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, 1996
Commission File Number: 0-7568
TOTH ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0646580
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
Highway 18,--River Road, P. O. Box 250, Vacherie, LA 70090
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:(504) 265-8181
Securities registered pursuant to Section 12(b) of the Act:
NONE
(Title of each class)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter periods that the registrant was required to
file reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date:
Common stock, without par value 35,466,193
Class Outstanding at November 30,1996
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TOTH ALUMINUM CORPORATION
INDEX TO FORM 10-Q
For the Quarter Ended November 30, 1996
Part I Financial Information (Unaudited)
Balance Sheets - November 30, 1996
and August 31, 1996............................
Statements of Operations - Three Months
Ended November 30, 1996 and 1995 ..............
Statements of Cash Flows - Three Months
Ended November 30, 1996 and 1995 ..............
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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TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
COMBINED BALANCE SHEETS (Unaudited)
November 30, August 31,
1996 1996
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ASSETS
CURRENT ASSETS:
Cash .................................... $ 5,197 $ 3,750
Accounts receivable:
Other.................................. 10,787 10,787
Prepaid:
Leases ................................ - -
Other.................................. _________ ________
Total current assets...................... 15,984 14,537
INVESTMENTS IN AND ADVANCES TO:
Armant Partnership..................... 466,690 894,425
PROPERTY, PLANT AND EQUIPMENT - Net....... 89,852 103,159
PREPAID LEASES ........................... - -
PATENTS AND PATENT RIGHTS (net of
accumulated amortization: ........... 7,368 37,161
TOTAL..................................... $ 579,894 $ 1,049,282
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<TABLE>
November 30, August 31,
1996 1996
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LIABILITIES
CURRENT LIABILITIES:
Notes payable-related parties............. $ - -
Notes payable-bank..................... - -
Notes payable-other ...................... 300,000 300,000
Accounts payable:
Trade................................... 421,389 391,246
Officers and employees.................. 204,421 187,361
Accrued salaries ....................... 1,737,306 1,676,994
Accrued expenses ....................... 37,871 -
Accrued interest payable................ 1,240,334 1,163,492
Total current liabilities................. 3,941,321 3,719,093
DEFERRED CREDIT .......................... 50,000 50,000
Series "A-1" Convertible Promissory Note1 (CPN)
CPN Related Parties
Principal........................... 7,398,265 7,398,265
Accrued interest payable............ 3,369,325 3,147,378
CPN Other Parties
Principal........................... 5,978,421 5,978,421
Accrued interest payable............ 3,522,193 3,342,841
Total Series "A-1" Notes............ 20,268,204 19,866,905
CONVERTIBLE DEBENTURES PAYABLE
(net of discounts, commissions,
and offering costs of:................ 20,437 20,437
STOCKHOLDERS' EQUITY:
Common stock - no par value................ 38,258,096* 38,258,096*
Common stock warrants......................
Common stock subscribed.................... 20,000 20,000
Paid in capital............................ 164,774 164,774
Deficit accumulated during the development
stage...................................... (62,142,938) (61,050,023)
Total stockholders' equity................. (23,700,068) (22,607,153)
TOTAL...................................... $ 579,894 $ 1,049,282
<FN>
* See Section 11, "Notes to Financial Statements" of the August 31, 1996 10-K.
</TABLE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE
FOR THE QUARTER ENDED NOVEMBER 30, 1996 (Unaudited)
Three Months Ended From Inception
November 30 To November 30,
1996 1995 1996
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COSTS AND EXPENSES:
Research and
Development................. $ 1,421 $12,841 $ 7,688,861
Promotional,
general and
administrative.............. 123,641 127,384 15,175,096
Interest....................... 478,141 472,172 9,458,195
Total.......................... $ 603,203 $ 612,397 33,941,566
OTHER (INCOME) EXPENSE:
Loss in Investment and Advances
To Armant................... 427,735 16,950,536
Equity in
loss of Armant.............. 102,364 189,750 11,250,836
NET LOSS............ ............. $ 1,133,302 $ 802,147 62,142,938
LOSS PER
COMMON SHARE................... $ .03 $ .02
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<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOW
Three Months Ended From Inception
November 30, To November 30,
1996 1995 1996
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OPERATING ACTIVITIES
NET LOSS......................... $(1,133,302) $(802,147) ($ 62,142,938)
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and
amortization................. 13,306 13,306 1,095,222
Amortization and write
off of patents............... 29,793 7,816 433,450
Amortization of prepaid
leases....................... - - 302,424
Amortization of financing
Cost......................... 95,000
Loss on divesture of
Subsidiaries................. 912,586
Loss from joint venture........ 102,364 189,750 9,708,358
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....... 222,228 86,734 12,075,729
Increase (decrease) in notes
notes payable.............. 324,673 508,863 17,618,109
(440,938) 4,322 ($ 19,644,201)
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
Three Months Ended From Inception
November 30, To November 30,
1996 1995 1996
INVESTING ACTIVITIES:
Purchase of property, plant
and equipment................ - - ($ 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.. 427,735 16,950,110
Cash investments in and
advances to Armant........... 18,400 (6,600) (21,500,089)
Redemption of Certificates
of Deposit................... 3,995,000
Proceeds from sale of net
Profit interest.............. $ 50,000
446,135 (6,600) ($7,178,669)
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 1,447 (2,278) 5,197
CASH BEGINNING OF PERIOD 3,750 5,051
CASH END OF PERIOD 5,197 2,773 5,197
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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, 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, 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 November 30, 1996, and
August 31, 1996, of $62,142,938 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. 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, 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.
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 1996 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
1996 1996
Direct carbo-chlorination plant costs:
Process equipment....................... $ 4,120,000 $ 5,473,000
Other equipment......................... - 7,000
Leasehold improvements.................. 100,000 175,000
4,220,000 5,675,000
Self-construction and start-up costs:
Salaries
Engineering........................ 206,000 427,000
Plant construction and operations.. 2,100,000 2,914,000
Indirect labor and overhead........ 319,000 425,000
2,625,000 3,766,000
$ 6,845,000 $ 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.
November 30, August 31,
1996 1996
Assets:
Plant and equipment................... $ 6,845,000 $ 9,441,000
Other................................. 420,000 737,000
Total.................... $ 7,265,000 $10,178,000
Liabilities and Equity
Notes payable - Toth Aluminum
Corporation......................... $ 7,881,000 $ 8,494,000
Notes payable - Banks................. 525,000 525,000
Payables - Toth Aluminum Corporation.. 12,155,000 13,950,000
Other payables........................ 241,000 547,000
Equity - Toth Aluminum Corporation.... (13,524,000) (13,325,000)
- Others....................... (13,000) (13,000)
(13,537,000) (13,338,000)
Total..................... $ 7,265,000 $10,178,000
Three Months Ended
November 30,
1996 1995
Statement of Plant Expenses
Direct plant costs.................... $ 3,000 $ 6,000
General and administrative costs...... 11,000 14,000
Interest Expense...................... 96,000 128,000
Net Loss.............................. $ 110,000 $ 148,000
November 30, August 31,
1996 1996
Payable to and Equity of Toth Aluminum
Corporation:
Notes payable......................... $18,975,000 $19,375,000
Payables.............................. 8,560,000 7,425,000
Beginning equity of the Company....... (5,560,000) (5,560,000)
Less: Loss from Armant................ (8,784,000) (9,375,000)
Capitalized by Armant, but
not accrued by the Company..... (5,620,000) (5,620,000)
Expensed by Armant but not accrued
By the Company..................... (7,105,000) (5,351,000)
Investment in and advances to
Armant.............................. $ 466,000 $ 894,000
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 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 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 1995 they have requested action requiring the
Company to replace or supplement its interest in TACMA. During
1996 the company issued a Series AA-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,
1996 1996
Notes payable to bank,
collateralized (A):.................... - -
Demand notes payable to related
parties, unsecured (A): At 12% ........ 2,777,829 2,555,601
Demand notes payable to other parties,
unsecured (A): At 12%............. - -
Series "A-1" Convertible Promissory Notes
Payable to related parties....... 7,398,265 7,398,265
Payable to others................ 5,978,421 5,978,421
Total.......................... $16,154,515 $15,932,287
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, 1996. 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,
1996, 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, 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 quarter ended November 30, 1996, total assets
decreased from 1,049,282 to $579,896, and current assets
increased from $14,537 to $15,984. While advances to Armant
increased by $18,400 during the quarter, the investment in Armant
was decreased by $427,735 from recognition of the Company's
equity in loss of Armant. The recoverability of the Company's
investment in and advances to Armant of $466,690 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 $3,719,093 to $3,941,321
during the same period. During the same period, accrued salaries
increased by $60,312 and accrued interest increased by $76,842.
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, 1996, the Company wrote down $16,950,536 of its
investment in Armant. This write down occurred due to the
prolonged delay in obtaining the necessary funding to restart the
plant.
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, 1996, of approximately
$62,142,938. 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
(1995). Once this equipment is installed, and with the plant
operating on a continuous basis, the Company believes that the
Vacherie plant's production rate of aluminum chloride and silicon
chloride will increase to 1,000,000 pounds per month and 900,000
pounds per month, respectively. Operation at this level of
production would clearly demonstrate the economical advantage of
the TAC process over other production methods for metal
chlorides.
The plans for upgrading and bringing Armant into commercial
operation are part of the Company's proposal to the United States
Department of Energy (DOE) for cost shared commercialization of
the clay-to-aluminum technology. The Company has submitted three
such proposals to DOE under the "Steel and Aluminum Energy
Conservation and Technology Competitiveness Act of 1988", Public
Law No. 100-680. The Company's first two proposals were rejected
by DOE for perceived inadequacies in addressing the requirements
of the Act in precise accordance with federal requirements. In
order to address DOE's concerns, the Company obtained the
assistance of ICF Kaiser Engineers, an engineering design company
with extensive experience in dealing with DOE, to revise its
proposal to meet DOE requirements. In addition, the Company
obtained a commitment from Alcoa to provide design and analytical
assistance in the initial phase of the commercialization effort,
with the option of increased participation in later phases. The
revised proposal is currently being held in abeyance at DOE
pending TAC's compliance with a new DOE request for additional
participation by industry. TAC has requested a full merit review
of the proposal and of the proposed process commercialization
project without such increased industry participation. However,
the DOE has thus far refused to review the proposal. The
Company continues to request a full review by the U.S. Department
of Energy.
The project to commercialize TAC's proposed clay-to-aluminum
process, as presented to DOE, is subdivided into three phases.
The three phases are logically arranged into a sequence of
progressively larger development steps. The project begins with
bench scale studies, continues through the commercial scale
production of metal chlorides, and leads to the works scale
production of aluminum metal, as shown in the table of project
phases below.
Phase I Execute laboratory and engineering studies to generate
design data for upgrading TAC's clay chlorination pilot
plant to continuous production for aluminum chloride
and silicon tetrachloride.
Phase II Generate the detailed design of the upgraded clay
chlorination pilot plant.
Phase III Construct, commission, start up and run the upgraded
clay chlorination pilot plant in order to determine the
economic feasibility of chlorinating clay as the first
stage of a two-stage Clay-to-Aluminum process.
If ultimately approved by the DOE, up to 70% of project costs could be
provided from federal sources. There is no guarantee, however, of any
funding of the project by any government agency. The company is also
currently pursuing alternative funding avenues for its commercialization
program including collateralized loans.
However, even if and when the Vacherie Plant and any
subsequent plants become fully operational on a continuous basis,
they will be subject to all of the risk inherent in any untried
process, including operational delays during "shakedown" periods,
unforeseeable cost overruns, and/or the inability of the plants,
for whatever unforeseeable reason, to sustain profitable
commercial operations, in which event the Company would consider
shut down of operations.
Since 1992, TAC has been evaluating the application of it's
clay carbo-chlorination technologies to the abundant raw
materials resources of western Canada. The Company acquired
samples of waste materials from the extraction of bitumen from
oil sands in Alberta, Canada, and testing had indicated that the
materials were amenable to the Company's process technology. In
subsequent inquiries and visits, the Company learned that vast
reserves of low grade kaolitic and other clays are present
throughout western Canada. A program was initiated in late 1993
to investigate the feasibility of using these raw materials in a
western Canadian clay chlorination plant to manufacture metal
chlorides (aluminum chloride, silicon tetrachloride and titanium
tetrachloride).
The Company retained Cominco Engineering Services Ltd.,
(CESL),in Calgary, Alberta, Canada as its engineering services
sub-contractor in Canada and undertook presentations to Canadian
industry and the Canadian federal government on a project to
construct plants in the region. In response to the high degree
of interest shown in the Company's proposed project in Canada,
the Company, through CESL, applied to the Canadian federal
government for financial assistance to evaluate western Canadian
raw materials for use in carbo-chlorination. A formal proposal
was submitted by CESL in the Company's behalf in December, 1993,
and this was approved by the federal government in May, 1995
under a Minerals Development Agreement (MDA) to be completed by
May 31, 1996. 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, 1996 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, 1996, was $1,133,302
compared to $802,147 for the corresponding period in 1995.
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, 1996, was $102,364,
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.
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 14, 1997
BY: Charles Toth
Charles Toth
Chairman of the Date: January 14, 1997
Board of Directors
and Chief Executive Officer
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