SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: May 31, 1998
Commission File Number: 0-7568
TOTH ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0646580
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
HIGHWAY 18 - RIVER ROAD, VACHERIE, LA 70090
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (504)
265-8181
Securities registered pursuant to Section 12(b) of the Act:
NONE
(Title of each class)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter periods that the registrant was required to
file reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date:
Common stock, without par value 35,466,193
Class Outstanding at May 31, 1998
TOTH ALUMINUM CORPORATION
INDEX TO FORM 10-Q
For The Quarter Ended May 31, 1998
Page
Part I Financial Information
Balance Sheets - May 31, 1998
and August 31, 1997..............................
Statements of Operations - Nine Months
Ended May 31, 1998 and May 31,1997...............
Statements of Cash Flows - Nine Months
Ended May 31, 1998 and May 31, 1997.............
Notes to Financial
statements..................................
Management's Discussion and Analysis
of the Financial Conditions and Results
Of Operations..................................
Part II Other Information.............................
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
COMBINED BALANCE SHEETS (UNAUDITED)
MAY 31, AUGUST 31,
1998 1997
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ASSETS
CURRENT ASSETS:
Cash ............................... 178 4,112
Accounts receivable-other........... - -
Total current assets................ 178 4,112
Property, Plant and
Equipment - Net..................... 56,198 79,738
OTHER ASSETS:
Investments in and Advances
to Armant Partnership......... 71,400 110,250
Patents and Patent Rights (Net of
accumulated amortization...... 357 940
Total Other Assets.................. 71,757 111,190
TOTAL ASSETS........................ $ 128,133 $ 195,040
MAY 31, AUGUST 31,
1998 1997
LIABILITIES
CURRENT LIABILITIES:
Notes payable-related parties....... $ 23,100 $ 23,100
Notes payable-bank.................. - -
Notes payable-other................. 300,000 300,000
Accounts payable:
Trade ......................... 471,420 457,300
Officers and employees......... 327,147 297,560
Accrued salaries.................... 2,134,455 1,948,961
Accrued expenses.................... 192,450 89,450
Accrued interest payable............ 1,759,433 1,474,005
Total current liabilities........... 5,208,005 4,572,376
DEFERRED CREDIT..................... - -
Series AA-1" Convertible Promissory Note(1)
Related Parties
Principal...................... 7,398,265 7,398,265
Accrued Interest Payable....... 5,736,891 4,404,380
Non-Related Parties
Principal...................... 5,978,421 5,978,421
Accrued Interest Payable....... 5,079,421 4,356,180
Total Series "A-1" Notes............ 24,192,998 22,137,246
CONVERTIBLE DEBENTURES PAYABLE
(net of discounts, commissions,
and offering costs of $1,563).. 20,437 20,437
STOCKHOLDERS' EQUITY:
Common stock - no par value......... 38,258,096 38,258,096
Common stock subscribed............. 20,000 20,000
Paid in capital..................... 164,774 164,774
Deficit accumulated during the
development stage.............. (67,736,177) (64,977,889)
Total stockholders' equity.......... (29,293,307) (26,535,019)
TOTAL LIABILITIES................... $ 128,133 $ 195,040
</TABLE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
From
Three Months Ended Nine Months Ended Inception
May May May May To May
31, 31, 31, 31, 31,
1998 1997 1998 1997 1998
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COSTS AND EXPENSES:
Research and
Development........ $ 3,750 $ 7,426 $ 9,600 $ 23,202 $ 7,726,740
Promotional, general and
administrative..... 77,600 87,430 251,420 321,521 15,682,146
Interest................ 991,362 754,486 2,341,180 2,120,828 13,906,044
Total................1,072,712 849,342 2,602,200 2,465,551 37,314,930
OTHER (INCOME) EXPENSE:
Loss in Investment and
advances to
Armant............ 12,832 229,120 38,850 630,425 17,612,639
Equity in loss of
Armant............ 27,841 141,499 92,821 1,380,639 12,810,608
NET LOSS...............$1,113,385 $1,219,961 $2,733,871 $4,476,615 $67,738,177
Loss Per Common Share.. $.03 $.03 $.08 $.13
</TABLE>
See notes to financial statements.
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
Nine Months Ended From Inception
May 31, May 31, To May 31,
1998 1997 1998
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OPERATING ACTIVITIES
NET LOSS.......................... ($2,733,871) ($4,476,615) ($67,738,177)
ADJUSTMENTS TO RECONCILE NET
INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and
amortization................. 23,540 20,001 1,115,032
Amortization and write
off of patents............... 590 35,921 441,118
Amortization of prepaid leases.... 302,424
Amortization of Financing......... 95,000
Loss on divestiture
of Subsidiaries.............. 912,586
Losses from joint venture......... 92,821 1,380,639 11,174,663
Other............................. 111,616
Proceeds from royalty
Prepayments.................. 172,760
Prepayment of Leases.............. (16,104)
Disposition of Property,
Plant, and Equipment......... 27,745
CHANGES IN OPERATING ASSETS
AND LIABILITIES:
Increase in accounts
receivable................... 10,787 0
Decrease (Increase) in
prepaid expenses............. - - (27,371)
Increase in accounts payable and
accrued expenses............. 538,380 635,225 12,756,260
Increase in notes payable......... 2,055,752 1,809,999 20,245,363
(22,788) (584,043) ($20,427,085)
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS - (Continued)
Nine Months Ended From Inception
May 31, May 31, May 31,
1998 1997 1998
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment........... (12,184) (13,307) ($1,171,230)
Acquisition of patents............. - - (443,375)
Investment of Certificate
of Deposit.................... (3,995,000)
Cash investment in and
Advances to TACMA............. (1,076,595)
Cash investments in and
Advances to Armant............ (3,700) (35,350) (21,539,139)
Write off of Investment and Cash
advances to Armant............ 38,850 630,425 17,790,029
Redemption of Certificates
of Deposit.................... 3,995,000
Proceeds from sale of net
Profit interest............... $ 50,000
22,966 581,768 (6,390,410)
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........ (473) (2,275) 178
CASH BEGINNING OF PERIOD........... 651 3,750
CASH END OF PERIOD................. $ 178 $ 1,475 178
See notes to financial statements
</TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying condensed
financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
financial position of Toth Aluminum Corporation (the Company) as
of May 31, 1998, 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, 1997.
2. The accompanying financial statements of the Company have
been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has incurred net losses
from its inception in August 1966 through May 31, 1998, and
August 31, 1997, of $67,736,177 and $64,977,889, 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.
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, 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), it
may experience significant difficulty. 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 Company applies the equity
method of accounting for its investment in Armant. The
collectibility of the advances to and the recovery of the
investment depends upon the affiliate achieving successful
commercial operations. The investment in TACMA was expensed
during 1988.
Armant
The Company is general partner in a limited partnership
(Armant) formed in 1982 to construct and operate a metal
chlorides plant in Vacherie, Louisiana. The plant, which through
August 31, 1989, has cost approximately $23 million to construct,
has been built on land (the Armant site) owned by Empresas Lince,
S.A., (ELSA), a Central American corporation controlled by a
former member of the Company's Board of Directors.
Under the terms of the original partnership agreement, the
Company was to have a 50% ownership interest in the partnership.
In March 1983, the partnership agreement was revised to provide
the Company a 2% ownership interest and under a separate license
agreement, a royalty payment based on net positive cash flow of
the partnership. The license agreement provides for royalty
payments to the Company equal to 28.6% of net positive cash flow
until each limited partnership unit has received $160,000 in
cash, at which time royalty payments increase to 49% of net
positive cash flow.
The Company's capital contribution to Armant consisted of
certain improvements to the property, a non-exclusive licensing
agreement providing for Armant's use of the Company's
carbo-chlorination processes for producing metal chlorides, and
prepaid leases as described in Note 4.
Contributions to Armant by the limited partners, on the
basis of a single limited partnership unit, consisted of $25,000
in initial cash deposits, $75,000 in cash to be paid in equal
monthly installments of $5,000 and either a $60,000 letter of
credit or the purchase of $60,000 of the Company's restricted
common stock. Armant has received subscriptions for all
thirty-five limited partnership units. At August 31, 1984,
Armant had received cash contributions of approximately
$3,459,000. The Chairman of the Company's Board of Directors
holds fifteen of the thirty-five units.
During November 1984, the Company loaned $3,995,000 to
Armant, resulting in the Company now having a receivable from
Armant in the amount of $3,995,000 bearing interest at 13.5% per
annum. As of August 31, 1989 the Company had made additional
cash advances to the Armant Partnership totaling $17,409,000,
bearing interest at 12% per annum. The Company has also
liquidated $240,000 of Armant's notes payable plus accrued
interest due to a corporation controlled by a member of the
Company's Board of Directors by issuing 240,000 shares of the
Company's restricted common stock. As a result the Company
recorded a receivable from Armant of $276,000 bearing interest at
12% per annum. The Company had additional non-interest bearing
receivables from Armant totaling $173,000 which were incurred in
fiscal 1984, resulting from billing under a service agreement.
Subsequent to that date all costs, including general and
administrative cost, incurred by the Company related to the
construction and operation of the Armant Plant, have been
absorbed by the Company and expensed as incurred. As of August
31, 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.
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. Costs capitalized and deferred by Armant consisted of
the following:
May 31, August 31,
1998 1997
Direct carbo-chlorination plant costs:
Process equipment.................. $ 3,100,000 $ 4,110,000
Other equipment.................... - 14,000
Leasehold improvements............. 85,000 100,000
3,185,000 4,269,000
Self-construction and start-up costs:
Salaries:
Engineering........................ 45,000 360,000
Plant construction and
operations..................... 745,000 2,154,000
Indirect labor and overhead....... 42,000 367,000
832,000 3,766,000
$ 4,017,000 $ 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.
May 31, August 31,
1998 1997
Assets:
Plant and equipment.............. $ 3,500,000 $ 7,150,000
Other............................ 100,000 525,000
Total............................ $ 3,670,000 $ 7,732,000
Liabilities and Equity:
Notes payable - Toth Aluminum
Corporation.................... $ 4,940,000 $ 7,087,000
Notes payable - Bank............. 525,000 525,000
Payables - Toth Aluminum Corp.... 12,630,000 13,950,000
Other payables.............. 680,000 550,000
Equity - Toth Aluminum
Corporation................. (15,162,000) (13,484,000)
- Other.................... (13,000) (13,000)
(15,175,000) (13,497,000)
Total.......................... $ 3,600,000 $ 7,732,000
Nine Months Ended
May 31, May 31,
1998 1997
Statement of Plant Expenses
Write down of
Capitalized costs.......... 8,000 470,000
Direct plant costs............... 18,000 154,000
Interest expense................. 155,000 1,725,000
General and
administrative costs....... 66,000 98,000
Net loss $ 247,000 $2,447,000
May 31, August 31,
1998 1997
Payable to and Equity of Toth Aluminum
Corporation:
Notes payable...................... $ 18,735,000 $ 18,975,000
Payables........................... 5,740,000 5,900,000
Beginning equity of the Company...... (5,560,000) (5,560,000)
Less: Loss from Armant......... (11,013,000) (11,110,000)
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...... (2,211,000) (1,356,000)
Investment in and advances to
Armant......................... $ 71,400 $ 110,000
4. Notes payable consisted of the following:
May 31, August 31,
1998 1997
Notes payable to bank, collateralized
(A): At 12%...................... $ - $ -
Demand notes payable to related
parties, unsecured At 12%........ 23,100 23,100
Notes payable to other parties,
secured (A) At 12%................ 300,000 300,000
Series AA-1" Convertible
Promissory Notes
Payable to related parties........ 7,398,265 7,398,265
Payable to others................. 5,978,421 5,978,421
13,376,686 13,376,686
Total.................................. $ 13,699,786 13,699,786
A) Collateralized by a pledge of personal assets owned by
the Company's Chairman of the Board.
5. The financial statements are summarized and reference is made
to the "NOTES TO FINANCIAL STATEMENTS" included in the Company's
Annual Report on Form 10-K for the fiscal year ended August 31,
1997, as filed with the Securities and Exchange Commission.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
During the nine months ended May 31, 1998, total assets
decreased to $128,133 from $195,040 at August 31, 1997, and
current assets decreased from $4,112 to $178. The decrease in
total assets is the results of the Company's decision to write
down an additional $38,850 in capitalized cost carried by
Armant Limited Partnership. This write down reduced the
Company's Investments in and Advances to Armant from $110,250 as
of August 31, 1997 to 71,400 on May 31, 1998. The
recoverability of the Company's investment in and advances to
Armant of $71,400 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 $26,730,059 to $29,293,307 during the same
period.
The Company, as general partner of Armant, has granted a
continuing guarantee of Armant's outstanding bank debt of
approximately $525,000 plus accrued interest.
Working Capital Meeting Operating Needs and Commitments
From inception, the Company has sustained its operations
primarily through funds provided by private placements and public
offerings of its common stock. Due to the length of its
development stage activities, liquidity has always been a
continuing concern. The Company has incurred net losses from its
inception in 1966 through May 31, 1998, of approximately
$67,736,177. 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.
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 this option to achieve this first level of
commercialization.
In August 1995, Fluor Daniel Inc. undertook a feasibility
study 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. Fluor
Daniel's assessment was highly favorable, but the Company has not
succeeded in raising the funding needed to complete the project.
Armant
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. Due to a lack of
funding the required equipment has not been installed. While such
installation is still a viable option, there are no current plans
to upgrade the Armant facility.
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
"WestCan Chemicals, Inc." which is licensed from the Company to
develop, construct, and operate a metal chlorides plant in Canada,
utilizing western Canadian feedstocks. Due to a lack of funding
no activities are currently underwy in Canada.
Results of Operations
The Company had no operating revenues and reported net
losses. The Company is considered to be a development stage
enterprise; start-up activities have commenced, but the Company
has received no revenue therefrom.
The net loss for the nine months ended May 31, 1998, was
$2,733,871 compared to $4,476,615 for the corresponding period in
1997. During the nine month period ending May 31, 1998, the
company continues to write 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 nine months ended May 31,1998, was $92,821, 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, 1997, concerning legal proceedings.
Item 6. Exhibits and reports on Form 8.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
TOTH ALUMINUM CORPORATION
(Registrant)
BY: Charles E. Toth Date: July 30, 1998
Charles E. Toth
Treasurer
BY: Charles Toth Date: July 30, 1998
Charles Toth
Chairman of the Board of Directors
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-31-1998
<PERIOD-TYPE> 9-MOS
<CASH> 178
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 178
<PP&E> 1,171,230
<DEPRECIATION> 1,115,032
<TOTAL-ASSETS> 128,133
<CURRENT-LIABILITIES> 5,208,005
<BONDS> 20,437
0
0
<COMMON> 38,258,096
<OTHER-SE> 0
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<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 256,042
<LOSS-PROVISION> 0
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<EPS-PRIMARY> (2,597,222)
<EPS-DILUTED> .07
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