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: May 31, 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, 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 May 31, 1996
<PAGE>
TOTH ALUMINUM CORPORATION
INDEX TO FORM 10-Q
For The Quarter Ended May 31, 1996
Page
Part I Financial Information
Balance Sheets - May 31, 1996
and August 31, 1995...........................
Statements of Operations - Nine Months
Ended May 31, 1996 and May 31,1995............
Statements of Cash Flows - Nine Months
Ended May 31, 1996 and May 31, 1995...........
Notes to Financial statements.................
Management's Discussion and Analysis
of the Financial Conditions and Results
of Operations.................................
Part II Other Information....................
<PAGE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
COMBINED BALANCE SHEETS (UNAUDITED)
<CAPTION>
MAY 31, AUGUST 31,
1996 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash................................... 1,972 5,051
Accounts receivable-other............... 10,787 10,787
Total current assets.................... 12,759 15,838
Property, Plant and Equipment - Net..... 116,466 156,384
OTHER ASSETS:
Investments in and Advances
to Armant Partnership.............. 3,575,000 4,267,350
Patents and Patent Rights (Net of
accumulated amortization............. 44,977 68,425
Total Other Assets.................... 3,619,977 4,335,775
TOTAL ASSETS.......................... $ 3,749,202 $ 4,507,997
</TABLE>
<PAGE>
<TABLE>
MAY 31, AUGUST 31,
1996 1995
LIABILITIES
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable-related parties......... $ - $ -
Notes payable-bank.................... - -
Notes payable-other................... 300,000 300,000
Accounts payable:
Trade................................ 357,481 334,375
Officers and employees............... 148,350 108,062
Accrued salaries...................... 1,619,244 1,457,032
Accrued expenses...................... 46,837 -
Accrued interest payable.............. 912,265 732,817
Total current liabilities............. 3,384,177 2,932,286
DEFERRED CREDIT....................... 50,000 50,000
Series "A-1" Convertible Promissory Note1
Related Parties
Principal............................ 7,052,085 6,726,150
Accrued Interest Payable............. 2,934,455 2,279,103
Non-Related Parties
Principal............................ 5,752,953 5,575,742
Accrued Interest Payable............. 3,169,124 2,667,308
Total Series "A-1" Notes.............. 18,908,617 17,248,303
CONVERTIBLE DEBENTURES PAYABLE
(net of discounts, commissions,
and offering costs of $1,563)........ 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..................... (57,056,899) (54,185,899)
Total stockholders' equity............. (18,614,029) (15,743,029)
TOTAL LIABILITIES...................... $ 3,749,202 $ 4,507,997
</TABLE>
<PAGE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended From Inception
May May May May To May
31, 31, 31, 31, 31,
1996 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C>
COSTS AND EXPENSES:
Research and
Development......... $ 6,491 $ 27,348 $ 39,425 $ 36,897 $ 7,683,084
Promotional, general and
administrative...... 142,375 94,375 272,443 161,904 14,917,802
Interest.............. 453,741 302,814 1,336,616 907,815 9,961,601
Total.............. 602,607 424,537 1,648,484 1,106,616 32,562,487
OTHER (INCOME) EXPENSE:
Loss in Investment and
advances to Armant. 12,774,100
Equity in loss
of Armant.......... 479,450 490,925 946,583 10,773,729 11,720,312
NET LOSS............. $1,082,057 $915,462 $2,595,067 $11,121,584 $57,056,899
Loss Per
Common Share........ $.03 $.03 $.07 $.31
<FN>
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended From Inception
May 31, May 31, To May 31,
1996 1995 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET LOSS................ ($2,595,067) ($11,121,584) ($57,056,899)
ADJUSTMENTS TO RECONCILE NET
INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and
amortization..................... 39,800 27,426 1,068,491
Amortization and write
off of patents................... 23,448 9,593 395,841
Amortization of prepaid leases.... 302,424
Amortization of Financing......... 95,000
Loss on divesture
of Subsidiaries ................. 912,586
Losses from joint venture......... 946,583 10,773,728 9,540,853
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:
Increase in accounts
receivable........................ - (27,577) (10,787)
Decrease (Increase) in
prepaid expenses.................. - - (27,371)
Increase in accounts payable and
accrued expenses.................. 451,891 268,019 10,518,855
Increase in notes payable.......... 1,213,665 147,022 18,598,526
80,320 76,627 ($15,366,464)
</TABLE>
<PAGE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS - (Continued)
<CAPTION>
Nine Months Ended From Inception
May 31, May 31, May 31,
1996 1995 1996
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment............... (10,700) (27,970) ($1,173,746)
Acquisition of patents............. - - (443,475)
Investment of Certificate
of Deposit........................ (3,995,000)
Cash investment in and
Advances to TACMA................. (1,076,595)
Cash investments in and
Advances to Armant................ (72,699) (59,961) (21,584,582)
Write off of Investment and Cash
advances to Armant................ 12,774,110
Redemption of Certificates
of Deposit........................ 3,995,000
Proceeds from sale of net
Profit interest................... $ 50,000
(83,399) (87,961) ($ 11,454,288)
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........ (3,079) (11,304) 1,972
CASH BEGINNING OF PERIOD........... 5,051 19,665
CASH END OF PERIOD................. $ 1,972 $ 489 1,972
<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 May 31, 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 May 31, 1996,
and August 31, 1995, of $57,056,899 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 1995, 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. 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 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 May 31, 1996, 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.
As of August 31, 1995, Armant has conducted 57 test runs. 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 $17,850,000 in capitalized costs. Costs capitalized
and deferred by Armant consisted of the following:
May 31, August 31,
1996 1995
Direct carbo-chlorination plant costs:
Process equipment................... $ 3,540,000 $ 6,846,000
Other equipment..................... - 50,000
Leasehold improvements.............. 110,000 200,000
3,650,000 7,096,000
Self-construction and start-up costs:
Salaries:
Engineering ..................... - 508,000
Plant construction and
operations....................... - 3,214,000
Indirect labor and overhead...... - 585,000
- 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............................ - -
- -
$ 3,650,000 $ 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. As of May 31, 1996, Armant elected to
write down $18,540,000 in capitalized costs.
May 31, August 31,
1996 1995
Assets:
Plant and equipment.......... $ 3,650,000 $ 11,403,000
Other........................ 145,000 945,000
Total..................... $ 3,795,000 $ 12,348,000
Liabilities and Equity:
Notes payable - Toth Aluminum
Corporation.................. $ 7,435,000 $ 9,625,000
Notes payable - Bank......... 525,000 525,000
Payables - Toth Aluminum Corp 14,450,000 14,550,000
Other payables................ 694,000 647,000
Equity - Toth Aluminum
Corporation................... (19,322,000) (12,986,000)
- Other....................... (13,000) (13,000)
(19,309,000) (12,999,000)
Total......................... $ 3,795,000 $ 12,348,000
Nine Months Ended
May 31, May 31,
1996 1995
Statement of Plant Expenses
Write down of Capitalized
Costs......................... $ 2,190,000 $ 16,876,000
Direct plant costs........... 43,500 65,500
Interest expense............. 1,610,000 1,745,000
General and
administrative costs............. 47,000 68,000
Net loss $ 3,890,000 $18,757,500
May 31, August 31,
1996 1995
Payable to and Equity of Toth Aluminum
Corporation:
Notes payable................... $ 22,671,000 $ 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.... (11,900,000) (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...... (10,014,000) (7,121,000)
Investment in and advances to
Armant.......................... $ 3,575,000 $ 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 52.5%.
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 May 31,
1996, 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: May 31, August 31,
1996 1995
Notes payable to bank, collateralized
(A): At 12% .......................... $ - $ -
Demand notes payable to related
parties, unsecured At 12% ................ - -
Notes payable to other parties,
secured (A) At 12% ..................... 375,000 345,000
Series "A-1" Convertible
Promissory Notes
Payable to related parties............... 7,052,085 6,726,150
Payable to others........................ 5,752,953 5,575,742
12,805,038 12,301,892
Total.................................... $13,180,038 12,646,892
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.
<PAGE>
Liquidity and Capital Resources
During the nine months ended May 31, 1996, total assets decreased to
$3,749,202 from $4,507,997 at August 31, 1995, and current assets decreased
from $15,838 to $12,759. This decrease in total assets is the results of the
Company's decision to write down an additional $959,000 in capitalized cost
carried by Armant Limited Partnership. This write down reduced the Company's
Investments in and Advances to Armant from $4,267,350 as of August 31, 1995
to $3,575,000 on May 31, 1996. The recoverability of the Company's investment
in and advances to Armant of $3,575,000 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
$22,303,231 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.
<PAGE>
Working Capital Meeting Operating Needs and Commitments
From inception, the Company has sustained its operations primarily throug
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 May 31, 1996, of approximately $57,056,899. 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.
<PAGE>
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 (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. 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 July 31, 1995. 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 was completed in May of 1995 and evaluate 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
Flour 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. With the pre-feasibility
completed, the company has commenced 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
intends to proceed 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 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.
<PAGE>
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 nine months ended May 31, 1996, was $2,595,067
compared to $11,121,584 for the corresponding period in 1995. During the 1995
period, the significant increase in the net loss is the results of Armant's
write down of $16,891,00 in capitalized and deferred costs, consequently, in
1996 the company wrote down an additional 959,000 in capitalized and deferred
costs. This resulted in the Company's write down of $12,774,100 in
Investments in and Advances to Armant Partnership and an equity loss in the
partnership for the period ended of $946.583.
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 nine months ended
May 31, 1996, was $946,583, 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.
<PAGE>
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.
SIGNATURE PAGE
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: July 30, 1996
Charles E. Toth
Treasurer
BY: CHARLES TOTH Date: July 30, 1996
Charles Toth
Chairman of the Board of Directors
Chief Executive Officer
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