-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MtBHUCAypeqj3NYO71wjkUcTo604uOxt4pyVuQZBXC+HrignwYxhz29EKnTF5qeY zNk/LKm7qmJAXiBLhvrhrA== 0000098788-97-000002.txt : 19970418 0000098788-97-000002.hdr.sgml : 19970418 ACCESSION NUMBER: 0000098788-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970417 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOTH ALUMINUM CORP CENTRAL INDEX KEY: 0000098788 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 720646580 STATE OF INCORPORATION: LA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07568 FILM NUMBER: 97582800 BUSINESS ADDRESS: STREET 1: P O BOX 250 CITY: VACHERIE STATE: LA ZIP: 70090 BUSINESS PHONE: 5042658181 MAIL ADDRESS: STREET 1: P O BOX 250 CITY: VACHERIE STATE: LA ZIP: 70090 FORMER COMPANY: FORMER CONFORMED NAME: APPLIED ALUMINUM RESEARCH CORP DATE OF NAME CHANGE: 19740109 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended: February 28,1997 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, P.O. BOX 250, VACHERIE, LA 70090 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (504) 265-8181 Securities registered pursuant to Section 12(b) of the Act: NONE (Title of each class) Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, WITHOUT PAR VALUE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Common stock, without par value 35,466,193 Class Outstanding at February 28, 1997 TOTH ALUMINUM CORPORATION INDEX TO FORM 10-Q For The Quarter Ended February 28, 1997 Page Part I Financial Information Balance Sheets - February 28, 1997 and August 31,1996.................... 3 Statements of Operations - Six Months Ended February 28, 1997 and February 29, 1996.... 5 Statements of Cash Flows - Six Months Ended February 28, 1997 and February 29, 1996.... 6 Notes to Financial Statements.............. 8 Management's Discussion and Analysis of the Financial Conditions and Results of Operations...................... 15 Part II Other Information................................ 20 TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) COMBINED BALANCE SHEETS (UNAUDITED)
February 28, AUGUST 31, 1997 1996 ASSETS CURRENT ASSETS: Cash.......................... $ 118 3,750 Accounts receivable-other..... 10,787 Prepaid: Leases........................ Other......................... Total Current Assets.................. 118 14,537 Property, Plant and Equipment Net...... 89,852 103,159 OTHER ASSETS Investments in and Advances to Armant Partnership Net........... 401,305 894,425 Patents and Patent Rights (net of accumulated amortization:........ 1,952 37,161 Total Other Assets.................... 403,257 931,586 TOTAL................................. $ 493,227 $ 1,049,282 See notes to financial statement
February 28, 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............................ 424,567 391,246 Officers and employees........... 237,421 187,361 Accrued salaries ..................... 1,806,472 1,676,994 Accrued expenses ..................... 61,832 - Accrued interest payable.............. 1,325,935 1,163,492 Total current liabilities............. 4,179,327 3,719,093 DEFERRED CREDIT ...................... 50,000 50,000 Series "A-1" Convertible Promissory Note1 Related Parties Principal........................ 7,398,265 7,398,265 Accrued interest payable......... 3,813,220 3,147,378 Non-Related Parties Principal........................ 5,978,421 5,978,421 Accrued interest payable......... 3,880,898 3,342,841 Total Series "A-1" Notes......... 21,070,804 19,866,905 CONVERTIBLE DEBENTURES PAYABLE (net of discounts, commissions, and offering costs of $1563...... 20,437 20,437 STOCKHOLDERS' EQUITY: Common stock - no par value........... 38,258,096 38,258,096 Common stock subscribed............... 20,000 20,000 Paid in capital....................... 164,774 164,774 Deficit accumulated during the development stage................(63,270,211) (61,050,023) Total stockholders' equity............(24,827,341) (22,607,153) TOTAL................................ $ 493,227 $ 1,049,282
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended From Inception February February February February to February 28, 29, 28, 29, 28, 1997 1996 1997 1996 1997 COSTS AND EXPENSES: Research and Development.......... $ 2,935 $ 1,834 $ 15,776 $ 14,675 7,704,637 Promotional, general and administrative... 110,450 125,375 234,091 250,040 15,285,546 Interest............. 888,201 392,167 1,366,342 864,339 10,346,396 Total............... 1,001,586 519,376 1,616,209 1,129,054 33,336,579 OTHER (INCOME) EXPENSE: Loss in Investment and Advances to Armant(A).. 493,120 920,855 17,443,656 Equity in loss of Armant............ 619,570 245,676 1,239,140 556,573 12,489,976 NET LOSS.............$ 2,114,276 $ 765,052 $3,776,204 $1,685,627 $63,270,211 Loss Per Common Share. $.05 $.02 $.10 $.04 (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. See notes to financial statements.
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF CASH FLOW
Six Months Ended From Inception February 28, To February 28, 1997 1996 1997 OPERATING ACTIVITIES NET LOSS.................... $(3,776,204) $(1,685,627) ($63,270,211) ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization............. 13,307 18,421 1,108,529 Amortization and write off of patents........... 35,209 15,632 468,659 Amortization of prepaid leases................... - - 302,424 Amortization of financing Cost..................... 95,000 Loss on divestiture of Subsidiaries............. 912,586 Loss from joint venture.... 1,239,140 556,573 10,127,928 Other...................... 111,616 Proceeds from royalty Prepayments.............. 172,760 Prepayment of Leases....... (16,104) Disposition of property, Plant, and equipment..... 27,745 CHANGES IN OPERATING ASSETS AND LIABILITIES: Increases in accounts receivable.............. 10,787 (10,787) Decrease (Increase) in Prepaid expenses........ (27,371) Increase in accounts payable and accrued expenses.... 437,134 451,292 12,312,863 Increase (decrease) in notes notes payable........... 1,159,797 485,217 17,641,209 (880,830) 71,119 ($ 20,032,367)
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF CASH FLOWS
Six Months Ended From Inception February 29, To February 29, 1997 1996 1997 INVESTING ACTIVITIES: Purchase of property, plant and equipment........... (13,307) (19,211) ($ 1,172,353) Acquisition of patents.... (443,475) Investment of Certificates of Deposit.............. (3,995,000) Cash investment in and Advances to TACMA....... (1,076,595) Cash investments in and advances to Armant...... (30,350) (46,550) (21,530,439) Write off of Investments and Cash advance to Armant. 920,885 17,387,674 Redemption of Certificates of Deposit.............. 3,995,000 Proceeds from sale of net Profit interest......... $ 50,000 877,198 (65,761) ($ 6,785,188) 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 (3,632) 5,350 118 CASH BEGINNING OF PERIOD 3,750 5,051 CASH END OF PERIOD 118 10,104 118 See notes to financial statements
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS 1. In the opinion of management, the accompanying condensed financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of Toth Aluminum Corporation (the Company) as of February 28, 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 February 28, 1997, and August 31, 1996, of $63,270,211 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 is actively evaluating the raw material resources in Western Canada and attempting to secure the necessary funding to construct a metal chlorides plant in Canada. The Company intends to fund the capital and operating needs of the Canadian operation through the formation of a joint venture with either industrial or venture partners in Canada. Management believes that a metal chlorides plant in Canada will be of a size to be commercially viable and will earn a significant profit. The metal chlorides plant being planned for Canada will have a capacity of 50,000 metric tons per year (seven times larger than the Armant plant) and will incorporate all of the process knowledge and proposed modifications resulting from the operation of the Armant facilities. Should the Company be able to successfully raise the required funds for either or both the Canadian operation and/or Armant, then the Company=s existence will be assured for the next twelve months. The Company's continuation in existence is dependent upon its ability to generate sufficient cash flow to meet its continuing obligations on a timely basis, to fund the operating and capital needs of Armant, and to obtain additional financing as may be required, and ultimately to attain successful operations. Should the Company be unable to obtain a joint venture partner(s) for either the Canadian operation or Armant, and/or funding from the DOE, it may experience significant difficulty raising funds to complete the required modifications to attain continuous production at Armant. These factors, among others, may indicate that the Company will be unable to continue in existence. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue in existence. 3. The Company has historically maintained investments in two affiliates, TACMA and Armant. In November of 1994, WestCAN Chemicals Inc.(WestCAN) was formed and registered in Alberta, Canada. The Company currently owns 100% of WestCAN, however the Company's equity position will be diluted as WestCAN raises the necessary funds to construct a 50,000 metric ton per year metal chlorides plant in Canada. The Company applies the equity method of accounting for its investment in Armant and WestCAN. The collectibility of the advances to and the recovery of the investment depends upon the affiliate achieving successful commercial operations. The investment in TACMA was expensed during 1988. Armant The Company is general partner in a limited partnership (Armant) formed in 1982 to construct and operate a metal chlorides plant in Vacherie, Louisiana. The plant, which through August 31, 1989, has cost approximately $23 million to construct, has been built on land (the Armant site) owned by Empresas Lince, S.A., (ELSA), a Central American corporation controlled by a former member of the Company's Board of Directors. Under the terms of the original partnership agreement, the Company was to have a 50% ownership interest in the partnership. In March 1983, the partnership agreement was revised to provide the Company a 2% ownership interest and under a separate license agreement, a royalty payment based on net positive cash flow of the partnership. The license agreement provides for royalty payments to the Company equal to 29.6% of net positive cash flow until each limited partnership unit has received $160,000 in cash, at which time royalty payments increase to 49% of net positive cash flow. The Company's capital contribution to Armant consisted of certain improvements to the property, a non-exclusive licensing agreement providing for Armant's use of the Company's carbo-chlorination processes for producing metal chlorides, and prepaid leases as described in Note 4. Contributions to Armant by the limited partners, on the basis of a single limited partnership unit, consisted of $25,000 in initial cash deposits, $75,000 in cash to be paid in equal monthly installments of $5,000 and either a $60,000 letter of credit or the purchase of $60,000 of the Company's restricted common stock. Armant has received subscriptions for all thirty-five limited partnership units. At August 31, 1984, Armant had received cash contributions of approximately $3,459,000. The Chairman of the Company's Board of Directors holds fifteen of the thirty-five units. During November 1984, the Company loaned $3,995,000 to Armant, resulting in the Company now having a receivable from Armant in the amount of $3,995,000 bearing interest at 13.5% per annum. As of August 31, 1989 the Company had made additional cash advances to the Armant Partnership totaling $21,530,000, bearing interest at 12% per annum. However the Company has written down $17,387,674 of this investment. 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 February 28, 1997, 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. During Armant's operation from 1983 to 1989, there were 57 test runs conducted 57. As a result of these test runs Armant has been able to successfully produce approximately 550,000 pounds of crude aluminum trichloride and has purified approximately 220,000 pounds and sold approximately 122,000 pounds of purified aluminum chloride. In addition Armant has sold approximately 46,000 pounds of silicon tetrachloride (commonly referred to as silicon chloride). After an extensive revaluation of the Armant Partnership, Management determined that the cost capitalized and deferred must be written down in accordance with Generally Accepted Accounting Practices. Although the Company believes the Armant Plant will ultimately achieve production, the prolonged delays in attaining the needed capital to restart the Armant Plant has forced the Company to write down $17,387,000 in capitalized costs. Costs capitalized and deferred by Armant consisted of the following: February 28, August 31, 1997 1996 Direct carbo-chlorination plant costs: Process equipment................ $ 2,785,000 $ 5,473,000 Other equipment.................. - 27,000 Leasehold improvements........... 125,000 175,000 2,910,000 5,675,000 Self-construction and start-up costs: Salaries: Engineering .................. 330,000 427,000 Plant construction and operations.................... 2,100,000 3,214,000 Indirect labor and overhead... 307,000 425,000 2,737,000 3,766,000 Related costs: Plant operations.............. - - Direct and indirect plant and material costs................ - - Technical outside services.... - - Other......................... - - - - Interest costs: Payable to Toth Aluminum Corporation................... - - Other......................... - - - - $ 5,647,000 $ 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. On February 28, 1997, Armant elected to write down $17,387,000 in capitalized costs. February 28, August 31, 1997 1996 Assets: Plant and equipment......... $ 5,647,000 $ 9,441,000 Other....................... 470,000 737,000 Total....................... $ 6,117,000 $ 10,178,000 Liabilities and Equity: Notes payable - Toth Aluminum Corporation................. $ 5,315,000 $ 8,494,000 Notes payable - Bank........ 525,000 525,000 Payables - Toth Aluminum Corp....... 13,350,000 13,950,000 Other payables........... 425,000 547,000 Equity - Toth Aluminum Corporation............ (13,485,000) (13,325,000) - Other................ (13,000) (13,000) (13,498,000) (13,338,000) Total........................ $ 6,117,000 $ 10,178,000 Six Months Ended February 28, February 29, 1997 1996 Statement of Plant Expenses Write down of Capitalized Costs................. $ 360,000 $ 448,000 Direct plant costs.......... 88,000 54,000 Interest expense............ 1,564,000 1,675,000 General and administrative costs.. 78,000 58,000 Net loss $ 2,090,000 $ 2,235,000 February 28, August 31, 1997 1996 Payable to and Equity of Toth Aluminum Corporation: Notes payable.................. $ 19,385,000 $ 19,375,000 Payables....................... 7,525,000 7,425,000 Beginning equity of the Company.............. (5,560,000) (5,560,000) Less: Loss from Armant... (9,475,000) (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............ (5,854,000) (5,381,000) Investment in and advances to Armant.................. $ 401,000 $ 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 February 29, 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: February 28, August 31, 1997 1996 Notes payable to bank, collateralized (A): At 12% ..................... $ - $ - Demand notes payable to related parties, unsecured: At 12% ...................... 23,100 - Notes payable to other parties, secured (A): At 12% ...................... 300,000 300,000 323,100 300,000 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 13,376,689 13,376,686 Total............................ $13,699,786 $13,676,686 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, 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 six months ended February 28, 1997, total assets decreased to $493,227 from $1,049,282 at August 31, 1996, and current assets decreased from $14,537 to $118. The decrease in current assets is attributed to two factors, first the write off of $10,787 receivable and secondly the reduction of cash on hand by $3,632. The primary assets of the Company is its Investment in and Advances to the Armant Partnership of $401,305. The recoverability of this sum is dependent on the Armant Partnership achieving and sustaining sufficiently profitable commercial operations (see note 3 of Notes to Financial Statements). Total liabilities, including the Series "A-1" Convertible Promissory Note, increased from $23,656,435 to $25,320,563 during the same period. On December 24, 1985, the Company commenced an offering of its 10% Convertible Debentures due August 1, 1990 (the "Debentures"). The offering contemplated the sale of a maximum of $4,320,000 of Debentures, convertible, at the election of the Debenture holders, into 3,175,000 shares of common stock, no par value, of the Company. The purchase price of each Debenture was $1,000, payable in cash. No minimum offering of Debentures was established and offerees were apprised of the fact that the proceeds of the offering would not be placed into escrow, but would be applied directly to the Company. The Debenture offering was closed as of May 31, 1986, resulting in net proceeds of $3,852,963 (after deducting offering costs of $467,037). As of November 30, 1988, 4,298 debentures were converted into 3,152,995 shares of the Company's common stock, resulting in an increase in common stock of $3,833,307 (net offering costs of $464,693) and a balance in debentures payable of $20,437 (net offering costs of $1,563). The Board of Directors of the Company learned that not all of the Debentures were sold for cash. Instead of the maximum offering of $4,320,000, $2,014,137 of Debentures were purchased in exchange for the cancellation of pre-existing debt which the Company owed to these purchasers. Of the $2,014,137 of Debentures sold in exchange for the cancellation of indebtedness, $1,957,137 or 97%, was sold to or through directors, officers or affiliates of the Company. As a result of the sale of Debentures for consideration other than cash, the proceeds of the Debenture offering were not directly applied in the manner that the Company intended, or as the Company would have applied the proceeds had the Debentures been sold entirely for cash. The Debenture offering contemplated that net proceeds (after deduction of sales commissions and offering costs) of $3,842,000 would be applied approximately $2,882,000 toward a loan to the Armant Partnership (A Louisiana Partnership of which the Company is the General Partner) for the repayment of the partnership's loan, capital expenditures, and working capital, with the balance of $960,000 for the Company's working capital and development expenses. Instead, the net proceeds of the Debenture offering were directly applied as follows: (I) $1,939,000 toward the retirement of debt, of which $1,045,000 was to retire the Company's debt and the balance of which was to retire the partnership's debt, and (ii) $1,902,000 was loaned to the Partnership for its working capital and for capital expenditures. This discrepancy is a result of the considerable delay which was experienced in bringing the Debenture offering effective. As a result, the Company, wishing to continue the operations of the Armant facility, and to continue the Company's research activities, borrowed funds from directors, affiliates and outside lenders, relying on the guarantee of certain directors and affiliates for Armant and corporate purposes. When the Debenture offering became effective, the proceeds of the offering were used substantially to retire this debt. Consequently, the Company believes that the net proceeds of the Debenture offering were applied, albeit indirectly, in the matter contemplated by the Debenture offering. However, if it were subsequently determined that this variance in the terms of the offering would require the Company to make an offer of rescission of the debenture offering, the Company has made no provision in the financial statements for such an offering. To date, there have been no claims against the Company with respect to this issue and the Company is not aware that any such claims are planned or contemplated. Because of the complex nature of securities law, legal counsel has not formed an opinion on whether there is any potential or actual liability to the Company. The Company, as general partner of Armant, has granted a continuing guarantee of Armant's outstanding bank debt of approximately $525,000 plus accrued interest. Working Capital Meeting Operating Needs and Commitments From inception, the Company has sustained its operations primarily through funds provided by private placements and public offerings of its common stock. Due to the length of its development stage activities, liquidity has always been a continuing concern. The Company has incurred net losses from its inception in 1966 through February 28, 1997, of approximately $63,270,211. Although the Company's investees (Armant and TACMA) have constructed facilities that employ the Company's patented processes, Armant has not achieved continuous commercial production, and the commercial viability of the processes has not been demonstrated. TACMA has not commenced commercial production and no such activities are currently planned. The recoverability of the Company's investments in and advances to Armant, is dependent on Armant achieving sufficiently profitable commercial operations. These factors, among others, may indicate that the Company will be unable to continue in existence. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue in existence. The Company's continuation in existence is dependent upon its ability to generate sufficient cash flow to meet its continuing obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain successful operations. Management believes that the plants constructed by Armant and TACMA demonstrate that the production of metal chlorides and aluminum intermediates through the Company's patented processes is possible. Further, the planned expansion of the Armant Plant should enable it to achieve continuous production of alumina as well as metal chlorides. Management believes that continuous production capabilities should enable it to attain successful operations. This will not occur at the TACMA facility unless and until the Company directs its efforts and resources toward TACMA. No such activities are currently planned at TACMA. Immediate Development Plans at Armant and Canada. The Armant Plant, which was intended to be constructed so as to operate on a continuous basis, was only capable of operating only in a "batch" mode when it was shutdown in 1988. The plant was then capable of producing approximately 100,000 pounds of aluminum chloride per batch. In order to operate on a continuous basis, additional equipment must be installed, including a new condenser system, several new conveyers, a revised silicon tetrachloride recovery and purification system, plus other equipment, some of which needs to be specially built, at a capital cost estimated by the Company to be up to $12,000,000 (1996). Once this equipment is installed, and with the plant operating on a continuous basis, the Company believes that the Vacherie plant's production rate of aluminum chloride and silicon chloride will increase to 1,000,000 pounds per month and 900,000 pounds per month, respectively. Operation at this level of production would clearly demonstrate the economical advantage of the TAC process over other production methods for metal chlorides. The plans for upgrading and bringing Armant into commercial operation are part of the Company's proposal to the United States Department of Energy (DOE) for cost shared commercialization of the clay-to-aluminum technology. The Company has submitted three such proposals to DOE under the "Steel and Aluminum Energy Conservation and Technology Competitiveness Act of 1988", Public Law No. 100-680. The Company's first two proposals were rejected by DOE for perceived inadequacies in addressing the requirements of the Act in precise accordance with federal requirements. In order to address DOE's concerns, the Company obtained the assistance of ICF Kaiser Engineers, an engineering design company with extensive experience in dealing with DOE, to revise its proposal to meet DOE requirements. In addition, the Company obtained a commitment from Alcoa to provide design and analytical assistance in the initial phase of the commercialization effort, with the option of increased participation in later phases. The revised proposal is currently being held in abeyance at DOE pending TAC's compliance with a new DOE request for additional participation by industry. TAC has requested a full merit review of the proposal and of the proposed process commercialization project without such increased industry participation. However, the DOE has thus far refused to review the proposal. The Company continues to request a full review by the U.S. Department of Energy. The project to commercialize TAC's proposed clay-to-aluminum process, as presented to DOE, is subdivided into three phases. The three phases are logically arranged into a sequence of progressively larger development steps. The project begins with bench scale studies, continues through the commercial scale production of metal chlorides, and leads to the works scale production of aluminum metal, as shown in the table of project phases below. Phase I Execute laboratory and engineering studies to generate design data for upgrading TAC's clay chlorination pilot plant to continuous production for aluminum chloride and silicon tetrachloride. Phase II Generate the detailed design of the upgraded clay chlorination pilot plant. Phase III Construct, commission, start up and run the upgraded clay chlorination pilot plant in order to determine the economic feasibility of chlorinating clay as the first stage of a two-stage Clay-to-Aluminum process. If ultimately approved by the DOE, up to 70% of project costs could be provided from federal sources. There is no guarantee, however, of any funding of the project by any government agency. The company is also currently pursuing alternative funding avenues for its commercialization program including collateralized loans. However, even if and when the Vacherie Plant and any subsequent plants become fully operational on a continuous basis, they will be subject to all of the risk inherent in any untried process, including operational delays during "shakedown" periods, unforeseeable cost overruns, and/or the inability of the plants, for whatever unforeseeable reason, to sustain profitable commercial operations, in which event the Company would consider shut down of operations. Since 1992, TAC has been evaluating the application of it's clay carbo-chlorination technologies to the abundant raw materials resources of western Canada. The Company acquired samples of waste materials from the extraction of bitumen from oil sands in Alberta, Canada, and testing had indicated that the materials were amenable to the Company's process technology. In subsequent inquiries and visits, the Company learned that vast reserves of low grade kaolitic and other clays are present throughout western Canada. A program was initiated in late 1993 to investigate the feasibility of using these raw materials in a western Canadian clay chlorination plant to manufacture metal chlorides (aluminum chloride, silicon tetrachloride and titanium tetrachloride). The Company retained Cominco Engineering Services Ltd., (CESL),in Calgary, Alberta, Canada as its engineering services sub-contractor in Canada and undertook presentations to Canadian industry and the Canadian federal government on a project to construct plants in the region. In response to the high degree of interest shown in the Company's proposed project in Canada, the Company, through CESL, applied to the Canadian federal government for financial assistance to evaluate western Canadian raw materials for use in carbo-chlorination. A formal proposal was submitted by CESL in the Company's behalf in December, 1993, and this was approved by the federal government in May, 1994 under a Minerals Development Agreement (MDA) to be completed by March 31, 1995. Under the terms of the MDA the Canadian government would fund C$ 306,000 of project costs with the balance to be provided by industrial participants. The MDA study has evaluate three classes of western Canadian clays and two classes of western Canadian coke resources. These raw material classes are: Clay Sources:Clays resulting from oil sands mining and processing Clays resulting from coal mining and/or processing Clays from naturally occurring kaolitic deposits Coke Sources:Cokes resulting from oil sands processing Cokes that are commercially available in western Canada. The Canadian project was completed in mid 1995 with favorable results. The MDA study concluded that the clays and cokes are adequate, and are available in plentiful supply to serve as feed stock for the company's process. Development Plans As in the previous years, the principal goal of the Company is to commercialize its process to produce aluminum and intermediate chloride and oxide products from clay. One of the first steps in the commercialization process is the commercial production of metal chlorides. The Company is currently engaged in pursuing two options to achieve this first level of commercialization. One, the construction of commercial facilities in Canada to take advantage of abundant raw materials resources and low cost electrical power, and two, the upgrading and completion of the Armant Plant, such that it is capable of producing high-purity aluminum chloride and other intermediates on a continuous basis. On August 30, 1995, the Company executed a Letter of Understanding with Fluor Daniel, an engineering company located in Greenville, South Carolina, under which the company declared its intent to appoint Fluor Daniel as the Project Manager and Construction Manager of a project to construct a commercial Metal Chlorides Plant to manufacture aluminum chloride, silicon tetrachloride, titanium tetrachloride and other products from clay using the company's proprietary carbo-chlorination technology. Subsequently, on September 26, 1995, the company and Fluor Daniel executed a Technical Services Agreement covering the work to be performed in the first phase of the three-phase project. The initial tasks cover a pre-feasibility study to determine the basic parameters for commercial production of metal chloride chemicals from clay. This study is expected to be completed in six to eight weeks and lead to Phase 2, the preparation of the document package needed to secure financing of the project. The second phase will take up to one year after which the third phase of the project, plant design, construction and start up will be undertaken. Fluor Daniel estimates that the commercial plant can be in operation within three years once it is funded. Canada The western Canadian raw materials resources were found to be economically suitable for the Company's clay carbo- chlorination technology. The Company has formed a Canadian company by the name of "WestCan Chemicals, Inc." which will operate under license from the Company to develop, construct, and operate a metal chlorides plant in Canada utilizing western Canadian feedstocks. Management believes that the successful manufacture of aluminum chloride, silicon tetrachloride and titanium tetrachloride in Canada will provide a substantial source of revenue to the company. Management further believes that the successful operations of a metal chlorides plant in Canada will eventually lead to the utilization of the Company's technology to produce aluminum from clay. Western Canada is in an opportune location for the furthering of the Company's technology since not only are abundant quantities of raw materials available, but also large supplies of low cost electrical power. Results of Operations The Company had no operating revenues and reported net losses. The Company is considered to be a development stage enterprise; start-up activities have commenced, but the Company has received no revenue therefrom. The net loss for the six months ended February 28, 1997, was $3,776,204 compared to $1,685,622 for the corresponding period in 1996. During the six month period ending February 28, 1996, the company wrote down a significant amount of its investment in the Armant Partnership which affected its net loss. The initial phase of construction of the Armant Plant was completed in December, 1983. Since that time, numerous test runs have been performed in an effort to achieve continuous commercial production of market grade metal chlorides. Subsequent to the Company's 1986 fiscal year end, Armant determined additional funding would be required to sustain successful operations. Therefore, because of unexpected construction delays and the continued lack of commercial production, Armant elected to discontinue capitalizing plant start-up costs as of August 31, 1986. The net loss recognized by Armant during the three months ended November 30, 1987, resulted primarily from expensing start- up costs. The net loss recognized by Armant during the year ended August 31, 1987, was first allocated to the partners' equity accounts based upon their respective percentage interests in the total partnership equity. To the extent that this loss exceeded the total partners' equity, all additional losses were allocated to the Company's equity interest in the partnership, since the Company is the sole general partner in the limited partnership and is at risk for these losses in the form of advances to Armant. The Company's equity in the loss of Armant for the six months ended February 28,1997, was $619,570, 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: April 30, 1997 Charles E. Toth Treasurer BY: Charles Toth Date: April 30, 1997 Charles Toth Chairman of the Board of Directors Chief Executive Officer EX-27 2 ARTICLE 5. FIN. DATA SCHEDULE FOR 2ND QTR. 10-Q.
5 AUG-31-1996 DEC-01-1996 FEB-28-1997 6-MOS 118 0 0 0 0 118 1,173,746 1,083,894 493,227 4,179,327 20,437 0 0 38,258,096 0 493,227 0 0 0 0 2,409,862 0 1,336,342 (3,776,204) 0 (3,776,204) 0 0 0 (3,776,204) .10 .10
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