SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
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
of incorporation or organization Identification No.
2414 Lytle Road 15102
Bethel Park, PA Zip Code
Address of principal executive offices
Registrant's telephone number, including area code: (412) 854-1200
Not Applicable
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1997
Common stock, $.01 par value 10,286,944
<PAGE>
NOXSO CORPORATION
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION ........................................... 4
Item 1. Consolidated Financial Statements ............................ 4
Consolidated Balance Sheets as of December 31, 1996 and
June 30, 1996 ............................................. 4
Consolidated Statements of Operations for the Cumulative
Period from Inception (August 28, 1979) to December 31,
1996 and for the three and
six months ended December 31, 1996 and 1995 .............. 5
Consolidated Statements of Changes in Stockholders' Equity for
the Cumulative Period from Inception (August 28, 1979) to
December 31, 1996 ........................................ 6
Consolidated Statements of Cash Flows for the Cumulative
Period from Inception (August 28, 1979) to December 31,
1996 and for the six months ended December 31, 1996 and
1995 ..................................................... 10
Notes to Consolidated Financial Statements ................... 11
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 17
PART II OTHER INFORMATION ............................................... 22
Item 1. Legal Proceedings ............................................ 22
Item 2. Changes in Securities ........................................ 23
Item 3. Defaults Upon Senior Securities .............................. 24
Item 6. Exhibits and Reports on Form 8-K ............................. 24
2
<PAGE>
SIGNATURES .............................................................. 25
3
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NOXSO Corporation
(A Development Stage Enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30, 1996
ASSETS 1996
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 528,213 $ 464,723
Bank certificate of deposit 1,000,000 1,000,000
Accounts receivable 343,394 2,163,420
Prepaid expenses and other current assets 35,306 38,136
-------------- --------------
Total Current Assets 1,906,913 3,666,279
-------------- --------------
PROPERTY AND EQUIPMENT:
Equipment 341,936 341,936
Furniture and Fixtures 153,134 111,661
Leasehold improvements 16,646 16,646
Construction in progress 10,521,530 7,469,545
-------------- --------------
11,033,246 7,939,788
Less: Accumulated depreciation (433,760) (412,151)
-------------- --------------
10,599,486 7,527,637
-------------- --------------
Other assets 1,024 1,172
Deposits 4,308 4,308
-------------- --------------
Total Assets $ 12,511,731 $ 11,199,396
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 3,124,000 $ 2,874,000
Accounts payable 7,672,331 3,424,692
Accrued compensation 47,285 98,975
Advanced billings 0 1,379,549
Deferred income taxes 115,268 0
Other current liabilities 429,951 290,945
-------------- --------------
Total Current Liabilities 11,388,835 8,068,161
-------------- --------------
OTHER LIABILITIES:
Minority interest in consolidated subsidiary 52,976 26,781
-------------- --------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: Authorized,
20,000,000 shares. Issued 10,059,596 shares and
9,652,096 shares, respectively 100,598 96,523
Paid in capital 15,538,066 14,914,953
Deficit accumulated during the development stage (14,543,744) (11,882,022)
-------------- --------------
1,094,920 3,129,454
Less: Cost of 2,985 shares of common stock held in treasury (25,000) (25,000)
-------------- --------------
Total Stockholders' Equity 1,069,920 3,104,454
-------------- --------------
Total Liabilities and Stockholders' Equity $ 12,511,731 $ 11,199,396
============== ==============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
NOXSO Corporation
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
-----------------------
<TABLE>
<CAPTION>
Date of Inception, Six Months Three Months
August 28, 1979, Ended December 31, Ended December 31,
to Dec. 31, 1996
1996 1995 1996 1995
------------ ------------ ------------ ------------ ------------
(Not covered by
auditor's report)
<S> <C> <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 -- -- -- --
Designing, drafting and consulting 1,114,781 7,490 4,353 5,375 --
Supplies, instruments and equipment 1,972,299 18,255 8,438 10,499 5,249
Depreciation and amortization 554,409 21,476 13,513 8,518 7,693
Other research and development 386,309 -- -- -- --
Salaries and benefits 7,809,458 194,540 60,132 101,891 34,678
Professional fees 1,687,075 105,281 16,095 90,459 1,841
Rent 568,592 49,009 14,155 24,872 5,617
Income tax expense 115,268 82,087 -- 35,222 --
Other general administrative 3,927,087 631,282 49,877 486,160 16,313
ALCOA Project Expense 1,932,482 1,932,482 -- 1,932,482 --
------------ ------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 23,225,859 3,041,902 166,563 2,695,478 71,391
------------ ------------ ------------ ------------ ------------
LESS FUNDING AND OTHER:
Funding of research agreement 1,200,000 -- -- -- --
Reimbursement of project costs 4,989,524 89,552 -- 18,437 --
Government grant 1,128,020 -- -- -- --
Interest income 1,069,137 30,815 39,247 11,922 20,290
Other 348,975 285,708 -- 169,192 --
---------- --------- ------- --------- ------
TOTAL FUNDING AND OTHER 8,735,656 406,075 39,247 199,551 20,290
---------- --------- ------- --------- ------
Minority interest in net income of
consolidated subsidiary 52,376 25,895 -- 23,132 --
NET LOSS $(14,542,579) $ (2,661,722) $ (127,316) $ (2,519,059) $ (51,101)
============ ============ ============ ============ ============
LOSS PER COMMON SHARE $ (.27) $ (0.01) $ (0.26) (0.01)
AVERAGE NUMBER OF SHARES
OUTSTANDING 9,868,310 9,203,000 9,722,019 9,275,000
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION, TO DECEMBER 31, 1996
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
Stockholders' Equity
--------------------------------------------------------------------
Consideration Common Stock
---------------------- -------------------
Per Shares Par Paid-in
Share Total Issued Value Capital
------ ----------- ------- ----- --------
<S> <C> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION)
TO JUNE 30, 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 - - -
---------- ----------- -----------
BALANCE, JUNE 30, 1991 6,293,420 $ 62,934 $ 5,378,188
</TABLE>
<TABLE>
<CAPTION>
Deficit Accumu- Notes
lated During Receivable
Development Treasury for Purchase of
Stage Stock Common Stock Total
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION)
TO JUNE 30, 1991
(not covered by auditor's report):
1979 - Issuance of Common Stock $ - $ - $ - $ 600
1980 - Issuance of Common Stock - - - 808,382
1980 - Issuance of Warrants - - - 850
1983 - Issuance of Common Stock - - - 28,125
1986 - Issuance of Common Stock - - - 155,000
1986 - Issuance of Common Stock - - - 32,500
1987 - Issuance of Common Stock - - - 134,000
1987 - Issuance of Common Stock - - - 42,900
1988 - Issuance of Stock Option - - - 250,000
1989 - Issuance of Common Stock - - (27,000) -
1989 - Issuance of Common Stock - - (30,000) 117,500
1989 - Issuance of Common Stock - - - 3,190,721
1989 - Issuance of Warrants - - - 80
1991 - Issuance of Common Stock - - - 569,464
1991 - Issuance of Common Stock - - (27,000) -
1991 - Issuance of Common Stock - - - 27,000
Net loss (3,278,694) - - (3,278,694)
------------ ------------ -------------- ------------
BALANCE, JUNE 30, 1991 $ (3,278,694) $ - $ (84,000) $ 2,078,428
</TABLE>
(1) Sale of common stock for cash.
(2) Proceeds of public offering.
(3) Sale of warrants for cash.
(4) Value assigned to common stock issued in connection with purchase of NOXSO
Process.
(5) Value assigned to common stock issued for compensation and services.
(6) Sale of common stock option.
(7) Stock issued in connection with exercise of common stock warrants and
options for notes receivable.
(8) Stock issued in connection with exercise of common stock purchase warrants
for $117,500 cash and a $30,000 note receivable.
(9) Stock issued in connection with exercise of common stock option agreements.
See accompanying notes to consolidated financial statements.
6
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION,
TO DECEMBER 31, 1996 (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:
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)
</TABLE>
<TABLE>
<CAPTION>
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:
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.
7
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION,
TO DECEMBER 31, 1996 (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 (9) 500 5 1,807
Issuance of Common Stock 3.21 503,209 (16) 156,763 1,569 501,640
Issuance of Common Stock 3.425 500,003 (16) 145,773 1,458 498,543
Net loss - - -
------------- ----------- -------------
BALANCE, JUNE 30, 1996 9,652,096 $ 96,523 $ 14,914,953
------------- ----------- -------------
SIX MONTHS ENDED
DECEMBER 31, 1996:
Issuance of Common Stock 3.63 27,188 (9) 7500 75 27,113
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
Net Loss - - -
------------- ----------- -------------
BALANCE, DECEMBER 31, 1996 10,059,596 $ 100,598 $ 15,538,066
------------- ----------- -------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Stockholders' Equity
--------------------------------------------
Deficit Accumu- Notes
lated During Receivable
Development Treasury for Purchase of
Stage Stock Common Stock Total
-------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 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 (1,760,658) - - (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
-------------- ------------ -------------- ------------
SIX MONTHS ENDED
DECEMBER 31, 1996:
Issuance of Common Stock - - - 27,188
Issuance of Common Stock - - - 99,000
Issuance of Common Stock - - - 351,000
Issuance of Common Stock - - - 150,000
Net Loss (2,661,722) - - (2,661,722)
-------------- ------------ -------------- ------------
BALANCE, DECEMBER 31, 1996 $ (14,543,744) $ (25,000) $ - $ 1,069,920
-------------- ------------ -------------- ------------
</TABLE>
(9) Stock issued in connection with exercise of common stock option
agreements.
(10) Stock issued in connection with exercise of common stock
warrant agreements.
(16) Stock issued in connection with private placement.
(17) Stock issued as contribution.
See accompanying notes to consolidated financial statements.
9
<PAGE>
NOXSO Corporation
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Date of Inception, Six Months
August 28, 1979, Ended December 31,
to Dec. 31, 1996 ------------------
----------------
(Unaudited) 1996 1995
---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,542,579) $ (2,661,722) $ (127,316)
Adjustments to reconcile net loss to
net cash flows from operating
activities:
Depreciation and amortization 549,123 21,609 13,513
Minority interest 52,976 26,195 --
Loss on disposal of property and equipment 5,752 -- --
Issuance of common stock for compensation and
other 75,725 -- --
Issuance of common stock for purchase of
NOXSO Process 28,125 -- --
Compensation in satisfaction of notes receivable 57,000 -- --
Changes in operating assets and liabilities:
Accounts receivable (343,394) 1,820,026 (777,603)
Prepaid expenses and other assets (31,555) 2,978 1,178
Deposits (4,308) -- --
Accounts payable 7,672,331 4,247,639 239,958
Accrued compensation 47,285 (51,690) (9,712)
Advanced billings -- (1,379,549) 733,714
Other current liabilities 545,220 254,274 (25,432)
------------ ------------ ------------
Net cash flows from operating activities $ (5,888,300) $ 2,279,760 $ 483,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of and deposits for property and equipment (11,158,753) (3,093,458) (2,510,513)
Bank certificate of deposit (1,000,000) -- --
Proceeds from the sale of property and equipment 4,546 -- --
------------ ------------ ------------
Net cash flows from investing activities $(12,154,207) $ (3,093,458) $ (2,510,513)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement offering 6,313,720 600,000 818,100
Proceeds from line of credit 3,025,000 -- 1,505,000
Payments of line of credit (2,025,000) -- (770,000)
Proceeds from commercial loan 250,000 250,000 --
Proceeds from issuance of common stock 7,760,647 -- --
Proceeds from sales of common stock
options and warrants 1,350,283 27,188 164,972
Proceeds from satisfaction of notes receivable 27,000 -- --
Proceeds from ACOA and Olin loans 2,874,000 -- 1,004,000
Payment of ACOA loan (1,000,000) -- --
Net loans to stockholders and officers (4,930) -- --
------------ ------------ ------------
Net cash flows from financing activities $ 18,570,720 $ 877,188 $ 2,722,072
------------ ------------ ------------
NET INCREASE (DECREASE), CASH AND
EQUIVALENTS $ 528,213 63,490 259,859
CASH AND EQUIVALENTS, BEGINNING OF
PERIOD -- 464,723 461,360
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 528,213 $ 528,213 $ 721,219
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 358,092 $ 150,803 $ 41,444
============ ============ ============
NONCASH FINANCING ACTIVITIES:
Issuance of common stock for notes receivable $ 84,000 $ -- $ --
============ ============ ============
Acquisition of common stock into treasury to satisfy
notes receivable $ (25,000) $ -- $ --
============ ============ ============
Issuance of common stock in exchange for warrant $ 1,165 $ -- $ --
Compensation in satisfaction of notes receivable $ 57,000 $ -- $ --
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
The balance sheet at the end of the preceding fiscal year has been derived from
the audited balance sheet contained in the Company's Form 10-K and is presented
for comparative purposes. All other financial statements are unaudited. In the
opinion of management, all adjustments which include only normal recurring
adjustments necessary to present fairly the financial position, results of
operations, changes in stockholders' equity and cash flows for all periods
presented, have been made. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year.
Footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted in
accordance with the published rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Form
10-K for the most recent fiscal year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of the
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 - Full Scale Commercial Demonstration:
In August 1994, the Company entered into a Project Agreement (the
"Alcoa Project Agreement") with Alcoa Generating Corporation ("Alcoa") for the
design, construction, and operation of the first commercial-size demonstration
of the NOXSO Process at Alcoa's Warrick Generating Station in Newburgh, Indiana.
Although the project definition and design phases of the Alcoa Project were
completed by the Company and the construction phase had been commenced, the
Company was unable to raise sufficient financing by January 31, 1997, the
amended designated date under the Alcoa Project Agreement, to fund completion of
the project. Alcoa refused to further extend the designated date beyond January
31, 1997 and terminated the Alcoa
11
<PAGE>
Project Agreement. The Company is currently seeking an alternate site to
construct a commercial demonstration facility. The United States Department of
Energy ("DOE") agreed to fund one-half of the costs of the Alcoa Project and the
related project at a facility owned by Olin Corporation that is described below,
up to $41.1 million. As a result of the termination of the Alcoa Project
Agreement because of failure to obtain sufficient financing, the Company is
obligated, under an amendment to its agreement with DOE, to repay DOE for all
funds provided by DOE for the Tennessee Facility (as described in Note 3 below),
plus interest, calculated pursuant to a formula contained in the agreement, from
November 1, 1996. The Company agreed 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, Inc., a supplier to the Company, described in Note 4
below). The entire amount becomes due and payable on January 1, 1999 if
repayment has not commenced by that time. The Company is currently seeking from
DOE approval to utilize DOE's funding at an alternate site, if one can be
located and will also seek to work with DOE regarding the repayment obligation
described above. Even if the Company is able to retain the DOE funding, it will
need to secure significant additional funding in order to continue as a going
concern and complete a commercial demonstration facility. The Company is
currently seeking funding for its immediate needs through private placements of
convertible securities. 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 financing.
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; i.e., construction in progress, has occurred. Due to the termination of
the Alcoa Project Agreement and 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
$1,932,482.
Note 3 - Olin Facility and Loan:
In April 1995, the Company entered into a License, Construction, Lease and
Sulfur Supply Agreement (the "Olin Agreement") with Olin Corporation ("Olin") to
construct a facility (the "Tennessee Facility") in Charleston, Tennessee to
convert elemental sulfur into liquid sulfur dioxide. Under the Olin Agreement,
as amended, provided that the Tennessee Facility produces liquid 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 the Company approximately $3.2 million annually (subject to escalation under
certain circumstances), and the Company is to deliver to Olin 16,000 short tons
per year of elemental sulfur. Unless and until a commercial facility using the
NOXSO Process and capable of producing the required amount of elemental sulfur
becomes operational, the Company would have to pay the costs of purchasing
elemental sulfur from suppliers. The Company believes the Tennessee Facility was
substantially completed in January 1997, and the Company and Olin had commenced
testing in order to cause it to become fully operational.
Under the terms of the Olin Agreement, the Company's failure to complete the
Olin Facility by September 1, 1996 entitled Olin to require that the Company pay
to Olin the amount by which (i) the costs Olin incurs to purchase up to 2,667
short tons of sulfur
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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 has
accrued the approximate $95,000 owed to Olin as of December 31, 1996 with
respect to sulfur dioxide purchases by Olin.
In April, 1996 the Company obtained from Olin Corporation a loan in the amount
of $1,874,000 (the "Olin Note") that bears interest at the rate of 10% per
annum. 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.
Note 4 - 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 3. In August
1996, the Company also obtained the agreement of Praxair Inc. ("Praxair"), an
air products company, to defer payment of the $2,700,000 balance owed for the
air separation plant until no later than September 30, 1996. In connection with
said agreement with Praxair, the Company agreed to pay late charges of .3% per
week from the date of each outstanding invoice and to assign revenues it is
entitled to receive under the Olin Agreement to Praxair until the Company's
obligations to Praxair are paid in full. At December 31, 1996, the Company has
accrued the approximate $188,000 owed to Praxair with respect to these late
charges. In addition, following repayment of Praxair, unless the Company
succeeds in restructuring its agreement with DOE, the Company will be obligated
to pay DOE an amount equal to 2/3 of the revenue received under the Olin
Agreement until the funds provided by DOE for the Tennessee Facility, plus
interest, have been repaid.
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 orally agreed to extend the terms of this loan to January 31, 1997.
This loan is currently in default.
Additionally, the Company's $1,000,000 committed line of credit expired on
October 15, 1996. The Company is currently in default with respect to this line
of credit.
Note 5 - Formation of Construction Management Company:
During November 1995, the Company formed a new subsidiary called Projex, Inc.
The Company holds 70% of the stock in Projex while two managing 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 is a $2,500,000 contract to
perform the construction management on the NOXSO full-scale demonstration
facility. Because of the
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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.
Due to the termination of the Alcoa Project Agreement, the Company offered
construction management services to companies, other than Noxso, through Projex.
Subsequently, in March 1997, the principals of Projex resigned, and its
operations were shut down.
Note 6 - Contingencies:
In late August 1996 a Complaint was filed against the Company in the District
Court of Jefferson County, Texas, by Calabrian Corporation ("Calabrian")
relating to a Purchase Agreement dated October 16, 1995 between the Company and
Calabrian and a related License Agreement, dated effective as of September 1,
1995, between the Company and Calabrian. The complaint alleges that the Company
took over direction and supervision of Calabrian's subcontract relating to the
construction of components of the Olin Facility, disrupting Calabrian's plans
with respect to the facility and constituting an unlawful interference with
Calabrian's contractual relationships with its subcontractors, and that the
Company defaulted in certain payment obligations to Calabrian under the Purchase
Agreement. The complaint requests damages in the amount of $665,000,
representing the balance of the fee allegedly owed to Calabrian under the
Purchase Agreement, unspecified damages caused Calabrian as a result of the
alleged interference with contract, any additional damages caused Calabrian by
the Company's conduct, and an order prohibiting the Company from disclosing to
any third party, other than Olin, and confidential and proprietary information
of Calabrian. The Company has removed the action to the United States District
Court for the Eastern District of Texas, Beaumont Division.
In October 1996, Calabrian amended its complaint to withdraw its request for a
temporary and permanent injunction enjoining the Company from using Calabrian's
technology.
The Company's Counsel has advised that it believes the causes of action in
Calabrian's complaint are without merit. The Company has filed an answer and
counterclaim denying the substantive allegations of the complaint and requesting
(i) actual damages caused the Company by Calabrian's abandonment and resulting
breach of its contract with the Company without cause or justification and for
tortious interference with its contract with Olin (ii) exemplary damages as a
result of its tortious interference with the Olin contract, (iii) the Company's
legal fees and costs, and (iv) any and all other damages caused the Company by
Calabrian's filing of an action against the Company that is without merit.
On January 30, 1997, the Company received notice from Olin purporting to
terminate
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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 has defaulted on the Olin Note issued in
connection with a loan by Olin to the Company as partial funding for
construction of the Tennessee Facility (see Note 3).
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. 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 seeks
damages in excess of $32 million, which is the aggregate purchase price payable
by Olin over the ten-year term of the Olin Agreement. 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 two months prior to the contractually agreed deadline.
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.
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 Company's motions to dismiss the
petition or to transfer the case to the United States Bankruptcy Court for the
Western District of Pennsylvania were dismissed without prejudice to the
Company's right to reassert its arguments to transfer venue of the case. The
Company has answered the petition on the merits, and a hearing in the matter has
been scheduled for April 7, 1997.
The Company is also engaged in utilizing its engineering expertise to develop
other technologies, processes, substances and facilities that can be used to
assist in complying with environmental laws, although all such efforts are at
this time developmental in nature. The Company also from time to time performs
research and development for others on a project basis. The Company has also
licensed the NOXSO Process for distribution in Europe and Asia under a License
Agreement with FLS miljo a/s, a Danish corporation engaged in the construction
and design of utility power plants ("FLS").
If the Company loses its DOE funding and/or is unable to find the necessary
additional
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financing, the Company does not expect to be able to complete a full-scale
commercial demonstration of the NOXSO Process even if an alternate site is
found. Inability to complete a commercial demonstration facility would require
that greater emphasis be placed upon the test results of the Company's pilot
plant conducted at Toronto, Ohio and on a demonstration currently being
conducted by FLS in Denmark. Because of the reluctance of regulated utilities to
purchase process technology which has not been tested on a commercial scale, due
to the uncertainty of cost considerations, the Company believes that it will
make it much more 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 financing for such a facility, both from the DOE and other
sources, is not secured. Further, the termination of the Alcoa Project Agreement
and the consequent delay in completing a commercial demonstration facility even
if an alternate site is found and financing is obtained may result in the loss
of revenues from utilities which retrofit prior to the year 2000 in order to
comply with requirements of the 1990 amendments to the Clean Air Act. In such
event, the Company customer base would be limited principally to those power
stations having the ability to postpone compliance beyond the year 2000.
Additionally, although the Company believes that Olin had no right to terminate
the Olin Agreement, to take title to the Tennessee Facility or to foreclose on
the Tennessee Facility as a result of the alleged default on the Olin Note,
Olin's notice of termination and the ensuing litigation make it unlikely that
the Company will, at least in the near term, receive payments from Olin under
the Olin Agreement.
The above matters raise substantial doubt about the Company's ability to
continue as a going concern. If the Company is unable to continue as a going
concern, the Company's ability to recover its construction in progress in the
accompanying consolidated balance sheet is uncertain.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview and Recent Developments
NOXSO Corporation (the "Company") is a development stage company
principally engaged in developing, testing, and marketing of a process (the
"NOXSO Process") to remove a high percentage of the pollutants which cause "acid
rain" from flue gas generated by burning fossil fuel. In August 1994, the
Company entered into a Project Agreement (the "Alcoa Project Agreement") with
Alcoa Generating Corporation ("Alcoa") for the design, construction, and
operation of the first commercial-size demonstration of the NOXSO Process at
Alcoa's Warrick Generating Station in Newburgh, Indiana. Although the project
definition and design phases of the Alcoa Project were completed by the Company
and the construction phase had been commenced, the Company was unable to raise
sufficient financing by January 31, 1997, the designated date under the Alcoa
Project Agreement, to fund completion of the project. Alcoa refused to extend
the designated date beyond January 31, 1997 and terminated the Alcoa Project
Agreement. The Company is currently seeking an alternate site to construct a
commercial demonstration facility. The United States Department of Energy (the
"DOE") agreed to fund one-half of the costs of the Alcoa Project and the related
project at a facility owned by Olin Corporation that is described below, up to
$41.1 million, (subject to a commitment by the Company to repay amounts provided
by DOE for the Olin project if failure to obtain financing resulted in failure
to complete the Alcoa Project.) The Company is currently seeking from DOE
approval to utilize DOE's funding at an alternate site, if one can be located,
and will also seek to work with DOE regarding the repayment obligation referred
to above.
In April 1995, the Company entered into a License, Construction, Lease and
Sulfur Supply Agreement (the "Olin Agreement") with Olin Corporation ("Olin") to
construct a facility (the "Tennessee Facility") in Charleston, Tennessee to
convert elemental sulfur into liquid sulfur dioxide. Under the Olin Agreement,
as amended, provided that the Tennessee Facility produces liquid 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 the Company $3.2 million annually (subject to escalation under certain
circumstances), and the Company is to deliver to Olin 16,000 short tons per year
of elemental sulfur. Unless and until a commercial facility using the NOXSO
Process and capable of producing the required amount of elemental sulfur becomes
operational, the Company would have to pay the costs of purchasing elemental
sulfur from suppliers.
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 a $1.8 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. The Olin Note has borne interest of 10%
per annum since April 12, 1996.
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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, which is the aggregate
purchase price payable by Olin over the ten-year term of the Olin Agreement. 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.
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 Company's motions to
dismiss the petition or to transfer the case to the United States Bankruptcy
Court for the Western District of Pennsylvania were dismissed without prejudice
to the Company's right to reassert its arguments to transfer venue of the case.
The Company has answered the petition on the merits, and a hearing in the matter
has been scheduled for April 7, 1997.
The Company is also engaged in utilizing its engineering expertise to
develop other technologies, processes, substances and facilities that can be
used to assist in complying with environmental laws, although all such efforts
are at this time developmental in nature. The Company also from time to time
performs research and development for others on a project basis. The Company has
also licensed the NOXSO Process for distribution in Europe and Asia under a
License Agreement with FLS miljo a/s, a Danish corporation engaged in the
construction and design of utility power plants ("FLS"). In addition, the
Company offered construction management services to others through its 70%-owned
subsidiary, PROJEX, Inc. During March 1997, however, the managing principals of
Projex resigned, and the operations of Projex were shut down.
Liquidity and Capital Resources
The Company is a development stage company engaged in developing and
testing the NOXSO Process. Since inception, the Company has dedicated
substantially all of its resources to the acquisition, development and testing
of the NOXSO Process. Since its inception, the Company's capital resources have
been derived from various sources including the sale of the Company's common
stock in both public and private offerings, government grants, research
contracts and cooperative research activities. The total of capital raised from
inception through December 31, 1996 was approximately $18.9 million.
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The Company's resources have been used to conduct a series of test programs
which provided the data necessary to bring the NOXSO Process to its present
state of development. The first of these programs began in 1982 in Paducah,
Kentucky, at the TVA Shawnee Steam Plant. The next phase of development began in
1985, after a move to DOE's Pittsburgh Energy Technology Center, and these tests
continued through June of 1989. This development program was followed by
operation and testing of a pilot-scale facility at the Ohio Edison power plant
located at Toronto, Ohio. This pilot-scale project facility was completed in
August of 1993 with over 10,000 hours of testing. In June 1995, the Company
began construction of the first commercial size demonstration facility for the
NOXSO Process at Alcoa's Warrick Generating Station pursuant to the terms of the
Alcoa Project Agreement. Under the terms of the Alcoa Project Agreement, the
Company was required to have in hand by a designated date sufficient financial
resources to perform its obligations under the Alcoa Project Agreement. The
designated date was extended on several occasions, most recently 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. As a result, the Company is obligated, under an amendment to
its 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 agreed 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, Inc., a supplier to the Company,
described below). The entire amount becomes due and payable on January 1, 1999
if repayment has not commenced by that time. 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 and will also seek to work with DOE regarding
the repayment obligation described above. Even if the Company is able to retain
the DOE funding, it will need to secure significant additional funding in order
to continue as a going concern and complete a commercial demonstration facility.
The Company is currently seeking funding for its immediate needs through private
placements of convertible securities. 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
financing.
If the Company loses its DOE funding and/or is unable to find the necessary
additional financing, the Company does not expect to be able to complete a
full-scale commercial demonstration of the NOXSO Process even if an alternate
site is found. Inability to complete a commercial demonstration facility would
require that greater emphasis be placed upon the test results of the Company's
pilot plant conducted at Toronto, Ohio and on a demonstration currently being
conducted by FLS in Denmark. Because of the reluctance of regulated utilities to
purchase process technology which has not been tested on a commercial scale, due
to the uncertainty of cost considerations, the Company believes that it will
make it much more 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 financing for such a facility, both from the DOE and other
sources, is not secured. Further, the termination of the Alcoa Project Agreement
and the consequent delay in completing a commercial demonstration facility even
if an alternate site is found and financing is obtained may result in the loss
of revenues from utilities which retrofit prior to the year 2000 in order to
comply with requirements of the 1990 amendments to the Clean Air Act. In such
event, the Company customer base would be limited principally to those power
stations having the ability to postpone compliance beyond the year 2000.
Pursuant to the Olin Agreement, the Company has substantially completed
construction of a facility at Olin's plant in Charleston, Tennessee, which will
convert elemental sulfur into liquid
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sulfur dioxide. As described above under "Overview and Recent Developments",
Olin has purported to terminate the Olin Agreement and to take title to the
Tennessee Facility. Olin also has claimed that the Company has defaulted under
the Olin Note. The Company has obtained a preliminary injunction which, among
other things, prevents Olin from taking such action, and the Company and Olin
are currently in the process of litigation with respect to the Olin Agreement.
Olin and two other creditors have also filed an involuntary petition in
bankruptcy against the Company. The Company had anticipated, since the Tennessee
Facility is substantially complete and startup of the Tennessee Facility has
been commenced, that the Tennessee Facility would be fully operational by April
1, 1997, the deadline for the occurrence of such event under the Olin Agreement,
at which point Olin would be obligated to make annual purchase price payments of
$3.2 million for a ten-year period to the Company (subject to escalation under
certain circumstances, but net of offsets for amounts due to Olin from the
Company). Although the Company believes that Olin had no right to terminate the
Olin Agreement, to take title to the Tennessee Facility or to foreclose on the
Tennessee Facility as a result of the alleged default on the Olin Note, Olin's
notice of termination and the ensuing litigation make it unlikely that the
Company will, at least in the near term, receive payments from Olin under the
Olin Agreement.
The Tennessee Facility consists of an air separation plant supplied to the
Company by Praxair, Inc. ("Praxair") and a liquid sulfur dioxide production
facility. In August 1996, Praxair agreed to defer payment of the $2.7 million
balance owed to Praxair for the air separation plant. The Company has agreed to
pay late charges of .3% a week from the date of each outstanding invoice and to
assign to Praxair amounts the Company is entitled to receive under the Olin
Agreement until the Company's obligations to Praxair are paid in full. As of
December 31, 1996, the Company owed Praxair $2.8 million (including late
charges). In addition, following repayment of Praxair, unless the Company
succeeds in restructuring its agreement with DOE, the Company will be obligated
to pay DOE an amount equal to 2/3 of the revenue received under the Olin
Agreement until the funds provided by DOE for the Tennessee Facility, plus
interest, have been repaid. The Company is also in default under a short term
commercial loan in the amount of $250,000 and a line of credit in the amount of
$1,000,000.
Since payments under the Olin Agreement are the only significant
anticipated source of operating revenue for the Company in the near term,
failure of the Company (i) to successfully conclude its litigation with Olin in
such a manner that Olin meets its obligations to make annual payments on the
Tennessee Facility or otherwise pays the Company for the Tennessee Facility and
(ii) to restructure its repayment obligation to DOE will make it difficult for
the Company to meet its obligations to suppliers (including Praxair), lenders
and others and would raise significant doubt as to the Company's ability to
continue as a going concern.
The decrease in the Company's cash and equivalents at December 31, 1996 was
the net result of several transactions. The major cash inflow was proceeds of
$600,000 from equity investments in the Company. These funds, together with cash
and cash equivalents on hand at September 30, 1996, were used during the second
quarter to pay expenses of operating the Company as well as to cover the costs
associated with the building of the Tennessee Facility and the commercial size
demonstration facility which the Company had been constructing under the Alcoa
Project Agreement (the "Alcoa Project") prior to its termination effective
January 31, 1997. The Company's current ratio decreased from 0.31:1 at September
30, 1996 to 0.17:1 at December 31, 1996. This decrease is the result of costs of
the Tennessee Facility and the Alcoa Project exceeding the funds received by the
Company. As of December 31, 1996, the Company had
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working capital of ($9.5 million) as compared to ($6.6 million) at September 30,
1996. This decrease is the result of the increased activity in the construction
of the Tennessee Facility and the Alcoa Project.
The Company's advance billings decreased to zero, and its accounts
receivable also decreased, as a result of notice received from the DOE requiring
the Company to bill the DOE for costs reimbursable under the Company's contract
with DOE only as such costs are incurred and paid by the Company rather than the
Company being permitted to estimate future costs and receive advance payments.
The reductions in the Company's total stockholder's equity and the increase
in its deficit accumulated during the development stage resulted primarily from
the writeoff of $1,932,482 in costs relating to the Alcoa Project which can no
longer be capitalized as a result of termination of the Alcoa Project Agreement.
Results of Operations
Inception to December 31, 1996
To date, the Company has not derived any revenues from operations. All
revenues to date have consisted of research funding, government grants,
reimbursement of project costs and interest income, aggregating $8.7 million
through December 31, 1996. As a result of the significant expenses incurred from
inception through December 31, 1996 in connection with the acquisition,
development and testing of the NOXSO Process, as well as general and
administrative expenses that have been incurred, the Company had an accumulated
deficit of $14.5 million at December 31, 1996. Since inception through December
31, 1996, the Company's total costs and expenses were $23.2 million, including
$7.8 million relating to salaries and benefits.
Three Months Ended December 31, 1996 Compared to the Three Months Ended
December 31, 1995
Total funding, interest income and reimbursement of project costs for the
three months ended December 31, 1996 and 1995, respectively, were $199,551 and
$20,290 while total costs and expenses for the same periods were $2,695,478 and
$71,391, respectively. The increase in revenues for the three month period ended
December 31, 1996 compared to December 31, 1995 is due to an increase in grants
received compared to the same period last year and the inclusion of revenues
from PROJEX, which began operations in November 1995. The increase in costs and
expenses for the three months ended December 31, 1996 compared to December 31,
1995 is primarily the result of the writeoff of $1,932,482 in costs associated
with the Alcoa Project. These costs can no longer be capitalized as a result of
termination of the Alcoa Project Agreement.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Calabrian Litigation
In late August 1996 a Complaint was filed against the Company in the
District Court of Jefferson County, Texas, by Calabrian Corporation
("Calabrian") relating to a Purchase Agreement dated October 16, 1995 between
the Company and Calabrian (the "Purchase Agreement") and a related License
Agreement, dated effective as of September 1, 1995, between the Company and
Calabrian. Under the agreements, Calabrian agreed to supply to the Company for a
fixed price a portion of the Tennessee Facility to be constructed by the Company
for Olin Corporation. The Tennessee Facility will convert elemental sulfur into
liquid sulfur dioxide for use by Olin under the Olin Agreement. The complaint
alleges that the Company took over direction and supervision of Calabrian's
subcontract relating to the construction of components of the Tennessee
Facility, disrupting Calabrian's plans with respect to the facility and
constituting an unlawful interference with Calabrian's contractual relationships
with its subcontractors, and that the Company defaulted in certain payment
obligations to Calabrian under the Purchase Agreement. The complaint requests
damages in the amount of $665,000, representing the balance of the fee allegedly
owed to Calabrian under the Purchase Agreement, unspecified damages caused
Calabrian as a result of the alleged interference with contract, any additional
damages caused Calabrian by the Company's conduct and an order prohibiting the
Company from disclosing to any third party, other than Olin, any confidential
and proprietary information of Calabrian. The Company has removed the action to
the United States District Court for the Eastern District of Texas, Beaumont
Division.
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.
Olin Litigation
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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 $1.8 million 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, which is the aggregate
purchase price payable by Olin over the ten-year term of the Olin Agreement. 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.
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. The Company's motions to dismiss the petition or to
transfer the case to the United States Bankruptcy Court for the Western District
of Pennsylvania were dismissed without prejudice to the Company's right to
reassert its arguments to transfer venue of the case. The Company has answered
the petition on the merits, and a hearing in the matter has been scheduled for
April 7, 1997.
Item 2. Changes in Securities.
(c) During December 1996 and January 1997, the Company sold to seven
accredited investors an aggregate of 630,333 Units for an aggregate purchase
price of $945,499.50, in reliance on Section 4(2) under the Securities Act of
1933, as amended, and Rule 506 promulgated thereunder. Each Unit consisted of
one share of Common Stock and a Warrant to purchase one share of Common Stock.
The Warrants are exercisable at a price of $1.50 per share. The exercise price
of the Warrants is subject to reduction by $.25 per month (but not to less than
$.01 per share) under certain circumstances relating to the filing and
effectiveness of a registration statement with respect to such shares.
Item 3. Defaults Upon Senior Securities.
23
<PAGE>
(a) On January 30, 1997, the Company received notice from Olin declaring
that the Company had defaulted under the $1.8 million Olin Note which by its
written terms was due on January 31, 1997. The Olin Note was issued by the
Company to Olin in connection with funding of construction costs for the
construction of the Tennessee Facility built by the Company under the Olin
Agreement. In a complaint filed by the Company against Olin in connection with
Olin's purported termination of the Olin Agreement and Olin's claim of a default
under the Olin Note, the Company states 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 under
the Olin Agreement when the Tennessee Facility becomes fully operational.
The Company has also defaulted in payment of a $250,000 short term
commercial loan and a $1,000,000 line of credit
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997. The Company filed a Form 8-K on February 14, 1997
reporting several matters under "Item 5. Other Events" including the termination
of the Alcoa Project Agreement, the purported termination of the Olin Agreement
and purported default under the Olin Note, the preliminary injunction issued
against Olin, the lawsuit filed by the Company against Olin and the involuntary
petition in bankruptcy filed by Olin and two other creditors against the
Company. All these matters are discussed in this Quarterly Report on Form 10-Q.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
NOXSO CORPORATION
Registrant
Dated: March 25, 1997
/s/ Edwin J. Kilpela
------------------------------
Edwin J. Kilpela
President
/s/ John L. Haslbeck
------------------------------
John L.Haslbeck
Vice President
25
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 528,213
<SECURITIES> 1,000,000
<RECEIVABLES> 343,394
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