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, 1997
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, 1997
TOTH ALUMINUM CORPORATION
INDEX TO FORM 10-Q
For The Quarter Ended May 31, 1997
Page
Part I Financial Information
Balance Sheets - May 31, 1997
and August 31, 1996..............................
Statements of Operations - Nine Months
Ended May 31, 1997 and May 31,1996...............
Statements of Cash Flows - Nine Months
Ended May 31, 1997 and May 31, 1996.............
Notes to Financial
statements..................................
Management's Discussion and Analysis
of the Financial Conditions and Results
Of Operations..................................
Part II Other Information.............................
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
COMBINED BALANCE SHEETS (UNAUDITED)
MAY 31, AUGUST 31,
1997 1996
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ASSETS
CURRENT ASSETS:
Cash ............................... 1,475 3,750
Accounts receivable-other........... - 10,787
Total current assets................ 1,475 14,537
Property, Plant and
Equipment - Net..................... 83,158 103,159
OTHER ASSETS:
Investments in and Advances
to Armant Partnership......... 264,000 894,425
Patents and Patent Rights (Net of
accumulated amortization...... 1,240 37,161
Total Other Assets.................. 265,240 931,586
TOTAL ASSETS........................ $ 349,873 $1,049,282
MAY 31, AUGUST 31,
1997 1996
LIABILITIES
CURRENT LIABILITIES:
Notes payable-related parties....... $ 23,100 $ -
Notes payable-bank.................. - -
Notes payable-other................. 300,000 300,000
Accounts payable:
Trade ......................... 427,360 391,246
Officers and employees......... 248,125 187,361
Accrued salaries.................... 1,891,211 1,676,994
Accrued expenses.................... 72,374 -
Accrued interest payable............ 1,415,278 1,163,492
Total current liabilities........... 4,377,448 3,719,093
DEFERRED CREDIT..................... 50,000 50,000
Series AA-1" Convertible Promissory Note(1)
Related Parties
Principal...................... 7,398,265 7,398,265
Accrued Interest Payable....... 4,182,433 3,147,378
Non-Related Parties
Principal...................... 5,978,421 5,978,421
Accrued Interest Payable....... 4,176,828 3,342,841
Total Series "A-1" Notes............ 21,735,947 19,866,905
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.............. (64,276,829) (61,050,023)
Total stockholders' equity.......... (25,833,959) (22,607,153)
TOTAL LIABILITIES................... $ 349,873 $ 1,049,282
</TABLE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended From Inception
May May May May To May
31, 31, 31, 31, 31,
1997 1996 1997 1996 1997
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COSTS AND EXPENSES:
Research and
Development........... $ 7,426 $ 6,491 $ 23,202 $ 39,425 $ 7,727,839
Promotional, general and
administrative........ 87,430 142,375 321,521 272,443 15,372,976
Interest................... 754,486 453,741 2,120,828 1,336,616 11,100,882
Total................... 849,342 602,607 2,465,551 1,648,424 34,201,697
OTHER (INCOME) EXPENSE:
Loss in Investment and
advances to Armant(A).. 229,120 630,425 17,443,656
Equity in loss of Armant.... 141,499 479,420 1,380,639 946,583 12,631,475
NET LOSS.................... $1,219,961 $1,082,057 $4,476,615 $2,595,067 $ 64,276,828
Loss Per Common Share....... $.03 $.03 $.13 $.07
(A) Due to the prolonged delay in attaining the necessary funding,
the company was forced to write down $17,443,656 of its investment
and advances in Armant.
</TABLE>
See notes to financial statements.
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
Nine Months Ended From Inception
May 31, May 31, To May 31,
1997 1996 1997
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OPERATING ACTIVITIES
NET LOSS.......................... ($4,476,615) ($2,595,067) ($64,276,829)
ADJUSTMENTS TO RECONCILE NET
INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and
amortization................. 20,001 39,800 1,128,530
Amortization and write
off of patents............... 35,921 23,448 504,580
Amortization of prepaid leases.... 302,424
Amortization of Financing......... 95,000
Loss on divestiture
of Subsidiaries.............. 912,586
Losses from joint venture......... 1,380,639 946,585 10,269,427
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................... 10,787 - 0
Decrease (Increase) in
prepaid expenses............. - - (27,371)
Increase in accounts payable and
accrued expenses............. 635,225 451,891 12,114,742
Increase in notes payable......... 1,809,999 1,213,665 18,291,379
(584,043) 80,320 ($20,389,515)
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS - (Continued)
Nine Months Ended From Inception
May 31, May 31, May 31,
1997 1996 1997
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment........... (13,307) (10,700) ($1,172,353)
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............ (35,350) (72,699) (21,535,439)
Write off of Investment and Cash
advances to Armant............ 630,425 17,751,179
Redemption of Certificates
of Deposit.................... 3,995,000
Proceeds from sale of net
Profit interest............... $ 50,000
581,768 83,399 (6,426,683)
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........ (2,275) (3,079) 1,475
CASH BEGINNING OF PERIOD........... 3,750 5,051
CASH END OF PERIOD................. $ 1,475 $ 1,972 1,475
See notes to financial statements
</TABLE>
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, 1997, 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, 1996.
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, 1997, and
August 31, 1996, of $64,276,829 and $61,050,023, 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. In November of 1996, 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 August
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, 1996, 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 $18,375,000 in capitalized costs. Costs
capitalized and deferred by Armant consisted of the following:
May 31, August 31,
1997 1996
Direct carbo-chlorination plant costs:
Process equipment.................. $ 2,650,000 $ 5,473,000
Other equipment.................... - 27,000
Leasehold improvements............. 95,000 175,000
2,745,000 5,675,000
Self-construction and start-up costs:
Salaries:
Engineering........................ 54,000 427,000
Plant construction and
operations..................... 813,000 2,914,000
Indirect labor and overhead....... 38,000 425,000
905,000 3,766,000
$ 3,650,000 $ 9,441,000
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,
1997, Armant elected to write down $18,375,000 in capitalized
costs.
May 31, August 31,
1997 1996
Assets:
Plant and equipment.............. $ 3,650,000 $ 9,441,000
Other............................ 120,000 737,000
Total............................ $ 3,770,000 $ 10,178,000
Liabilities and Equity:
Notes payable - Toth Aluminum
Corporation.................... $ 4,727,000 $ 8,494,000
Notes payable - Bank............. 525,000 525,000
Payables - Toth Aluminum Corp.... 11,248,000 13,950,000
Other payables.............. 375,000 547,000
Equity - Toth Aluminum
Corporation................. (13,092,000) (13,325,000)
- Other.................... (13,000) (13,000)
(13,105,000) (13,338,000)
Total.......................... $ 3,770,000 $ 10,178,000
Nine Months Ended
May 31, May 31,
1997 1996
Statement of Plant Expenses
Write down of
Capitalized costs.......... 470,000 550,000
Direct plant costs............... 154,000 67,000
Interest expense................. 1,725,000 1,895,000
General and
administrative costs....... 98,000 87,000
Net loss $ 2,447,000 $2,599,000
May 31, August 31,
1997 1996
Payable to and Equity of Toth Aluminum
Corporation:
Notes payable...................... $ 19,405,000 $ 19,375,000
Payables........................... 7,376,000 7,425,000
Beginning equity of the Company...... (5,560,000) (5,560,000)
Less: Loss from Armant......... (11,822,000) (9,375,000)
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...... (3,515,000) (5,351,000)
Investment in and advances to
Armant......................... $ 264,000 $ 984,000
4. Notes payable consisted of the following:
May 31, August 31,
1997 1996
Notes payable to bank, collateralized
(A): At 12%...................... $ - $ -
Demand notes payable to related
parties, unsecured At 12%........ 2,625,350 2,555,601
Notes payable to other parties,
secured (A) At 12%................ 300,000 300,000
Series AA-1" Convertible
Promissory Notes
Payable to related parties........ 7,398,265 7,398,265
Payable to others................. 5,978,421 5,978,421
13,376,686 13,376,686
Total.................................. $ 16,302,036 16,232,287
A) Collateralized by a pledge of personal assets owned by
the Company's Chairman of the Board.
5. 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,
1996, as filed with the Securities and Exchange Commission.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
During the nine months ended May 31, 1997, total assets
decreased to $349,873 from $1,049,282 at August 31, 1996, and
current assets decreased from $14,537 to $1,475. This decrease in
total assets is the results of the Company's decision to write
down an additional $630,425 in capitalized cost carried by
Armant Limited Partnership. This write down reduced the
Company's Investments in and Advances to Armant from $894,425 as
of August 31, 1996 to $264,000 on May 31, 1997. The
recoverability of the Company's investment in and advances to
Armant of $264,000 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 $23,656,435 to $26,183,832 during the same
period.
The Company, as general partner of Armant, has granted a
continuing guarantee of Armant's outstanding bank debt of
approximately $525,000 plus accrued interest.
Working Capital Meeting Operating Needs and Commitments
From inception, the Company has sustained its operations
primarily through funds provided by private placements and public
offerings of its common stock. Due to the length of its
development stage activities, liquidity has always been a
continuing concern. The Company has incurred net losses from its
inception in 1966 through May 31, 1997, 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.
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 $15,000,000
(1997). 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 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, 1996. Under the terms of the MDA the Canadian
government funded C$ 306,000 of project costs with the balance
to be provided by industrial participants.
The MDA study was completed in May of 1996 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 two years 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 four 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.
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, 1997, was
$4,476,615 compared to $2,595,067 for the corresponding period in
1996. During the 1997 period, the significant increase in the
net loss is the results of interest payable of $2,120,828 plus
the write down of $630,425 in loans and advances made to Armant.
This resulted in the Company's write down of $17,443,653 in
Investments in and Advances to Armant Partnership and an equity
loss in the partnership for the period ended of $1,380.639.
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, 1997, was $1,380,639, 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, 1996, concerning legal proceedings.
Item 6. Exhibits and reports on Form 8.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
TOTH ALUMINUM CORPORATION
(Registrant)
BY: Charles E. Toth Date: July 30, 1997
Charles E. Toth
Treasurer
BY: Charles Toth Date: July 30, 1997
Charles Toth
Chairman of the Board of Directors
Chief Executive Officer
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