stock -- -- -- 5,500
</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.
(10) Stock issued in connection with exercise of common stock warrant
agreements.
(11) Stock issued in exchange for warrant.
See accompanying notes to consolidated financial statements.
5
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION, TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Stockholders' Equity
-----------------------------------------------------------------------------
Consideration Common Stock
---------------------------- ------------------------
Per Shares Par Paid-in
Share Total Issued Value Capital
------ -------------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994: (CONTINUED)
1992 - Issuance of Common Stock $2.00 $ 69,124 (10) 34,562 $ 346 $ 68,778
1992 - Issuance of Common Stock (11) 116,500 1,165 -
1992 - Satisfaction of notes receivable -- -- -
1993 - Issuance of Common Stock 1.129 683,356 (9) 605,544 6,056 677,300
1993 - Issuance of Common Stock 2.04 26,260 (9) 12,866 129 26,131
1993 - Issuance of Common Stock .50 50,000 500 24,500
1993 - Acquisition of Common Stock for treasury -- -- --
1993 - Satisfaction of notes receivable -- -- --
1993 - Issuance of Common Stock 5.00 2,594,115 (16) 571,250 5,712 2,588,403
1994 - Issuance of Common Stock 1.129 113,888 (9) 100,920 1,009 112,879
1994 - Issuance of Common Stock 2.00 23,624 (13) 11,812 118 23,506
Net loss -- -- -
---------- -------- -----------
BALANCE, JUNE 30, 1994 8,671,084 $ 86,711 $11,579,799
========== ======== ===========
YEAR ENDED JUNE 30, 1995:
Issuance of Common Stock $2.00 $ 47,252 (10) 23,626 $ 236 $ 47,016
Issuance of Common Stock 2.75 11,000 (9) 4,000 40 10,960
Issuance of Common Stock 3.85 497,500 (16) 150,000 1,500 496,000
Issuance of Common Stock 3.56 800,795 (16) 250,000 2,500 798,295
Issuance of Common Stock 3.25 325 (17) 100 1 324
Net loss -- -- -
---------- -------- -----------
BALANCE, JUNE 30, 1995 9,098,810 $ 90,988 $12,932,394
========== ======== ===========
YEAR ENDED JUNE 30, 1996:
Issuance of Common Stock 3.25 81,250 (9) 25,000 250 81,000
Issuance of Common Stock 1.91 19,063 (9) 10,000 100 18,963
Issuance of Common Stock 3.625 20,845 (9) 5,750 58 20,787
Issuance of Common Stock 4.55 409,725 (16) 100,000 1,000 408,725
Issuance of Common Stock 4.54 408,375 (16) 100,000 1,000 407,375
Issuance of Common Stock 4.56 45,626 (9) 10,000 100 45,526
Issuance of Common Stock 3.21 503,209 (16) 156,763 1,569 501,640
Issuance of Common Stock 3.425 500,003 (16) 145,773 1,458 498,543
Net loss -- -- -
---------- -------- -----------
BALANCE, JUNE 30, 1996 9,652,096 $ 96,523 $ 5,378,188
========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity
--------------------------------------------------------------------
Deficit Accumu- Notes
lated During Receivable
Development Treasury for Purchase of
Stage Stock Common Stock Total
------------ -------- --------------- -----------
<S> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994: (CONTINUED)
1992 - Issuance of Common Stock $ -- $ -- $ -- $ 69,124
1992 - Issuance of Common Stock (1,165) -- -- --
1992 - Satisfaction of notes receivable -- -- 57,000 (12) 57,000
1993 - Issuance of Common Stock -- -- -- 683,356
1993 - Issuance of Common Stock -- -- -- 26,260
1993 - Issuance of Common Stock -- -- (25,000) 0
1993 - Acquisition of Common Stock for treasury -- (25,000) 25,000 (15) 0
1993 - Satisfaction of notes receivable -- -- 27,000 (14) 27,000
1993 - Issuance of Common Stock -- -- -- 2,594,115
1994 - Issuance of Common Stock -- -- -- 113,888
1994 - Issuance of Common Stock -- -- -- 23,624
Net loss (9,727,095) -- -- (9,727,095)
------------ -------- -------- -----------
BALANCE, JUNE 30, 1994 $ (9,727,095) $(25,000) $ -- $ 1,914,415
============ ======== ======== ===========
YEAR ENDED JUNE 30, 1995:
Issuance of Common Stock $ -- $ -- $ -- $ 47,252
Issuance of Common Stock -- -- -- 11,000
Issuance of Common Stock -- -- -- 497,500
Issuance of Common Stock -- -- -- 800,795
Issuance of Common Stock -- -- -- 325
Net loss (1,931,657) -- -- (1,760,658)
------------ -------- -------- -----------
BALANCE, JUNE 30, 1995 $(11,487,753) $(25,000) $ -- $ 1,510,629
============ ======== ======== ===========
YEAR ENDED JUNE 30, 1996:
Issuance of Common Stock -- -- -- 81,250
Issuance of Common Stock -- -- -- 19,063
Issuance of Common Stock -- -- -- 20,845
Issuance of Common Stock -- -- -- 409,725
Issuance of Common Stock -- -- -- 408,375
Issuance of Common Stock -- -- -- 45,626
Issuance of Common Stock -- -- -- 503,209
Issuance of Common Stock -- -- -- 500,001
Net loss (394,269) -- -- (394,269)
------------ -------- -------- -----------
BALANCE, JUNE 30, 1996 $ (3,278,694) $(25,000) $ -- $ 3,104,454
============ ======== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION,
TO SEPTEMBER 30, 1997 (continued)
<TABLE>
<CAPTION>
Stockholders' Equity
-----------------------------------------------------------------------------
Consideration Common Stock
---------------------------- ------------------------
Per Shares Par Paid-in
Share Total Issued Value Capital
------ -------------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997:
Issuance of Common Stock $3.63 $ 27,186 (9) 7,500 $ 75 $ 27,111
Issuance of Common Stock 1.50 945,500 (16) 630,333 6,303 939,197
Issuance of Common Stock 0.00 - (16) 200,000 -- --
Issuance of Common Stock 0.26 40,000 (17) 154,811 1,548 38,452
Issuance of Common Stock 0.25 100,000 (16) 400,000 4,000 96,000
Issuance of Common Stock 0.63 43,750 (18) 70,000 700 43,050
Issuance of Common Stock 0.00 1,500 (19) 150,000 1,500 --
Deferred Debt Discount -- -- 290,769
Net loss -- -- --
---------- -------- -----------
BALANCE, JUNE 30, 1997 11,264,740 $110,649 $16,349,532
========== ======== ===========
THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED):
Issuance of Common Stock 0.15 150,000 (17) 973,203 9,732 140,268
Issuance of Common Stock 0.13 150,000 (17) 1,142,857 11,429 138,571
Issuance of Common Stock 0.16 200,000 (17) 1,280,171 12,802 187,198
Issuance of Common Stock 0.00 1,000 (19) 100,000 1,000 --
Issuance of Common Stock 0.00 1,000 (19) 100,000 1,000 --
Issuance of Common Stock 0.00 167 (19) 16,666 167 --
Issuance of Common Stock 0.00 417 (19) 41,666 417 --
Issuance of Common Stock 0.00 333 (19) 33,333 333 --
Net loss -- -- --
BALANCE, SEPTEMBER 30, 1997 (UNAUDITED) 14,952,636 $147,529 $16,815,569
========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity
--------------------------------------------------------------------
Deficit Accumu- Notes
lated During Receivable
Development Treasury for Purchase of
Stage Stock Common Stock Total
------------ -------- --------------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997:
Issuance of Common Stock $ -- $ -- $ -- $ 27,186
Issuance of Common Stock -- -- -- 945,500
Issuance of Common Stock -- -- -- 0
Issuance of Common Stock -- -- -- 40,000
Issuance of Common Stock -- -- -- 100,000
Issuance of Common Stock -- -- -- 43,750
Issuance of Common Stock -- -- -- 1,500
Deferred Debt Discount -- -- -- 290,769
Net loss (6,011,352) -- -- (6,011,352)
------------ -------- -------- -----------
BALANCE, JUNE 30, 1997 $(17,893,374) $ -- $ -- $(1,458,193)
============ ======== ======== ===========
THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED):
Issuance of Common Stock -- -- -- 150,000
Issuance of Common Stock -- -- -- 150,000
Issuance of Common Stock -- -- -- 200,000
Issuance of Common Stock -- -- -- 1,000
Issuance of Common Stock -- -- -- 1,000
Issuance of Common Stock -- -- -- 167
Issuance of Common Stock -- -- -- 417
Issuance of Common Stock -- -- -- 333
Net loss (546,452) -- -- (546,452)
------------ -------- -------- -----------
BALANCE, SEPTEMBER 30, 1997 (UNAUDITED) $(18,439,826) $ -- $ -- $(1,501,728)
============ ======== ======== ===========
</TABLE>
(9) Stock issued in connection with exercise of common stock option agreements.
(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.
(17) Stock issued in connection with conversion of debt.
(18) Stock issued in connection with employee termination.
(19) Stock issued in connection with debtor-in-possession financing.
See accompanying notes to consolidated financial statements.
7
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Date of Inception Three Months Ended September 30,
August 28, 1979, to -------------------------------
September 30, 1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(18,438,661) $ (546,452) $ (142,663)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Depreciation and amortization 1,509,292 334,796 12,958
Amortization of deferred debt discount 290,769 --
Minority interest 24,300 -- 3,063
Loss on disposal of property and equipment 5,752 -- --
Loss on impairment of property and equipment 1,975,028 478,094 --
Issuance of common stock for compensation and other 150,140 29,167 --
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 (67,211) (1,451) 1,465,873
Prepaid expenses and other current assets 157,800 252,803 9,955
Deposits (4,308) -- --
Liabilities not subject to compromise:
Accounts payable 5,485,706 10,278 1,751,857
Accrued compensation 17,281 (8,740) (10,476)
Advanced billings -- -- (626,125)
Accrued expenses -- -- --
Other current liabilities 646,042 (52,307) 71,416
Liabilities subject to compromise 3,988,381 (500,000) 250,000
------------ ------------ ------------
Net cash flows from operating activities (4,174,564) (3,812) $ 2,785,858
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of and deposits for property and equipment (14,119,139) (478,094) (2,078,271)
Proceeds from sale of certificate of deposit 0 1,000,000 --
Proceeds from the sale of property and equipment 4,546 -- --
------------ ------------ ------------
Net cash flows from investing activities (14,114,593) 521,906 (2,078,271)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement offering 6,826,408 -- --
Proceeds from line of credit 3,025,000 -- --
Payment of line of credit (3,025,000) (1,000,000) --
Proceeds from issuance of common stock 7,760,647 -- --
Proceeds from sales of common stock options and warrants 1,323,095 -- 27,188
Proceeds from satisfaction of notes receivable 27,000 -- --
Proceeds from ALCOA and Olin loans 2,874,000 --
Payment of ALCOA loan (1,000,000) --
Proceeds from debtor-in-possession financing 602,667 554,166
Net loans to stockholders and officers (4,930) -- --
------------ ------------ ------------
Net cash flows from financing activities $ 18,408,887 $ (445,834) $ 27,188
------------ ------------ ------------
NET INCREASE (DECREASE), CASH AND EQUIVALENTS $ 119,730 72,260 734,775
CASH AND EQUIVALENTS, BEGINNING OF PERIOD -- 47,470 464,723
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 119,730 $ 119,730 $ 1,199,498
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 341,469 $ -- $ 22,124
============ ============ ============
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 warrants $ 1,165 $ -- $ --
============ ============ ============
Compensation in satisfaction of notes receivable $ 57,000 $ -- $ --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation:
The balance sheet at the end of the preceding fiscal year has been derived
from the audited balance sheet contained in the Company's Form 10-K and is
presented for comparative purposes. All other financial statements are
unaudited. In the opinion of management, all adjustments which include only
normal recurring adjustments necessary to present fairly the financial position,
results of operations, changes in stockholders' equity and cash flows for all
periods presented have been made. The results of operations for interim periods
are not necessarily indicative of the operating results for the full year.
Footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted in
accordance with the published rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Form
10-K for the most recent fiscal year.
Note 2 - Plan of Reorganization:
Bankruptcy Proceedings - On February 6, 1997, Olin Corporation ("Olin"),
FRU- CON Construction Company and Industrial Rubber & Safety Products, Inc.,
filed an involuntary petition in bankruptcy against the company in the United
States Bankruptcy Court in the Eastern District of Tennessee. On June 4, 1997,
the Company (i) consented to the jurisdiction of the Court and was adjudicated
bankrupt and (ii) converted the bankruptcy to a proceeding under chapter 11 of
the Bankruptcy Code. The Company is presently operating as a
debtor-in-possession in the proceeding.
Plan of Reorganization - Pursuant to the provisions of the Bankruptcy Code,
the Company had the exclusive right to file a plan of reorganization until
October 7, 1997. The sale of a facility (the "Tennessee Facility") constructed
by the Company pursuant to a License, Construction, Lease and Sulfur Supply
Agreement (the "Olin Agreement") with Olin Corporation ("Olin") is a key element
of the Company's overall reorganization plan to emerge from Chapter 11 (see Note
6). In order to allow the Company to close on the sale of the Tennessee Facility
to Republic Financial Corp. and to continue its search for a host site in order
to commercially demonstrate the NOXSO Process, the Company filed a Motion for
Extension of Exclusive Time to File Plan, and on October 2, 1997, an order was
entered by the Bankruptcy Court extending the Company's exclusive period until
January 5, 1998.
The Company is presently operating as a debtor-in-possession under Chapter
11 of the Bankruptcy Code. The principal elements of the Company's plan to
emerge from bankruptcy are the sale of the Tennessee Facility and the location
of a site and the obtaining of funding
9
<PAGE>
(including reinstatement of DOE funding) to construct a commercial-size
demonstration of the NOXSO Process (see Note 3).
Note 3 - Full-Scale Demonstration Facility:
From 1989 until the present the Company has been attempting to develop a
full- scale commercial demonstration of the NOXSO Process. In December 1989, the
federal government's Clean Coal III Technology Program selected a proposal which
had been submitted by the Company, MK-Ferguson Company ("MK-Ferguson") and W. R.
Grace & Co.("Grace") for a commercial demonstration of the NOXSO Process. In
March 1991, the DOE entered into a Clean Coal Technology Cooperative Agreement
with MK-Ferguson 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 the Company by MK-Ferguson.
The site originally proposed for construction of the full-scale commercial
demonstration proved unsuitable for various reasons. The Company engaged in a
search for an alternative site to construct a full-scale commercial
demonstration facility, and, in August 1994, the Company entered into a Project
Agreement (the "Alcoa Project Agreement") with Alcoa Generating Corporation
("Alcoa") for the design, construction and operation of a facility to
demonstrate the NOXSO Process at Alcoa's Warrick Generating Station in Newburgh,
Indiana (the "Alcoa Project"). The Company completed the project definition and
design phases of the Alcoa Project and commenced construction in June 1995. 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 Alcoa Project Agreement was
subject to termination by Alcoa if certain conditions were not met, including
the requirement that the Company obtain the financing necessary to complete the
Alcoa Project by a designated date, which was extended several times until
January 31, 1997. The Company was unable to obtain the financing required to
complete the project by the deadline, and Alcoa terminated the Alcoa Project
Agreement on February 3, 1997.
The Company is currently seeking an alternate site to build a
commercial-size demonstration of the NOXSO Process and to obtain approval from
the DOE to utilize funding granted by the DOE for the Alcoa Project at an
alternate site. DOE is not currently providing any funding to the Company.
Location of an alternate site to build a commercial-size demonstration facility
and obtaining the funding necessary to finance construction of such a facility
are two of the principal elements of the Company's plan to emerge from
bankruptcy.
Even if the Company is able to locate an alternate site for a
commercial-size demonstration facility and retain the DOE funding, the Company
will need to secure significant additional funding in order to continue as a
going concern and complete a commercial demonstration facility. The Company has
never generated any significant operating revenue and does not anticipate that
it will generate significant operating revenue in the foreseeable future. Funds
generated from debtor-in-possession financing entered into by the Company and
from the sale of the Tennessee Facility, if consummated, would not be sufficient
to permit the Company to construct a commercial-size demonstration facility, and
the Company does not presently have
10
<PAGE>
any source for any significant additional funding. 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 will be extremely difficult for the Company to market and sell
the NOXSO Process if an alternate site for a commercial demonstration facility
is not located in the near future or if funding for such a facility, both from
the DOE and other sources, is not secured promptly. There can be no assurance
that the Company will be successful in locating an alternate site, in obtaining
DOE's approval to utilize DOE funding at such a site or in obtaining the needed
additional funding. If the Company is unable to accomplish all of the foregoing
objectives, it may be necessary for the Company to sell the rights to the NOXSO
Process in the bankruptcy proceedings and to liquidate.
Note 4 - Financing:
In order to provide for construction of the Tennessee Facility, the Company
obtained a loan from Olin in the amount of $1,874,000. In August 1996, the
Company also obtained the agreement of Praxair Inc. ("Praxair"), an air products
company, to defer payment of the $2,750,000 balance owed for the air separation
plant until completion of the bond financing then contemplated by the Company
but no later than September 30, 1996. In connection with the 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. At September 30, 1997, the Company had accrued approximately
$401,676 in late charges relating to this agreement with Praxair. The Company
intends to file an objection to the claim of Praxair arguing, among other
things, that Praxair is not entitled to these late charges. Those issues will be
decided by the Bankruptcy Court following a hearing expected to be held in
December 1997 or January 1998.
As a result of the termination of the Alcoa Project Agreement, the Company
became obligated, under an amendment to its Cooperative Agreement with DOE, to
repay DOE for all funds provided by DOE for the Tennessee Facility (see Note 6),
plus interest, calculated pursuant to a formula contained in the agreement, from
November 1, 1996. The Company is to pay DOE an amount equal to 2/3 of the
revenue received by the Company under the Olin Agreement (after repayment of
amounts due to Praxair). The entire amount becomes due and payable on January 1,
1999 if repayment has not commenced by that time. The Company is engaged in
discussions with DOE regarding this repayment obligation. DOE has filed a proof
of claim as an unsecured creditor in the amount of approximately $15 million in
the Company's bankruptcy proceedings.
The Company applied to the Bankruptcy Court for approval of additional
debtor-in-possession financing in an amount of up to $600,000. On August 18,
1997, the Bankruptcy Court entered a final order authorizing the Company to
obtain such financing from a group of lenders (the "DIP Lenders"). Pursuant to
such arrangement, the Company is authorized to grant and has granted to the DIP
Lenders a first priority lien in certain of the Company's patents and laboratory
equipment and is authorized to issue 300,000 shares of its Common Stock in the
aggregate to the DIP Lenders. During the three months ended September 30, 1997,
the DIP Lenders have loaned $583,333 to the Company pursuant to the financing
arrangement, and the Company has issued 289,333 shares of Common Stock to the
DIP Lenders. To date, the DIP Lenders have loaned $600,000 to the Company
pursuant to the financing arrangement, and the Company has issued 300,000 shares
of Common Stock to the DIP Lenders. The loans from the DIP Lenders bear interest
at the rate of 20% per annum. Interest for a one-year period (one-half of which
will be refunded to the extent not earned ) and a 5% origination fee have been
paid from proceeds.
The loans from the DIP Lenders are due and payable on the earlier of the
date one year after the specific loans were made or consummation of the
Company's plan of reorganization.
Note 5 - Contingencies:
Calabrian Litigation - In late August 1996 a complaint was filed against
the Company in the District Court of Jefferson County, Texas, by Calabrian
Corporation ("Calabrian") relating to a Purchase Agreement dated October 16,
1995 between the Company and Calabrian (the "Purchase Agreement") and a related
License Agreement (the "Calabrian License Agreement"), dated effective as of
September 1, 1995, between the Company and Calabrian.
11
<PAGE>
Under the agreements, Calabrian agreed to supply to the Company for a fixed
price a portion of the Tennessee Facility to be constructed by the Company for
Olin Corporation. The Tennessee Facility will convert elemental sulfur into
liquid sulfur dioxide for use by Olin under the Olin Agreement. The complaint
alleges that the Company took over direction and supervision of Calabrian's
subcontract relating to the construction of components of the Tennessee
Facility, disrupting Calabrian's plans with respect to the facility and
constituting an unlawful interference with Calabrian's contractual relationships
with its subcontractors, and that the Company defaulted in certain payment
obligations to Calabrian under the Purchase Agreement. The complaint requests
damages in the amount of $665,000, representing the balance of the fee allegedly
owed to Calabrian under the Purchase Agreement, unspecified damages caused
Calabrian as a result of the alleged interference with contract, any additional
damages caused Calabrian by the Company's conduct and an order prohibiting the
Company from disclosing to any third party, other than Olin, any confidential
and proprietary information of Calabrian. The Company has removed the action to
the United States District Court for the Eastern District of Texas, Beaumont
Division.
In October 1996, Calabrian amended its complaint to withdraw its request
for a temporary and permanent injunction enjoining the Company from using
Calabrian's technology.
The Company's counsel has advised that it believes the causes of action in
Calabrian's complaint are without merit. The Company has filed an answer and
counterclaim denying the substantive allegations of the complaint and requesting
(i) actual damages caused the Company by Calabrian's abandonment and resulting
breach of its contracts with the Company without cause or justification and for
tortious interference with its contract with Olin, (ii) exemplary damages as a
result of its tortious interference with the Olin contract, (iii) the Company's
legal fees and costs, and (iv) any and all other damages caused the Company by
Calabrian's filing of an action against the Company that is without merit.
This litigation has been stayed as a result of the pendency of the
Company's bankruptcy proceedings. The Company has filed a Motion to Transfer
this litigation to the Bankruptcy Court. A hearing on the Motion has not been
scheduled.
Olin Litigation - In April 1995, the Company and Olin entered into the Olin
Agreement to construct the Tennessee Facility to convert elemental sulfur into
liquid sulfur dioxide. The Tennessee Facility was substantially completed in
January 1997, and the Company and Olin had commenced startup of the Tennessee
Facility in order to cause it to become fully operational. The Company received
notice from Olin, by letter dated January 30, 1997, purporting to terminate the
Olin Agreement as a result of alleged defaults by the Company and claiming that
Olin had the right to take title to the Tennessee Facility. Olin's notice also
claimed that the Company had defaulted on the $1.874 million note (the "Olin
Note") issued in connection with a loan by Olin to the Company as partial
funding for construction of the Tennessee Facility.
On February 4, 1997, the Company sought and was granted a preliminary
injunction against Olin in the Court of Common Pleas of Allegheny County,
Pennsylvania, preventing Olin from (i) terminating the Olin Agreement, (ii)
taking any action in violation of the
12
<PAGE>
Company's title to the Tennessee Facility, (iii) performing any work on the
Tennessee Facility, (iv) interfering with the Company's completion of the
Tennessee Facility or (v) taking any action to foreclose against the Tennessee
Facility. In its complaint, the Company also requested a declaratory judgment
requiring Olin, among other things, to perform its obligations under the Olin
Agreement and a permanent injunction having substantially the same terms as the
preliminary injunction. In the alternative, the Company has sought damages in
excess of $32 million. In its action, the Company contends, among other things,
that it has committed no material breach of the Olin Agreement and that the
Company has substantially completed construction of the Tennessee Facility. The
Company also contends that the parties had agreed to extend the January 31, 1997
due date for the Olin Note and to set off the amount of the Olin Note against
purchase price payments which Olin is obligated to make on the Tennessee
Facility when it becomes fully operational. This litigation has been transferred
to the jurisdiction of the Bankruptcy Court.
In connection with the sale of the Tennessee Facility contemplated by the
Asset Purchase Agreement between the Company and Republic Financial Corporation
("Republic"), by Stipulation and Order of Court entered September 12, 1997
("Stipulation"), Olin and the Company conditionally resolved their disputes on
the following basis. In the event that the sale to Republic closes, Olin will be
entitled to payment at closing of claims totaling $5,705,828.84 plus certain
accruals and less credits to the Company for liquid sulfur dioxide produced at
the Facility and used or stored by Olin since February 1, 1997. As of October
31, 1997, those credits totaled $2,136,530. See Note 6 for further information
on the potential sale of the Tennessee Facility.
Additionally, at the closing on the Republic sale, the Company and Olin
have agreed to execute mutual releases releasing any and all other claims or
causes of action. In the event that the sale to Republic does not close, the
Company and Olin will be entitled to pursue any and all claims and lawsuits
which they have against each other. However, any claim of Olin in excess of the
aggregate sum as agreed pursuant to the Stipulation will be assertable
defensively by set-off and/or counterclaim only and will not result in any
increase in the aggregate claims of Olin payable by the Company. On October 2,
1997, Calabrian Corporation filed an Objection to the Stipulation. The
Bankruptcy Court denied Calabrian's Objection at a hearing held on October 14,
1997.
Note 6 - Potential Sale of the Tennessee Facility:
On August 15, 1997, NOXSO entered into a letter of intent with Republic for
the sale of the Tennessee Facility. Republic, a merchant banking firm which
specializes in the acquisition and financing of assets, has proposed, subject to
a number of conditions, to purchase the Facility at a price of $11 million. A
definitive Asset Purchase Agreement (the "Asset Purchase Agreement") setting
forth the terms and conditions of the sale of the Facility to Republic was
executed by the Company and Republic on September 17, 1997. In addition to the
sale of the Facility and related assets, the Asset Purchase Agreement provides
for the assumption by the Company of the Calabrian License Agreement.
13
<PAGE>
Among the numerous conditions that must be satisfied prior to the
completion of the sale are negotiations with third parties of various associated
agreements, including contracts for the sale of liquid sulfur dioxide and the
purchase of elemental sulfur, an operation and maintenance contract, a technical
support agreement, agreements for the purchase of any other input of process
materials required to operate the Tennessee Facility effectively, and a land
lease for the Tennessee Facility. Completion of certain of the associated
agreements will require the cooperation of Olin.
A Motion for Order Approving (i) Sale of Assets Free and Clear of Liens and
Encumbrances and (ii) Assumption and Assignment of Executory Contract in
Connection with Sale of Assets (the "Motion") was filed with the Court on
September 22, 1997, and a hearing on the Motion was held on October 21-22, 1997.
In addition to the sale of the Tennessee Facility and related assets, the Motion
sought authority for the Company to assume the Calabrian License Agreement and
to assign it to Republic. On October 22, 1997, the Bankruptcy Court entered an
Order authorizing the sale to Republic including the assumption and assignment
of the Calabrian License Agreement. Subject to satisfaction of all conditions,
the Asset Purchase Agreement targets November 1997 for the closing of the sale
of the Tennessee Facility.
Completion of a sale of the Tennessee Facility is one of the principal
elements of the Company's plan to emerge from bankruptcy.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company is a development stage company and 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.
On June 4, 1997, the Company consented to the jurisdiction of the United
States Bankruptcy Court in the Eastern District of Tennessee (the "Bankruptcy
Court") and was adjudicated bankrupt. The Company is presently operating as a
debtor-in-possession in the bankruptcy proceeding. Under an order of the
Bankruptcy Court entered on October 2, 1997, the Company has the exclusive right
to file a plan of reorganization until January 5, 1998.
Liquidity and Capital Resources
Since inception, the Company has dedicated substantially all its resources
to the acquisition, development and testing of the NOXSO Process. From the
beginning of fiscal 1997 until January 31, 1997, the Company was principally
engaged in (i) the design, construction and operation of a facility to
demonstrate the NOXSO Process at Alcoa's Warrick Generating Station in Newburgh,
Indiana (the "Alcoa Project") and (ii) the construction of a facility (the
"Tennessee Facility") at Olin's plant in Charleston, Tennessee to convert
elemental sulfur, which is generated as a by-product of the NOXSO Process, into
liquid sulfur dioxide (the "Olin Project") pursuant to a License, Construction,
Lease and Sulfur Supply Agreement (the "Olin Agreement"). In connection with
construction of the Tennessee Facility, the Company became obligated to Olin
under a loan (the "Olin Loan") in the amount of $1.874 million which Olin had
made to the Company in order to provide for construction of the Tennessee
Facility and to Praxair for the balance of the approximately $2.75 million
balance, (plus late charges) of the contract price for an air separation plant
supplied to the Company by Praxair as part of the Tennessee Facility.
The Company received notice from Olin, by letter dated January 30, 1997,
purporting to terminate the Olin Agreement as a result of alleged defaults by
the Company and claiming that Olin had the right to take title to the Tennessee
Facility. Olin's notice also claimed that the Company had defaulted on the Olin
Loan. The Company commenced litigation against Olin in connection with it
purported termination of the Olin Agreement. In addition, on February 3, 1997,
Alcoa terminated the Alcoa Project Agreement because the Company was unable to
obtain the financing required to complete the project by the designed date,
which was extended several times until January 31, 1997. As a result of the
termination of the Alcoa Project Agreement, the Company became obligated, under
an amendment to its Cooperative Agreement with DOE, to repay DOE for all funds
provided by DOE for the Tennessee Facility, plus interest, calculated pursuant
to a formula contained in the agreement, from November 1, 1996. DOE has filed a
proof
15
<PAGE>
of claim as an unsecured creditor in the amount of approximately $15 million in
the Company's bankruptcy proceedings.
On February 6, 1997, Olin and two of the company's suppliers filed an
involuntary petition in bankruptcy against the Company in the United States
Bankruptcy Court in the Eastern District of Tennessee (the "Bankruptcy Court").
On June 4, 1997, the Company (i) consented to the jurisdiction of the Bankruptcy
Court and was adjudicated bankrupt and (ii) converted the bankruptcy to a
proceeding under Chapter 11 of the Bankruptcy Code (case no. 97-10709). The
Company is presently operating as a debtor-in-possession in the proceeding. The
litigation described above brought by the Company against Olin has been
transferred to the jurisdiction of the Bankruptcy Court.
The Company is currently seeking an alternate site to build a
commercial-size demonstration of the NOXSO Process and to obtain approval from
the DOE to utilize funding granted by the DOE for the Alcoa Project at an
alternate site. DOE is not currently providing any funding to the Company.
Location of an alternate site to build a commercial-size demonstration facility
and obtaining the financing necessary to finance construction of such a facility
are two of the principal elements of the Company's plan to emerge from
bankruptcy.
On June 30, 1997, the Bankruptcy Court preliminarily approved the Company's
request for emergency interim debtor-in-possession financing. Pursuant to an
agreement with certain lenders (collectively, the "Interim Lenders"), the
Interim Lenders agreed to lend the Company the amount of $50,000, interest free
for one year. Pursuant to such agreement, the Company issued to the Interim
Lenders 150,000 shares of the Company's Common Stock, par value $.01 per share
(the "Common Stock"). A final order approving the interim debtor-in-possession
financing was entered on August 18, 1997.
The Company applied to the Bankruptcy Court for approval of additional
debtor-in-possession financing in an amount of up to $600,000. On August 18,
1997, the Bankruptcy Court entered a final order authorizing the Company to
obtain such financing from a group of lenders (the "DIP Lenders"). Pursuant to
such arrangement, the Company is authorized to grant and has granted to the DIP
Lenders a first priority lien in certain of the Company's patents and laboratory
equipment and is authorized to issue 300,000 shares of its Common Stock in the
aggregate to the DIP Lenders. During the three months ended September 30, 1997,
the DIP Lenders have loaned $583,333 to the Company pursuant to the financing
arrangement, and the Company has issued 289,333 shares of Common Stock to the
DIP Lenders. To date, the DIP Lenders have loaned $600,000 to the Company
pursuant to the financing arrangement, and the Company has issued 300,000 shares
of Common Stock to the DIP Lenders. The loans from the DIP Lenders bear interest
at the rate of 20% per annum. Interest for a one-year period (one-half of which
will be refunded to the extent not earned ) and a 5% origination fee have been
paid from proceeds.
The loans from both the Interim Lenders and the DIP Lenders are due and
payable on the earlier of the date one year after the specific loans were made
or consummation of the Company's plan of reorganization.
16
<PAGE>
Even if the Company is able to locate an alternate site for a
commercial-size demonstration facility and retain the DOE funding, the Company
will need to secure significant additional funding in order to continue as a
going concern and complete a commercial demonstration facility. The Company has
never generated any significant operating revenue and does not anticipate that
it will generate significant operating revenue in the foreseeable future. The
Company has secured certain emergency interim debtor-in-possession financing and
has entered into an agreement which provides, subject to numerous conditions,
for the sale of the Tennessee Facility. However, funds generated from these
sources would not be sufficient to permit the Company to construct a
commercial-size demonstration facility, and the Company does not presently have
any source for any significant additional funding. 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 will be extremely difficult for the Company to market and sell
the NOXSO Process if an alternate site for a commercial demonstration facility
is not located in the near future or if funding for such a facility, both from
the DOE and other sources, is not secured promptly. There can be no assurance
that the Company will be successful in locating an alternate site, in obtaining
DOE's approval to utilize DOE funding at such a site or in obtaining the needed
additional funding. If the Company is unable to accomplish all of the foregoing
objectives, it may be necessary for the Company to sell the rights to the NOXSO
Process in the bankruptcy proceedings and to liquidate. In such event, it is
unlikely that sufficient funds will be generated to permit any distribution to
be made to the Company's stockholders.
Although the Company and Republic Financial Corporation have executed an
Asset Purchase Agreement relating to the sale of the Tennessee Facility,
consummation of such sale is subject to a number of conditions, many of which
are outside the Company's control. As a result, there can be no assurance that
the Company will succeed in selling the Tennessee Facility to Republic or to any
other purchaser at a satisfactory price.
Results of Operations
Inception to September 30, 1997
To date, the Company has not derived any significant revenues from
operations. Substantially all revenues to date have consisted of research
funding, government grants, reimbursement of project costs and interest income,
aggregating $10.7 million through September 30, 1997. As a result of the
significant expenses incurred from inception through September 30, 1997 in
connection with the acquisition, development and testing the NOXSO Process, as
well as general and administrative expenses that have been incurred, the Company
had an accumulated deficit of $18.4 million at September 30, 1997. Since
inception through September 30, 1997, the Company's total costs and expenses
were $29.1 million, including $8.6 million relating to salaries and benefits.
17
<PAGE>
Three Months Ended September 30, 1997
Compared to the Three Months Ended September 30, 1996.
Total funding, interest income, reimbursement of project costs and sulfur
dioxide processing revenue for the three months ended September 30, 1997 and
1996, respectively, were $1.0 million and $0.2 million respectively, while total
costs and expenses for the same periods were $1.5 million and $0.3 million,
respectively. Depreciation and amortization increased by $0.33 million because
the Tennessee Facility is completed and is now classified as plant and is
accordingly being depreciated. The Company has also recognized a $0.5 million
loss on impairment of asset related to the Tennessee Facility. Because of the
termination of the Alcoa Project Agreement, costs relating to the Alcoa Project
can no longer be capitalized, and $2.1 million of such costs were written off in
fiscal 1997. The Tennessee Facility became operational in 1997, and the Company
has revenue and operating expenses relating to the Tennessee Facility. During
the three months ended September 30, 1997, the Company had revenue of $0.96
million relating to the sale of liquid sulfur dioxide produced at the Tennessee
Facility and incurred expenses of $0.49 million in sulfur dioxide processing
costs.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Calabrian Litigation
In late August 1996 a complaint was filed against the Company in the
District Court of Jefferson County, Texas, by Calabrian Corporation
("Calabrian") relating to a Purchase Agreement dated October 16, 1995 between
the Company and Calabrian (the "Purchase Agreement") and a related License
Agreement, dated effective as of September 1, 1995, between the Company and
Calabrian. Under the agreements, Calabrian agreed to supply to the Company for a
fixed price a portion of the Tennessee Facility to be constructed by the Company
for Olin Corporation. The Tennessee Facility will convert elemental sulfur into
liquid sulfur dioxide for use by Olin under the Olin Agreement. The complaint
alleges that the Company took over direction and supervision of Calabrian's
subcontract relating to the construction of components of the Tennessee
Facility, disrupting Calabrian's plans with respect to the facility and
constituting an unlawful interference with Calabrian's contractual relationships
with its subcontractors, and that the Company defaulted in certain payment
obligations to Calabrian under the Purchase Agreement. The complaint requests
damages in the amount of $665,000, representing the balance of the fee allegedly
owed to Calabrian under the Purchase Agreement, unspecified damages caused
Calabrian as a result of the alleged interference with contract, any additional
damages caused Calabrian by the Company's conduct and an order prohibiting the
Company from disclosing to any third party, other than Olin, any confidential
and proprietary information of Calabrian. The Company has removed the action to
the United States District Court for the Eastern District of Texas, Beaumont
Division.
18
<PAGE>
In October 1996, Calabrian amended its complaint to withdraw its request
for a temporary and permanent injunction enjoining the Company from using
Calabrian's technology.
The Company's counsel has advised that it believes the causes of action in
Calabrian's complaint are without merit. The Company has filed an answer and
counterclaim denying the substantive allegations of the complaint and requesting
(i) actual damages caused the Company by Calabrian's abandonment and resulting
breach of its contracts with the Company without cause or justification and for
tortious interference with its contract with Olin, (ii) exemplary damages as a
result of its tortious interference with the Olin contract, (iii) the Company's
legal fees and costs, and (iv) any and all other damages caused the Company by
Calabrian's filing of an action against the Company that is without merit.
This litigation has been stayed as a result of the pendency of the
Company's bankruptcy proceedings.The Company has filed a Motion to Transfer this
litigation to the Bankruptcy Court. A hearing on the Motion has not been
scheduled.
Olin Litigation
In April 1995, the Company and Olin entered into the Olin Agreement to
construct the Tennessee Facility to convert elemental sulfur into liquid sulfur
dioxide. The Tennessee Facility was substantially completed in January 1997, and
the Company and Olin had commenced startup of the Tennessee Facility in order to
cause it to become fully operational. The Company received notice from Olin, by
letter dated January 30, 1997, purporting to terminate the Olin Agreement as a
result of alleged defaults by the Company and claiming that Olin had the right
to take title to the Tennessee Facility. Olin's notice also claimed that the
Company had defaulted on the $1.874 million note (the "Olin Note") issued in
connection with a loan by Olin to the Company as partial funding for
construction of the Tennessee Facility.
On February 4, 1997, the Company sought and was granted a preliminary
injunction against Olin in the Court of Common Pleas of Allegheny County,
Pennsylvania, preventing Olin from (i) terminating the Olin Agreement, (ii)
taking any action in violation of the Company's title to the Tennessee Facility,
(iii) performing any work on the Tennessee Facility, (iv) interfering with the
Company's completion of the Tennessee Facility, or (v) taking any action to
foreclose against the Tennessee Facility. In its complaint, the Company also
requested a declaratory judgment requiring Olin, among other things, to perform
its obligations under the Olin Agreement and a permanent injunction having
substantially the same terms as the preliminary injunction. In the alternative,
the Company has sought damages in excess of $32 million. In its action, the
Company contends, among other things, that it has committed no material breach
of the Olin Agreement and that the Company has substantially completed
construction of the Tennessee Facility. The Company also contends that the
parties had agreed to extend the January 31, 1997 due date for the Olin Note and
to set off the amount of the Olin Note against purchase price payments with Olin
is obligated to make on the Tennessee Facility when it becomes fully
operational. This litigation has been transferred to the jurisdiction of the
Bankruptcy Court.
19
<PAGE>
In connection with the sale of the Tennessee Facility contemplated by the
Asset Purchase Agreement between the Company and Republic Financial Corporation
("Republic"), by Stipulation and Order of Court entered September 12, 1997
("Stipulation"), Olin and the Company conditionally resolved their disputes on
the following basis. In the event that the sale to Republic closes, Olin will be
entitled to payment as closing of claims totaling $5,705,828.84 plus certain
accruals and less credits to the Company for liquid sulfur dioxide produced at
the Facility and used or stored by Olin since February 1, 1997. As of October
31, 1997, those credits totaled $2,136,530. Additionally, at the closing on the
Republic sale, the Company and Olin have agreed to execute mutual releases
releasing any and all other claims or causes of action. In the event that the
sale to Republic does not close, the Company and Olin will be entitled to pursue
any and all claims and lawsuits which they have against each other. However, any
claim of Olin in excess of the aggregate sum as agreed pursuant to the
Stipulation will be assertable defensively by set-off and/or counterclaim only
and will not result in any increase in the aggregate claims of Olin payable by
the Company. On October 2, 1997, Calabrian Corporation filed an Objection to the
Stipulation. The Bankruptcy Court denied Calabrian's Objection at a hearing held
on October 14, 1997.
Bankruptcy Proceedings
On February 6, 1997, Olin, FRU-CON Construction Company and Industrial
Rubber & Safety Products, Inc., filed an involuntary petition in bankruptcy
against the Company in the United States Bankruptcy Court in the Eastern
District of Tennessee. On June 4, 1997, the Company (i) consented to the
jurisdiction of the Court and was adjudicated bankrupt and (ii) converted the
bankruptcy to a proceeding under Chapter 11 of the Bankruptcy Code (case no. 97-
10709). The Company is presently operating as a debtor-in-possession in the
proceeding.
Item 2. Changes in Securities
During the three months ended September 30, 1997, the Company issued
3,396,231 shares of Common Stock on conversion of $500,000 in principal amount
of Convertible Subordinated Debentures and 291,665 shares of Common Stock in
connection with its debtor-in-possession financing.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports - On September 30, 1997, the Company filed a Form 8-K reporting
the Company's agreement with Republic Financial Corporation for the sale of the
Tennessee Facility, certain matters relating to the hearing on the Company's
plan of reorganization, the Company's debtor-in-possession financing and the
conversion of the Company's Convertible Subordinated Debentures into Common
Stock.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOXSO CORPORATION
Registrant
Date: November 19, 1997 By: /s/ Edwin J. Kilpela
----------------------------------
Edwin J. Kilpela, President
(On behalf of the Registrant)
Date: November 19, 1997 By: /s/ John L. Haslbeck
----------------------------------
John L. Haslbeck, Treasurer
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 119,730
<SECURITIES> 0
<RECEIVABLES> 67,211
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 539,522
<PP&E> 12,042,508
<DEPRECIATION> 1,417,833
<TOTAL-ASSETS> 11,168,505
<CURRENT-LIABILITIES> 12,086,900
<BONDS> 0
0
0
<COMMON> 147,529
<OTHER-SE> 1,329,199
<TOTAL-LIABILITY-AND-EQUITY> 11,168,505
<SALES> 0
<TOTAL-REVENUES> 974,103
<CGS> 0
<TOTAL-COSTS> 1,520,555
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (546,452)
<INCOME-TAX> 0
<INCOME-CONTINUING> (546,452)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (546,452)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> 0
</TABLE>
