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, 1997, 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
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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, 1997: $3,023,463
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, 1997
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Common stock, $.01 par value 14,999,651
Documents Incorporated by Reference: None
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Item 1. Business
Overview
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."
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.
Early Development of the NOXSO Process
From 1980 to 1993 the Company was primarily engaged in designing,
constructing and operating programs to test and continue the development of the
NOXSO Process. The Company has operated (i) a pre-pilot testing apparatus at a
coal-fired utility boiler having the equivalent of approximately 1/60 megawatts
in electrical generating capacity at the Tennessee Valley Authority's Shawnee
Steam Plant in Paducah, Kentucky, (ii) a pre-pilot plant demonstration on a
larger scale at the Pittsburgh Energy Technology Center operated by the U.S.
Department of Energy ("DOE") under a Cooperative Agreement with the DOE; and
(iii) a pilot-scale demonstration plant at an Ohio Edison power plant in
Toronto, Ohio which tested a larger-scale fully-integrated NOXSO Process
treatment system, treating flue gas generated from approximately 5 megawatts of
electrical generating capacity.
Efforts to Develop a Commercial 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.
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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. The
Company has secured certain emergency interim debtor-in-possession financing
(see "Funding for the Company's Operations" below) and has entered into an
agreement which provides, subject to numerous conditions, for the sale of a
facility constructed by the Company (see "The Olin Project -- Agreement with
Republic Financial Corporation" below). 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.
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The Olin Project
Construction of the Tennessee Facility
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 agreed to construct 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"). It had been intended that the
Company would provide elemental sulfur produced at the Alcoa Project, convert
such elemental sulfur to liquid sulfur dioxide and sell the liquid sulfur
dioxide to Olin. Until the Company is able to provide elemental sulfur, the
Company is obligated to provide elemental sulfur and, accordingly, must purchase
it from suppliers. In addition, because the Olin Project was not completed by
September 1, 1996, the Company was obligated under the Olin Agreement to make
certain payments to Olin relating to the purchase by Olin of liquid sulfur
dioxide.
The Olin Facility consists of an air separation plant that was supplied to
the Company by Praxair, Inc. ("Praxair") 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
(the "Calabrian License Agreement"). In May 1996, Calabrian abandoned its
portion of the Tennessee 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.
Such litigation has been stayed on account of the Company's bankruptcy
proceedings. See Item 3.
In order to provide for construction of the Tennessee Facility, the Company
obtained a loan from Olin (the "Olin Loan") 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 approximately $2.75 million balance owed for the air separation plant
until completion of a 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 June 30, 1997, the Company had accrued approximately $400,000 in late
charges relating to this agreement with Praxair.
The agreements regarding the Olin loan provide that the loan is to be
repaid on demand, but no later than October 31, 1996, which date was extended in
writing to January 31, 1997. The loan is secured by a security interest in all
of the Company's personal property. The loan proceeds were used to complete
construction of the Tennessee Facility.
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
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funds provided by DOE for the Tennessee Facility, 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.
Dispute with Olin Concerning 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.
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, among other things, from terminating the Olin
Agreement or taking any action in violation of the Company's title to 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 sought
monetary damages from Olin.
On February 6, 1997, Olin and FRU-CON Construction Company and Industrial
Rubber & Safety Products, Inc., 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. 97-19709). 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.
Agreement with Republic Financial Corporation and Conditional Settlement of Olin
Disputes
On August 15, 1997, NOXSO entered into a letter of intent with Republic
Financial Corporation ("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. See "The Olin Project --
Construction of the Tennessee Facility" above and item 3.
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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.
Another condition of sale involving Olin is the resolution of the disputes
between the Company and Olin described above. 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 August 31, 1997, those credits totaled $1,590,930.
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
file an Objection to the Stipulation. A hearing will be scheduled by the
Bankruptcy Court to consider Calabrian's objection.
Completion of a sale of the Tennessee Facility is subject to the approval
of the Bankruptcy Court. 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 is scheduled for hearing on October
21, 1997. In addition to the sale of the Tennessee Facility and related assets,
the Motion seeks authority for the Company to assume the Calabrian License
Agreement and to assign it to Republic. Subject to satisfaction of all
conditions, the Asset Purchase Agreement targets November 1997 for the closing
of the sale.
Completion of a sale of the Tennessee Facility is one of the principal
elements of the Company's plan to emerge from bankruptcy.
Plan of Reorganization
Pursuant to the provisions of the Bankruptcy Code, the Company has the
exclusive right to file a plan of reorganization until October 7, 1997. The sale
of the Tennessee Facility is a key element of the Company's overall
reorganization plan to emerge from Chapter 11. In order to allow the Company to
close on the sale to Republic 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.
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Funding for the Company's Operations
During fiscal 1997, the Company raised (i) an aggregate amount of
$1,095,500 through private placements resulting in the issuance of 1,380,333
shares of the Company's Common Stock, par value $.01 per share ("Common Stock"),
and warrants to purchase 1,097,133 shares of Common Stock at exercise prices
ranging from $1.50 to $.25 and (ii) $540,000 through a private placement
pursuant to Regulation S of convertible subordinated debentures (the
"Debentures"). All of the Debentures were converted into Common Stock, resulting
in the issuance of 3,551,042 shares of Common Stock.
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 subsequently 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. To date, 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. 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.
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
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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. Alternatively, the nitrogen oxides
are extracted from a closed loop around the sorbent heater and fed to a small
furnace specifically designed to convert nitrogen oxides to nitrogen and oxygen.
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 by NOXSO at its pilot-scale facility at Ohio Edison's plant in
Toronto, Ohio, between 80% 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. Some of 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 ("SO/2"), nitrogen oxides ("NOx") and particulate matter have been
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.
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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 SO/2, 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 SO/2
emissions and place caps on nationwide SO/2 and NO/x 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 SO/2.
The law provides for a two-phased program to reduce SO/2 emissions
nationwide by 10 million tons from 1980 levels. When fully implemented, the
amendments will limit additional annual emissions of SO/2 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 may become part of the program through
certain "opt-in" provisions of the regulations.
The EPA has promulgated a two-phased NO/x emission reduction program under
Title IV of the Clean Air Act Amendments of 1990. Units affected by Phase I were
required to meet the applicable limits by January 1, 1996. Units affected by
Phase II are required to meet the applicable limits by the year 2000. The
program is intended to result in a reduction in annual NO/x emissions by
approximately 1.17 million tons by the year 2000. In order to provide a more
flexible approach to emission reduction, states can petition EPA to accept an
emissions cap and trade program. This added flexibility is intended to encourage
states in the Ozone Transport Assessment Group to move toward a regional cap and
trade program for NO/x similar to that already in place for SO/2.
In July 1997, the EPA made final new, more stringent air standards for
ozone and fine particles. On October 10, 1997, the EPA proposed targets for
reducing these pollutants in the Midwest, South and along the east Coast of the
United States. The EPA proposal calls for significant reductions in nitrogen
oxide emissions from power plants in 22 states. Ozone is produced when nitrogen
oxides and unburned
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hydrocarbons are exposed to sunlight. Management believes these developments
will have a positive effect on the market for technologies that achieve
significant reductions in nitrogen oxide emissions from power plants (including
the NOXSO Process, if it proves successful).
Under the SO/2 allowance program, each generator receives SO/2 Allowances
("Allowances") at the beginning of each year each of which, when used, allows it
to generate one ton of SO/2 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 SO/2.
The standards set by the 1990 amendments, as they relate to sulfur oxide
emissions, are unlikely to be met without the use of low sulfur fuels, 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
systems that produce gypsum as a byproduct, generate large volumes of solid
waste material which must be disposed of in an environmentally acceptable
manner.
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 NO/x and SO/2 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 (if it is
proven successful) 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 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 ten 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.
The Company believes that 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 has not located a site to construct
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a commercial-scale demonstration facility or obtained the funding to construct
such a facility if a site is located.
It is anticipated that, if the NOXSO demonstration is successful, the
Company's revenues would be derived principally from royalties on the sale of
NOXSO sorbent and from technology license fees for licenses of the NOXSO
technology to energy companies, independent power producers, or engineering
firms that design, build, and install pollution control equipment on new and
existing power plants.
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 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 Babcock & Wilcox Company, Asea Brown
Boveri, Wheelabrator, Joy Bischoff and Pure Air. The Company does not intend to
construct pollution control facilities itself, but, if the NOXSO Process is
successful, the Company will seek to license the technology to major engineering
firms engaged in the design and construction of pollution control equipment.
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 and solar energy, geo thermal and wind
power. To the extent that any of these energy sources becomes 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, if the NOXSO Process is successful, it 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.
11
<PAGE>
Certain License Agreements
Agreements with Grace
Since March 1982, Grace, which as of September 30, 1997 owned approximately
13.4% 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 per year for three years
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 and pollution control
equipment. The FLS License Agreement authorizes FLS to market, sell, design and
construct NOXSO Process facilities in 33 countries throughout Europe, parts of
Asia and the countries comprising the former Soviet Union. 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 March 1997 in order to maintain its license. To the Company's
knowledge, no installations have been sold to date. 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
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<PAGE>
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 was completed by the Summer of 1997. To the Company's
knowledge, the demonstration, to date, has met expectations as to SO/2 and NO/x
removal rates. The Company is not a party to this agreement and has no role in
the funding or operation of the project. The Company does not presently expect
to receive any royalty income on the FLS license before 1999 at the earliest.
Other Business
In November 1995 the Company formed a 70%-owned subsidiary, PROJEX, Inc.,
to conduct a business utilizing the construction management expertise available
to the Company in its development and demonstration of the NOXSO Process. PROJEX
provided construction management support services and was also engaged by the
Company to supervise construction of the Alcoa Project and the Tennessee
Facility. In March 1997 the operations of PROJEX were shut down.
The Company has also in the past 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. The Company is presently limiting its efforts
on these projects to concentrate on developing and implementing its plan to
emerge from bankruptcy.
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's
United States patents expire on various dates ranging from 2005 to 2014.
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
13
<PAGE>
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.
The Company also has two United States patent applications pending which
cover improvements to the NOXSO Process that were demonstrated at the Company's
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 ten full-time employees. 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. As a result of termination of the Alcoa Project Agreement and
the Company's bankruptcy, the Company has significantly reduced its staff. The
Company would be required to hire additional staff to develop and construct a
commercial-size demonstration facility, if a site for such facility is located
and funding to construct such facility is obtained. The Company is not a party
to any collective bargaining agreement and believes that it has a favorable
relationship with its employees.
Risks; Forward Looking and Other Statements
The statements above and elsewhere in this Report relating to the Company's
prospects and its ability to meet it various objectives are forward-looking
statements. Various factors could prevent the Company from realizing these
objectives, including the following:
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 (including reinstatement of DOE funding)
to construct a commercial-size demonstration of the NOXSO Process.
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
(see "Funding
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<PAGE>
for the Company's Operations" above) and has entered into an agreement which
provides, subject to numerous conditions, for the sale of the Tennessee Facility
(see "The Olin Project -- Agreement with Republic Financial Corporation" above).
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 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. See "The Olin Project -- Agreement with Republic Financial
Corporation." 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.
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
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
15
<PAGE>
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.
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
16
<PAGE>
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 August 31,
1997, those credits totaled $1,590,930. 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. A hearing will be scheduled by the Bankruptcy Court to consider
Calabrian's objection.
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-
19709). The Company is presently operating as a debtor-in-possession in the
proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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<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 under
the symbol "NOXSOQ". Prior to June 4, 1997, it was traded in the Nasdaq Small
Cap Market System. The following table sets forth the range of high and low
closing bid quotations of the common stock 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.
Fiscal Quarter Ended Bid Prices $
-------------------- ------------
1996 High Low
---- ---- ---
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) 6.875 4.00
December 31, 1996 (Second Quarter) 6.125 1.75
March 31, 1997 (Third Quarter) 4.5625 0.75
June 30, 1997 (Fourth Quarter) 1.50 0.25
1998
----
September 30, 1997 (First Quarter) 0.75 0.125
---------------------------------
The closing price of the Company's common stock was $0.25 on October 6,
1997.
Holders of the Company's Common Stock
As of June 30, 1997 and September 30, 1997, respectively, there were
approximately 783 and 775 holders of the Company's common stock.
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<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, 1997, has been derived from the Company's audited financial statements.
<TABLE>
<CAPTION>
Operating Results Year Ended June 30,
----------------- -------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Costs and Expenses ... $ 7,411,804 $ 556,132 $ 2,648,842 $ 3,125,312 $ 4,222,034
Net Loss ............. (6,011,352) (394,269) (1,760,658) (1,931,657) (2,292,197)
Per Share Data:
Net Loss Per Share ... (0.59) (0.04) (0.20) (0.22) (0.30)
Weighted Average
Number of Shares
Outstanding (in 000's) 10,109 9,308 8,777 8,645 7,723
<CAPTION>
Financial Position June 30,
------------------ -------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working Capital ... (12,421,971) $ (4,428,663) $ 583,359 $ 1,808,399 $ 3,578,616
Total Assets ...... 12,176,786 11,199,396 3,423,873 3,690,130 4,964,195
Long-Term Debt .... -- -- -- -- --
Total Stockholders'
Equity ............ (1,458,193) 3,104,454 1,510,629 1,914,415 3,708,560
</TABLE>
19
<PAGE>
Item 7. 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. See
"Efforts to Develop a Commercial Demonstration Facility" and "The Olin Project
- -- Construction of the Tennessee Facility" in item 1.
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 its
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 designated 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
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<PAGE>
pursuant to a formula contained in the agreement, from November 1, 1996. DOE has
filed a proof 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. 97-19709). 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.
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. During
fiscal 1997, the Company raised (i) an aggregate amount of $1,095,500 through
private placements resulting in the issuance of 1,380,333 shares of the
Company's Common Stock, par value $.01 per share ("Common Stock"), and warrants
to purchase 1,097,133 shares of Common Stock at exercise prices ranging from
$1.50 to $.25 and (ii) $540,000 through a private placement pursuant to
Regulation S of convertible subordinated debentures (the "Debentures"). All of
the Debentures were converted into Common Stock, resulting in the issuance of
3,551,042 shares of Common Stock. The Company has also secured certain emergency
interim debtor-in-possession financing (see "Funding for the Company's
Operations" in item 1) and has entered into an agreement which provides, subject
to numerous conditions, for the sale of the Tennessee Facility (see "The Olin
Project -- Agreement with Republic Financial Corporation" in item 1). 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
21
<PAGE>
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 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. See "The Olin Project -- Agreement with Republic Financial Corporation"
in item 1. 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
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 $9.7 million through June 30, 1997. As a result of the significant
expenses incurred from inception through June 30, 1997 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 $17.9 million at June 30, 1997. Since inception through
June 30, 1997, the Company's total costs and expenses were $27.6 million,
including $8.5 million relating to salaries and benefits.
Total funding, interest income, reimbursement of project costs and sulfur
dioxide processing revenue for the fiscal years ended June 30, 1997,1996 and
1995 were $1.4 million, $0.2 million and $0.9 million, respectively, while total
costs and expenses for the same periods were $7.4 million, $0.6 million and $2.6
million, respectively. The decrease in revenues and the decrease in costs and
expenses from fiscal 1995 to fiscal 1996 was due to the fact that the Company
had begun capitalizing its costs related to the Alcoa Project and the Tennessee
Facility and the DOE's portion of the costs and revenues were being offset
against the construction-in-progress. 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. In
addition, significant other costs, such as salaries and general and
administrative expenses, during fiscal 1997 were not related to any ongoing
project and, accordingly, were expensed. Depreciation and amortization increased
by $0.66 million because the Tennessee Facility is completed and is now
classified as plant and is accordingly being depreciated. The Company has also
recognized a $1.5 million loss on impairment of asset related to the Tennessee
Facility. Primarily for these reasons, costs and expenses increased by $6.8
million in fiscal 1997 over fiscal 1996. The Tennessee Facility became
operational in 1997, and the Company had revenue and operating expenses relating
to the Tennessee Facility for the first time. In fiscal 1997, the Company had
revenue of $0.86 million relating to the sale of liquid sulfur dioxide produced
at the Tennessee Facility and incurred expenses of $1.3 million in sulfur
dioxide processing costs.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) recently issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" and SFAS
No. 129, "Disclosure of Information about Capital Structures." SFAS No. 128 was
issued in February 1997 and is effective for periods ending after December 15,
1997. This statement, upon adoption, will require all prior year earnings per
share (EPS) data to be restated to conform to the provisions of the statement.
This statement's objective is to simplify the computations of EPS and to make
the U.S. standard for EPS computations more compatible with that of the
International Accounting Standards Committee. The Company will adopt SFAS No.
128 in fiscal 1998 and does not anticipate that the statement will have a
significant on its reported EPS.
SFAS No. 129 was issued in February 1997 and is effective for periods
ending after December 15, 1997. This statement, upon adoption, will require all
companies to provide specific disclosure regarding their capital structure and
the contractual rights of the holders of such securities. The company will adopt
SFAS No. 129 in fiscal 1998 and does not anticipate that the statement will have
a significant on its disclosures.
22
<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, 1997 and 1996
Consolidated Statements of Operations for the Cumulative
Period from Inception to June 30, 1997, and for the
Years Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity
for the Cumulative Period from Inception to June 30, 1997,
and for the Years Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Cumulative
Period from Inception to June 30, 1997, and for the Years
Ended June 30, 1997, 1996 and 1995
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
23
<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 as of June 30, 1997 and 1996
Consolidated Statements of Operations for the
Cumulative Period from Inception to June 30, 1997,
and for the Years Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Changes in
Stockholders' Equity for the Cumulative
Period from Inception to June 30, 1997, and for
the Years Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the
Cumulative Period from Inception to June 30, 1997,
and for the Years Ended June 30, 1997, 1996 and 1995
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, 1997 and 1996, 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, 1997. 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.
Generally accepted accounting principles recommend, but do not require, that
companies change their method of accounting for stock-based compensation plans
to one that attributes costs equal to the fair 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 disclosure which in effect restates a
company's results for comparative periods as if the new method of accounting had
been adopted. As more fully explained in Note 17 to the financial statements,
the Company elected not to adopt the recognition provisions of Statement of
Financial Accounting Standard No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation," and has not complied with the related disclosure
requirements.
In our opinion, except for the effects of not adopting SFAS No. 123 as discussed
in the preceeding paragraph, 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, 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 3 to the
consolidated financial statements, the Company has never generated revenue from
operations as it has yet been unsuccessful in obtaining a host site for the
Full-Scale Demonstration Facility to implement the Noxso process. In addition,
as described in Note 1 to the accompanying consolidated financial statements, on
February 6, 1997, Olin Corporation 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 consented to the jurisdiction of the Bankruptcy
Court and was adjudicated bankrupt and converted the bankruptcy to a proceeding
under Chapter 11 of the U.S. Bankruptcy Code. These matters, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters, including its intent to file a
plan of reorganization that will be acceptable to the Court and the Company's
creditors, are also described in Note 3. In the event a plan of reorganization
is accepted, continuation of the business thereafter is dependent on the
Company's ability to achieve successful future operations. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
September 30, 1997, except
for the matters discussed
in Notes 1, 3, and 14 as
to which the date is
October 2, 1997.
<PAGE>
NOXSO Corporation
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 1997 June 30, 1996
------------- -------------
CURRENT ASSETS:
Cash and equivalents $ 47,470 $ 464,723
Bank certificate of deposit 1,000,000 1,000,000
Accounts receivable 65,760 2,163,420
Prepaid expenses and other current assets 99,778 38,136
--------- ---------
Total Current Assets 1,213,008 3,666,279
--------- ---------
PROPERTY AND EQUIPMENT:
Plant 11,532,124 --
Equipment 339,931 341,936
Furniture and Fixtures 108,832 111,661
Leasehold improvements 16,646 16,646
Construction in progress 44,975 7,469,545
--------- ---------
12,042,508 7,939,788
Less: Accumulated depreciation (1,083,038) (412,151)
--------- ---------
10,959,470 7,527,637
---------- ---------
Other assets -- 1,172
Deposits 4,308 4,308
--------- ---------
Total Assets $12,176,786 $11,199,396
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
Notes payable $2,922,500 $2,874,000
Accounts payable 5,475,428 3,424,692
Accrued compensation 26,021 98,975
Advanced billings -- 1,379,549
Deferred income taxes 120,294 --
Other current liabilities 578,055 290,945
Minority interest in consolidated subsidiary 24,300 26,781
--------- ---------
Total Liabilities Not Subject To Compromise 9,146,598 8,094,942
--------- ---------
PREPETITION LIABILITIES SUBJECT TO COMPROMISE: 4,488,381 --
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value: Authorized,
20,000,000 shares. Issued and outstanding
11,264,740 shares and
9,652,096 shares, respectively 110,649 96,523
Paid-in capital 16,349,532 14,914,953
Deficit accumulated during the development stage (17,893,374) (11,882,022)
---------- ---------
(1,433,193) 3,129,454
Less: Cost of 2,985 shares of
common stock held in treasury (25,000) (25,000)
---------- ---------
Total Stockholders' Equity (Deficit) (1,458,193) 3,104,454
---------- ---------
Total Liabilities and Stockholders' Equity $12,176,786 $11,199,396
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
NOXSO Corporation
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Date of Inception, Fiscal Year Ended June 30,
August 28, 1979, ----------------------------------------------------
to June 30, 1997 1997 1996 1995
---------------- ---- ---- ----
(Not covered by
auditor's report)
<S> <C> <C> <C> <C>
COSTS AND EXPENSES:
Purchase of NOXSO Process $ 260,625 $ -- $ -- $ --
Contract development - concept testing 1,169,759 -- -- --
Contract development - demonstration testing 1,727,715 -- -- 767,387
Designing, drafting and consulting 1,122,653 15,362 4,750 38,679
Supplies, instruments and equipment 1,992,287 38,243 19,520 83,102
Depreciation and amortization 1,222,210 689,277 33,101 32,440
Other research and development 386,309 -- -- 43,969
Salaries and benefits 8,460,526 845,608 175,633 1,108,250
Professional fees 1,845,120 263,326 33,323 194,023
Rent 624,661 105,078 33,501 125,628
Income tax expense 116,733 83,552 33,181 --
Other general administrative 3,794,572 498,677 223,123 255,364
Sulfur dioxide processing costs 1,280,532 1,280,532 -- --
Loss on impairment of asset 1,496,935 1,496,935 -- --
ALCOA Project Expense 2,095,124 2,095,124 -- --
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 27,595,761 7,411,804 556,132 2,648,842
------------ ------------ ------------ ------------
LESS FUNDING AND OTHER:
Funding of research agreement 1,200,000 -- -- --
Reimbursement of project costs 4,992,031 92,059 45,782 793,086
Government grant 1,128,020 -- -- 39,863
Sulfur dioxide processing revenue 863,940 863,940 -- --
Interest income 1,096,306 57,984 81,560 55,235
Other 446,955 383,688 61,002 --
------------ ------------ ------------ ------------
TOTAL FUNDING AND OTHER 9,727,252 1,397,671 188,344 888,184
------------ ------------ ------------ ------------
Minority interest in net income of
consolidated subsidiary 23,700 (2,781) 26,481 --
NET LOSS $(17,892,209) $ (6,011,352) $ (394,269) $ (1,760,658)
============ ============ ============ ============
LOSS PER COMMON SHARE $ (0.59) $ (0.04) $ (0.20)
AVERAGE NUMBER OF SHARES
OUTSTANDING 10,109,179 9,308,394 8,776,817
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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 1997
<TABLE>
<CAPTION>
Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Consideration Common Stock Deficit Accumu-
------------------ ------------------ lated During
Per Shares Par Paid-in Development
Share Total Issued Value Capital Stage
----- ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION)
TO JUNE 30, 1991 (not covered by auditor's report):
1979 - Issuance of Common Stock $ .005 $ 600(1) 120,000 $ 1,200 $ (600) $ --
1980 - Issuance of Common Stock .563 956,250(2) 1,700,000 17,000 791,382 --
1980 - Issuance of Warrants -- 850(3) -- -- 850 --
1983 - Issuance of Common Stock .2813 28,125(4) 100,000 1,000 27,125 --
1986 - Issuance of Common Stock .125 155,000(1) 1,240,000 12,400 142,600 --
1986 - Issuance of Common Stock .125 32,500(5) 260,000 2,600 29,900 --
1987 - Issuance of Common Stock .50 134,000(1) 268,000 2,680 131,320 --
1987 - Issuance of Common Stock .50 42,900(5) 85,800 858 42,042 --
1988 - Issuance of Stock Option 250,000(6) -- -- 250,000 --
1989 - Issuance of Common Stock .675 27,000(7) 40,000 400 26,600 --
1989 - Issuance of Common Stock .50 147,500(8) 295,000 2,950 144,550 --
1989 - Issuance of Common Stock 2.50 4,000,000(2) 1,600,000 16,000 3,174,721 --
1989 - Issuance of Warrants 80(3) -- -- 80 --
1991 - Issuance of Common Stock 1.129 569,464(9) 504,620 5,046 564,418 --
1991 - Issuance of Common Stock .675 27,000(7) 40,000 400 26,600 --
1991 - Issuance of Common Stock .675 27,000(9) 40,000 400 26,600 --
Net loss -- -- -- (3,278,694)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1991 6,293,420 $ 62,934 $ 5,378,188 $(3,278,694)
<CAPTION>
Stockholders' Equity
- ------------------------------------------------------------------------------------------
Notes
Receivable
Treasury for Purchase of
Stock Common Stock Total
----- ------------ -----
<S> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION)
TO JUNE 30, 1991 (not covered by auditor's report):
1979 - Issuance of Common Stock $ -- $ -- $ 600
1980 - Issuance of Common Stock -- -- 808,382
1980 - Issuance of Warrants -- -- 850
1983 - Issuance of Common Stock -- -- 28,125
1986 - Issuance of Common Stock -- -- 155,000
1986 - Issuance of Common Stock -- -- 32,500
1987 - Issuance of Common Stock -- -- 134,000
1987 - Issuance of Common Stock -- -- 42,900
1988 - Issuance of Stock Option -- -- 250,000
1989 - Issuance of Common Stock -- (27,000) --
1989 - Issuance of Common Stock -- (30,000) 117,500
1989 - Issuance of Common Stock -- -- 3,190,721
1989 - Issuance of Warrants -- -- 80
1991 - Issuance of Common Stock -- -- 569,464
1991 - Issuance of Common Stock -- (27,000) --
1991 - Issuance of Common Stock -- -- 27,000
Net loss -- -- (3,278,694)
----------- ----------- -----------
BALANCE, JUNE 30, 1991 $ -- $ (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.
<PAGE>
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, 1997 (continued)
<TABLE>
<CAPTION>
Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Consideration Common Stock Deficit Accumu-
------------------ -------------------- lated During
Per Shares Par Paid-in Development
Share Total Issued Value Capital Stage
----- ----- ------ ----- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1992: (not covered in auditor's report)
Issuance of Common Stock $1.129 $ 683,356(9) 605,544 $ 6,056 $ 677,300 $ --
Issuance of Common Stock 7.50 2,000,000(1) 266,666 2,666 1,997,334 --
Issuance of Common Stock 2.75 5,500(9) 2,000 20 5,480 --
Issuance of Common Stock 2.00 69,124(10) 34,562 346 68,778 --
Issuance of Common Stock (11) 116,500 1,165 -- (1,165)
Satisfaction of notes receivable -- -- -- -- --
Net loss -- -- -- (2,223,382)
--------- ----------- ----------- -----------
BALANCE, JUNE 30, 1992 7,318,692 73,187 8,127,080 (5,503,241)
YEAR ENDED JUNE 30, 1993: (not covered in auditor's report)
Issuance of Common Stock 1.129 683,356(9) 605,544 6,056 677,300 --
Issuance of Common Stock 2.04 26,260(9) 12,866 129 26,131 --
Issuance of Common Stock .50 50,000 500 24,500 --
Acquisition of Common Stock for treasury -- -- -- --
Satisfaction of notes receivable -- -- -- -- --
Issuance of Common Stock 5.00 2,594,115(16) 571,250 5,712 2,588,403 --
Net loss -- -- -- (2,292,197)
--------- ----------- ----------- -----------
BALANCE, JUNE 30, 1993 8,558,352 85,584 11,443,414 (7,795,438)
YEAR ENDED JUNE 30, 1994: (not covered in auditor's report)
Issuance of Common Stock 1.129 113,888(9) 100,920 1,009 112,879 --
Issuance of Common Stock 2.00 23,624(13) 11,812 118 23,506 --
Net loss -- -- -- (1,931,657)
--------- ----------- ----------- -----------
BALANCE, JUNE 30, 1994 8,671,084 $ 86,711 $11,579,799 $(9,727,095)
<CAPTION>
Stockholders' Equity
- ------------------------------------------------------------------------------------------
Notes
Receivable
Treasury for Purchase of
Stock Common Stock Total
----- ------------ -----
<S> <C> <C> <C>
YEAR ENDED JUNE 30, 1992: (not covered in auditor's report)
Issuance of Common Stock $ -- $ -- $ 683,356
Issuance of Common Stock -- -- 2,000,000
Issuance of Common Stock -- -- 5,500
Issuance of Common Stock -- -- 69,124
Issuance of Common Stock -- -- --
Satisfaction of notes receivable -- 57,000(12) 57,000
Net loss -- -- (2,223,382)
----------- ----------- -----------
BALANCE, JUNE 30, 1992 -- (27,000) 2,670,026
YEAR ENDED JUNE 30, 1993: (not covered in auditor's report)
Issuance of Common Stock -- -- 683,356
Issuance of Common Stock -- -- 26,260
Issuance of Common Stock -- (25,000) --
Acquisition of Common Stock for treasury 25,000(15) 25,000(15) --
Satisfaction of notes receivable -- 27,000(14) 27,000
Issuance of Common Stock -- -- 2,594,115
Net loss -- -- (2,292,197)
----------- ----------- -----------
BALANCE, JUNE 30, 1993 (25,000) -- 3,708,560
YEAR ENDED JUNE 30, 1994: (not covered by auditor's report)
Issuance of Common Stock -- -- 113,888
Issuance of Common Stock -- -- 23,624
Net loss -- -- (1,931,657)
----------- ----------- -----------
BALANCE, JUNE 30, 1994 $ (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.
<PAGE>
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, 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, 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 5,438(9) 1,500 15 5,423
Issuance of Common Stock 3.625 1,813(9) 500 5 1,808
Issuance of Common Stock 4.55 409,725(16) 100,000 1,000 408,725
Issuance of Common Stock 4.54 408,375(16) 100,000 1,000 407,375
Issuance of Common Stock 4.56 45,626(9) 10,000 100 45,526
Issuance of Common Stock 3.625 9,063(9) 2,500 25 9,038
Issuance of Common Stock 3.625 2,719(9) 750 8 2,711
Issuance of Common Stock 3.625 1,812 500 5 1,807
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 $ 14,914,953
============ ============ ============
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 99,000(16) 66,000 660 98,340
Issuance of Common Stock 1.50 351,000(16) 234,000 2,340 348,660
Issuance of Common Stock 1.50 150,000(16) 100,000 1,000 149,000
Issuance of Common Stock 1.50 5,000(16) 3,333 33 4,967
Issuance of Common Stock 1.50 5,000(16) 3,333 33 4,967
Issuance of Common Stock 1.50 35,500(16) 23,667 237 35,263
Issuance of Common Stock 1.50 300,000(16) 200,000 2,000 298,000
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 0.00 750(19) 75,000 750 --
Issuance of Common Stock 0.00 750(19) 75,000 750 --
Deferred Debt Discount -- -- 290,769
Net loss -- -- --
------------ ------------ ------------
BALANCE, JUNE 30, 1997 11,264,740 $ 110,649 $ 16,349,532
============ ============ ============
<CAPTION>
Stockholders' Equity
- ------------------------------------------------------------------------------------------
Deficit Accumu- Notes
lated During Receivable
Development Treasury for Purchase of
Stage Stock Common Stock Total
----- ----- ---------------- -----
YEAR ENDED JUNE 30, 1995
Issuance of Common Stock -- -- -- 47,252
Issuance of Common Stock -- -- -- 11,000
Issuance of Common Stock -- -- -- 497,500
Issuance of Common Stock -- -- -- 800,795
Issuance of Common Stock -- -- -- 325
Net loss (1,931,657) -- -- (1,760,658)
------------- ------------ --- ------------
BALANCE, JUNE 30, 1995 $ (11,487,753) $ (25,000) $ -- $ 1,510,629
============= ============ === ============
YEAR ENDED JUNE 30, 1996:
Issuance of Common Stock -- -- -- 81,250
Issuance of Common Stock -- -- -- 19,063
Issuance of Common Stock -- -- -- 5,438
Issuance of Common Stock -- -- -- 1,813
Issuance of Common Stock -- -- -- 409,725
Issuance of Common Stock -- -- -- 408,375
Issuance of Common Stock -- -- -- 45,626
Issuance of Common Stock -- -- -- 9,063
Issuance of Common Stock -- -- -- 2,719
Issuance of Common Stock -- -- -- 1,812
Issuance of Common Stock -- -- -- 503,209
Issuance of Common Stock -- -- -- 500,001
Net loss (394,269) -- -- (394,269)
------------- ------------ --- ------------
BALANCE, JUNE 30, 1996 $ (11,882,022) $ (25,000) $ -- $ 3,104,454
============= ============ === ============
YEAR ENDED JUNE 30, 1997:
Issuance of Common Stock -- -- -- 27,186
Issuance of Common Stock -- -- -- 99,000
Issuance of Common Stock -- -- -- 351,000
Issuance of Common Stock -- -- -- 150,000
Issuance of Common Stock -- -- -- 5,000
Issuance of Common Stock -- -- -- 5,000
Issuance of Common Stock -- -- -- 35,500
Issuance of Common Stock -- -- -- 300,000
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 -- -- -- 750
Issuance of Common Stock -- -- -- 750
Deferred Debt Discount -- -- -- 290,769
Net loss (6,011,352) -- -- (6,011,352)
------------- ------------ --- ------------
BALANCE, JUNE 30, 1997 $ (17,893,374) $ (25,000) $ -- $ (1,458,193)
============= ============ === ============
</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 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.
<PAGE>
NOXSO Corporation
(A Development Stage Enterprise)
CONDOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Date of
Inception, Fiscal Year Ended June 30,
August 28, 1979, -------------------------------------------------
to June 30,1997 1997 1996 1995
--------------- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(17,892,209) $ (6,011,352) $ (394,269) $ (1,760,658)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Depreciation and amortization 1,174,496 646,982 33,101 32,440
Amortization of deferred debt discount 290,769 290,769 -- --
Minority interest 24,300 (2,481) 26,781 --
Loss on disposal of property and equipment 5,752 -- -- --
Loss on impairment of property and equipment 1,496,935 1,496,935 -- --
Issuance of common stock for compensation 120,973 45,248 -- 325
and other
Issuance of common stock for purchase of
NOXSO Process 28,125 -- -- --
Compensation in satisfaction of notes 57,000 -- -- --
receivable
Changes in operating assets and liabilities:
Accounts receivable (65,760) 2,097,660 (1,148,789) 472,193
Prepaid expenses and other assets (95,003) (60,470) (18,851) 1,319
Deposits (4,308) -- -- --
Liabilities not subject to compromise:
Accounts payable 5,475,428 2,049,236 2,731,266 601,309
Accrued compensation 26,021 (72,954) 70,716 (50,589)
Advanced billings -- (1,379,549) 1,184,974 194,575
Accured expenses -- -- -- (159,736)
Other current liabilities 698,349 407,404 208,961 67,357
Liabilities subject to compromise 4,488,381 4,488,381 -- --
------------ ------------ ------------ ------------
Net cash flows from operating activities $ (4,170,751) $ 3,995,809 $ 2,693,890 $ (601,465)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of and deposits for property and equipment (13,641,045) (5,575,750) (6,637,621) (853,694)
Bank certificate of deposit (1,000,000) -- -- 29,157
Proceeds from the sale of property and equipment 4,546 -- -- --
Net cash flows from investing activities $(14,636,499) $ (5,575,750) $ (6,637,621) $ (824,537)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement offering 6,826,408 1,112,688 1,821,310 1,298,295
Proceeds from line of credit 3,025,000 -- 1,525,000 970,000
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
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) --
Proceeds from debtor-in-possession financing 48,500 50,000 -- --
Net loans to stockholders and officers (4,930) -- -- --
------------ ------------ ------------ ------------
Net cash flows from financing activities $ 18,854,720 $ 1,162,688 $ 3,947,094 $ 1,801,547
------------ ------------ ------------ ------------
NET INCREASE (DECREASE), CASH AND
EQUIVALENTS $ 47,470 (417,253) 3,363 375,545
CASH AND EQUIVALENTS, BEGINNING OF
PERIOD -- 464,723 461,360 85,815
------------ ------------ ------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 47,470 $ 47,470 $ 464,723 $ 461,360
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 341,469 $ 134,180 $ 130,126 $ 70,890
============ ============ ============ ============
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 $ -- $ -- $ --
============ ============ ============ ============
See accompanying notes to financial statements.
</TABLE>
See accompanying notes to consolidated financial statements.
<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").
On February 6, 1997, Olin Corporation 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
consented to the jurisdiction of the Bankruptcy Court and was
adjudicated bankrupt and 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 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.
The accompanying consolidated financial statements do not purport to
reflect or provide for the consequences of the bankruptcy proceedings.
In particular, such consolidated financial statements do not purport to
show (a) as to assets, the remaining assets, their realizable value on
a liquidated basis or their availability to satisfy liabilities; (b) as
to prepetition liabilities, the amounts that may be allowed for claims
or contingencies, or the status and priority thereof; (c) as to
stockholder's accounts, the effect of any changes that may be made in
the capitalization of the Company; or (d) as to operations, the effect
of any changes that may be made in the Company's remaining business.
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 10 years for plant, 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 (see Notes 4 and 5) and the Tennessee
Facility (see Note 4) to convert elemental sulfur into liquid sulfur
dioxide. Funds received from the U.S. Department of Energy ("DOE") were
used to offset total costs incurred on the project with the result that
net costs capitalized on the balance sheet will
<PAGE>
reflect the Company's portion of the project costs. During the fourth
quarter of fiscal 1997, the Tennessee plant was transferred from
construction-in-progress to plant on the balance sheet.
Financial Accounting Standards Board Statement No. 121 - Effective July
1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", and accordingly has continued to evaluate whether an
impairment to the Alcoa Project has occurred. Due to the termination of
the Alcoa Project Agreement and the fact that no further contracts have
been entered into with respect to the costs capitalized to date, the
Company believes that the carrying amount of this asset will not be
recoverable, and has therefore recognized an impairment loss in
accordance with SFAS No. 121 in the amount of approximately $2,095,000.
Additionally, pursuant to SFAS No. 121, the Company has recognized an
impairment loss of approximately $1,497,000 related to the Tennessee
Facility.
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
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, 1997. At June 30, 1997, the Company had tax loss carryforwards of
approximately $17,600,000 which expire beginning in 1998. The deferred
tax assets related to these net operating losses were entirely offset
by a valuation allowance at June 30, 1997.
The income tax expense and deferred tax liability 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 was part of the DOE
funding mechanism. Under the terms of the contract with the DOE, the
Company billed 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, 1997, 1996, and 1995 because their inclusion would
be antidilutive.
<PAGE>
Note 3 - 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 has the exclusive right to file a plan of
reorganization until October 7, 1997. The sale of the Tennessee
Facility is a key element of the Company's overall reorganization plan
to emerge from Chapter 11. (See Note 18) In order to allow the Company
to close on the sale of the Tennessee Facility to Republic Financial
Corp (see Note 18) 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
(including reinstatement of DOE funding) to construct a commercial-size
demonstration of the NOXSO Process. (see Note 5).
Note 4 - 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 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
<PAGE>
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
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
<PAGE>
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 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 utilized 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 were 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 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.
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. These warrants expired unexercised on
December 1, 1996.
D) Agreement with Olin Corporation ("Olin") - Under the Olin
Agreement, the Company has constructed the Tennessee Facility
at Olin's plant in Charleston, Tennessee. The Tennessee
Facility will convert elemental sulfur into liquid sulfur
dioxide. Provided that the Tennessee Facility produces sulfur
dioxide in accordance with specifications set forth in the
Olin Agreement, Olin is required, for a 10-year period after
the Tennessee 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 a full-scale demonstration
facility to be constructed in the future, and the Company is
to deliver 16,000 short tons per year of elemental sulfur. It
had been intended that the Company would provide elemental
sulfur produced at the
<PAGE>
Alcoa Project, convert such elemental sulfur to liquid sulfur
dioxide and sell the liquid sulfur dioxide to Olin. Until the
Company is able to provide elemental sulfur, the Company is
obligated to provide elemental sulfur and, accordingly, must
purchase it from suppliers. In addition, because the Tennessee
Facility was not completed by September 1, 1996, the Company
was obligated under the Olin Agreement to make certain
payments to Olin relating to the purchase by Olin of liquid
sulfur dioxide.
Under the terms of the Olin Agreement, the Company's failure
to complete the Tennessee 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 $882,000 to Olin at June 30, 1997 for
sulfur dioxide purchases.
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.
During fiscal 1997, no costs had been incurred relating to
these projects. 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.
Note 5 - 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
<PAGE>
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. However, funds generated
from the debtor-in-possession financing 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.
Note 6 - Formation of Construction Management Company:
During November 1995, the Company formed a new subsidiary called
Projex, Inc. The Company holds 70% of the stock in Projex, while two
managing principals of Projex hold the remaining 30% of such stock.
Projex was capitalized with contributions of $1,000. Projex was formed
to perform construction management services. The first contract
obtained by Projex was a $2,500,000 contract to perform the
construction management on the NOXSO full-scale demonstration facility.
In March 1997, the operations of PROJEX were shut down. Because of the
Company's majority ownership of Projex, Projex's financial statements
are consolidated herein. There is no related party relationship between
the minority shareholders and the Company, its employees or directors.
<PAGE>
The Company has also in the past 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. The
Company is presently limiting its efforts on these projects to
concentrate on developing and implementing its plan to emerge from
bankruptcy.
Note 7 - Prepetition Liabilities Subject to Compromise:
Prepetition liabilities subject to compromise at June 30, 1997 include
the following:
$250,000 - 9.75% Note $ 250,000
$500,000 - 6.00% Convertible Debentures 500,000
Accounts payable 2,774,070
Other current liabilities 964,311
-----------
$ 4,488,381
===========
On September 23, 1996, the Company obtained a short term commercial
loan in the amount of $250,000 at a rate of 9.75%. This loan matured on
October 30, 1996. The lender agreed to extend the term of this loan to
June 15, 1997.
On February 28, 1997, the Company issued $540,000 in convertible debt
securities (the "Debentures") at an interest rate of 6%. The conversion
of these Debentures will be at a price per share which is discounted at
a maximum of 35% from market. Commencing at any time on or after sixty
days from the issuance date of the Debentures, the holders of the
Debentures are entitled, at their option, to convert up to 100% of the
original principal amount of the Debentures into shares of common stock
of the Company at a conversion price equal to the lesser of: (i) $15/16
per share; or (ii) the average closing price of the common stock for
the five business days prior to conversion multiplied by the conversion
percentage, as defined in the Debentures Subscription Agreement. In
June 1997, $40,000 of the securities were converted into 154,811 shares
of common stock.
Because of Chapter 11 proceedings, there has been no accrual of
interest on the above notes since June 4, 1997. Additionally, the
amounts reflected as prepetition liabilities do not include amounts
related to potential claims, which are substantially in excess of the
recorded liabilities at June 30, 1997.
Note 8 - 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, 1997.
Year Ending June 30,
--------------------
1998 $164,000
1999 120,000
2000 10,000
2001 2,000
2002 2,000
--------
$298,000
========
Note 9 - Notes Payable:
The Company has a line of credit with a bank which expired on 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, 1997 and 1996 were $1,000,000. Because of Chapter 11
proceedings, there has been no accrual of interest on the above notes
since June 4, 1997. Subsequent to year-end, the Company utilized the
$1,000,000 certificate of deposit to repay the line of credit.
In conjunction with the Project Agreement, Alcoa assisted the Company
in the procurement of a $1,000,000 loan from ACOA at an interest rate
of 8.75% payable quarterly in arrears. The loan was repaid in April
1996.
In April 1996, Olin Corporation granted the Company a note in the
amount of $1,874,000, bearing an interest rate of 10.0%. 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, which date was
extended in writing to January 31, 1997. The loan is secured by a
security interest in all of the Company's personal property. The loan
proceeds were used to complete construction of the Tennessee Facility.
As the note is in default, it now bears a default interest rate of
11.5%. The outstanding borrowings at June 30, 1997 and 1996 were
$1,874,000. Because of Chapter 11 proceedings, there has been no
accrual of interest on the above notes since June 4, 1997.
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. See Note 19 for
debtor-in-possession financing subsequent to year-end.
The weighted average interest rate for total notes payable as of June
30, 1997 and 1996 was 10.1% and 9.4%, respectively.
<PAGE>
Note 10 - Financing:
In order to provide for construction of the Olin facility, the Company
obtained a loan from Olin in the amount of $1,874,000 as discussed in
Note 9. 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 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 June 30, 1997, the Company had accrued approximately
$400,000 in late charges relating to this agreement with Praxair.
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. 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. Subsequent to
year-end, DOE has filed a proof of claim as an unsecured creditor in
the amount of approximately $15 million in the Company's bankruptcy
proceedings.
Note 11 - Private Placement Offerings:
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.
<PAGE>
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 shareholders who purchased the above shares under private
placements have been granted registration rights or piggyback
registration rights by the Company.
In December 1996 and January 1997, the Company sold in private
placement offerings to accredited investors 630,333 shares at a price
of $1.50 per share. The $945,500 in net proceeds after transaction
costs have been used to fund the ongoing operations of the Company.
Additionally, 200,000 shares related to these transactions have been
issued as advance payment for financing costs.
On May 20, 1997, the Company sold in a private placement offering to
accredited investors 400,000 shares at a price of $0.25 per share. The
$100,000 in net proceeds after transaction costs have been used to fund
the ongoing operations of the Company.
The warrants and common stock issuable upon exercise have not been
registered or qualified for sale under the Securities Act of 1933, as
amended or any state securities law.
Note 12 - 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
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
1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Options outstanding July 1 654,750 621,500 543,500
Granted 330,000 90,000 328,500
Exercised (7,500) (50,750) (4,000)
Canceled (55,500) (6,000) (246,500)
Options outstanding at June 30, 921,750 654,750 621,500
Option price range at June 30, $0.94 to $1.91 to $1.91 to
$12.25 $12.25 $12.25
Options exercisable at June 30, 631,750 609,750 576,500
Options available for grant at June 30, 78,250 345,250 378,500
</TABLE>
<PAGE>
On March 17, 1996 and 1997, 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. Additionally, the President was
granted 250,000 options which vest in stages on completion of certain
specified targets. None of these options are currently exercisable. 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, 1997 and 1996:
Aggregate Number
of Shares Subject Price
Year End to Warrant Per Share Expiration Date
-------- ---------- --------- ---------------
June 30, 1997 156,763 $4.28 April 12, 1999
10,000 $6.00 October 27, 2000
767,133 $1.50 December 31, 2001
June 30, 1996 60,000 $3.75 February 24, 1997
156,763 $4.28 April 12, 1999
10,000 $6.00 October 27, 2000
On February 24, 1997, 60,000 warrants, with an exercise price of $3.75
per share, expired.
Note 13 - Forgiveness of Directors' Compensation:
As of June 30, 1997, all members except for one of the Board of
Directors of the Company elected to forgo any and all compensation due
them in their capacity as Directors.
Note 14 - 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, 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
<PAGE>
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.
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 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.
<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 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 August 31, 1997, those
credits totaled $1,590,930. See Note 18 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. A hearing will be
scheduled by the Bankruptcy Court to consider Calabrian's objection.
Note 15 - Credit Concentration:
The Company maintains its cash balances in a financial institution
which is insured by the Federal Deposit Insurance Corporation.
Note 16 - New Accounting Pronouncements:
The Financial Accounting Standards Board (FASB) recently issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share" and SFAS No. 129, "Disclosure of Information about Capital
Structures." SFAS No. 128 was issued in February 1997 and is effective
for periods ending after December 15, 1997. This statement, upon
adoption, will require all prior year earnings per share (EPS) data be
restated to conform to the provisions of the statement. This
statement's objective is to simplify the computations of EPS and to
make the U.S. standard for EPS computations more compatible with that
of the International Accounting Standards Committee. The Company will
adopt SFAS No. 128 in fiscal 1998 and does not anticipate that the
statement will have a significant impact on its reported EPS.
SFAS No. 129 was issued in February 1997 and is effective for periods
ending after December 15, 1997. This statement, upon adoption, will
require all companies to provide specific disclosure regarding their
capital structure. SFAS No. 129 will specify the disclosure for all
companies, including descriptions of their capital structure and the
contractual rights of the holders of such securities. The company will
adopt SFAS No. 129 in fiscal 1998 and does not anticipate that the
statement will have a significant impact on its disclosures.
Note 17 - Departure From Generally Accepted Accounting Principles:
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. As the Company is currently in Chapter 11
bankruptcy, they do not have the funds available to engage a firm to
complete the required SFAS No. 123 calculation.
<PAGE>
Note 18 - 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 (See Note
14).
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.
Completion of a sale of the Tennessee Facility is subject to the
approval of the Bankruptcy Court. 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 is
scheduled for hearing on October 21, 1997. In addition to the sale of
the Tennessee Facility and related assets, the Motion seeks authority
for the Company to assume the Calabrian License Agreement and to assign
it to Republic. Subject to satisfaction of all conditions, the Asset
Purchase Agreement targets November 1997 for the closing of the sale.
Completion of a sale of the Tennessee Facility is one of the principal
elements of the Company's plan to emerge from bankruptcy.
Note 19 - Debtor-In-Possession Financing Subsequent to Year End
A final order approving the interim debtor-in-possession financing was
entered on August 18, 1997. The Company subsequently 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.
To date, 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. 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.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
24
<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
---- --- -----------------------
Edwin J. Kilpela 51 President and Chief Executive
Officer, Director
John L. Haslbeck 48 Vice President, Treasurer, Director
Robert M. Long 38 Secretary, Director
Lewis G. Neal 64 Director
John R. Toedtman 52 Director
Stephen C. Voss 49 Director
Edwin J. Kilpela has been President and Chief Executive Officer and a
member of the Board of Directors of the Company since February 1997. Mr. Kilpela
was employed in various positions by Westinghouse Electric Corporation from 1968
until February 1996. Most recently, from 1991 until February 1996 he was General
Manager of the Environmental Services Divisions, which provided industrial,
government and utility customers with services for the management of various
types of wastes. From July 1996 until February 1997, Mr. Kilpela was the
President of Ansaldo Ross Hill, a power electronics firm in Houston, Texas. Mr.
Kilpela received a BS in Mechanical Engineering from Carnegie Mellon University
and an MBA from the University of Pittsburgh. He is a director of PDG
Environmental Inc. (provider of asbestos abatement services).
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 1981. He is a co-inventor of the NOXSO Process and holds numerous
patents related to the NOXSO technology. Mr Haslbeck has more than 25 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 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.,
25
<PAGE>
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.
Dr. Lewis G. Neal is a founder of the Company and has been a member of the
Board of Directors since November 1979. He 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 April 1987, Dr. Neal rejoined
the Company as its President and Treasurer and served in such capacity until
February 1997. He also served as Secretary of the Company from November 1989
until March 1991. Dr. Neal acquired his Ph.D. from Northwestern University in
1962.
John R. Toedtman has been a member of the Board of Directors since July
1986. He currently acts as a financial consultant. From January 1990 until
January 1995, Mr. Toedtman was 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., an
investment banker. From 1981 to 1986, he was Chairman and Chief Executive
Officer of Personal Diagnostics, Incorporated. Mr. Toedtman is a director of
Vital Signs, Inc.
Stephen C. Voss is a founder of the Company and has been a Director since
1979. 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 24 years ago.
Board members are elected by the shareholders and the officers are
appointed annually by the Board of Directors. Vacancies in the Board of
Directors are filled by the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
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, John L.
26
<PAGE>
Haslbeck, a director and officer of the Company, filed late Form 5 reporting his
receipt of options in March 1996, March 1995 and August 1994. Robert M. Long,
Lewis G. Neal, John R. Toedtman and Steven C. Voss, directors of the Company,
filed late Form 5s reporting their receipt of options in March 1997, March 1996,
March 1995 and August 1994.
27
<PAGE>
Item 11. Executive Compensation
The following table sets forth a summary for the fiscal years ended June
30, 1997, 1996 and 1995, respectively, of the cash and non-cash compensation
awarded, paid or accrued, by the Company to each person who served as the
Company's President during fiscal 1997 (the "named executive officers"). No
other person earned salary and bonus in excess of $100,000 during fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Restricted
Name and Fiscal Stock All Other
Principal Position Year Salary Bonus Awards ($) Options/SARs (#) Compensation
------------------ ---- ------ ----- ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Edwin J. Kilpela
President and Chief
Executive Officer 1997 $ 32,019 -- -- 275,000(1) $ --
Lewis G. Neal 1997 113,290 -- 43,750(2) 80,000(3) --
President
(until Feb. 1997) 1996 150,000 37,500 -- 25,000(4) --
1995 156,932 30,000 -- 50,000(5) --
</TABLE>
(1) Of the options shown, options to purchase 250,000 shares were granted at an
exercise price of $1.00 per share and vest in stages on completion of
certain specified targets. None of these options is currently exercisable.
The remaining options to purchase 25,000 shares were granted under the
Company's 1990 Stock Option Plan, as amended, at an exercise price of
$0.9375 per share. These options terminate on March 15, 2007, subject to
early termination on cessation of an officer's employment with the Company.
They were exercisable with respect to one-half of the shares on March 15,
1997, the date of grant, and with respect to the balance of the shares on
the first anniversary of the date of grant.
(2) Represents the value of 70,000 shares of Common Stock awarded to Mr. Neal
pursuant to his Employment Agreement dated as of February 1, 1997,
effective on the date of termination of Mr. Neal's employment with the
Company under certain circumstances. These shares were issued on May 15,
1997, and the value shown is based upon the market price of the Company's
common stock on that date ($0.625 per share).
(3) Of the options shown, 10,000 were granted under the Company's 1990 Stock
Option Plan, as amended, at an exercise price of $0.9375 per share. The
options terminate on March
28
<PAGE>
15, 2007, subject to early termination on cessation of an officer's
employment with the Company. They were exercisable with respect to one-half
of the shares on March 15, 1997, the date of grant, and with respect to the
balance of the shares on the first anniversary of the date of grant. The
remaining options to purchase 70,000 shares were issued at an exercise
price of $1.50 under a Warrant issued to Mr. Neal pursuant to his
Employment Agreement in connection with the termination of his employment.
The Warrant may be exercised at any time to and including December 31,
2001.
(4) The options shown were 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.
(5) The options shown were 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.
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, except for certain stock options granted to Mr. Kilpela
and described in note (1) to the Summary Compensation Table. Executive officers
who qualify to participate in the Company's 1990 Stock Option Plan. See "Stock
Options" below. 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.
29
<PAGE>
The 1990 Plan does not provide for the issuance of stock appreciation rights.
The purpose of the 1990 Plan is to advance the interests of the Company and its
shareholders by providing additional incentives 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 1990 Plan
authorizes the issuance of options to purchase up to 544,000 shares of common
stock.
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 anniversary of the
issuance. The grants are effective on the third 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 1997.
Option/SAR Grants in Fiscal Year 1997
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term(2)
- --------------------------------------------------------------------------------------------- -----------------------
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>
Edwin J. Kilpela 250,000 67.5 1.00 3/15/07 157,224 398,436
25,000 6.75 0.9375 3/15/07 14,470 37,353
L.G. Neal 10,000 2.7 0.9375 3/15/07 5,896 14,941
70,000 18.91 1.50 12/31/01 (10,077) 14,782
</TABLE>
(1) The options shown for Mr. Kilpela and Mr. Neal are described in notes (1)
and (3) to the Summary Compensation Table.
30
<PAGE>
(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 1997
and the number and value of unexercised options held as of the end of fiscal
year 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
No. of Securities Underlying Value of Unexercised
Unexercised Options/ In-the-Money Options/SARs
No. of Shares Value SARs at Fiscal Year-End at Fiscal Year-End (2)
Acquired on Realized ----------------------- ----------------------
Name Exercise (1) Exercisable Unexercisable Exercisable Unexercisable
---- ---------- --- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edwin J. Kilpela -- -- 12,500 262,500 -- --
Lewis G. Neal -- -- 200,000 5,000 -- --
</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 $0.375 market price of the common stock on June 30, 1997
(fiscal year end) and the exercise price of the options, none of the
options is an in-the-money option.
Employment Agreements
Mr. Kilpela is currently employed under an employment agreement dated as of
February 13, 1997. The agreement has a term of two years and provides that Mr.
Kilpela will serve as the President and Chief Executive Officer of the company
at an annual base salary of $185,000 with additional increases to be determined
by the Board of Directors. The agreement requires that Mr. Kilpela 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. Kilpela following termination of the agreement if Mr. Kilpela has
complied with such covenants. The Company has the right to waive the provisions
of the covenant not to compete and, in such event, will have no further monetary
obligation with respect thereto. The agreement is terminable by Mr. Kilpela
under various conditions including a change in control of the Company, in which
31
<PAGE>
case Mr. Kilpela 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. Kilpela during the term of his employment which are within the scope of the
Company's business (whether or not patentable), are and shall remain the
exclusive property of the Company.
Prior to February 1, 1997, Dr. Neal was employed pursuant to the terms of
employment agreements effective as of April 22, 1992, which had an initial terms
of two years and which governed his employment until that time. The agreement
provided that Dr. Neal would 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. In
connection with the hiring of Mr. Kilpela as President and Chief Executive
Officer of the Company, Dr. Neal and the Company entered into an employment
agreement dated as of February 1, 1997, terminating and superseding Dr. Neal's
previous employment agreement. The agreement was terminable by either party upon
written notice. It provided for compensation at an annual rate of $150,000 (the
"Annual Salary"); provided that so long as other employees of the Company were
serving under salaries reduced from the rate payable in January 1997, Dr. Neal's
compensation under the agreement was at a rate equal to 50% of the Annual
Salary. Pursuant to the agreement, when Dr. Neal's employment with the Company
was terminated by the Company on April 18, 1997, he was entitled to receive, in
a lump sum payment, an amount equal to the Annual Salary, 70,000 shares of the
Company's common stock and a warrant to purchase 70,000 shares of the Company's
common stock at an exercise price of $1.50 per share. The Common Stock and
Warrant were issued, and Dr. Neal has filed a claim in the Company's bankruptcy
proceeding relating to the cash severance payment. The agreement also contained
certain covenants not to compete with the Company in exchange for payment of an
additional one year's salary to Dr. Neal following termination of the agreement
if Dr. Neal has complied with such covenants. Pursuant to the agreement, the
Company waived the provisions of the covenant not to compete and, as a result,
has no further monetary obligation with respect thereto. The agreement requires
that all ideas, inventions, discoveries, developments or improvements conceived
by Dr. Neal during the term of his employment which are within the scope of the
Company's business (whether or not patentable), are and shall remain the
exclusive property of the Company.
Mr. Haslbeck is presently employed pursuant to the terms of an employment
agreement effective as of April 29, 1992, which had an initial term of two years
and which continues to govern his employment. Mr. Haslbeck's employment
agreement 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. In February 1997, the compensation of all of the Company's
employees, including Mr. Haslbeck, was reduced to one-half of their previous
compensation. In July 1997, such compensation was increased to 3/4 of an
employee's pre- February 1997 compensation. 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
32
<PAGE>
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 during the term of his
employment 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 1997, Robert M. Long and Stephen H. Voss served on the
Company's Compensation Committee. In addition, John H. Michael, a former
director of the Company, served on the Compensation Committee until his
resignation from the Board in October 1996. 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. Matters relating to the compensation of Mr. Kilpela and Dr. Neal
were made by the Board of Directors as a whole, with the affected executive
having excused himself from the discussion. 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
Prior to June 1997, the Company's outside directors had been entitled to
receive an annual fee of $30,000 for serving as members of the Board of
Directors and members of the Executive Committee. The Board had previously
agreed to defer indefinitely payment of the annual fee, and in June 1997, the
Board determined to eliminate the annual director's fee. Each director and
former director who would have been entitled to a fee for past services (other
than John H. Michael) also waived his right to any unpaid annual fee. Directors
are reimbursed for their expenses in connection with attendance at each Board
Meeting.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of September 30, 1997, there were 14,999,651 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 (6 persons),
based upon the number of shares of common stock outstanding on September 30,
1997. Unless otherwise stated, each person so named exercises sole voting and
investment powers to the shares of Common Stock so indicated.
33
<PAGE>
Name and Address of Amount and Nature
Beneficial Owner of Beneficial Ownership(1) Percentage
- ------------------- -------------------------- ----------
W.R. Grace & Co. - Conn. 2,005,494 13.37%
1114 Avenue of the Americas
New York, NY
Stephen C. Voss 838,415(2) 5.56
8415 Willow Forge Road
Springfield, VA
Edwin J. Kilpela 12,500(3) *
Lewis G. Neal 436,000(4) 2.87
John L. Haslbeck 204,575(5) 1.36
Robert M. Long 120,000(6) *
John R. Toedtman 80,000(7) *
All officers and
directors as a
group (6 persons) 1,691,490(8) 10.86
* 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 481,800 shares held by
Voss & Co., Inc., a stock brokerage firm of which Mr. Voss is President and
sole stockholder and include 80,000 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 $0.9375 per share that
expires on March 15, 2007; for 10,000 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.
34
<PAGE>
(3) The shares beneficially owned by Mr. Kilpela consist of 12,500 shares
issuable to him upon the exercise of currently exercisable options awarded
to him under the 1990 Plan at an exercise price of $0.9375 per share that
expires on March 15, 2007.
(4) The shares beneficially owned by Mr. Neal include 70,000 shares issuable to
him upon exercise of the warrant described in note (3) to the Summary
Compensation Table at an exercise price of $1.50 per share and 130,000
shares issuable to him upon the exercise of currently exercisable options
awarded to him under the 1990 Plan as follows: for 5,000 shares at an
exercise price of $0.9375 per share that expires on March 15, 2007; for
25,000 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.
(5) The shares beneficially owned by Mr. Haslbeck include 89,500 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 $0.9375 per share that expires on March 15, 2007; for 15,000
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.
(6) The shares beneficially owned by Mr. Long consist of 120,000 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
$0.9375 per share that expires on March 15, 2007; for 10,000 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 80,000 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
$0.9375 per share that expires on March 15, 2007; for 10,000 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;
35
<PAGE>
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.
(10) 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 and a warrant which are
exercisable currently or within sixty (60) days.
36
<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.
37
<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 31 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 incorporated 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.
38
<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.
10.11(7) Asset Purchase Agreement dated as of September 18, 1997,
between the Company and Republic Financial Corporation.
10.12(7) Stipulation and Order.
23 Consent of Arthur Andersen LLP.
(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.
(7) Incorporated by reference to the Company's Annual Report on Form 8-K filed
on September 30, 1997.
(b) Reports on Form 8-K
The following Reports on Form 8-K were filed during the last quarter of
fiscal 1997: (i) a Report filed on June 12, 1997 reported the Company's
adjudication as a bankrupt under Item 3 and certain matters relating to the
Company's Nasdaq listing under Item 5 and (ii)
39
<PAGE>
a report filed on September 30, 1997 reporting under Item 5 the execution
of the Asset Purchase Agreement with Republic Financial Corporation, the
filing of a Motion for Extension of Exclusive Time to File Plan, the
Company's debtor-in-possession financing and the conversion of the
Company's convertible subordinated debentures.
40
<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, 1997 By: /s/ Edwin J. Kilpela
-------------------------------
Edwin J. Kilpela, President
and Chief Executive Officer
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/ Edwin J. Kilpela President and Chief Executive October 14, 1997
- ----------------------- Officer, Director (Principal
Edwin J. Kilpela Executive and Accounting
Officer)
/s/ John L. Haslbeck Vice President, Treasurer, October 14, 1997
- ----------------------- Director
John L. Haslbeck
/s/ Robert M. Long Secretary, Director October 14, 1997
- -----------------------
Robert M. Long
/s/ Lewis G. Neal Director October 14, 1997
- -----------------------
Lewis G. Neal
Director October __, 1997
- -----------------------
John R. Toedtman
/s/ Stephen C. Voss Director October 14, 1997
- -----------------------
Stephen C. Voss
41
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, 1997, or
performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
October 14, 1997
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<PERIOD-START> Jul-01-1996
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