SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: November 30, 1995
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 November 30,1995
<PAGE>
TOTH ALUMINUM CORPORATION
INDEX TO FORM 10-Q
For the Quarter Ended November 30, 1995
Page
Part I
Financial Information (Unaudited)
Balance Sheets - November 30, 1995
and August 31, 1995 .........................................
Statements of Operations - Three Months
Ended November 30, 1995 and 1994 ............................
Statements of Cash Flows - Three Months
Ended November 30, 1995 and 1994 ............................
Notes to Financial Statements ...............................
Management's Discussion and Analysis
of the Financial Conditions and Results
of Operations ...............................................
Part II
Other Information ...........................................
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<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
COMBINED BALANCE SHEETS (Unaudited)
<CAPTION>
November 30, August 31,
1995 1995
------ -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .................................... $ 2,773 $ 5,051
Accounts receivable:
Other.................................. 10,787 10,787
Prepaid:
Leases ................................ - -
Other..................................
Total current assets........................ 13,560 15,838
INVESTMENTS IN AND ADVANCES TO:
Armant Partnership.................... 4,273,950 4,267,350
PROPERTY, PLANT AND EQUIPMENT - Net....... 143,078 156,384
PREPAID LEASES ........................... - -
PATENTS AND PATENT RIGHTS (net of
accumulated amortization: ........... 60,609 68,425
---------- ---------
TOTAL..................................... $ 4,491,197 $ 4,507,997
</TABLE>
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<TABLE>
November 30, August 31,
1995 1995
-------- --------
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES:
Notes payable-related parties............. $ - -
Notes payable-bank..................... - -
Notes payable-other ....................... 300,000 300,000
Accounts payable:
Trade................................... 337,841 334,375
Officers and employees.................. 126,384 108,062
Accrued salaries .................... 1,511,094 1,457,032
Accrued expenses ....................... 14,350 -
Accrued interest payable................ 782,633 732,817
Total current liabilities.................. 3,072,302 2,932,286
DEFERRED CREDIT .......................... 50,000 50,000
Series "A-1" Convertible Promissory Note1 (CPN)
CPN Related Parties
Principal........................... 6,943,385 6,726,150
Accrued interest payable............ 2,480,887 2,279,103
CPN Other Parties
Principal........................... 5,634,782 5,575,742
Accrued interest payable............ 2,834,580 2,667,308
Total Series "A-1" Notes............ 17,893,634 17,248,303
CONVERTIBLE DEBENTURES PAYABLE
(net of discounts, commissions,
and offering costs of:................ 20,437 20,437
STOCKHOLDERS' EQUITY:
Common stock - no par value................ 38,258,0961 38,258,0961
Common stock warrants......................
Common stock subscribed.................... 20,000 20,000
Paid in capital............................ 164,774 164,774
Deficit accumulated during the development
stage...................................... (54,988,046) (54,185,899)
Total stockholders' equity................. (16,545,176) (15,743,029)
------------ -----------
TOTAL...................................... $ 4,491,197 $ 4,507,997
<FN>
1 See Section 11, "Notes to Financial Statements" of the August 31, 1995 10-K.
</TABLE>
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<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE
FOR THE QUARTER ENDED NOVEMBER 30, 1995 (Unaudited)
<CAPTION>
Three Months Ended From Inception
November 30 To November 30,
1995 1994 1995
-------- -------- --------
<S> <C> <C> <C>
COSTS AND EXPENSES:
Research and
Development................. $ 12,841 $ 5,364 $ 7,656,500
Promotional,
general and
administrative.............. 127,384 6,237 14,772,743
Interest....................... 472,172 264,470 9,458,195
Total.......................... $ 612,397 $ 276,071 31,887,438
OTHER (INCOME) EXPENSE:
Loss in Investment and Advances
To Armant................... 12,774,110
Equity in
loss of Armant.............. 189,750 94,125 10,326,498
NET LOSS............ ............. $ 802,147 $ 558,799 54,988,046
LOSS PER
COMMON SHARE................... $ .02 $ .01
</TABLE>
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<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOW
<CAPTION>
Three Months Ended From Inception
November 30, To November 30,
1994 1993 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET LOSS......................... $(802,147) $(370,196) ($ 54,988,046)
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and
amortization................. 13,306 2,895 1,041,997
Amortization and write
off of patents............... 7,816 8,221 380,209
Amortization of prepaid
leases....................... - - 302,424
Amortization of financing
Cost......................... 95,000
Loss on divesture of
Subsidiaries 912,586
Loss from joint venture........ 189,750 94,125 8,784,020
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....... 86,734 197,598 10,153,698
Increase (decrease) in notes
notes payable.............. 508,863 108,575 17,618,848
4,322 41,218 ($ 15,441,405)
</TABLE>
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<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
<CAPTION>
Three Months Ended From Inception
November 30, To November 30,
1995 1994 1995
-------- -------- --------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Purchase of property, plant
and equipment................ - ( 9,874) ($ 1,159,046)
Acquisition of patents......... (443,475)
Investment of Certificates
of Deposit................... (3,995,000)
Cash investment in and
Advances to TACMA............ (1,076,595)
Write off of Investments
And Cash Advances to Armant.. 12,774,110
Cash investments in and
advances to Armant........... (6,600) (34,425) (21,518,489)
Redemption of Certificates
of Deposit................... 3,995,000
Proceeds from sale of net
Profit interest.............. $ 50,000
(6,600) (44,299) ($11,373,495)
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 (2,278) (3,081) 2,773
CASH BEGINNING OF PERIOD 5,051 19,665
CASH END OF PERIOD 2,773 16,584 2,773
</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 November 30, 1995, 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 November 30, 1995, and August 31, 1995, of $54,988,046 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 has actively evaluated the raw material resources in
Western Canada and is 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. The investment in TACMA was expensed during 1988. The
Company applies the equity method of accounting for its investment in Armant.
The collectibility of the advances to and the recovery of the investment in
Armant depends upon the affiliate achieving successful commercial operations.
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 28.6% 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
$525,000 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.
Since the plant was shutdown in 1988 due to insufficient capital
to maintain operations, the Company has been attempting to secure
additional funds to enable it to modify and start-up the Armant plant.
Significant effort has been devoted in the period 1988 to 1995 to securing
funding from the DOE under the "Steel and Aluminum Energy Conservation and
Technology Competitiveness Act of 1988".
Costs Capitalized and deferred by Armant consisted of the following:
November 30 August 31
1995 1995
Direct carbo-chlorination plant costs:
Process equipment....................... $ 6,450,000 $ 6,846,000
Other equipment......................... 50,000 50,000
Leasehold improvements.................. 100,000 200,000
6,600,000 7,096,000
Self-construction and start-up costs:
Salaries
Engineering........................ 508,000 508,000
Plant construction and operations.. 3,214,000 3,214,000
Indirect labor and overhead........ 585,000 585,000
4,307,000 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................................... - -
- -
$10,907,000 $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.
November 30, August 31,
1995 1995
Assets:
Plant and equipment................... $10,907,000 $11,403,000
Other................................. 945,000 945,000
Total.................... $11,852,000 $12,348,000
Liabilities and Equity
Notes payable - Toth Aluminum
Corporation......................... $ 9,631,000 $ 9,625,000
Notes payable - Banks................. 525,000 525,000
Payables - Toth Aluminum Corporation.. 14,584,000 14,550,000
Other payables........................ 649,000 647,000
Equity - Toth Aluminum Corporation.... (13,524,000) (12,986,000)
- Others....................... (13,000) (13,000)
(13,537,000) (12,999,000)
Total..................... $11,852,000 $12,348,000
Three Months Ended
November 30,
1995 1994
Statement of Plant Expenses
Direct plant costs.................... $ 6,000 $ 10,000
General and administrative costs...... 14,000 27,000
Interest Expense...................... 128,000 727,000
Net Loss.............................. $ 148,000 $ 764,000
November 30, August 31,
1995 1995
Payable to and Equity of Toth Aluminum
Corporation:
Notes payable......................... $22,608,000 $22,602,000
Payables.............................. 8,560,000 8,560,000
Beginning equity of the Company....... (5,560,000) (5,560,000)
Less: Loss from Armant................ (8,784,000) (8,594,000)
Capitalized by Armant, but
not accrued by the Company..... (5,620,000) (5,620,000)
Expensed by Armant but not accrued
By the Company..................... (6,930,000) (7,121,000)
Investment in and advances to
Armant.............................. $ 4,274,000 $ 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 August 31, 1989 and 1988, 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.
Reference is made to Note 6 regarding a Swiss corporation's advance
to TACMA, in 1982, on the Company's behalf. The Company recorded this
advance as an additional investment in and advance to TACMA. The Swiss
Corporation has not received payments equal to $50,000, and in 1994 they
have requested action requiring the Company to replace or supplement its
interest in TACMA. During 1995 the company issued a Series "A-1" Convertible
Promissory Note to the Swiss Corporation for the original $50,000.00 plus
accrued interest of $98,200 for a total of $148,000.
4. NOTES PAYABLE
Notes payable consisted of the following:
November 30, August 31,
1995 1995
Notes payable to bank,
collateralized (A): - -
Demand notes payable to related
parties, unsecured (A):
At 12% ........................... 1,651,826 1,565,094
Demand notes payable to other parties,
unsecured (A):
At 12%............................ 637,841 634,375
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
Total.......................... $11,984,614 $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. As of
November 30, 1988, 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, but in no event later than August 30, 1995.
If no such authorization has been made prior to that date, options will
automatically be converted into the Company's subordinated debt in a
principal amount representing the difference between the closing bid price
of the Company's common stock on August 30, 1995, and the exercise price of
the option, bearing interest at the rate of 1% per month until paid.
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, 1994, 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 quarter ended November 30, 1995, total assets decreased from
4,507,997 to $4,491,197, and current assets decreased from $15,838 to $13,560.
While advances to Armant increased by $6,600 during the quarter, the
investment in Armant was decreased by $189,750 from recognition of the
Company's equity in loss of Armant. The recoverability of the Company's
investment in and advances to Armant of $4,273,950 is dependent on the
Armant Partnership achieving and sustaining sufficiently profitable
commercial operations (see note 3 of Notes to Financial Statements).
Current liabilities, increased from $2,932,286 to $3,072,302 during the
same period. During the same period, accrued salaries increased by $54,062
and accrued interest increased by $49,816.
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. During the year ending August 31, 1995, the Company
wrote down $12,774,110 of its investment in Armant. This write down occurred
due to the prolonged delay in obtaining the necessary funding to restart the
plant.
<PAGE>
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 November 30, 1995, of
approximately $54,988,046. 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 $10,000,000 (1994). 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, 1994 under a Minerals Development
Agreement (MDA) to be completed by May 31, 1995. Under the terms of the MDA
the Canadian government would fund C$ 306,000 of project costs with the
balance to be provided by industrial participants.
The MDA study has evaluated at least 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 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 performed in the first
phase of the three-phased 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 the
by late November or early December 1995, and will lead into 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.
Canada
The western Canadian raw materials resources were found to be economically
suitable for the Company's clay carbo-chlorination technology. The Company
has proceeded with the formation of a Canadian company which will operate
under license from the Company to develop, construct, and operate a metal
chlorides plant in Canada utilizing western Canadian feed stocks.
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 three months ended November 30, 1995, was $802,147
compared to $370,196 for the corresponding period in 1994.
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 three months ended November 30, 1995, was $189,750, 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, 1994,
concerning legal proceedings.
Item 6.
On October 2, 1995, the Company filed an 8-k announcing a Letter of
Understanding and subsequently a Technical Services Agreement with Flour
Daniels of Greenville, South Carolina. The Letter of Understanding
acknowledged the Company's intent to appoint Fluor Daniel as the Project
Manager and Construction Manager of a project to construct a commercial
Metal Chlorides Plant. The Technical Services Agreement, executed on
September 26, 1995 covering the work to be performed in the first phase
of the three-phased project. The initial tasks cover a pre-feasibility
study to determine the basic parameters for commercial production of metal
chloride chemicals from clay.
<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 Jr.
Charles E. Toth Jr.
Treasurer Date: January 15, 1996
BY: Charles Toth
Charles Toth
Chairman of the Board of Directors Date: January 15, 1996
and Chief Executive Officer
