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, 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, 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, 1998
<PAGE>
TOTH ALUMINUM CORPORATION
INDEX TO FORM 10-Q
For the Quarter Ended November 30, 1998
Page
Part I Financial Information (Unaudited)
Balance Sheets - November 30, 1998
and August 31, 1998.................................... 3
Statements of Operations - Three Months
Ended November 30, 1998 and 1997 ...................... 5
Statements of Cash Flows - Three Months
Ended November 30, 1998 and 1997....................... 6
Notes to Financial Statements.......................... 8
Management's Discussion and Analysis
of the Financial Conditions and Results
of Operations.......................................... 14
Part II Other Information...................................... 16
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
COMBINED BALANCE SHEETS (Unaudited)
November 30, August 31,
1998 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .............................. $ 366 $ 918
Accounts receivable:
Other........................... 0 0
Prepaid:
Leases ......................... - -
Other........................... _________ __________
Total current assets............... 366 918
INVESTMENTS IN AND
ADVANCES TO:
Armant Partnership.............. 44,100 58,450
PROPERTY, PLANT AND
EQUIPMENT - Net................. 40,508 48,354
PREPAID LEASES..................... - -
PATENTS AND PATENT
RIGHTS (net of
accumulated amortization:...... 260 320
TOTAL.............................. $ 85,234 $ 108,042
</TABLE>
<TABLE>
November 30, August 31,
1998 1998
<S>
LIABILITIES <C> <C>
CURRENT LIABILITIES:
Notes payable-related parties.... $ 23,100 23,100
Notes payable-bank.............. - -
Notes payable-other ............ 300,000 300,000
Accounts payable:
Trade.......................... 523,670 498,300
Officers and employees......... 410,900 357,491
Accrued salaries ............. 2,341,495 2,246,955
Accrued expenses .............. 268,400 243,000
Accrued interest payable...... 1,970,179 1,855,552
Total current liabilities....... 5,837,744 5,524,398
DEFERRED CREDIT ................... 0 0
Series "A-1" Convertible
Promissory Note1 (CPN)
CPN Related Parties
Principal.................... 7,398,265 7,398,265
Accrued interest payable..... 6,180,785 5,958,838
CPN Other Parties
Principal.................... 5,978,421 5,978,421
Accrued interest payable..... 5,438,125 5,258,773
Total Series "A-1" Notes.... 24,995,596 24,594,297
CONVERTIBLE DEBENTURES PAYABLE
(net of discounts, commissions,
and offering costs of:........ 20,437 20,437
STOCKHOLDERS' EQUITY:
Common stock - no par value........ 38,258,0961 38,258,0961
Common stock warrants..............
Common stock subscribed............ 20,000 20,000
Paid in capital.................... 164,774 164,774
Deficit accumulated
during the development stage...... (69,211,413) (68,473,960)
Total stockholders' equity........ (30,768,543) (30,031,090)
TOTAL............................... $ 85,234 $ 108,042
</TABLE>
See Section 11, "Notes to Financial Statements" of the August
31, 1998 10-K.
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED DURING THE
DEVELOPMENT STAGE FOR THE QUARTER ENDED NOVEMBER 30, 1998
(Unaudited)
<S> <C> <C> <C>
Three Months Ended From Inception
November 30 To November 30,
1998 1997 1998
COSTS AND EXPENSES:
Research and Development........... $ 3,420 $ 3,740 $ 7,732,960
Promotional, general and
administrative.................. 198,719 95,420 16,098,957
Interest.......................... 515,926 497,112 15,277,844
Total............................. $ 718,065 $ 596,272 $ 39,109,763
OTHER (INCOME) EXPENSE:
Loss in Investment and Advances
To Armant........................ 14,3503,191 17,433,513
Equity in loss of Armant........ 14,962 16,009 12,668,139
NET LOSS............ .................. $ 747,377 $ 615,472
69,211,413
LOSS PER
COMMON SHARE....................... $ .02 $ .01
</TABLE>
<TABLE>
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOW
<S> <C> <C> <C>
Three Months Ended From Inception
November 30, To November 30,
1998 1997 1998
OPERATING ACTIVITIES
NET LOSS.......................... $ (747,377) $ (615,472) ($ 69,211,413)
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and
amortization.................... 7,846 5,886 1,174,371
Amortization and write
off of patents.................. 60 260 440,558
Amortization of prepaid leases... - - 302,424
Amortization of financing Cost... 95,000
Loss on divesture of Subsidiaries. 912,586
Loss from joint venture........... 14,350 16,009 11,154,973
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........... 304,938 181,304 13,663,744
Increase (decrease) in notes
notes payable.................. 401,299 401,299 20,710,074
(18,884) (10,715) ($ 20,499,824)
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
Three Months Ended From Inception
November 30, To November 30,
1998 1997 1998
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.. 3,370 3,191 17,072,772
Cash investments in and
advances to Armant........... 14,962 7,850 (20,755,327)
Redemption of Certificates
of Deposit................... 3,995,000
Proceeds from sale of net
Profit interest................ $ 50,000
18,332 11,041 ($6,311,671)
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 (552) 4,112 366
CASH BEGINNING OF PERIOD (918) 3,786
CASH END OF PERIOD 366 326 366
</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 November 30, 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, 1998.
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,
1998, and August 31, 1998, of $69,211,413 and $68,473,960,
respectively. Although the Company's investees (TACMA and Armant)
have constructed facilities that will employ the Company's
patented processes, TACMA and Armant are both inactive. The Co
mpany has determined that the operating plant of each investee
will require further modifications before commercial production
can be achieved.
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 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'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, 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 raising funds. 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.
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.
Costs Capitalized and deferred by Armant consisted of the
following:
November 30 August 31
1998 1998
Direct carbo-chlorination plant costs:
Process equipment................. $ 2,440,000 $ 2,950,000
Other equipment................... 0 0
Leasehold improvements............ 65,000 72,000
2,505,000 3,022,000
Self-construction and start-up costs:
Salaries
Engineering....................... 30,000 40,000
Plant construction
and operations................. 640,000 702,000
Indirect labor and overhead....... 32,000 35,000
700,000 777,000
$ 3,205,000 $ 3,799,000
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,
1998 1998
Assets:
Plant and equipment................. $ 3,205,000 $ 3,799,000
Other............................... 80,000 100,000
Total............................... $ 3,285,000 $ 3,899,000
Liabilities and Equity
Notes payable - Toth Aluminum
Corporation..................... $ 4,250,000 $ 4,740,000
Notes payable - Banks............. 0 0
Payables - Toth Aluminum
Corporation..................... 16,974,000 16,970,000
Other payables.................... 740,000 710,000
Equity - Toth Aluminum
Corporation..................... (18,666,000) (18,508,000)
- Others........................ (13,000) (13,000)
(18,679,000) (18,521,000)
Total........................... $ 3,285,000 $ 3,899,000
Three Months Ended
November 30,
1998 1997
Statement of Plant Expenses
Direct plant costs................. $ 4,200 $ 3,000
General and administrative costs... 17,400 11,000
Interest Expense................... 84,000 96,000
Net Loss........................... $ 105,600 $ 110,000
November 30, August 31,
1998 1998
Payable to and Equity of Toth Aluminum
Corporation:
Notes payable...................... 19,845,000 $ 19,842,000
Payables........................... 4,800,000 5,240,000
Beginning equity
of the Company................... (5,560,000) (5,560,000)
Less:Loss from Armant.............. (11,310,000) (11,650,000)
Capitalized by Armant, but
not accrued by the Company....... (5,620,000) (5,620,000)
Expensed by Armant but
not accrued by the Company....... (2,171,000) (2,310,000)
Investment in and advances to
Armant............................. $ 44,100 $ 58,450
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 1997 they have requested action requiring the
Company to replace or supplement its interest in TACMA. During
1997 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,
1998 1998
Notes payable to bank,
collateralized (A):............... - -
Demand notes payable to related
parties, unsecured (A): At 12%... 2,968,400 2,813,055
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................................... $ 16,345,086 $ 16,189,741
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, 1998. 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,
1998, 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, 1998, 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, 1998, total assets
decreased from $108,042 to $85,234. While advances to Armant
increased by $3,700 during the quarter, the investment in Armant
was decreased by $14,350 from recognition of the Company's
equity in loss of Armant. The recoverability of the Company's
investment in and advances to Armant of $44,100 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 $5,524,398 to $5,837,744
during the same period. During the same period, accrued salaries
increased by $94,540 and accrued interest increased by $114,627.
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.
During the first quarter ending November 30, 1998, the
Company wrote down a total of $17,433,513 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, 1998, of approximately
$69,211,413. 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.
Immediate Development.
The Company's intention in the near-term is to focus its
efforts and resources on completing a project to commercialize
the Clay-to-Aluminum Process be undertaken in two steps.
In the first step, which TAC has designated Phase 1, TAC
proposes that a semi-commercial demonstration plant be built and
operated. Operation of this semi-commercial plant will permit
engineers to fine tune the design of the subsequent full
commercial facility in Phase 2. Equally important, the Phase 1
plant will provide a hands-on training facility for commercial
plant staff. Phase 2 of the project will comprise the design and
construction of a full scale commercial Clay-to-Aluminum plant.
Cost of Phase 1 is estimated to be $45 million and the cost of
phase 2 will be determined after Phase 1 has been completed.
There will be two principal goals in executing Phase 1. The
first goal is to refine TAC's clay chlorination procedures for
implementation in commercial production facilities. TAC has
already developed these procedures to an advanced stage in its
pilot plant, but the design of that pilot plant did not permit
long duration, continuous operation runs. Refinement of
procedures will permit confident scale-up to full scale
commercial plant capacity.
The second goal will be generation of refined designs for
full scale commercial smelting cells. This will be accomplished
by constructing the operating a complete ACS smelting facility
which will consume a portion of the aluminum chloride produced in
clay chlorination. The balance of production will be marketed as
high purity anhydrous aluminum chloride to generate revenues to
help defray plant operating costs. Smelting specialists foresee
rapid development of a final design for commercial cells in Phase
1, and anticipate that this will consume nine to twelve months of
development time.
The project will start as soon as TAC has secured the
financing for Phase1. Initial tasks includes detailed
engineering design of clay chlorination and smelting facilities,
and the selection of a suitable plant site. Construction will
begin with site preparation, approximately nine months after the
project start. After an initial ramp-up period the Phase 1 plant
is expected to reach full design capacity within 36 months after
project start.
After confirmation of the economic viability of the Clay-to-
Aluminum Process, work will begin on the second phase of the
project, namely the design, construction and operation of a
commercial Clay-to-Aluminum plant. TAC proposes that a modular
design concept be adopted for Phase 2, such that the eventual
full scale commercial plant will consist of a set of duplicate
plant modules, operating in parallel. TAC estimates that the
first plant module will be completed in year seven of the
project, with additional modules constructed in parallel in
subsequent years.
Armant
The Armant Plant, which was originally intended to be
constructed to operate on a continuous basis, but was only
capable of operating in a "batch" mode, when it was shutdown in
1988. The plant was 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.
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, 1998,
was $747,377 compared to $615,472 for the corresponding period in
1997.
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, 1998, was $14,350, 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, 1998, concerning legal proceedings.
<PAGE>
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 13, 1999
BY: Charles Toth
Charles Toth
Chairman of the
Board of Directors Date: January 13, 1999
and Chief Executive Officer
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