SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: February 28,1996
Commission File Number: 0-7568
TOTH ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0646580
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
HIGHWAY 18--RIVER ROAD, P.O. BOX 250, VACHERIE, LA 70090
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (504) 265-8181
Securities registered pursuant to Section 12(b) of the Act:
NONE
(Title of each class)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
(Title of class)
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 periods
that the registrant was required to file 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 registrant's
classes of common stock, as of the latest practicable date:
Common stock, without par value 35,466,193
Class Outstanding at February 29, 1996
<PAGE>
TOTH ALUMINUM CORPORATION
INDEX TO FORM 10-Q
For The Quarter Ended February 29, 1996
Page
Part I Financial Information
Balance Sheets - February 29, 1996 and August 31, 1995...... 3
Statements of Operations - Six Months
Ended February 29, 1996 and February 28, 1995............... 5
Statements of Cash Flows - Six Months
Ended February 29, 1996 and February 28, 1995............... 6
Notes to Financial Statements............................... 8
Management's Discussion and Analysis of the Financial
Conditions and Results of Operations........................ 15
Part II Other
Information................................................. 20
<PAGE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
COMBINED BALANCE SHEETS (UNAUDITED)
<CAPTION>
February 29, AUGUST 31,
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .................................. $ 10,401 $ 5,051
Accounts receivable-other.............. 10,787 10,787
Prepaid:
Leases .............................
Other............................... ________ ________
Total Current Assets................... 21,188 15,838
Property, Plant and Equipment Net...... 129,772 156,384
OTHER ASSETS
Investments in and Advances to
Armant Partnership Net............. 4,313,900 4,267,350
Patents and Patent Rights (net of
accumulated amortization:.......... 52,793 68,425
_________ _________
Total Other Assets..................... 4,366,693 4,335,775
=========== ===========
TOTAL.................................. $ 4,517,653 $ 4,507,997
<FN>
See notes to financial statement
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 29, AUGUST 31,
1996 1995
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES:
Notes payable-related parties.......... $ 94,370 $ -
Notes payable-bank..................... - -
Notes payable-other ................... 300,000 300,000
Accounts payable:
Trade.............................. 369,400 334,375
Officers and employees............. 157,312 108,062
Accrued salaries ...................... 1,566,032 1,457,032
Accrued expenses ...................... 37,421
Accrued interest payable............... 859,043 732,817
Total current liabilities.............. 3,383,578 2,932,286
DEFERRED CREDIT ....................... 50,000 50,000
Series "A-1" Convertible Promissory Note1
Related Parties
Principal......................... 6,943,385 6,726,150
Accrued interest payable.......... 2,682,672 2,279,103
Non-Related Parties
Principal......................... 5,634,782 5,575,742
Accrued interest payable.......... 3,001,852 2,667,308
Total Series "A-1" Notes.......... 18,262,691 17,248,303
CONVERTIBLE DEBENTURES PAYABLE
(net of discounts, commissions,
and offering costs of $1563........ 20,437 20,437
STOCKHOLDERS' EQUITY:
Common stock - no par value............ 38,258,096 38,258,096
Common stock subscribed................ 20,000 20,000
Paid in capital........................ 164,774 164,774
Deficit accumulated during the
development stage.................. (55,641,923) (54,185,899)
Total stockholders' equity............. (17,199,053) (15,743,029)
TOTAL.................................. $ 4,517,653 $ 4,507,997
</TABLE>
<PAGE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended From Inception
February February February February to February
29, 28, 29, 28, 29,
1996 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C>
COSTS AND EXPENSES:
Research and
Development.......... $ 1,834 $ 4,185 $ 14,675 $ 9,549 7,658,334
Promotional, general
and administrative... 14,200 256,279 20,437 250,040 14,665,796
Interest............. 392,167 197,904 864,339 462,372 9,489,324
Total............ 408,201 458,368 899,451 721,961 31,813,454
OTHER (INCOME) EXPENSE:
Loss in Investment and
Advances to ArmantA..... 13,135,158
Equity in loss
of Armant............ 245,676 10,282,802 556,573 10,376,914 10,693,321
NET LOSS.............. $ 653,877 $10,741,170 $1,456,024 $11,098,875 55,641,923
Loss Per Common Share.. $. 02 $.29 $. 04 $.30
Due to the prolonged delay in attaining the necessary funding, the
company was forced to write down $13,135,158 of its investment and
advances in Armant.
<FN>
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOW
<CAPTION>
Six Months Ended From Inception
February 29, To February 29,
1996 1995 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET LOSS....................... $(1,456,024) $(10,206,122) ($56,641,923)
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and
amortization................ 18,421 2,850 1,047,112
Amortization and write
off of patents.............. 15,632 23,910 395,841
Amortization of prepaid
leases...................... - - 302,424
Amortization of financing
Cost........................ 95,000
Loss on divesture of
Subsidiaries................ 912,586
Loss from joint venture....... 556,573 10,046,492 11,172,442
Other......................... 111,616
Proceeds from royalty
Prepayments................. 172,760
Prepayment of Leases.......... (16,104)
Disposition of property,
Plant, and equipment........ 27,745
CHANGES IN OPERATING ASSETS
AND LIABILITIES:
Increases in accounts
receivable................. (10,787)
Decrease (Increase) in
Prepaid expenses........... (27,371)
Increase in accounts payable
and accrued expenses....... 451,292 216,077 9,604,990
Increase (decrease) in notes
notes payable.............. 485,217 171,395 17,104,065
========= ========= ==============
71,111 201,352 ($ 15,749,604)
</TABLE>
<PAGE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
<CAPTION>
Six Months Ended From Inception
February 29, To February 29,
1996 1995 1996
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Purchase of property, plant
and equipment............. (19,211) (28,375) ($ 1,178,527)
Acquisition of patents...... (443,475)
Investment of Certificates
of Deposit................ (3,995,000)
Cash investment in and
Advances to TACMA......... (1,076,595)
Cash investments in and
advances to Armant........ (46,550) (157,202) (21,565,039)
Write off of Investments and
Cash advance to Armant... 13,135,158
Redemption of Certificates
of Deposit................ 3,995,000
Proceeds from sale of net
Profit interest........... $ 50,000
========= ========= ==============
(65,761) (185,577) ($ 11,078,470)
FINANCING ACTIVITIES:
Stock issued or subscribed
For cash................... 18,481,076
Preferred stock issued
For cash................... 266,400
Proceeds from long term
Obligations................ 1,430,349
Proceeds from warrants
Issued for cash............ 6,236,507
Common stock issuance
cost....................... (166,550)
Issuance of convertible
Debentures................. 1,913,963
Cash received upon
Conversion of debentures
To common stock............ 112,999
Payment of long term
Obligations................ (1,457,071)
- - 26,817,673
INCREASE (DECREASE) IN CASH 5,350 15,775 10,401
CASH BEGINNING OF PERIOD 5,051 16,584
CASH END OF PERIOD 10,401 32,359 10,401
<FN>
See notes to financial statements.
</TABLE>
<PAGE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying condensed financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position of Toth
Aluminum Corporation (the Company) as of February 29, 1996, and the
results of its operations and changes in financial position for the
three months then ended.
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in Form 10-K, dated August 31, 1995.
2. The accompanying financial statements of the Company have been prepared
on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The Company
has incurred net losses from its inception in August 1966 through
February 29, 1996, and August 31, 1995, of $55,641,923 and $54,185,899,
respectively. Although the Company's investees (TACMA and Armant) have
constructed facilities that will employ the Company's patented processes,
TACMA has been inactive and Armant has not achieved continuous commercial
production. The Company has determined that the operating plant of each
investee will require further modifications before commercial production
can be achieved. This will not occur at the TACMA facility unless and until
the Company directs its efforts and resources toward TACMA. No such
activities are currently planned at TACMA.
Expansion of the Armant plant (as discussed in Note 2) should enable
it to achieve continuous production of alumina as well as metal chlorides.
Management believes that the plant constructed by Armant demonstrates that
the production of metal chlorides and aluminum intermediates through the
Company's patented processes is possible and that continuous production
capabilities should enable it to attain profitable operations. The Company
plans to fund its operations through short-term borrowing secured by the
personal assets of the Company's Chairman of the Board. The capital and
operating needs of Armant will be raised through a commercialization
program sponsored by the U.S. Department of Energy "DOE" and/or the
formation of a joint venture partner with Armant. The recoverability
of the Company's investments in and advances to Armant and the
recoverability of the capitalized cost of Armant is dependent on the
investee achieving sufficiently profitable commercial operations, as well
as the Company's ability to raise the funds indicated above to provide
the necessary capital and to support these operations.
The Company is actively evaluating the raw material resources in Western
Canada and attempting to secure the necessary funding to construct a metal
chlorides plant in Canada. The Company intends to fund the capital and
operating needs of the Canadian operation through the formation of a joint
venture with either industrial or venture partners in Canada. Management
believes that a metal chlorides plant in Canada will be of a size to be
commercially viable and will earn a significant profit. The metal chlorides
plant being planned for Canada will have a capacity of 50,000 metric tons
per year (seven times larger than the Armant plant) and will incorporate
all of the process knowledge and proposed modifications resulting from the
operation of the Armant facilities. Should the Company be able to successfully
raise the required funds for either or both the Canadian operation and/or
Armant, then the Company's existence will be assured for the next twelve
months.
The Company's continuation in existence is dependent upon its ability to
generate sufficient cash flow to meet its continuing obligations on a timely
basis, to fund the operating and capital needs of Armant, and to obtain
additional financing as may be required, and ultimately to attain successful
operations. Should the Company be unable to obtain a joint venture
partner(s) for either the Canadian operation or Armant, and/or funding from
the DOE, it may experience significant difficulty raising funds to complete
the required modifications to attain continuous production at Armant.
These factors, among others, may indicate that the Company will be unable
to continue in existence. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amount and classification of liabilities that might
be necessary should the Company be unable to continue in existence.
3. The Company has historically maintained investments in two affiliates,
TACMA and Armant. In November of 1994, WestCAN Chemicals Inc.(WestCAN) was
formed and registered in Alberta, Canada. The Company currently owns 100%
of WestCAN, however the Company's equity position will be diluted as WestCAN
raises the necessary funds to construct a 50,000 metric ton per year metal
chlorides plant in Canada. The Company applies the equity method of
accounting for its investment in Armant and WestCAN. The collectibility
of the advances to and the recovery of the investment depends upon the
affiliate achieving successful commercial operations. The investment
in TACMA was expensed during 1988.
Armant
The Company is general partner in a limited partnership (Armant) formed
in 1982 to construct and operate a metal chlorides plant in Vacherie,
Louisiana. The plant, which through August 31, 1989, has cost approximately
$23 million to construct, has been built on land (the Armant site) owned by
Empresas Lince, S.A., (ELSA), a Central American corporation controlled by
a former member of the Company's Board of Directors.
Under the terms of the original partnership agreement, the Company was
to have a 50% ownership interest in the partnership. In March 1983, the
partnership agreement was revised to provide the Company a 2% ownership
interest and under a separate license agreement, a royalty payment based
on net positive cash flow of the partnership. The license agreement provides
for royalty payments to the Company equal to 29.6% of net positive cash
flow until each limited partnership unit has received $160,000 in cash, at
which time royalty payments increase to 49% of net positive cash flow.
The Company's capital contribution to Armant consisted of certain
improvements to the property, a non-exclusive licensing agreement providing
for Armant's use of the Company's carbo-chlorination processes for producing
metal chlorides, and prepaid leases as described in Note 4.
Contributions to Armant by the limited partners, on the basis of a single
limited partnership unit, consisted of $25,000 in initial cash deposits,
$75,000 in cash to be paid in equal monthly installments of $5,000 and
either a $60,000 letter of credit or the purchase of $60,000 of the Company's
restricted common stock. Armant has received subscriptions for all thirty-five
limited partnership units. At August 31, 1984, Armant had received cash
contributions of approximately $3,459,000. The Chairman of the Company's
Board of Directors holds fifteen of the thirty-five units.
During November 1984, the Company loaned $3,995,000 to Armant, resulting
in the Company now having a receivable from Armant in the amount of $3,995,000
bearing interest at 13.5% per annum. As of August 31, 1989 the Company had
made additional cash advances to the Armant Partnership totaling $17,409,000,
bearing interest at 12% per annum. The Company has also liquidated $240,000
of Armant's notes payable plus accrued interest due to a corporation controlled
by a member of the Company's Board of Directors by issuing 240,000 shares of
the Company's restricted common stock. As a result the Company recorded a
receivable from Armant of $276,000 bearing interest at 12% per annum. The
Company had additional non-interest bearing receivables from Armant totaling
$173,000 which were incurred in fiscal 1984, resulting from billing under a
service agreement. Subsequent to that date all costs, including general and
administrative cost, incurred by the Company related to the construction
and operation of the Armant Plant, have been absorbed by the Company and
expensed as incurred. As of August 31, 1995, the Company has guaranteed
nearly $1,400,000 of Armant's bank debt plus accrued interest.
The initial phase of construction of the Armant Plant was completed in
December 1983. Since that time, numerous test runs have been performed in
an effort to achieve continuous commercial production of market grade metal
chlorides. Subsequent to the Company's 1986 fiscal year end, Armant determined
additional funding would be required to sustain successful operations.
Therefore, because of unexpected construction delays and the continued lack of
commercial production at Armant, the Company elected to discontinue accruing
interest income on the Armant receivable and reversed, in the fourth quarter
of fiscal year 1986, all interest income previously accrued which totaled
$1,164,000 of which $551,000 was accrued through August 31, 1986.
Further, Armant elected to discontinue capitalizing plant start-up costs.
The net loss recognized by Armant during the year ended August 31, 1987,
which primarily resulted from expensing start-up costs, was first allocated
to the partners' equity accounts based upon their respective percentage
interests in the total partnership equity. To the extent that this loss
exceeded the total limited partners' equity, all additional losses were
allocated to the Company's equity interest in the partnership, since the
Company is the sole general partner in the limited partnership and is at
risk for these losses in the form of advances to Armant.
During Armant's operation from 1983 to 1989, there were 57 test runs
conducted 57. As a result of these test runs Armant has been able to
successfully produce approximately 550,000 pounds of crude aluminum
trichloride and has purified approximately 220,000 pounds and sold
approximately 122,000 pounds of purified aluminum chloride. In addition
Armant has sold approximately 46,000 pounds of silicon tetrachloride
(commonly referred to as silicon chloride).
After an extensive revaluation of the Armant Partnership, Management
determined that the cost capitalized and deferred must be written down
in accordance with Generally Accepted Accounting Practices. Although the
Company believes the Armant Plant will ultimately achieve production, the
prolonged delays in attaining the needed capital to restart the Armant
Plant has forced the Company to write down $17,324,000 in capitalized costs.
Costs capitalized and deferred by Armant consisted of the following:
February 29, August 31,
1996 1995
Direct carbo-chlorination plant costs:
Process equipment................ $ 4,135,000 $ 6,846,000
Other equipment.................. - 50,000
Leasehold improvements........... 125,000 200,000
--------- ---------
4,260,000 7,096,000
Self-construction and start-up costs:
Salaries:
Engineering .................. 400,000 508,000
Plant construction and
operations.................... 2,100,000 3,214,000
Indirect labor and overhead... 425,000 585,000
--------- ---------
2,925,000 4,307,000
Related costs:
Plant operations............... - -
Direct and indirect plant and
material costs................. - -
Technical outside services..... - -
Other.......................... - -
- -
Interest costs:
Payable to Toth Aluminum
Corporation.................... - -
Other.......................... - -
- -
============= ============
$ 7,185,000 $ 11,403,000
Presented below is summarized financial information of Armant. Beginning
September 1, 1986, Armant elected to discontinue capitalizing costs not
directly associated with plant construction. Further, Armant elected to
discontinue capitalizing interest costs in 1988 and reversed all interest costs
that had been capitalized in 1988. Prior to September 1, 1986, all costs were
capitalized and deferred. On February 29, 1996, Armant elected to write down
$17,324,000 in capitalized costs.
February 29, August 31,
1996 1995
Assets:
Plant and equipment............. $ 11,260,000 $ 11,403,000
Other........................... 145,000 945,000
Total........................ $ 11,405,000 $ 12,348,000
Liabilities and Equity:
Notes payable - Toth Aluminum
Corporation.................... $ 9,671,000 $ 9,625,000
Notes payable - Bank........... 525,000 525,000
Payables - Toth Aluminum Corp.. 14,850,000 14,550,000
Other payables............ 658,000 647,000
Equity - Toth Aluminum
Corporation............... (14,286,000) (12,986,000)
- Other................... (13,000) (13,000)
------------ ------------
(14,299,000) (12,999,000)
============ ============
Total........................... $ 11,405,000 $ 12,348,000
Six Months Ended
February 29, February 28,
1996 1995
Statement of Plant Expenses
Write down of Capitalized
Costs..................... $ 448,000 $ 16,876,000
Direct plant costs.............. 54,300 32,800
Interest expense................ 1,675,000 1,550,000
General and
administrative costs...... 58,000 51,000
=========== ============
Net loss $ 2,235,300 $ 18,509,000
February 29, August 31,
1996 1995
Payable to and Equity of Toth Aluminum
Corporation:
Notes payable..................... $ 22,602,000 $ 22,556,000
Payables.......................... 8,560,000 8,560,000
Beginning equity of the Company... (5,560,000) (5,560,000)
Less: Loss from Armant....... (17,221,000) ( 8,594,000)
Affiliates interest:
Capitalized by Armant, but
not accrued by the Company.. (5,620,000) (5,620,000)
Expensed by Armant, but not
accrued by the Company...... (9,568,000) (7,121,000)
============ ============
Investment in and advances to
Armant...................... $ 4,313,000 $ 4,267,000
TACMA
In January 1982, the Company and an Indian company entered into a Promotion
Agreement providing for the formation of TACMA. TACMA was formed to construct
a plant in India designed to produce metal chloride through the use of the
Company's carbo-chlorination processes. The Promotion Agreement provided for
an initial capital contribution by the Company of approximately $42,800 in
exchange for a 40% equity interest in TACMA. During the 1983 fiscal year, the
Company and TACMA's other stockholder assigned to a third party the right to
a 25% equity interest in TACMA in exchange for the third party's $200,000
advance to TACMA. A transfer of equity interest to the third party, which
is subject to the prior approval of the Indian government, would have reduced
the Company's equity interest in TACMA to 27 1/2%. The Company and the third
party also entered into a separate agreement which provided that the third
party could convey to the Company its right to the 25% equity interest in
TACMA in exchange for 200,000 shares of the Company's common stock. During
July 1987, the Company issued 200,000 shares of its common stock valued at
$325,000 in exchange for the third party's rights to the additional equity
in TACMA. Under this agreement, the transfer to the Company of the
additional equity interest in TACMA, which is subject to the prior approval
of the Indian government, would increase the Company's equity interest in
TACMA to 52 1/2%.
As of August 31, 1984, the Company had also made cash advances to TACMA
totaling approximately $218,600. In addition, during December 1984, the
Company acquired from Empresas Lince, S.A., a receivable from TACMA of
$60,000 in exchange for 60,000 shares of the Company's restricted common
stock. The Company has also incurred costs on TACMA's behalf which the
Company considers reimbursable under the terms of its service agreement with
TACMA. At February 29, 1995, the Company's receivable for such costs billed
to TACMA was approximately $815,000. TACMA has not recorded a corresponding
payable for such costs because the approval of the Indian government and
Reserve Bank of India is required before TACMA can make payment to the
Company. The collectibility of this receivable is dependent on obtaining
approval of foreign authorities as well as TACMA commencing and sustaining
sufficiently profitable commercial operations, for which the Company currently
has no plans. During the fiscal year ended August 31, 1987, because of the
continuing delays in obtaining government approval, the Company reversed the
previously recorded receivable from TACMA. During 1988, based upon the Company's
decision to indefinitely postpone attempts to bring the TACMA plant to full
commercial production, its previously recorded investment in the TACMA facility
was also reversed.
4. Notes payable consisted of the following:
February 29, August 31,
1996 1995
Notes payable to bank,
collateralized (A):
At 12% ........................ $ - $ -
Demand notes payable to related
parties, unsecured:
At 12% ........................ 94,370 -
Notes payable to other parties,
secured (A):
At 12% ........................ 300,000 300,000
---------- ---------
394,370 300,000
Series "A-1" Convertible
Promissory Notes
Payable to related parties.... 6,943,385 6,726,150
Payable to others............. 5,634,782 5,575,742
----------- -----------
12,972,537 12,601,892
=========== ===========
Total............................. $12,183,146 11,876,039
A) Collateralized by a pledge of personal assets owned by the
Company's Chairman of the
Board.
5. During 1988, the Company commenced a private offering of 1,500,000 units
of its securities. Each unit consisted of one share of the Company's common
stock and the right to acquire an option to purchase an additional share at a
price equal to the original purchase price of the unit. At the close of the
offering, the Company had sold 1,292,367 units and had issued option rights
to purchase 1,292,367 shares with an exercise price ranging from $0.75 per
share to $0.95 per share. Of the 1,292,367 units sold, during September 1988,
27,386 units were issued in satisfaction of $20,539 of lease payments. The
option is exercisable for a period of three years, commencing on the date that
the Company's shareholders approve an increase in the authorized shares of the
Company so as to permit the exercise of all of the options offered hereby.
6. The financial statements are summarized and reference is made to the "NOTES
TO FINANCIAL STATEMENTS" included in the Company's Annual Report on Form 10-K
for the fiscal year ended August 31, 1995, as filed with the Securities and
Exchange Commission.
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity and Capital Resources
During the six months ended February 29, 1996, total assets increased to
$4,517,653 from $4,507,997 at August 31, 1995, and current assets increased
from $15,838 to $21,188. The primary assets of the Company is its Investment
in and Advances to the Armant Partnership of $4,313,900. The recoverability
of this sum is dependent on the Armant Partnership achieving and sustaining
sufficiently profitable commercial operations (see note 3 of Notes to Financial
Statements). Total liabilities, including the Series "A-1" Convertible
Promissory Note, increased from $20,251,026 to $21,716,706 during the same
period.
On December 24, 1985, the Company commenced an offering of its 10%
Convertible Debentures due August 1, 1990 (the "Debentures"). The offering
contemplated the sale of a maximum of $4,320,000 of Debentures, convertible,
at the election of the Debenture holders, into 3,175,000 shares of common
stock, no par value, of the Company. The purchase price of each Debenture
was $1,000, payable in cash. No minimum offering of Debentures was
established and offerees were apprised of the fact that the proceeds of the
offering would not be placed into escrow, but would be applied directly to
the Company.
The Debenture offering was closed as of May 31, 1986, resulting in net
proceeds of $3,852,963 (after deducting offering costs of $467,037). As of
November 30, 1988, 4,298 debentures were converted into 3,152,995 shares of
the Company's common stock, resulting in an increase in common stock of
$3,833,307 (net offering costs of $464,693) and a balance in debentures payable
of $20,437 (net offering costs of $1,563).
The Board of Directors of the Company learned that not all of the Debentures
were sold for cash. Instead of the maximum offering of $4,320,000, $2,014,137
of Debentures were purchased in exchange for the cancellation of pre-existing
debt which the Company owed to these purchasers. Of the $2,014,137 of
Debentures sold in exchange for the cancellation of indebtedness, $1,957,137
or 97%, was sold to or through directors, officers or affiliates of the Company.
As a result of the sale of Debentures for consideration other than cash, the
proceeds of the Debenture offering were not directly applied in the manner that
the Company intended, or as the Company would have applied the proceeds had
the Debentures been sold entirely for cash. The Debenture offering contemplated
that net proceeds (after deduction of sales commissions and offering costs)
of $3,842,000 would be applied approximately $2,882,000 toward a loan to the
Armant Partnership (A Louisiana Partnership of which the Company is the General
Partner) for the repayment of the partnership's loan, capital expenditures,
and working capital, with the balance of $960,000 for the Company's working
capital and development expenses. Instead, the net proceeds of the Debenture
offering were directly applied as follows: (I) $1,939,000 toward the
retirement of debt, of which $1,045,000 was to retire the Company's debt and
the balance of which was to retire the partnership's debt, and (ii) $1,902,000
was loaned to the Partnership for its working capital and for capital
expenditures.
This discrepancy is a result of the considerable delay which was experienced
in bringing the Debenture offering effective. As a result, the Company,
wishing to continue the operations of the Armant facility, and to continue the
Company's research activities, borrowed funds from directors, affiliates and
outside lenders, relying on the guarantee of certain directors and affiliates
for Armant and corporate purposes. When the Debenture offering became
effective, the proceeds of the offering were used substantially to retire this
debt. Consequently, the Company believes that the net proceeds of the
Debenture offering were applied, albeit indirectly, in the matter contemplated
by the Debenture offering.
However, if it were subsequently determined that this variance in the terms
of the offering would require the Company to make an offer of rescission of the
debenture offering, the Company has made no provision in the financial
statements for such an offering. To date, there have been no claims against
the Company with respect to this issue and the Company is not aware that any
such claims are planned or contemplated. Because of the complex nature of
securities law, legal counsel has not formed an opinion on whether there is
any potential or actual liability to the Company.
The Company, as general partner of Armant, has granted a continuing
guarantee of Armant's outstanding bank debt of approximately $525,000
plus accrued interest.
Working Capital Meeting Operating Needs and Commitments
From inception, the Company has sustained its operations primarily through
funds provided by private placements and public offerings of its common
stock. Due to the length of its development stage activities, liquidity
has always been a continuing concern. The Company has incurred net losses
from its inception in 1966 through February 29, 1996, of approximately
$55,641,923. Although the Company's investees (Armant and TACMA) have
constructed facilities that employ the Company's patented processes, Armant
has not achieved continuous commercial production, and the commercial
viability of the processes has not been demonstrated. TACMA has not
commenced commercial production and no such activities are currently planned.
The recoverability of the Company's investments in and advances to Armant,
is dependent on Armant achieving sufficiently profitable commercial operations.
These factors, among others, may indicate that the Company will be unable to
continue in existence. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amount and classification of liabilities that might
be necessary should the Company be unable to continue in existence. The
Company's continuation in existence is dependent upon its ability to generate
sufficient cash flow to meet its continuing obligations on a timely basis,
to obtain additional financing as may be required, and ultimately to attain
successful operations. Management believes that the plants constructed by
Armant and TACMA demonstrate that the production of metal chlorides and aluminum
intermediates through the Company's patented processes is possible. Further,
the planned expansion of the Armant Plant should enable it to achieve
continuous production of alumina as well as metal chlorides. Management
believes that continuous production capabilities should enable it to attain
successful operations. This will not occur at the TACMA facility unless and
until the Company directs its efforts and resources toward TACMA. No such
activities are currently planned at TACMA.
Immediate Development Plans at Armant and Canada.
The Armant Plant, which was intended to be constructed so as to operate
on a continuous basis, was only capable of operating only in a "batch" mode
when it was shutdown in 1988. The plant was then capable of producing
approximately 100,000 pounds of aluminum chloride per batch. In order to
operate on a continuous basis, additional equipment must be installed,
including a new condenser system, several new conveyers, a revised silicon
tetrachloride recovery and purification system, plus other equipment, some of
which needs to be specially built, at a capital cost estimated by the Company
to be up to $12,000,000 (1995). Once this equipment is installed, and with
the plant operating on a continuous basis, the Company believes that the
Vacherie plant's production rate of aluminum chloride and silicon chloride will
increase to 1,000,000 pounds per month and 900,000 pounds per month,
respectively. Operation at this level of production would clearly demonstrate
the economical advantage of the TAC process over other production methods for
metal chlorides.
The plans for upgrading and bringing Armant into commercial operation are
part of the Company's proposal to the United States Department of Energy (DOE)
for cost shared commercialization of the clay-to-aluminum technology. The
Company has submitted three such proposals to DOE under the "Steel and
Aluminum Energy Conservation and Technology Competitiveness Act of 1988",
Public Law No. 100-680. The Company's first two proposals were rejected by
DOE for perceived inadequacies in addressing the requirements of the Act in
precise accordance with federal requirements. In order to address DOE's
concerns, the Company obtained the assistance of ICF Kaiser Engineers, an
engineering design company with extensive experience in dealing with DOE, to
revise its proposal to meet DOE requirements. In addition, the Company
obtained a commitment from Alcoa to provide design and analytical assistance
in the initial phase of the commercialization effort, with the option of
increased participation in later phases. The revised proposal is currently
being held in abeyance at DOE pending TAC's compliance with a new DOE request
for additional participation by industry. TAC has requested a full merit
review of the proposal and of the proposed process commercialization project
without such increased industry participation. However, the DOE has thus
far refused to review the proposal. The Company continues to request a
full review by the U.S. Department of Energy.
The project to commercialize TAC's proposed clay-to-aluminum process, as
presented to DOE, is subdivided into three phases. The three phases are
logically arranged into a sequence of progressively larger development steps.
The project begins with bench scale studies, continues through the commercial
scale production of metal chlorides, and leads to the works scale production
of aluminum metal, as shown in the table of project phases below.
Phase I Execute laboratory and engineering studies to generate
design data for upgrading TAC's clay chlorination pilot
plant to continuous production for aluminum chloride
and silicon tetrachloride.
Phase II Generate the detailed design of the upgraded clay
chlorination pilot plant.
Phase III Construct, commission, start up and run the upgraded
clay chlorination pilot plant in order to determine the
economic feasibility of chlorinating clay as the first stage
of a two-stage Clay-to-Aluminum process.
If ultimately approved by the DOE, up to 70% of project costs could be
provided from federal sources. There is no guarantee, however, of any funding
of the project by any government agency. The company is also currently
pursuing alternative funding avenues for its commercialization program
including collateralized loans.
However, even if and when the Vacherie Plant and any subsequent plants
become fully operational on a continuous basis, they will be subject to all
of the risk inherent in any untried process, including operational delays
during "shakedown" periods, unforeseeable cost overruns, and/or the inability
of the plants, for whatever unforeseeable reason, to sustain profitable
commercial operations, in which event the Company would consider shut down
of operations.
Since 1992, TAC has been evaluating the application of it's clay
carbo-chlorination technologies to the abundant raw materials resources of
western Canada. The Company acquired samples of waste materials from the
extraction of bitumen from oil sands in Alberta, Canada, and testing had
indicated that the materials were amenable to the Company's process
technology. In subsequent inquiries and visits, the Company learned that
vast reserves of low grade kaolitic and other clays are present throughout
western Canada. A program was initiated in late 1993 to investigate the
feasibility of using these raw materials in a western Canadian clay
chlorination plant to manufacture metal chlorides (aluminum chloride, silicon
tetrachloride and titanium tetrachloride).
The Company retained Cominco Engineering Services Ltd., (CESL),in Calgary,
Alberta, Canada as its engineering services sub-contractor in Canada and
undertook presentations to Canadian industry and the Canadian federal
government on a project to construct plants in the region. In response to
the high degree of interest shown in the Company's proposed project in Canada,
the Company, through CESL, applied to the Canadian federal government for
financial assistance to evaluate western Canadian raw materials for use in
carbo-chlorination. A formal proposal was submitted by CESL in the Company's
behalf in December, 1993, and this was approved by the federal government in
May, 1995 under a Minerals Development Agreement (MDA) and was completed by
March 31, 1996. Under the terms of the MDA the Canadian government funded
C$ 306,000 of project costs with the balance to be provided by industrial
participants.
The MDA study has evaluate three classes of western Canadian clays and
two classes of western Canadian coke resources. These raw material
classes are:
Clay Sources: Clays resulting from oil sands mining and processing
Clays resulting from coal mining and/or processing
Clays from naturally occurring kaolitic deposits
Coke Sources: Cokes resulting from oil sands processing
Cokes that are commercially available in western Canada.
The Canadian project was completed in mid 1995 with favorable results.
The MDA study concluded that the clays and cokes are adequate, and are
available in plentiful supply to serve as feed stock for the company's process.
Development Plans
As in the previous years, the principal goal of the Company is to
commercialize its process to produce aluminum and intermediate chloride and
oxide products from clay. One of the first steps in the commercialization
process is the commercial production of metal chlorides. The Company is
currently engaged in pursuing two options to achieve this first level of
commercialization. One, the construction of commercial facilities in Canada
to take advantage of abundant raw materials resources and low cost electrical
power, and two, the upgrading and completion of the Armant Plant, such that
it is capable of producing high-purity aluminum chloride and other
intermediates on a continuous basis.
On August 30, 1995, the Company executed a Letter of Understanding with
Fluor Daniel, an engineering company located in Greenville, South Carolina,
under which the company declared its intent to appoint Fluor Daniel as the
Project Manager and Construction Manager of a project to construct a
commercial Metal Chlorides Plant to manufacture aluminum chloride, silicon
tetrachloride, titanium tetrachloride and other products from clay using the
company's proprietary carbo-chlorination technology.
Subsequently, on September 26, 1995, the company and Fluor Daniel executed
a Technical Services Agreement covering the work to be preformed in the first
phase of the three-phase project. The initial tasks cover a pre-feasibility
study to determine the basic parameters for commercial production of metal
chloride chemicals from clay. This study is expected to be completed in six
to eight weeks and lead to Phase 2, the preparation of the document package
needed to secure financing of the project. The second phase will take up to
one year after which the third phase of the project, plant design,
construction and start up will be undertaken. Fluor Daniel estimates that
the commercial plant can be in operation within three years once it is
funded.
Canada
The western Canadian raw materials resources were found to be economically
suitable for the Company's clay carbo-chlorination technology. The Company
has formed a Canadian company by the name of "WestCan Chemicals, Inc." which
will operate under license from the Company to develop, construct, and operate
a metal chlorides plant in Canada utilizing western Canadian feedstocks.
Management believes that the successful manufacture of aluminum chloride,
silicon tetrachloride and titanium tetrachloride in Canada will provide a
substantial source of revenue to the company. Management further believes
that the successful operations of a metal chlorides plant in Canada will
eventually lead to the utilization of the Company's technology to produce
aluminum from clay. Western Canada is in an opportune location for the
furthering of the Company's technology since not only are abundant quantities
of raw materials available, but also large supplies of low cost electrical
power.
Results of Operations
The Company had no operating revenues and reported net losses. The Company
is considered to be a development stage enterprise; start-up activities have
commenced, but the Company has received no revenue therefrom.
The net loss for the six months ended February 29, 1996, was $1,456,024
compared to $10,206,122 for the corresponding period in 1995. During the six
month period ending February 28, 1995, the company wrote down a significate
amount of its investment in the Armant Partnership which adversely affected
its net loss.
The initial phase of construction of the Armant Plant was completed in
December, 1983. Since that time, numerous test runs have been performed in
an effort to achieve continuous commercial production of market grade metal
chlorides. Subsequent to the Company's 1986 fiscal year end, Armant
determined additional funding would be required to sustain successful
operations. Therefore, because of unexpected construction delays and the
continued lack of commercial production, Armant elected to discontinue
capitalizing plant start-up costs as of August 31, 1986. The net loss
recognized by Armant during the three months ended November 30, 1987, resulted
primarily from expensing start-up costs. The net loss recognized by Armant
during the year ended August 31, 1987, was first allocated to the partners'
equity accounts based upon their respective percentage interests in the total
partnership equity. To the extent that this loss exceeded the total partners'
equity, all additional losses were allocated to the Company's equity interest
in the partnership, since the Company is the sole general partner in the
limited partnership and is at risk for these losses in the form of advances to
Armant. The Company's equity in the loss of Armant for the six months ended
February 29, 1996, was $556,573, which was a result of Armant losses in
excess of total partnership equity and was recorded as a reduction in
investment in and advances to Armant.
PART II. Other Information
Item 1. Legal Proceedings
See Item 10 of the Company's Form 10-K for the year ended August 31, 1995,
concerning legal proceedings.
Item 6. Exhibits and reports on Form 8.
<PAGE>
SIGNATURE
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.
TOTH ALUMINUM CORPORATION
(Registrant)
BY: Charles E. Toth Date: April 30, 1996
Charles E. Toth
Treasurer
BY: Charles Toth Date: April 30, 1996
Charles Toth
Chairman of the
Board of Directors
Chief Executive Officer
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