SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file No. 0-17454
NOXSO CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1118334
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
2414 Lytle Road 15102
Bethel Park, PA Zip Code
Address of principal executive offices
Registrant's telephone number, including area code: (412) 854-1200
Not Applicable
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1998
Common stock, $.01 par value 15,422,051
<PAGE>
NOXSO CORPORATION
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION 3
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and June 30, 1997 (Audited) 3
Consolidated Statements of Operations for the Cumulative
Period from Inception to March 31, 1998 (Unaudited) and
for the three and nine months ended March 31, 1998
and 1997 (Unaudited) 4
Consolidated Statements of Changes in Stockholders'
Equity for the Cumulative Period from Inception to
March 31, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the Cumulative
Period from Inception to March 31, 1998 and for the nine
months ended March 31, 1998
and 1997 (Unaudited) 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
PART II. OTHER INFORMATION 23
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
NOXSO CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS: (Unaudited) (Audited)
Cash and equivalents $ 322,285 $ 47,470
Restricted cash 446,610 --
Bank certificate of deposit -- 1,000,000
Accounts receivable -- 65,760
Prepaid expenses and other current assets 237,736 99,778
------------ ------------
Total Current Assets 1,006,631 1,213,008
------------ ------------
PROPERTY AND EQUIPMENT:
Plant -- 11,532,124
Equipment 324,219 339,931
Furniture and fixtures 108,832 108,832
Leasehold Improvements 16,646 16,646
Construction in progress 44,975 44,975
------------ ------------
494,672 12,042,508
Less: Accumulated depreciation (441,289) (1,083,038)
------------ ------------
53,383 10,959,470
------------ ------------
Deposits 4,308 4,308
------------ ------------
Total Assets $ 1,064,322 $ 12,176,786
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE
Notes payable $ -- $ 2,922,500
Accounts payable 102,149 5,475,428
Accrued compensation 7,167 26,021
Deferred income taxes 141,240 120,294
Other current liabilities 105,711 578,055
Minority interest in consolidated subsidiary -- 24,300
------------ ------------
Total Liabilities Not Subject to Compromise 356,267 9,146,598
------------ ------------
PREPETITION LIABILITIES SUBJECT TO COMPROMISE 2,401,538 4,488,381
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: Authorized,
20,000,000 shares. Issued 15,383,468 shares
and 11,264,740 shares, respectively 151,836 110,649
Paid-in capital 16,815,569 16,349,532
Deficit accumulated during the development stage (18,635,888) (17,893,374)
------------ ------------
(1,668,483) (1,433,193)
Less: Cost of 2,985 shares of common stock held in treasury (25,000) (25,000)
------------ ------------
Total Stockholders' Equity (Deficit) (1,693,483) (1,458,193)
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,064,322 $ 12,176,786
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended Three Months Ended
Date of Inception, March 31, March 31,
August 28, 1979, ---------------------------- ----------------------------
to Mar. 31, 1998 1998 1997 1998 1997
----------------- ------------ ------------ ------------ ------------
<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 plant 1,727,715 -- -- -- --
Designing, drafting and consulting 1,122,653 -- 13,390 -- 5,900
Supplies, instruments and equipment 2,010,589 18,302 29,836 7,695 11,581
Depreciation and amortization 1,935,996 713,787 29,706 43,790 8,230
Other research and development 386,309 -- -- -- --
Salaries and benefits 8,990,154 529,628 475,796 230,580 281,256
Professional fees 2,534,263 689,143 110,679 177,211 5,398
Rent 736,703 112,042 90,461 35,203 41,452
Income tax expense 139,940 23,207 82,087 -- --
Other general administrative 4,184,724 390,152 1,895,491 252,123 1,264,209
Sulfur dioxide processing costs 1,739,299 458,768 -- -- --
Loss on impairment of asset 1,975,028 478,094 -- -- --
ALCOA Project Expense 2,095,124 -- 2,049,332 -- 116,849
------------ ------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 31,008,881 3,413,123 4,776,778 746,602 1,734,875
------------ ------------ ------------ ------------ ------------
LESS FUNDING AND OTHER:
Funding of research agreement 1,200,000 -- -- -- --
Reimbursement of project costs 5,022,007 29,976 91,302 -- 1,750
Government grant 1,128,020 -- -- -- --
Sulfur dioxide processing revenue 2,680,810 1,816,870 -- -- --
Interest income 1,104,896 8,590 42,190 -- 11,375
Gain on sale of assets 771,534 771,534 -- -- --
Other 446,955 -- 336,638 -- 50,930
------------ ------------ ------------ ------------ ------------
TOTAL FUNDING AND OTHER 12,354,222 2,626,970 470,130 -- 64,055
------------ ------------ ------------ ------------ ------------
Minority interest in net income of
consolidated subsidiary (23,700) -- 20,623 -- (5,271)
Gain on early extinguishment of debt 43,639 43,639 -- 43,639 --
============ ============ ============ ============ ============
NET LOSS $(18,634,722) $ (742,514) $ (4,327,271) $ (702,963) $ (1,665,549)
============ ============ ============ ============ ============
LOSS PER COMMON SHARE:
Basic $ (.05) $ (.44) $ (.05) $ (.16)
============ ============ ============ ============
Average number of shares outstanding - basic 14,595,594 9,868,164 13,859,110 10,233,811
============ ============ ============ ============
Diluted $ (.05) $ (.44) $ (.05) $ (.16)
============ ============ ============ ============
Average number of shares outstanding - diluted 14,595,594 9,868,164 13,859,110 10,233,811
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION, TO MARCH 31, 1998
<TABLE>
<CAPTION>
Stockholders' Equity
----------------------------------------------------------------------------
Consideration Common Stock
------------------------------------ ----------------------------
Per Shares Par
Share Total Issued Value
------------- ------------- --------- ----------
<S> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994:
1979 - Issuance of Common Stock $ .005 $ 600 (1) 120,000 $ 1,200
1980 - Issuance of Common Stock .563 956,250 (2) 1,700,000 17,000
1980 - Issuance of Warrants -- 850 (3) -- --
1983 - Issuance of Common Stock .2813 28,125 (4) 100,000 1,000
1986 - Issuance of Common Stock .125 155,000 (1) 1,240,000 12,400
1986 - Issuance of Common Stock .125 32,500 (5) 260,000 2,600
1987 - Issuance of Common Stock .50 134,000 (1) 268,000 2,680
1987 - Issuance of Common Stock .50 42,900 (5) 85,800 858
1988 - Issuance of Stock Option 250,000 (6) -- --
1989 - Issuance of Common Stock .675 27,000 (7) 40,000 400
1989 - Issuance of Common Stock .50 147,500 (8) 295,000 2,950
1989 - Issuance of Common Stock 2.50 4,000,000 (2) 1,600,000 16,000
1989 - Issuance of Warrants 80 (3) -- --
1991 - Issuance of Common Stock 1.129 569,464 (9) 504,620 5,046
1991 - Issuance of Common Stock .675 27,000 (7) 40,000 400
1991 - Issuance of Common Stock .675 27,000 (9) 40,000 400
1992 - Issuance of Common Stock 1.129 683,356 (9) 605,544 6,056
1992 - Issuance of Common Stock 7.50 2,000,000 (1) 266,666 2,666
1992 - Issuance of Common Stock 2.75 5,500 (9) 2,000 20
<CAPTION>
Stockholders' Equity
----------------------------------------------------------------------------
Deficit
Accumulated Notes
During Receivable
Paid-in Development Treasury for Purchase of
Capital Stage Stock Common Stock Total
-------------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994:
1979 - Issuance of Common Stock $ (600) $ -- $ -- $ -- $ 600
1980 - Issuance of Common Stock 791,382 -- -- -- 808,382
1980 - Issuance of Warrants 850 -- -- -- 850
1983 - Issuance of Common Stock 27,125 -- -- -- 28,125
1986 - Issuance of Common Stock 142,600 -- -- -- 155,000
1986 - Issuance of Common Stock 29,900 -- -- -- 32,500
1987 - Issuance of Common Stock 131,320 -- -- -- 134,000
1987 - Issuance of Common Stock 42,042 -- -- -- 42,900
1988 - Issuance of Stock Option 250,000 -- -- -- 250,000
1989 - Issuance of Common Stock 26,600 -- -- (27,000) --
1989 - Issuance of Common Stock 144,550 -- -- (30,000) 117,500
1989 - Issuance of Common Stock 3,174,721 -- -- -- 3,190,721
1989 - Issuance of Warrants 80 -- -- -- 80
1991 - Issuance of Common Stock 564,418 -- -- -- 569,464
1991 - Issuance of Common Stock 26,600 -- -- (27,000) --
1991 - Issuance of Common Stock 26,600 -- -- -- 27,000
1992 - Issuance of Common Stock 677,300 -- -- -- 683,356
1992 - Issuance of Common Stock 1,997,334 -- -- -- 2,000,000
1992 - Issuance of Common Stock 5,480 -- -- -- 5,500
</TABLE>
(1) Sale of common stock for cash.
(2) Proceeds of public offering.
(3) Sale of warrants for cash.
(4) Value assigned to common stock issued in connection with purchase of NOXSO
Process.
(5) Value assigned to common stock issued for compensation and services.
(6) Sale of common stock option.
(7) Stock issued in connection with exercise of common stock warrants and
options for notes receivable.
(8) Stock issued in connection with exercise of common stock purchase warrants
for $117,500 cash and a $30,000 note receivable.
(9) Stock issued in connection with exercise of common stock option agreements.
(10) Stock issued in connection with exercise of common stock warrant
agreements.
(11) Stock issued in exchange for warrant. See accompanying notes to
consolidated financial statements.
5
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION, TO MARCH 31, 1998
<TABLE>
<CAPTION>
Stockholders' Equity
--------------------------------------------------------------------
Consideration Common Stock
---------------------------------- ---------------------------
Per Shares Par
Share Total Issued Value
-------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994: (CONTINUED)
1992 - Issuance of Common Stock $ 2.00 $ 69,124(10) 34,562 $ 346
1992 - Issuance of Common Stock (11) 116,500 1,165
1992 - Satisfaction of notes receivable -- --
1993 - Issuance of Common Stock 1.129 683,356(9) 605,544 6,056
1993 - Issuance of Common Stock 2.04 26,260(9) 12,866 129
1993 - Issuance of Common Stock .50 50,000 500
1993 - Acquisition of Common Stock for treasury -- --
1993 - Satisfaction of notes receivable -- --
1993 - Issuance of Common Stock 5.00 2,594,115(16) 571,250 5,712
1994 - Issuance of Common Stock 1.129 113,888(9) 100,920 1,009
1994 - Issuance of Common Stock 2.00 23,624(13) 11,812 118
Net loss -- --
----------- -----------
BALANCE, JUNE 30, 1994 8,671,084 $ 86,711
=========== ===========
YEAR ENDED JUNE 30, 1995:
Issuance of Common Stock $ 2.00 $ 47,252(10) 23,626 $ 236
Issuance of Common Stock 2.75 11,000(9) 4,000 40
Issuance of Common Stock 3.85 497,500(16) 150,000 1,500
Issuance of Common Stock 3.56 800,795(16) 250,000 2,500
Issuance of Common Stock 3.25 325(17) 100 1
Net loss -- --
----------- -----------
BALANCE, JUNE 30, 1995 9,098,810 $ 90,988
=========== ===========
YEAR ENDED JUNE 30, 1996:
Issuance of Common Stock 3.25 81,250(9) 25,000 250
Issuance of Common Stock 1.91 19,063(9) 10,000 100
Issuance of Common Stock 3.625 20,845(9) 5,750 58
Issuance of Common Stock 4.55 409,725(16) 100,000 1,000
Issuance of Common Stock 4.54 408,375(16) 100,000 1,000
Issuance of Common Stock 4.56 45,626(9) 10,000 100
Issuance of Common Stock 3.21 503,209(16) 156,763 1,569
Issuance of Common Stock 3.425 500,003(16) 145,773 1,458
Net loss -- --
----------- -----------
BALANCE, JUNE 30, 1996 9,652,096 $ 96,523
=========== ===========
<CAPTION>
Stockholders' Equity
--------------------------------------------------------------------------------
Deficit
Accumulated Notes
During Receivable
Paid-in Development Treasury for Purchase of
Capital Stage Stock Common Stock Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994: (CONTINUED)
1992 - Issuance of Common Stock $ 68,778 $ -- $ -- $ -- $ 69,124
1992 - Issuance of Common Stock -- (1,165) -- -- --
1992 - Satisfaction of notes receivable -- -- -- 57,000(12) 57,000
1993 - Issuance of Common Stock 677,300 -- -- -- 683,356
1993 - Issuance of Common Stock 26,131 -- -- -- 26,260
1993 - Issuance of Common Stock 24,500 -- -- (25,000) 0
1993 - Acquisition of Common Stock for treasury -- -- (25,000) 25,000(15) 0
1993 - Satisfaction of notes receivable -- -- -- 27,000(14) 27,000
1993 - Issuance of Common Stock 2,588,403 -- -- -- 2,594,115
1994 - Issuance of Common Stock 112,879 -- -- -- 113,888
1994 - Issuance of Common Stock 23,506 -- -- -- 23,624
Net loss -- (9,727,095) -- -- (9,727,095)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1994 $ 11,579,799 $ (9,727,095) $ (25,000) $ -- $ 1,914,415
============ ============ ============ ============ ============
YEAR ENDED JUNE 30, 1995:
Issuance of Common Stock $ 47,016 $-- $ -- $-- $ 47,252
Issuance of Common Stock 10,960 -- -- -- 11,000
Issuance of Common Stock 496,000 -- -- -- 497,500
Issuance of Common Stock 798,295 -- -- -- 800,795
Issuance of Common Stock 324 -- -- -- 325
Net loss -- (1,931,657) -- -- (1,760,658)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1995 $ 12,932,394 $(11,487,753) $ (25,000)$ -- $ 1,510,629
============ ============ ============ ============ ============
YEAR ENDED JUNE 30, 1996:
Issuance of Common Stock 81,000 -- -- -- 81,250
Issuance of Common Stock 18,963 -- -- -- 19,063
Issuance of Common Stock 20,787 -- -- -- 20,845
Issuance of Common Stock 408,725 -- -- -- 409,725
Issuance of Common Stock 407,375 -- -- -- 408,375
Issuance of Common Stock 45,526 -- -- -- 45,626
Issuance of Common Stock 501,640 -- -- -- 503,209
Issuance of Common Stock 498,543 -- -- -- 500,001
Net loss -- (394,269) -- -- (394,269)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1996 $ 15,378,188 $ (3,278,694) $ (25,000) $ -- $ 3,104,454
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION,
TO MARCH 31, 1998 (continued)
<TABLE>
<CAPTION>
Stockholders' Equity
--------------------------------------------------------------------
Consideration Common Stock
---------------------------------- ---------------------------
Per Shares Par
Share Total Issued Value
-------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997:
Issuance of Common Stock $ 3.63 $ 27,186(9) 7,500 $ 75
Issuance of Common Stock 1.50 945,500(16) 630,333 6,303
Issuance of Common Stock 0.00 --(16) 200,000 --
Issuance of Common Stock 0.26 40,000(17) 154,811 1,548
Issuance of Common Stock 0.25 100,000(16) 400,000 4,000
Issuance of Common Stock 0.63 43,750(18) 70,000 700
Issuance of Common Stock 0.00 1,500(19) 150,000 1,500
Deferred Debt Discount -- --
Net loss -- --
---------- ----------
BALANCE, JUNE 30, 1997 11,264,740 $ 110,649
========== ==========
NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED):
Issuance of Common Stock 0.15 150,000(17) 973,203 9,732
Issuance of Common Stock 0.13 150,000(17) 1,142,857 11,429
Issuance of Common Stock 0.16 200,000(17) 1,280,171 12,802
Issuance of Common Stock 0.00 1,000(19) 100,000 1,000
Issuance of Common Stock 0.00 1,000(19) 100,000 1,000
Issuance of Common Stock 0.00 167(19) 16,666 167
Issuance of Common Stock 0.00 417(19) 41,666 417
Issuance of Common Stock 0.00 333(19) 33,333 333
Issuance of Common Stock 0.00 83(19) 8,333 83
Issuance of Common Stock 0.00 108(19) 10,833 108
Issuance of Common Stock 0.00 83(19) 8,333 83
Issuance of Common Stock 0.00 33(19) 3,333 33
Issuance of Common Stock 0.01 1,000(13) 100,000 1,000
Issuance of Common Stock 0.01 2,340(13) 234,000 2,340
Issuance of Common Stock 0.01 660(13) 66,000 660
Net loss -- --
---------- ----------
BALANCE, MARCH 31, 1998 (UNAUDITED) 15,383,468 $ 151,836
========== ==========
<CAPTION>
Stockholders' Equity
--------------------------------------------------------------------------------
Deficit
Accumulated Notes
During Receivable
Paid-in Development Treasury for Purchase of
Capital Stage Stock Common Stock Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997:
Issuance of Common Stock $ 27,111 $ -- $ -- $ -- $ 27,186
Issuance of Common Stock 939,197 -- -- -- 945,500
Issuance of Common Stock -- -- -- -- 0
Issuance of Common Stock 38,452 -- -- -- 40,000
Issuance of Common Stock 96,000 -- -- -- 100,000
Issuance of Common Stock 43,050 -- -- -- 43,750
Issuance of Common Stock -- -- -- -- 1,500
Deferred Debt Discount 290,769 -- -- -- 290,769
Net loss -- (6,011,352) -- -- (6,011,352)
------------ ------------ ---------- ---------- ------------
BALANCE, JUNE 30, 1997 $ 16,349,532 $(17,893,374) $ (25,000) $ -- $ (1,458,193)
============ ============ ========== ========== ============
NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED):
Issuance of Common Stock 140,268 -- -- -- 150,000
Issuance of Common Stock 138,571 -- -- -- 150,000
Issuance of Common Stock 187,198 -- -- -- 200,000
Issuance of Common Stock -- -- -- -- 1,000
Issuance of Common Stock -- -- -- -- 1,000
Issuance of Common Stock -- -- -- -- 167
Issuance of Common Stock -- -- -- -- 417
Issuance of Common Stock -- -- -- -- 333
Issuance of Common Stock -- -- -- -- 83
Issuance of Common Stock -- -- -- -- 108
Issuance of Common Stock -- -- -- -- 83
Issuance of Common Stock -- -- -- -- 33
Issuance of Common Stock -- -- -- -- 1,000
Issuance of Common Stock -- -- -- -- 2,340
Issuance of Common Stock -- -- -- -- 660
Net loss -- (742,514) -- -- (742,514)
------------ ------------ ---------- ---------- ------------
BALANCE, MARCH 31, 1998 (UNAUDITED) $ 16,815,569 $(18,635,888) $ (25,000) $ -- $ (1,693,483)
============ ============ ========== ========== ============
</TABLE>
(9) Stock issued in connection with exercise of common stock option agreements.
(12) Compensation in satisfaction of notes receivable.
(13) Stock issued in connection with exercise of common stock warrants.
(14) Payment in satisfaction of note receivable.
(15) Acquisition of 2,985 shares of treasury stock in satisfaction of notes
receivable.
(16) Stock issued in connection with private placement.
(17) Stock issued in connection with conversion of debt.
(18) Stock issued in connection with employee termination.
(19) Stock issued in connection with debtor-in-possession financing. See
accompanying notes to consolidated financial statements.
7
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Date of Inception Nine Months Ended March 31,
August 28, 1979, to ----------------------------
March 31, 1998 1998 1997
------------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(18,634,722) $ (742,514) $ (4,327,271)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 1,888,284 713,787 29,839
Amortization of deferred debt discount 295,494 4,725 145,385
Minority interest -- 24,300 20,923
Gain on sale of assets (765,782) (771,534) --
Gain on extinguishment of debt (43,639) (43,639)
Loss on impairment of property and equipment 1,975,029 478,094 --
Issuance of common stock for compensation and other 150,030 29,057 --
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 -- 65,760 2,018,727
Prepaid expenses and other current assets (232,961) (137,958) (104,772)
Deposits (4,308) -- --
Liabilities not subject to compromise:
Accounts payable 102,149 (5,373,279) 5,093,181
Accrued compensation 7,167 (18,854) (81,144)
Advanced billings -- -- (1,379,549)
Other current liabilities 297,687 (449,260) 556,109
Liabilities subject to compromise 2,401,538 (2,086,843) --
------------ ------------ ------------
Net cash flows from operating activities $(12,478,909) $ (8,308,158) $ 1,971,428
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of and deposits for property and equipment (13,641,045) -- (4,010,493)
Subsidiary acquisition of treasury stock (60,083) (60,083) --
Proceeds from the sale of certificate of deposit 0 1,000,000 --
Proceeds from the sale of property and equipment 11,004,546 11,000,000 --
------------ ------------ ------------
Net cash flows from investing activities $ (2,696,582) $ 11,939,917 $ (4,010,493)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement offering 6,826,408 -- 945,498
Proceeds from line of credit 3,025,000 -- --
Payment of line of credit (3,025,000) (1,000,000) --
Proceeds from convertible debt -- -- 540,000
Proceeds from commercial loan -- -- 250,000
Proceeds from issuance of common stock 7,764,647 4,000 --
Proceeds from sales of common stock options and warrants 1,323,095 -- 27,188
Proceeds from satisfaction of notes receivable 27,000 -- --
Proceeds from ALCOA and Olin loans 2,874,000 -- --
Payment of ALCOA loan and Olin loans (2,874,000) (1,874,000) --
Proceeds from debtor-in-possession financing 705,166 656,666 --
Payment of debtor-in-possession financing (697,000) (697,000) --
Net loans to stockholders and officers (4,930) -- --
------------ ------------ ------------
Net cash flows from financing activities $ 15,944,386 $ (2,910,334) $ 1,762,686
------------ ------------ ------------
NET INCREASE (DECREASE), CASH AND EQUIVALENTS
AND RESTRICTED CASH 768,895 721,425 (276,379)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD -- 47,470 464,723
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 768,895 $ 768,895 $ 188,344
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 447,508 $ 106,039 $ 185,522
============ ============ ============
NONCASH FINANCING ACTIVITIES:
Issuance of common stock for notes receivable $ 84,000 $ -- $ --
============ ============ ============
Acquisition of common stock into treasury to satisfy notes receivable $ (25,000) $ -- $ --
============ ============ ============
Issuance of common stock in exchange for warrants $ 5,165 $ 4,000 $ --
============ ============ ============
Compensation in satisfaction of notes receivable $ 57,000 $ -- $ --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
NOTES TO 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 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 - 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 an order of the Bankruptcy Court, the
Company has the exclusive right to file a plan of reorganization until June 15,
1998.
The Company has identified two principal elements in its plan to emerge
from bankruptcy: the sale of its liquid sulfur dioxide production facility
located in Charleston, Tennessee (the "Tennessee Facility") and organizing a
project for the commercial demonstration of the NOXSO Process. (see Notes 3, 4
and 5).
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Note 3 - Full-Scale Demonstration Facility:
From 1989 until the present the Company has been attempting to develop a
full-scale commercial demonstration of the NOXSO Process. In December 1989, the
federal government's Clean Coal III Technology Program selected a proposal which
had been submitted by the Company, MK-Ferguson Company ("MK-Ferguson") and W. R.
Grace & Co.("Grace") for a commercial demonstration of the NOXSO Process. In
March 1991, the DOE entered into a Clean Coal Technology Cooperative Agreement
with MK-Ferguson to provide funding for one-half of the then-estimated $66
million cost of the project. In September 1994, the Cooperative Agreement was
amended and novated to the Company by MK-Ferguson.
The site originally proposed for construction of the full-scale commercial
demonstration proved unsuitable for various reasons. The Company engaged in a
search for an alternative site to construct a full-scale commercial
demonstration facility, and, in August 1994, the Company entered into a Project
Agreement (the "Alcoa Project Agreement") with Alcoa Generating Corporation
("Alcoa") for the design, construction and operation of a facility to
demonstrate the NOXSO Process at Alcoa's Warrick Generating Station in Newburgh,
Indiana (the "Alcoa Project"). The Company completed the project definition and
design phases of the Alcoa Project and commenced construction in June 1995. As a
part of the approval, the DOE increased the funding for its share of costs for
the project from $33 million to $41.1 million. The Alcoa Project Agreement was
subject to termination by Alcoa if certain conditions were not met, including
the requirement that the Company obtain the financing necessary to complete the
Alcoa Project by a designated date, which was extended several times until
January 31, 1997. The Company was unable to obtain the financing required to
complete the project by the deadline, and Alcoa terminated the Alcoa Project
Agreement on February 3, 1997.
On January 5, 1998, the Company signed a Host Site Agreement (the "Host
Site Agreement") with Richmond Power & Light ("RPL") to demonstrate the first
commercial-sized installation of the NOXSO Process. RPL is a municipally owned
electric generation and transmission organization serving the Richmond, Indiana
area. The NOXSO plant will be constructed at RPL's Whitewater Valley Station
located in Richmond, Indiana, and will treat all of the flue gas from a
33-megawatt electric generating unit.
With execution of the Host Site Agreement, the Company is requesting
approval by the DOE of the new project site and funding plan. DOE had previously
approved funding for the Alcoa Project. If DOE approval is obtained, this
project would be part of the DOE's Clean Coal Technology Program that provides
up to 50% project funding.
The design, construction and two-year demonstration is budgeted at
approximately $30 million. In addition to DOE and RPL, outside funding will be
requested by the Company and RPL from research organizations, state agencies and
other interested parties. The Company is currently seeking to secure
approximately $10 to $12 million to complete the financing package,
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as well as an additional $2 million to $3 million anticipated to be needed for
working capital during the design and construction period, through a combination
of new equity and/or debt plus the aforementioned outside funding. In addition
to DOE approval and a complete financing package, other conditions that must be
met for the project to proceed with detailed engineering and construction
include obtaining environmental and construction permits.
Subject to satisfying all conditions, construction of the NOXSO
installation at RPL is scheduled to begin in the summer of 1999 with startup in
the summer of 2000.
If the project proceeds through the start-up phase, the Host Site Agreement
provides that, during a two-year demonstration period (the "Demonstration
Period"), the Company will own all SO2 allowances ("SO2 Allowances"), and the
Company and RPL will each own one half of the NOx allowances ("NOx Allowances"),
if any, generated by the operation of the plant with the facilities for the
operation of the NOXSO Process (the "Project Facilities") as compared to those
generated by the operation of the plant without such facilities. The Company
also has the option to receive from RPL the cash value of such Allowances. Under
the SO2 Allowance program established under the federal Clean Air Act, each
generator receives SO2 Allowances at the beginning of each year, which, when
used, allow it to generate one ton of SO2 emissions during the year of use. To
the extent a generator does not expend such SO2 Allowances in a year, they can
be banked. Banked SO2 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. SO2 Allowances
can also be sold for use by others to enable them to emit SO2. The EPA has not
adopted a national program for NOx Allowances similar to the SO2 Allowances
program, but has recommended, in proposed regulations under Title I of the Clean
Air Act, that states adopt NOx Allowance programs. While certain states have
adopted NOx Allowance programs, Indiana has not to date adopted such a program.
At the end of the Demonstration Period, or upon the earlier termination of
the Host Site Agreement in accordance with its terms, the Company is obligated
to remove the Project Facilities. In lieu of requiring removal of the Project
Facilities at the end of the Demonstration Period, RPL has the option to
purchase the Project Facilities at an agreed-upon price.
The consummation of the sale of the Tennessee Facility (see Note 4)
constituted the completion of one of the elements of the Company's plan to
emerge from bankruptcy. Execution of the Host Site Agreement is a significant
step toward the completion of the second element, that is, organizing a project
for the commercial demonstration of the NOXSO Process. However, in order to
complete a commercial demonstration of the NOXSO Process, the Company must,
among other things, obtain the consent of the DOE to utilize DOE funding at the
new project site, as well as raise $10 million to $12 million in additional
equity and/or debt financing for construction of the facility, and an additional
$2 million to $3 million anticipated to be needed for working capital during the
design and construction period. No source has been identified for such
additional financing. If the Company is unable to accomplish these objectives,
it may be necessary for the
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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.
Note 4 - Sale of Tennessee Facility:
On December 31, 1997, the Company completed the sale of the Tennessee
Facility, which does not utilize the NOXSO Process, to an affiliate of Republic
Financial Corporation for $11 million.
Approximately $9 million of the proceeds from the sale of the Tennessee
Facility has been used to retire claims of creditors of the Company holding
liens on the Tennessee Facility and to pay administrative expenses. In
connection with the closing of the sale of the Tennessee Facility and the
application of the proceeds thereof, the claims of Olin and Praxair against the
Company were extinguished, and the litigation between Olin and the Company was
terminated (see Note 6). Various claims made against the Company in the
bankruptcy proceeding which were not secured by the Tennessee Facility remain
outstanding and, except for post-petition claims, it is unlikely that a
substantial portion of these claims will be paid with the remaining proceeds
from the sale of the Tennessee Facility. Other than the claims of Calabrian
Corporation (See Note 6) and the DOE (See Note 5), the claims of the Company's
creditors that remain unpaid are those of the Company's prepetition priority and
non-priority unsecured creditors. The Company's debtor-in-possession financing
(approximately $650,000) (See Note 5) was repaid during the quarter ended March
31, 1998. As a result of this repayment, a portion of the prepaid interest and
principal (a total of approximately $43,600) was forgiven and was classified as
gain on early extinguishment of debt.
The Company will use a portion of the remaining proceeds from the sale of
the Tennessee Facility to pay its operating expenses while it continues in its
efforts to emerge from bankruptcy, including, in particular, obtaining the
funding and approvals needed to build and operate a commercial demonstration of
the NOXSO Process pursuant to the Host Site Agreement (see Note 3).
Approximately $1.28 million of the proceeds from the sale of the Tennessee
Facility was recorded as restricted cash on the balance sheet. This amount has
been reduced by the repayment of the debtor-in-possession financing and by the
payment of certain administrative costs. Approximately $447,000 in restricted
cash remained as of March 31, 1998.
Note 5 - Financing:
In order to provide for construction of the Tennessee Facility, the Company
obtained a loan from Olin in the amount of $1,874,000. In August 1996, the
Company also obtained the agreement of Praxair Inc. ("Praxair"), an air products
company, to defer payment of the $2,750,000 balance owed for the air separation
plant until completion of the bond financing then contemplated by the Company
but no later than September 30, 1996. In connection with the agreement with
Praxair, the Company agreed to pay late charges of .3% per week from the date
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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. These claims were satisfied using the proceeds from the sale
of the Tennessee Facility (see Note 4).
As a result of the termination of the Alcoa Project Agreement, the Company
became obligated, under an amendment to its Cooperative Agreement with DOE, to
repay DOE for all funds provided by DOE for the Tennessee Facility (see Note 6),
plus interest, calculated pursuant to a formula contained in the agreement, from
November 1, 1996. The Company is to pay DOE an amount equal to 2/3 of the
revenue received by the Company under the Olin Agreement (after repayment of
amounts due to Praxair). The entire amount becomes due and payable on January 1,
1999 if repayment has not commenced by that time. DOE has filed a proof of claim
as an unsecured creditor in the amount of approximately $15 million in the
Company's bankruptcy proceedings. The Company is currently engaged in
discussions with DOE regarding DOE's approval of funding for a portion of
construction costs under the Company's new Host Site Agreement (see Note 3), as
well as the nature, extent and method of repayment of DOE's claim.
Pursuant to an agreement for debtor-in-possession financing with certain
lenders (collectively, the "Interim Lenders"), in June 1997, the Interim Lenders
loaned 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").
Pursuant to an arrangement with another group of lenders (the "DIP Lenders"),
the DIP Lenders loaned $600,000 to the Company, and the Company issued 300,000
shares of Common Stock to the DIP Lenders. The Company also granted to the DIP
Lenders a first priority lien in certain of the Company's patents and laboratory
equipment. The loans from the DIP Lenders bore interest at the rate of 20% per
annum. Interest for a one-year period (one-half of which was to be refunded to
the extent not earned ) and a 5% origination fee was paid from proceeds. All of
the debtor-in-possession financing was repaid during the quarter ended March 31,
1998. As a result of this repayment, a portion of the prepaid interest and
principal (a total of approximately $43,600) was forgiven and was classified as
gain on early extinguishment of debt.
In December 1997, the Company borrowed an additional $90,000, which was
repaid when the Tennessee Facility was sold, together with interest equal to 1%
of the principal amount loaned. The loans were made to the Company as follows:
$32,500 from Robert M. Long, a director of the Company; $10,000 from John
Toedtman, a director of the Company; $22,500 from Edwin J. Kilpela, the Chief
Executive Officer and a director of the Company; and $25,000 from a financial
advisor to the Company. In connection with the loans and as authorized by the
Bankruptcy Court, the Company issued one share of its Common Stock for each
$3.00 of principal loaned to the Company. Mr. Kilpela waived any right he had to
receive such shares. As a result, the Company issued 22,500 shares of its Common
Stock in connection with the financing.
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Note 6 - Contingencies:
Calabrian Litigation - In late August 1996 a complaint was filed against
the Company in the District Court of Jefferson County, Texas, by Calabrian
Corporation ("Calabrian") relating to a Purchase Agreement dated October 16,
1995 between the Company and Calabrian (the "Purchase Agreement") and a related
License Agreement (the "Calabrian License Agreement"), dated effective as of
September 1, 1995, between the Company and Calabrian. Under the agreements,
Calabrian agreed to supply to the Company for a fixed price a portion of the
Tennessee Facility to be constructed by the Company for Olin Corporation. The
Tennessee Facility will convert elemental sulfur into liquid sulfur dioxide for
use by Olin under the Olin Agreement. The complaint alleges that the Company
took over direction and supervision of Calabrian's subcontract relating to the
construction of components of the Tennessee Facility, disrupting Calabrian's
plans with respect to the facility and constituting an unlawful interference
with Calabrian's contractual relationships with its subcontractors, and that the
Company defaulted in certain payment obligations to Calabrian under the Purchase
Agreement. The complaint requests damages in the amount of $665,000,
representing the balance of the fee allegedly owed to Calabrian under the
Purchase Agreement, unspecified damages caused Calabrian as a result of the
alleged interference with contract, any additional damages caused Calabrian by
the Company's conduct and an order prohibiting the Company from disclosing to
any third party, other than Olin, any confidential and proprietary information
of Calabrian. The Company has removed the action to the United States District
Court for the Eastern District of Texas, Beaumont Division.
In October 1996, Calabrian amended its complaint to withdraw its request
for a temporary and permanent injunction enjoining the Company from using
Calabrian's technology.
The Company's counsel has advised that it believes the causes of action in
Calabrian's complaint are without merit. The Company has filed an answer and
counterclaim denying the substantive allegations of the complaint and requesting
(i) actual damages caused the Company by Calabrian's abandonment and resulting
breach of its contracts with the Company without cause or justification and for
tortious interference with its contract with Olin, (ii) exemplary damages as a
result of its tortious interference with the Olin contract, (iii) the Company's
legal fees and costs, and (iv) any and all other damages caused the Company by
Calabrian's filing of an action against the Company that is without merit.
This litigation, which had been stayed as a result of the pendency of the
Company's bankruptcy proceeding, has now been transferred to the Bankruptcy
Court.
Additionally, in October, 1997, Calabrian filed a proof of claim in the
Bankruptcy Court which raises the same claims which are contained in the Texas
litigation together with additional claims related to the Tennessee Facility.
In May, 1998, the Company and Calabrian filed a motion to resolve all
outstanding issues between them. This settlement provides for mutual releases,
the dismissal of the Texas
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litigation and withdrawal with prejudice of the Calabrian proof of claim. No
money will be paid by either party. A hearing on the motion has not been
scheduled for June 18, 1998.
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 sought damages in excess of $32 million. This litigation was
transferred to the jurisdiction of the Bankruptcy Court.
Upon closing of the sale of the Tennessee Facility contemplated by the
Asset Purchase Agreement between the Company and Republic Financial Corporation
("Republic"), and pursuant to Stipulation and Order of Court entered September
12, 1997 ("Stipulation"), Olin and the Company resolved their disputes on the
following basis. Olin received payment at closing in the amount of $3.22
million. Additionally, the Company and Olin executed mutual releases releasing
any and all other claims or causes of action.
Note 7 - Earnings Per Share:
In the second quarter of fiscal 1998, the Company adopted SFAS No. 128
"Earnings Per Share." As of the nine and three month periods ended March 31,
1998 and 1997, all outstanding options and warrants would have had an
antidilutive impact on the calculation of earnings per share. Therefore, the
basic and diluted weighted average shares outstanding are the same.
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Note 8 - Goodwill:
In the second quarter of fiscal 1998, the Company's subsidiary, Projex,
Inc., purchased all outstanding shares of stock held by minority shareholders.
As a result, the Company is now the sole owner of Projex, Inc. The amount paid
to the minority shareholders in excess of minority interest totaled
approximately $36,000. In the third quarter of fiscal 1998, Projex, Inc. ceased
operations, and, therefore, the above-mentioned goodwill has been written off.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a development stage company and is principally engaged in
developing, testing and marketing the NOXSO Process. The NOXSO Process is an
advanced flue-gas treatment technology that simultaneously removes pollutants
(sulfur dioxide (SO2) and nitrogen oxides (NOx)) linked to both acid rain and
ground level ozone from flue gas generated by coal-fired boilers. The removed
SO2 is converted into a saleable sulfur by-product; the removed NOx is converted
to nitrogen and oxygen and released to the atmosphere.
The Company is presently operating as a debtor-in-possession in a
bankruptcy proceeding before the United States Bankruptcy Court in the Eastern
District of Tennessee (the "Bankruptcy Court"). Pursuant to an order of the
Bankruptcy Court, the Company has the exclusive right to file a plan of
reorganization until June 15, 1998.
The Company has identified two principal elements in its plan to emerge
from bankruptcy: the sale of its liquid sulfur dioxide production facility
located in Charleston, Tennessee (the "Tennessee Facility") and organizing a
project for the commercial demonstration of the NOXSO Process.
Liquidity and Capital Resources
Historical Overview
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
commercially demonstrate the NOXSO Process at Alcoa's Warrick Generating Station
in Newburgh, Indiana (the "Alcoa Project") and (ii) the construction of the
Tennessee Facility at a plant operated by Olin Corporation ("Olin") 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, Inc. ("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.
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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 a 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 the U. S. Department of Energy,
to repay DOE for all funds provided by DOE for the Tennessee Facility, plus
interest, calculated pursuant to a formula contained in the agreement, from
November 1, 1996. DOE has filed a proof of claim as an unsecured creditor in the
amount of approximately $15 million in the Company's bankruptcy proceedings. The
Company is currently engaged in discussions with DOE regarding DOE's approval of
funding for a portion of construction costs under the Company's new Host Site
Agreement, discussed below, as well as the nature, extent and method of
repayment of DOE's claim.
Bankruptcy Proceedings
On February 6, 1997, Olin and two of the Company's suppliers filed an
involuntary petition in bankruptcy against the Company in the United States
Bankruptcy Court in the Eastern District of Tennessee (the "Bankruptcy Court").
On June 4, 1997, the Company (i) consented to the jurisdiction of the Bankruptcy
Court and was adjudicated bankrupt and (ii) converted the bankruptcy to a
proceeding under Chapter 11 of the Bankruptcy Code (case no. 97-10709). The
Company is presently operating as a debtor-in-possession in the proceeding. The
litigation described above brought by the Company against Olin was transferred
to the jurisdiction of the Bankruptcy Court.
Sale of Tennessee Facility
On December 31, 1997, the Company completed the sale of the Tennessee
Facility, which does not utilize the NOXSO Process, to an affiliate of Republic
Financial Corporation for $11 million.
Approximately $9 million of the proceeds from the sale of the Tennessee
Facility has been used to retire claims of creditors of the Company holding
liens on the Tennessee Facility and to pay administrative expenses. In
connection with the closing of the sale of the Tennessee Facility and the
application of the proceeds thereof, the claims of Olin and Praxair against the
Company were extinguished, and the litigation between Olin and the Company was
terminated. Various claims made against the Company in the bankruptcy proceeding
which were not secured by the Tennessee Facility remain outstanding and, except
for post-petition claims, it is unlikely that a substantial portion of these
claims will be paid with the remaining proceeds from the sale of the Tennessee
Facility. Other than the claims of Calabrian Corporation (see Part II, Item 1)
and the
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DOE, discussed above, the claims of the Company's creditors that remain unpaid
as of the date hereof are those of the Company's priority and nonpriority
unsecured creditors. Other than the claims of Calabrian and DOE, unsecured
priority and nonpriority claims total approximately $6,000,000. The Company
expects to file objections to approximately $3,500,000 of those unsecured
prepetition claims. With respect to the claim of the DOE, as indicated above,
the Company is currently engaged in discussions with DOE regarding DOE's
approval of funding for a portion of construction costs under the Company's new
Host Site Agreement, discussed below, as well as the nature, extent and method
of repayment of DOE's claim.
The Company will use a portion of the remaining proceeds from the sale of
the Tennessee Facility to pay its operating expenses while it continues in its
efforts to emerge from bankruptcy, including, in particular, obtaining the
funding and approvals needed to build and operate a commercial demonstration of
the NOXSO Process pursuant to the Host Site Agreement discussed below.
Execution of Host Site Agreement
On January 5, 1998, the Company signed a Host Site Agreement (the "Host
Site Agreement") with Richmond Power & Light ("RPL") to demonstrate the first
commercial-sized installation of the NOXSO Process. RPL is a municipally owned
electric generation and transmission organization serving the Richmond, Indiana
area. The NOXSO plant will be constructed at RPL's Whitewater Valley Station
located in Richmond, Indiana, and will treat all of the flue gas from a
33-megawatt electric generating unit.
With execution of the Host Site Agreement, the Company is requesting
approval by the DOE of the new project site and funding plan. DOE had previously
approved funding for the Alcoa Project. If DOE approval is obtained, this
project would be part of the DOE's Clean Coal Technology Program that provides
up to 50% project funding.
The design, construction and two-year demonstration is budgeted at
approximately $30 million. In addition to DOE and RPL, outside funding will be
requested by the Company and RPL from research organizations, state agencies and
other interested parties. The Company is currently seeking to secure
approximately $10 to $12 million to complete the financing package, as well as
an additional $2 million to $3 million anticipated to be needed for working
capital during the design and construction period, through a combination of new
equity and/or debt plus the aforementioned outside funding. In addition to DOE
approval and a complete financing package, other conditions that must be met for
the project to proceed with detailed engineering and construction include
obtaining environmental and construction permits.
Subject to satisfying all conditions, construction of the NOXSO
installation at RPL is scheduled to begin in the summer of 1999 with startup in
the summer of 2000.
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If the project proceeds through the start-up phase, the Host Site Agreement
provides that, during a two-year demonstration period (the "Demonstration
Period"), the Company will own all SO2 allowances ("SO2 Allowances"), and the
Company and RPL will each own one half of the NOx allowances ("NOx Allowances"),
if any, generated by the operation of the plant with the facilities for the
operation of the NOXSO Process (the "Project Facilities") as compared to those
generated by the operation of the plant without such facilities. The Company
also has the option to receive from RPL the cash value of such Allowances. Under
the SO2 Allowance program established under the federal Clean Air Act, each
generator receives SO2 Allowances at the beginning of each year, which, when
used, allow it to generate one ton of SO2 emissions during the year of use. To
the extent a generator does not expend such SO2 Allowances in a year, they can
be banked. Banked SO2 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. SO2 Allowances
can also be sold for use by others to enable them to emit SO2. The EPA has not
adopted a national program for NOx Allowances similar to the SO2 Allowances
program, but has recommended, in proposed regulations under Title I of the Clean
Air Act, that states adopt NOx Allowance programs. While certain states have
adopted NOx Allowance programs, Indiana has not to date adopted such a program.
At the end of the Demonstration Period, or upon the earlier termination of
the Host Site Agreement in accordance with its terms, the Company is obligated
to remove the Project Facilities. In lieu of requiring removal of the Project
Facilities at the end of the Demonstration Period, RPL has the option to
purchase the Project Facilities at an agreed-upon price.
Debtor-in-Possession Financing
Pursuant to an agreement for debtor-in-possession financing with certain
lenders (collectively, the "Interim Lenders"), in June 1997, the Interim Lenders
loaned 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").
Pursuant to an arrangement with another group of lenders (the "DIP
Lenders"), the DIP Lenders loaned $600,000 to the Company, and the Company
issued 300,000 shares of Common Stock to the DIP Lenders. The Company also
granted to the DIP Lenders a first priority lien in certain of the Company's
patents and laboratory equipment. The loans from the DIP Lenders bore interest
at the rate of 20% per annum. Interest for a one-year period (one-half of which
was to be refunded to the extent not earned ) and a 5% origination fee was paid
from proceeds.
In February and March 1998, the loans made by the DIP Lenders and the
Interim Lenders were repaid early. As a result, a portion of the prepaid
interest and principal (a total of approximately $43,600) was forgiven and was
classified as gain on early extinguishment of debt.
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In December 1997, the Company borrowed an additional $90,000, which was
repaid when the Tennessee Facility was sold, together with interest equal to 1%
of the principal amount loaned. The loans were made to the Company as follows:
$32,500 from Robert M. Long, a director of the Company; $10,000 from John
Toedtman, a director of the Company; $22,500 from Edwin J. Kilpela, the Chief
Executive Officer and a director of the Company; and $25,000 from a financial
advisor to the Company. In connection with the loans and as authorized by the
Bankruptcy Court, the Company issued one share of its Common Stock for each
$3.00 of principal loaned to the Company. Mr. Kilpela waived any right he had to
receive such shares. As a result, the Company issued 22,500 shares of its Common
Stock in connection with the financing.
Project Funding Needs
The consummation of the sale of the Tennessee Facility constituted the
completion of one of the elements of the Company's plan to emerge from
bankruptcy. Execution of the Host Site Agreement is a significant step toward
the completion of the second element, that is, organizing a project for the
commercial demonstration of the NOXSO Process. However, in order to complete
such a commercial demonstration, the Company must, among other things, obtain
the consent of the DOE to utilize DOE funding at the new project site, as well
as raise $10 million to $12 million in additional equity and/or debt financing
for construction of the facility, and an additional $2 million to $3 million
anticipated to be needed for working capital during the design and construction
period. No source has been identified for such additional financing. If the
Company is unable to accomplish these 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.
Results of Operations
Inception to March 31, 1998
Except for $2.68 million of sulfur dioxide processing revenue which the
Company received from the operation of the Tennessee Facility (of which $1.8
million was received during the nine months ended March 31, 1998), the Company
has not derived any significant revenues from operations. Substantially all of
the Company's other revenues to date have consisted of research funding,
government grants, reimbursement of project costs and interest income,
aggregating $8.46 million through March 31, 1998. The Company also recognized
$0.77 million in gain on the sale of the Tennessee Facility during the nine
months ended March 31, 1998. Because of the sale of the Tennessee Facility on
December 31, 1997, the Company will not receive additional operating revenue
from the processing of sulfur dioxide at the Tennessee Facility and does not
presently have any other source of revenue from operations.
As a result of the significant expenses incurred from inception through
March 31, 1998 in connection with the acquisition, development and testing the
NOXSO Process, as well as general
21
<PAGE>
and administrative expenses that have been incurred, the Company had an
accumulated deficit of $18.6 million at March 31, 1998. Since inception through
March 31, 1998, the Company's total costs and expenses were $31.0 million,
including $9.0 million relating to salaries and benefits. For the nine months
ended March 31, 1998, the Company's costs and expenses also included $0.46
million in sulfur dioxide processing costs. As a result of the sale of the
Tennessee Facility, the Company will not incur such costs after December 31,
1997.
Three and Nine Months Ended March 31, 1998 Compared to Three and Nine Months
Ended March 31, 1997
Total funding and other revenue for the three and nine months ended March
31, 1998, were zero and $2.63 million, respectively, compared to $.06 million
and $.47 million, respectively, for the three and nine months ended March 31,
1997. As to the nine-month periods, these differences resulted primarily from
(i) the fact that the Tennessee Facility was operational during the first six
months of the 1998 fiscal year, so that the Company received $1.82 million in
sulfur dioxide processing revenue during nine months ended March 31, 1998 and
(ii) the recognition of $0.77 million in gain on the sale of the Tennessee
Facility during the nine months ended March 31, 1998. As indicated above,
because of the sale of the Tennessee Facility, the Company will not receive
sulfur dioxide processing revenue after December 31, 1997.
Total costs and expenses for the three and nine months ended March 31, 1998
were $.75 million and $3.41 million, respectively, compared with $1.73 million
and $4.78 million, respectively, for the same periods in 1997. A number of
elements of costs and expenses increased during the three and nine months ended
March 31, 1998 as compared to the same periods in 1997. Depreciation and
amortization increased by $.04 million and $.71 million, respectively, during
the three and nine month periods ended March 31, 1998 as compared to the same
periods in 1997 because the Tennessee Facility was completed and was classified
as plant and was accordingly being depreciated. The Company also incurred $0.46
million in sulfur dioxide processing costs during the nine months ended March
31, 1998. The Company will no longer incur depreciation and amortization costs
or sulfur dioxide processing costs relating to the Tennessee Facility because of
the sale of the Tennessee Facility in December 1997. In addition, during the
nine months ended March 31, 1998, the Company recognized a $0.48 million loss on
impairment of asset related to the Tennessee Facility. The Company also incurred
$.18 million and $.69 million, respectively, in professional fees during the
three and nine months ended March 31, 1998 as compared to zero and $.11 million,
respectively during the three and nine months ended March 31, 1997. Because of
the termination of the Alcoa Project Agreement, costs relating to the Alcoa
Project can no longer be capitalized, and the write-off of $.12 million and
$2.05 million of such costs was reflected during the three and nine months ended
March 31, 1998, and as a result the Company's costs and expenses decreased
during the three and nine months ended March 31, 1998, as compared to the same
periods during 1997.
22
<PAGE>
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.
This litigation, which had been stayed as a result of the pendency of the
Company's bankruptcy proceeding, has now been transferred to the Bankruptcy
Court.
23
<PAGE>
Additionally, in October, 1997, Calabrian filed a proof of claim in the
Bankruptcy Court which raises the same claims which are contained in the Texas
litigation together with additional claims related to the Tennessee Facility.
In May, 1998, the Company and Calabrian filed a motion to resolve all
outstanding issues between them. This settlement provides for mutual releases,
the dismissal of the Texas litigation and withdrawal with prejudice of the
Calabrian proof of claim. No money will be paid by either party. A hearing on
the motion has not been scheduled for June 18, 1998.
Olin Litigation
See Part II, Item 1 of the Company's Quarterly Reports on Form 10-Q for the
periods ended September 30, 1997 and December 31, 1997 for a description of the
litigation between the Company and Olin Corporation ("Olin").
Bankruptcy Proceedings
On February 6, 1997, Olin, FRU-CON Construction Company and Industrial
Rubber & Safety Products, Inc., filed an involuntary petition in bankruptcy
against the Company in the United States Bankruptcy Court in the Eastern
District of Tennessee. On June 4, 1997, the Company (i) consented to the
jurisdiction of the Court and was adjudicated bankrupt and (ii) converted the
bankruptcy to a proceeding under Chapter 11 of the Bankruptcy Code (case no. 97-
10709). The Company is presently operating as a debtor-in-possession in the
proceeding.
All of the Company's secured claims were paid from the closing on the sale
of the Tennessee Facility. The claims of the Company's creditors which remain
unpaid as of the date hereof are those of the Company's prepetition priority and
nonpriority unsecured creditors. Other than the claims of Calabrian (see
"Calabrian Litigation" above) and the DOE (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Historical Overview"), unsecured priority and nonpriority
claims total approximately $6,000,000. The Company expects to file objections to
approximately $3,500,000 of those unsecured prepetition claims.
Item 2. Changes in Securities
During the three months ended March 31, 1998, the Company issued 400,000
shares of Common Stock on exercise of outstanding warrants. These shares were
issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports - On January 15, 1998, the Company filed a Current Report on
Form 8-K reporting the sale of the Tennessee Facility, the execution of the Host
Site Agreement, the securing of additional debtor-in-possession financing and
the extension of the Company's exclusive time to file a plan of reorganization.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOXSO Corporation
---------------------------------------
Registrant
By: /s/ Edwin J. Kilpela
----------------------------------
Edwin J. Kilpela, President
(On behalf of the Registrant)
By: /s/ John L. Haslbeck
----------------------------------
John L. Haslbeck, Treasurer
Dated: May 14, 1998
26
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