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 December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file No. 0-17454
NOXSO CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1118334
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
2414 Lytle Road 15102
Bethel Park, PA Zip Code
Address of principal executive offices
Registrant's telephone number,
including area code: (412) 854-1200
Not Applicable
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1998
Common stock, $.01 par value 15,022,051
1
<PAGE>
NOXSO CORPORATION
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION 3
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997
(Unaudited) and June 30, 1997 (Audited) 3
Consolidated Statements of Operations for the Cumulative
Period from Inception to December 31, 1997
(Unaudited) and for the three and six months ended
December 31, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Changes in Stockholders'
Equity for the Cumulative Period from Inception to
December 31, 1997 (Unaudited) 5
Consolidated Statements of Cash Flows for the Cumulative
Period from Inception to December 31, 1997 and for
the six months ended December 31, 1997
and 1996 (Unaudited) 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II. OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
NOXSO CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1997 1997
------------ ------------
CURRENT ASSETS: (Unaudited) (Audited)
<S> <C> <C>
Cash and equivalents $ 708,455 $ 47,470
Restricted cash 1,275,881 --
Bank certificate of deposit -- 1,000,000
Accounts receivable 14,146 65,760
Prepaid expenses and other current assets 350,129 99,778
------------ ------------
Total Current Assets 2,348,611 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 (433,282) (1,083,038)
------------ ------------
61,390 10,959,470
------------ ------------
Goodwill 35,783 --
Deposits 4,308 4,308
------------ ------------
Total Assets $ 2,450,092 $ 12,176,786
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE
Notes payable $ -- $ 2,922,500
Long-term debt 645,276 --
Accounts payable 132,330 5,475,428
Accrued compensation 11,342 26,021
Deferred income taxes 141,240 120,294
Other current liabilities 102,886 578,055
Minority interest in consolidated subsidiary -- 24,300
------------ ------------
Total Liabilities Not Subject to Compromise 1,033,074 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 and outstanding 14,983,468 shares
and 11,264,740 shares, respectively 147,836 110,649
Paid-in capital 16,815,569 16,349,532
Deficit accumulated during the development stage (17,922,925) (17,893,374)
------------ ------------
(959,520) (1,433,193)
Less: Cost of 2,985 shares of common stock held in treasury (25,000) (25,000)
------------ ------------
Total Stockholders' Equity (Deficit) (984,520) (1,458,193)
------------ ------------
Total Liabilities and Stockholders' Equity $ 2,450,092 $ 12,176,786
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NOXSO CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Date of December 31,
Inception, -----------------------------
August 28, 1979,
to Dec. 31, 1997 1997 1996
---------------- ------------ ------------
<S> <C> <C> <C>
COSTS AND EXPENSES:
Purchase of NOXSO Process $ 260,625 $ -- $ --
Contract development-concept testing 1,169,759 -- --
Contract development-demonstration plant 1,727,715 -- --
Designing, drafting and consulting 1,122,653 -- 7,490
Supplies, instruments and equipment 2,002,894 10,607 18,255
Depreciation and amortization 1,892,207 669,997 21,476
Other research and development 386,309 -- --
Salaries and benefits 8,759,574 299,048 194,540
Professional fees 2,357,052 511,932 105,281
Rent 701,500 76,839 49,009
Income tax expense 139,940 23,207 82,087
Other general administrative 3,922,601 128,029 631,282
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 -- 1,932,482
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 30,252,280 2,656,521 3,041,902
------------ ------------ ------------
LESS FUNDING AND OTHER:
Funding of research agreement 1,200,000 -- --
Reimbursement of project costs 5,022,007 29,976 89,552
Government grant 1,128,020 -- --
Sulfur dioxide processing revenue 2,680,810 1,816,870 --
Interest income 1,104,896 8,590 30,815
Gain on sale of assets 771,534 771,534 --
Other 470,345 -- 285,708
------------ ------------ ------------
TOTAL FUNDING AND OTHER 12,354,222 2,626,970 406,075
------------ ------------ ------------
Minority interest in net income of consolidated subsidiary 23,700 -- 25,895
NET (LOSS) INCOME $(17,921,758) $ (29,551) $ (2,661,722)
============ ============ ============
(LOSS) INCOME PER COMMON SHARE:
Basic $ -- $ (.27)
============ ============
Average number of shares outstanding - basic 13,136,726 9,868,310
============ ============
Diluted $ -- $ (.27)
============ ============
Average number of shares outstanding - diluted 13,136,726 9,868,310
============ ============
<CAPTION>
Three Months Ended
December 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
COSTS AND EXPENSES:
Purchase of NOXSO Process $ -- $ --
Contract development-concept testing -- --
Contract development-demonstration plant -- --
Designing, drafting and consulting -- 5,375
Supplies, instruments and equipment 4,563 10,499
Depreciation and amortization 335,201 8,518
Other research and development -- --
Salaries and benefits 159,719 101,891
Professional fees 511,932 90,459
Rent 38,434 24,872
Income tax expense 23,207 35,222
Other general administrative 62,908 486,160
Sulfur dioxide processing costs -- --
Loss on impairment of asset -- --
ALCOA Project Expense -- 1,932,482
------------ ------------
TOTAL COSTS AND EXPENSES 1,135,964 2,695,478
------------ ------------
LESS FUNDING AND OTHER:
Funding of research agreement -- --
Reimbursement of project costs 12,773 18,437
Government grant -- --
Sulfur dioxide processing revenue 868,560 --
Interest income -- 11,922
Gain on sale of assets 771,534 --
Other -- 169,192
------------ ------------
TOTAL FUNDING AND OTHER 1,652,867 199,551
------------ ------------
Minority interest in net income of consolidated subsidiary -- 23,132
NET (LOSS) INCOME $ 516,903 $ (2,519,059)
============ ============
(LOSS) INCOME PER COMMON SHARE:
Basic $ .04 $ (.26)
============ ============
Average number of shares outstanding - basic 12,640,155 9,722,019
============ ============
Diluted $ .04 $ (.26)
============ ============
Average number of shares outstanding - diluted 12,640,155 9,722,019
============ ============
</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 DECEMBER 31, 1997
<TABLE>
<CAPTION>
Stockholders' Equity
------------------------------------------------------------------
Consideration Common Stock
----------------------- --------------------- ----------
Per Shares Par Paid-in
Share Total Issued Value Capital
--------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994:
1979 - Issuance of Common Stock $ .005 $ 600(1) 120,000 $ 1,200 $ (600)
1980 - Issuance of Common Stock .563 956,250(2) 1,700,000 17,000 791,382
1980 - Issuance of Warrants -- 850(3) -- -- 850
1983 - Issuance of Common Stock .2813 28,125(4) 100,000 1,000 27,125
1986 - Issuance of Common Stock .125 155,000(1) 1,240,000 12,400 142,600
1986 - Issuance of Common Stock .125 32,500(5) 260,000 2,600 29,900
1987 - Issuance of Common Stock .50 134,000(1) 268,000 2,680 131,320
1987 - Issuance of Common Stock .50 42,900(5) 85,800 858 42,042
1988 - Issuance of Stock Option 250,000(6) -- -- 250,000
1989 - Issuance of Common Stock .675 27,000(7) 40,000 400 26,600
1989 - Issuance of Common Stock .50 147,500(8) 295,000 2,950 144,550
1989 - Issuance of Common Stock 2.50 4,000,000(2) 1,600,000 16,000 3,174,721
1989 - Issuance of Warrants 80(3) -- -- 80
1991 - Issuance of Common Stock 1.129 569,464(9) 504,620 5,046 564,418
1991 - Issuance of Common Stock .675 27,000(7) 40,000 400 26,600
1991 - Issuance of Common Stock .675 27,000(9) 40,000 400 26,600
1992 - Issuance of Common Stock 1.129 683,356(9) 605,544 6,056 677,300
1992 - Issuance of Common Stock 7.50 2,000,000(1) 266,666 2,666 1,997,334
1992 - Issuance of Common Stock 2.75 5,500(9) 2,000 20 5,480
<CAPTION>
Stockholders' Equity
-------------------------------------------------------
Deficit
Accumulated Notes
During Receivable for
Development Treasury Purchase of
Stage Stock Common Stock Total
----------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994:
1979 - Issuance of Common Stock $ -- $ -- $ -- $ 600
1980 - Issuance of Common Stock -- -- -- 808,382
1980 - Issuance of Warrants -- -- -- 850
1983 - Issuance of Common Stock -- -- -- 28,125
1986 - Issuance of Common Stock -- -- -- 155,000
1986 - Issuance of Common Stock -- -- -- 32,500
1987 - Issuance of Common Stock -- -- -- 134,000
1987 - Issuance of Common Stock -- -- -- 42,900
1988 - Issuance of Stock Option -- -- -- 250,000
1989 - Issuance of Common Stock -- -- (27,000) --
1989 - Issuance of Common Stock -- -- (30,000) 117,500
1989 - Issuance of Common Stock -- -- -- 3,190,721
1989 - Issuance of Warrants -- -- -- 80
1991 - Issuance of Common Stock -- -- -- 569,464
1991 - Issuance of Common Stock -- -- (27,000) --
1991 - Issuance of Common Stock -- -- -- 27,000
1992 - Issuance of Common Stock -- -- -- 683,356
1992 - Issuance of Common Stock -- -- -- 2,000,000
1992 - Issuance of Common Stock -- -- -- 5,500
</TABLE>
(1) Sale of common stock for cash.
(2) Proceeds of public offering.
(3) Sale of warrants for cash.
(4) Value assigned to common stock issued in connection with purchase of NOXSO
Process.
(5) Value assigned to common stock issued for compensation and services.
(6) Sale of common stock option.
(7) Stock issued in connection with exercise of common stock warrants and
options for notes receivable.
(8) Stock issued in connection with exercise of common stock purchase warrants
for $117,500 cash and a $30,000 note receivable.
(9) Stock issued in connection with exercise of common stock option agreements.
(10) Stock issued in connection with exercise of common stock warrant
agreements.
(11) Stock issued in exchange for warrant.
See accompanying notes to consolidated financial statements.
5
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION, TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Stockholders' Equity
----------------------------------------------------------------------
Consideration Common Stock
---------------------- -------------------------------------------
Per Shares Par Paid-in
Share Total Issued Value Capital
--------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994: (CONTINUED)
1992 - Issuance of Common Stock $ 2.00 $ 69,124(10) 34,562 $ 346 $ 68,778
1992 - Issuance of Common Stock (11) 116,500 1,165 --
1992 - Satisfaction of notes receivable -- -- --
1993 - Issuance of Common Stock 1.129 683,356(9) 605,544 6,056 677,300
1993 - Issuance of Common Stock 2.04 26,260(9) 12,866 129 26,131
1993 - Issuance of Common Stock .50 50,000 500 24,500
1993 - Acquisition of Common Stock for treasury -- -- --
1993 - Satisfaction of notes receivable -- -- --
1993 - Issuance of Common Stock 5.00 2,594,115(16) 571,250 5,712 2,588,403
1994 - Issuance of Common Stock 1.129 113,888(9) 100,920 1,009 112,879
1994 - Issuance of Common Stock 2.00 23,624(13) 11,812 118 23,506
Net loss -- -- --
------------ ------------ ------------
BALANCE, JUNE 30, 1994 8,671,084 $ 86,711 $ 11,579,799
============ ============ ============
YEAR ENDED JUNE 30, 1995:
Issuance of Common Stock $ 2.00 $ 47,252(10) 23,626 $ 236 $ 47,016
Issuance of Common Stock 2.75 11,000(9) 4,000 40 10,960
Issuance of Common Stock 3.85 497,500(16) 150,000 1,500 496,000
Issuance of Common Stock 3.56 800,795(16) 250,000 2,500 798,295
Issuance of Common Stock 3.25 325(17) 100 1 324
Net loss -- -- --
------------ ------------ ------------
BALANCE, JUNE 30, 1995 9,098,810 $ 90,988 $ 12,932,394
============ ============ ============
YEAR ENDED JUNE 30, 1996:
Issuance of Common Stock 3.25 81,250(9) 25,000 250 81,000
Issuance of Common Stock 1.91 19,063(9) 10,000 100 18,963
Issuance of Common Stock 3.625 20,845(9) 5,750 58 20,787
Issuance of Common Stock 4.55 409,725(16) 100,000 1,000 408,725
Issuance of Common Stock 4.54 408,375(16) 100,000 1,000 407,375
Issuance of Common Stock 4.56 45,626(9) 10,000 100 45,526
Issuance of Common Stock 3.21 503,209(16) 156,763 1,569 501,640
Issuance of Common Stock 3.425 500,003(16) 145,773 1,458 498,543
Net loss -- -- --
------------ ------------ ------------
BALANCE, JUNE 30, 1996 9,652,096 $ 96,523 $ 5,378,188
============ ============ ============
<CAPTION>
Stockholders' Equity
-------------------------------------------------------
Deficit
Accumulated Notes
During Receivable for
Development Treasury Purchase of
Stage Stock Common Stock Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AUGUST 28, 1979 (INCEPTION) TO JUNE 30, 1994:
1992 - Issuance of Common Stock $ -- $ -- $ -- $ 69,124
1992 - Issuance of Common Stock (1,165) -- -- --
1992 - Satisfaction of notes receivable -- -- 57,000(12) 57,000
1993 - Issuance of Common Stock -- -- -- 683,356
1993 - Issuance of Common Stock -- -- -- 26,260
1993 - Issuance of Common Stock -- -- (25,000) 0
1993 - Acquisition of Common Stock for treasury -- (25,000) 25,000(15) 0
1993 - Satisfaction of notes receivable -- -- 27,000(14) 27,000
1993 - Issuance of Common Stock -- -- -- 2,594,115
1994 - Issuance of Common Stock -- -- -- 113,888
1994 - Issuance of Common Stock -- -- -- 23,624
Net loss (9,727,095) -- -- (9,727,095)
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1994 $ (9,727,095) $ (25,000) $ -- $ 1,914,415
============ ============ ============ ============
YEAR ENDED JUNE 30, 1995:
Issuance of Common Stock $ -- $ -- $ -- $ 47,252
Issuance of Common Stock -- -- -- 11,000
Issuance of Common Stock -- -- -- 497,500
Issuance of Common Stock -- -- -- 800,795
Issuance of Common Stock -- -- -- 325
Net loss (1,931,657) -- -- (1,760,658)
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1995 $(11,487,753) $ (25,000) $ -- $ 1,510,629
============ ============ ============ ============
YEAR ENDED JUNE 30, 1996:
Issuance of Common Stock -- -- -- 81,250
Issuance of Common Stock -- -- -- 19,063
Issuance of Common Stock -- -- -- 20,845
Issuance of Common Stock -- -- -- 409,725
Issuance of Common Stock -- -- -- 408,375
Issuance of Common Stock -- -- -- 45,626
Issuance of Common Stock -- -- -- 503,209
Issuance of Common Stock -- -- -- 500,001
Net loss (394,269) -- -- (394,269)
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1996 $ (3,278,694) $ (25,000) $ -- $ 3,104,454
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 28, 1979, DATE OF INCEPTION, TO DECEMBER 31, 1997
(continued)
<TABLE>
<CAPTION>
Stockholders' Equity
----------------------------------------------------------------------------------
Consideration Common Stock
------------------------- ------------------------------ ------------
Per Shares Par Paid-in
Share Total Issued Value Capital
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997:
Issuance of Common Stock $ 3.63 $ 27,186(9) 7,500 $ 75 $ 27,111
Issuance of Common Stock 1.50 945,500(16) 630,333 6,303 939,197
Issuance of Common Stock 0.00 -- (16) 200,000 -- --
Issuance of Common Stock 0.26 40,000(17) 154,811 1,548 38,452
Issuance of Common Stock 0.25 100,000(16) 400,000 4,000 96,000
Issuance of Common Stock 0.63 43,750(18) 70,000 700 43,050
Issuance of Common Stock 0.00 1,500(19) 150,000 1,500 --
Deferred Debt Discount -- -- 290,769
Net loss -- -- --
---------- ---------- ------------
BALANCE, JUNE 30, 1997 11,264,740 $ 110,649 $ 16,349,532
========== ========== ============
SIX MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED):
Issuance of Common Stock 0.15 150,000(17) 973,203 9,732 140,268
Issuance of Common Stock 0.13 150,000(17) 1,142,857 11,429 138,571
Issuance of Common Stock 0.16 200,000(17) 1,280,171 12,802 187,198
Issuance of Common Stock 0.00 1,000(19) 100,000 1,000 --
Issuance of Common Stock 0.00 1,000(19) 100,000 1,000 --
Issuance of Common Stock 0.00 167(19) 16,666 167 --
Issuance of Common Stock 0.00 417(19) 41,666 417 --
Issuance of Common Stock 0.00 333(19) 33,333 333 --
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 --
Net loss -- -- --
---------- ---------- ------------
BALANCE, DECEMBER 31, 1997 (UNAUDITED) 14,983,468 $ 147,836 $ 16,815,569
========== ========== ============
<CAPTION>
Stockholders' Equity
--------------------------------------------------------------------
Deficit
Accumulated Notes
During Receivable for
Development Treasury Purchase of
Stage Stock Common Stock Total
------------ ---------- ------------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997:
Issuance of Common Stock $ -- $ -- $ -- $ 27,186
Issuance of Common Stock -- -- -- 945,500
Issuance of Common Stock -- -- -- 0
Issuance of Common Stock -- -- -- 40,000
Issuance of Common Stock -- -- -- 100,000
Issuance of Common Stock -- -- -- 43,750
Issuance of Common Stock -- -- -- 1,500
Deferred Debt Discount -- -- -- 290,769
Net loss (6,011,352) -- -- (6,011,352)
------------ --------- ------------ ------------
BALANCE, JUNE 30, 1997 $(17,893,374) $ (25,000) $ -- $ (1,458,193)
============ ========= ============ ============
SIX MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED):
Issuance of Common Stock -- -- -- 150,000
Issuance of Common Stock -- -- -- 150,000
Issuance of Common Stock -- -- -- 200,000
Issuance of Common Stock -- -- -- 1,000
Issuance of Common Stock -- -- -- 1,000
Issuance of Common Stock -- -- -- 167
Issuance of Common Stock -- -- -- 417
Issuance of Common Stock -- -- -- 333
Issuance of Common Stock -- -- -- 83
Issuance of Common Stock -- -- -- 108
Issuance of Common Stock -- -- -- 83
Issuance of Common Stock -- -- -- 33
Net loss (29,551) -- -- (29,551)
------------ --------- ------------ ------------
BALANCE, DECEMBER 31, 1997 (UNAUDITED) $(17,922,925) $ (25,000) $ -- $ (984,520)
============ ========= ============ ============
</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
August 28, 1979,
to Six Months Ended December 31,
December -----------------------------
31, 1997 1997 1996
------------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(17,921,758) $ (29,551) $ (2,661,722)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization 1,844,492 669,997 21,609
Amortization of deferred debt discount 290,769 -- --
Minority interest -- 24,300 26,195
Gain on sale of assets (765,782) (771,534) --
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 (14,146) 51,614 1,820,026
Prepaid expenses and other current assets (345,354) (250,351) 2,978
Deposits (4,308) -- --
Liabilities not subject to compromise:
Accounts payable 132,330 (5,343,098) 3,997,639
Accrued compensation 11,342 (14,679) (51,690)
Advanced billings -- -- (1,379,549)
Other current liabilities 495,626 (202,723) 254,274
Liabilities subject to compromise 2,151,537 (2,336,843) 250,000
------------ ------------ ------------
Net cash flows from operating activities $(11,866,468) $ (7,695,717) $ 2,279,760
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of and deposits for property and equipment (13,641,045) -- (3,093,458)
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 $ (3,093,458)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement offering 6,826,408 -- 600,000
Proceeds from line of credit 3,025,000 -- --
Payment of line of credit (3,025,000) (1,000,000) --
Proceeds from commercial loan -- -- 250,000
Proceeds from issuance of common stock 7,760,647 -- --
Proceeds from sales of common stock options and warrants 1,323,095 -- 27,188
Proceeds from satisfaction of notes receivable 27,000 -- --
Proceeds from ALCOA and Olin loans 2,874,000 -- --
Payment of ALCOA loan 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 (90,000) (90,000) --
Net loans to stockholders and officers (4,930) -- --
------------ ------------ ------------
Net cash flows from financing activities $ 16,547,386 $ (2,307,334) $ 877,188
------------ ------------ ------------
NET INCREASE (DECREASE), CASH AND EQUIVALENTS
AND RESTRICTED CASH 1,984,336 1,936,866 63,490
CASH AND EQUIVALENTS, BEGINNING OF PERIOD -- 47,470 464,723
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,984,336 $ 1,984,336 $ 528,213
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 342,369 $ 900 $ 150,803
============ ============ ============
NONCASH FINANCING ACTIVITIES:
Issuance of common stock for notes receivable $ 84,000 $ -- $ --
============ ============ ============
Acquisition of common stock into treasury to satisfy notes receivable $ (25,000) $ -- $ --
============ ============ ============
Issuance of common stock in exchange for warrants $ 1,165 $ -- $ --
============ ============ ============
Compensation in satisfaction of notes receivable $ 57,000 $ -- $ --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
NOXSO CORPORATION (A Development Stage Enterprise)
NOTES TO 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.
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 - On February 11, 1998, the Bankruptcy Court granted
the Motion filed by the Company, with the consent of its unsecured creditors,
extending the time during which the Company has the exclusive right to file a
plan of reorganization until April 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 will seek 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
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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 spring of 1999 with startup in
the spring 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 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 Company to sell the rights to the NOXSO Process in the
bankruptcy proceedings and to liquidate.
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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 approximately $645,000 as of December 31, 1997
owed to certain lenders of debtor-in-possession financing (See Note 5) and the
claims of the Company's prepetition priority and non-priority unsecured
creditors. Approximately $595,000 of the debtor-in-possession financing was
repaid subsequent to December 31, 1997. As a result of this repayment, a portion
of the prepaid interest (a total of approximately $40,000) was refunded.
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 has been recorded as restricted cash on the balance sheet.
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 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).
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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.
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.
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
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the Tennessee Facility to be constructed by the Company for Olin Corporation.
The Tennessee Facility will convert elemental sulfur into liquid sulfur dioxide
for use by Olin under the Olin Agreement. The complaint alleges that the Company
took over direction and supervision of Calabrian's subcontract relating to the
construction of components of the Tennessee Facility, disrupting Calabrian's
plans with respect to the facility and constituting an unlawful interference
with Calabrian's contractual relationships with its subcontractors, and that the
Company defaulted in certain payment obligations to Calabrian under the Purchase
Agreement. The complaint requests damages in the amount of $665,000,
representing the balance of the fee allegedly owed to Calabrian under the
Purchase Agreement, unspecified damages caused Calabrian as a result of the
alleged interference with contract, any additional damages caused Calabrian by
the Company's conduct and an order prohibiting the Company from disclosing to
any third party, other than Olin, any confidential and proprietary information
of Calabrian. The Company has removed the action to the United States District
Court for the Eastern District of Texas, Beaumont Division.
In October 1996, Calabrian amended its complaint to withdraw its request
for a temporary and permanent injunction enjoining the Company from using
Calabrian's technology.
The Company's counsel has advised that it believes the causes of action in
Calabrian's complaint are without merit. The Company has filed an answer and
counterclaim denying the substantive allegations of the complaint and requesting
(i) actual damages caused the Company by Calabrian's abandonment and resulting
breach of its contracts with the Company without cause or justification and for
tortious interference with its contract with Olin, (ii) exemplary damages as a
result of its tortious interference with the Olin contract, (iii) the Company's
legal fees and costs, and (iv) any and all other damages caused the Company by
Calabrian's filing of an action against the Company that is without merit.
This litigation has been stayed as a result of the pendency of the
Company's bankruptcy proceedings. The Company has filed a Motion to Transfer
this litigation to the Bankruptcy Court. A hearing on the Motion has not been
scheduled.
Olin Litigation - In April 1995, the Company and Olin entered into the Olin
Agreement to construct the Tennessee Facility to convert elemental sulfur into
liquid sulfur dioxide. The Tennessee Facility was substantially completed in
January 1997, and the Company and Olin had commenced startup of the Tennessee
Facility in order to cause it to become fully operational. The Company received
notice from Olin, by letter dated January 30, 1997, purporting to terminate the
Olin Agreement as a result of alleged defaults by the Company and claiming that
Olin had the right to take title to the Tennessee Facility. Olin's notice also
claimed that the Company had defaulted on the $1.874 million note (the "Olin
Note") issued in connection with a loan by Olin to the Company as partial
funding for construction of the Tennessee Facility.
On February 4, 1997, the Company sought and was granted a preliminary
injunction against Olin in the Court of Common Pleas of Allegheny County,
Pennsylvania, preventing Olin from (i) terminating the Olin Agreement, (ii)
taking any action in violation of the
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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 six and three month periods ended December 31,
1997 and 1996, 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.
Note 6 - 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, totaling
approximately $36,000, has been recorded as goodwill and will be amortized over
a period of ten years.
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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"). On February 11, 1998, the
Bankruptcy Court granted the motion filed by the Company, with the consent of
its unsecured creditors, extending the time during which the Company has the
exclusive right to file a plan of reorganization until April 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 $50,000 owed to certain lenders of
debtor-in-possession financing (see "Debtor-in-Possession Financing") and the
claims 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 will seek 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 spring of 1999 with startup in
the spring 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 1998, the loans made by the DIP Lenders were repaid early. As a
result, a portion of the prepaid interest (a total of approximately $40,000) was
refunded.
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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 December 31, 1997
Except for $2.7 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 six months ended December 31, 1997), 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 $9.7 million through December 31, 1997. The Company also recognized
$0.77 million in gain on the sale of the Tennessee Facility during the three
months ended December 31, 1997. 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
September 30, 1997 in connection with the acquisition, development and testing
the NOXSO Process, as well as
20
<PAGE>
general and administrative expenses that have been incurred, the Company had an
accumulated deficit of $17.9 million at December 31, 1997. Since inception
through December 31, 1997, the Company's total costs and expenses were $30.3
million, including $8.8 million relating to salaries and benefits. For the six
months ended December 31, 1997, 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 Six Months Ended December 31, 1997 Compared
to Three and Six Months Ended December 31, 1996
Total funding and other revenue for the three and six months ended December
31, 1997, were $1.65 million and $2.63 million, respectively, compared to $0.20
and $0.41 million, respectively, for the three and six months ended December 31,
1996. 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 $0.87 million and $1.82 million, respectively, in
sulfur dioxide processing revenue during the three and six months ended December
31, 1997 and (ii) the recognition of $0.77 million in gain on the sale of the
Tennessee Facility during the three months ended December 31, 1997. 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 six months ended December 31,
1997 were $1.14 million and $2.66 million, respectively, compared with $2.70
million and $3.04 million, respectively, for the same periods in 1996. A number
of elements of costs and expenses increased during the three and six months
ended December 31, 1997 as compared to the same periods in 1996. Depreciation
and amortization increased by $0.65 million and $0.33 million, respectively,
during the three and six month periods ended December 31, 1997 as compared to
the same periods in 1996 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 six months
ended December 31, 1997. 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 six months ended December 31, 1997, the Company recognized
a $0.48 million loss on impairment of asset related to the Tennessee Facility.
The Company also incurred $0.51 million and $0.51 million, respectively, in
professional fees during the three and six months ended December 31, 1997 as
compared to $0.09 million and $0.11 million, respectively during the three and
six months ended December 31, 1996. 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 $1.93 million of such costs was reflected
during the three and six months ended December 31, 1996, and as a result the
Company's costs and expenses decreased during the three and six months ended
December 31, 1997, as compared to the same periods during 1996.
21
<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 has been stayed as a result of the pendency of the
Company's bankruptcy proceedings. The Company has filed a Motion to Transfer
this litigation to the Bankruptcy Court. A hearing on the Motion has not been
scheduled.
22
<PAGE>
Olin Litigation
See Part II, Item 1 of the Company's Quarterly Report Form 10-Q for the
period ended September 30, 1997 for a description of the litigation between the
Company and Olin Corporation ("Olin").
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, at the closing on the Republic sale, the Company and Olin
executed mutual releases releasing any and all other claims or causes of action.
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 $50,000 owed to certain lenders pursuant to
debtor-in-possession financing (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources -
Debtor-in-Possession Financing") and the claims 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 December 31, 1997, the Company issued 30,833
shares of Common Stock in connection with its debtor-in-possession financing.
These shares were issued in reliance on Section 4(2) of the Securities Act of
1933, as amended.
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports - The Company did not file any reports on Form 8-K during the
three months ended December 31, 1997. 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 until February 15, 1998.
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 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: February 13, 1998
25
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