-----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, Uh7G5HH0giESqxtO1O5bOMmDufCfyg7AuI9ZqjHWO5JDlwqKHBbRbikjV4iO5NOR w5SzKpJ25MukeL0xXK3bxg== 0000098788-98-000002.txt : 19980202 0000098788-98-000002.hdr.sgml : 19980202 ACCESSION NUMBER: 0000098788-98-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980130 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: SEC FILE NUMBER: 000-07568 FILM NUMBER: 98517434 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 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: November 30, 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 November 30,1997 TOTH ALUMINUM CORPORATION INDEX TO FORM 10-Q For the Quarter Ended November 30, 1997 Page Part I Financial Information (Unaudited) Balance Sheets - November 30, 1997 and August 31, 1997 .......................... Statements of Operations - Three Months Ended November 30, 1997 and 1996.............. Statements of Cash Flows - Three Months Ended November 30, 1997 and 1996.............. Notes to Financial Statements................. Management's Discussion and Analysis of the Financial Conditions and Results of Operations ................................ Part II Other Information ............................ TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) COMBINED BALANCE SHEETS (Unaudited) November 30, August 31, 1997 1997 ASSETS CURRENT ASSETS: Cash .............................................. $ 326 $ 4,112 Accounts receivable: Other.......................................... 0 0 Prepaid: Leases................................ ........ - - Other........................................... _______ _______ Total current assets............................... 326 4,112 INVESTMENTS IN AND ADVANCES TO: Armant Partnership............................. 97,241 110,250 PROPERTY, PLANT AND EQUIPMENT - Net................ 73,853 79,738 PREPAID LEASES.................................... - - PATENTS AND PATENT RIGHTS (net of accumulated amortization:........................ 680 940 TOTAL ASSETS....................................... $ 172,100 $ 195,040 LIABILITIES CURRENT LIABILITIES: Notes payable-related parties................... $ 23,100 23,100 Notes payable-bank.............................. - - Notes payable-other............................. 300,000 300,000 Accounts payable: Trade......................................... 461,350 457,300 Officers and employees........................ 297,460 279,560 Accrued salaries ............................ 2,010,461 1,948,961 Accrued expenses ............................. 101,420 89,450 Accrued interest payable..................... 1,569,818 1,474,005 Total current liabilities...................... 4,763,609 4,572,376 DEFERRED CREDIT .................................. 0 0 Series "A-1" Convertible Promissory Note1 (CPN) CPN Related Parties Principal................................... 7,398,265 7,398,265 Accrued interest payable................... 4,626,327 4,404,380 CPN Other Parties Principal................................... 5,978,421 5,978,421 Accrued interest payable................... 4,535,532 4,356,180 Total Series "A-1" Notes................... 22,538,545 22,137,246 CONVERTIBLE DEBENTURES PAYABLE (net of discounts, commissions, and offering costs of:...................... 20,437 20,437 STOCKHOLDERS' EQUITY: Common stock - no par value.(1).................. 38,258,096 38,258,096 Common stock warrants............................. Common stock subscribed.......................... 20,000 20,000 Paid in capital................................. 164,774 164,774 Deficit accumulated during the development stage........................... (65,593,361) (64,977,889) Total stockholders' equity....................... (27,150,491) (26,535,019) TOTAL............................................. $ 172,100 $ 195,040 (1) See Section 11, "Notes to Financial Statements" of the August 31, 1997 10-K.
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE FOR THE QUARTER ENDED NOVEMBER 30, 1997 (Unaudited) Three Months Ended From Inception November 30 To November 30, 1997 1996 1997 COSTS AND EXPENSES: Research and Development................... $ 3,740 $ 1,421 $ 7,720,880 Promotional, general and administrative................ 95,420 123,641 15,526,146 Interest........................ 497,112 478,141 12,420,432 Total........................... $ 596,272 $ 603,203 35,667,458 OTHER (INCOME) EXPENSE: Loss in Investment and Advances To Armant..................... 3,191 427,735 17,350,554 Equity in loss of Armant............... 16,009 102,364 12,575,349 NET LOSS............ ............... $ 615,472 $ 1,133,302 $ 65,593,361 LOSS PER COMMON SHARE..................... $ .01 $ .03
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF CASH FLOW Three Months Ended From Inception November 30, To November 30, 1997 1996 1997 OPERATING ACTIVITIES NET LOSS......................... $(615,472) $(802,147) ($ 65,593,361) ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization................. 5,886 13,306 1,141,026 Amortization and write off of patents............... 260 29,793 440,138 Amortization of prepaid leases.. - - 302,424 Amortization of financing Cost.. 95,000 Loss on divesture of Subsidiaries................... 912,586 Loss from joint venture.......... 16,009 102,364 11,032,871 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........... 181,304 222,228 12,354,529 Increase (decrease) in notes notes payable.................. 401,299 324,673 18,414,234 (10,715) 4,322 ($ 20,642,694) 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. 3,191 427,735 17,254,352 Cash investments in and advances to Armant.......... 7,850 18,400 (20,799,889) Redemption of Certificates of Deposit.................. 3,995,000 Proceeds from sale of net Profit interest............... $ 50,000 11,041 466,135 ($6,174,653) 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 4,112 1,447 326 CASH BEGINNING OF PERIOD 3,786 3,750 CASH END OF PERIOD 326 5,197 326
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, 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, 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 November 30, 1997, and August 31, 1997, of $65,593,361 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 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. 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. Since the plant was shutdown in 1988 due to insufficient capital to maintain operations, the Company has been attempting to secure additional funds to enable it to modify and start-up the Armant plant. Significant effort has been devoted in the period 1988 to 1997 to securing funding from the DOE under the "Steel and Aluminum Energy Conservation and Technology Competitiveness Act of 1988". Costs Capitalized and deferred by Armant consisted of the following: November 30 August 31 1997 1997 Direct carbo-chlorination plant costs: Process equipment....................... $ 3,735,000 $ 4,110,000 Other equipment......................... 7,000 14,000 Leasehold improvements.................. 70,000 100,000 3,812,000 4,269,000 Self-construction and start-up costs: Salaries Engineering......................... 216,000 360,000 Plant construction and operations... 2,200,000 2,154,000 Indirect labor and overhead......... 285,000 367,000 2,701,000 2,881,000 $ 6,513,000 $ 7,150,000 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, 1997 1997 Assets: Plant and equipment................... $ 6,513,000 $ 7,150,000 Other................................. 440,000 528,000 Total........................ $ 6,953,000 $ 7,732,000 Liabilities and Equity Notes payable - Toth Aluminum Corporation....................... $ 6,839,000 $ 7,087,000 Notes payable - Banks................. 525,000 525,000 Payables - Toth Aluminum Corporation....................... 12,747,000 13,067,000 Other payables........................ 640,000 550,000 Equity - Toth Aluminum Corporation....................... (13,785,000) (13,484,000) - Others.......................... (13,000) (13,000) (13,798,000) (13,497,000) Total............................. $ 6,953,000 $ 7,732,000 Three Months Ended November 30, 1997 1996 Statement of Plant Expenses Direct plant costs.................... $ 7,000 $ 3,000 General and administrative costs...... 26,000 11,000 Interest Expense...................... 105,000 96,000 Net Loss.............................. $ 138,000 $ 110,000 November 30, August 31, 1997 1997 Payable to and Equity of Toth Aluminum Corporation: Notes payable.......................... $ 17,843,000 $ 18,975,000 Payables............................... 5,900,000 8,560,000 Beginning equity of the Company........ (5,560,000) (5,560,000) Less: Loss from Armant................. (11,110,000) (8,784,000) Capitalized by Armant, but not accrued by the Company........... (5,620,000) (5,620,000) Expensed by Armant but not accrued by the Company........... (1,356,000) (7,105,000) Investment in and advances to Armant............................... $ 97,241 $ 466,000 TACMA In January 1982, the Company and an Indian company entered into a Promotion Agreement providing for the formation of TACMA. TACMA was formed to construct a plant in India designed to produce metal chloride through the use of the Company's carbo-chlorination processes. The Promotion Agreement provided for an initial capital contribution by the Company of approximately $42,800 in exchange for a 40% equity interest in TACMA. During the 1983 fiscal year, the Company and TACMA's other stockholder assigned to a third party the right to a 25% equity interest in TACMA in exchange for the third party's $200,000 advance to TACMA. A transfer of equity interest to the third party, which is subject to the prior approval of the Indian government, would have reduced the Company's equity interest in TACMA to 27 2%. The Company and the third party also entered into a separate agreement which provided that the third party could convey to the Company its right to the 25% equity interest in TACMA in exchange for 200,000 shares of the Company's common stock. During July 1987, the Company issued 200,000 shares of its common stock valued at $325,000 in exchange for the third party's rights to the additional equity in TACMA. Under this agreement, the transfer to the Company of the additional equity interest in TACMA, which is subject to the prior approval of the Indian government, would increase the Company's equity interest in TACMA to 52 2%. As of August 31, 1984, the Company had also made cash advances to TACMA totaling approximately $218,600. In addition, during December 1984, the Company acquired from Empresas Lince, S.A., a receivable from TACMA of $60,000 In exchange for 60,000 shares of the Company's restricted common stock. The Company has also incurred costs on TACMA's behalf which the Company considers reimbursable under the terms of its service agreement with TACMA. At August 31, 1989 and 1988, the Company's receivable for such costs billed to TACMA was approximately $815,000. TACMA has not recorded a corresponding payable for such costs because the approval of the Indian government and Reserve Bank of India is required before TACMA can make payment to the Company. The collectibility of this receivable is dependent on obtaining approval of foreign authorities as well as TACMA commencing and sustaining sufficiently profitable commercial operations, for which the Company currently has no plans. During the fiscal year ended August 31, 1987, because of the continuing delays in obtaining government approval, the Company reversed the previously recorded receivable from TACMA. During 1988, based upon the Company's decision to indefinitely postpone attempts to bring the TACMA plant to full commercial production, its previously recorded investment in the TACMA facility was also reversed. Reference is made to Note 6 regarding a Swiss corporation's advance to TACMA, in 1982, on the Company's behalf. The Company recorded this advance as an additional investment in and advance to TACMA. The Swiss Corporation has not received payments equal to $50,000, and in 1996 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, 1997 1997 Notes payable to bank, collateralized (A):................... - - Demand notes payable to related parties, unsecured (A): At 12%....... 2,843,217 2,677,350 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................................... $ 16,219,903 $ 16,054,036 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, 1997. 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, 1997, 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, 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 quarter ended November 30, 1997, total assets decreased from 195,040 to $172,100, and current assets decreased from $4,112 to $326. While advances to Armant increased by $3,191 during the quarter, the investment in Armant was decreased by $16,009 from recognition of the Company's equity in loss of Armant. The recoverability of the Company's investment in and advances to Armant of $97,241 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 $4,572,376 to $4,763,609 during the same period. During the same period, accrued salaries increased by $61,500 and accrued interest increased by $95,813. On December 24, 1985, the Company commenced an offering of its 10% Convertible Debentures due August 1, 1990 (the "Debentures"). The offering contemplated the sale of a maximum of $4,320,000 of Debentures, convertible, at the election of the Debenture holders, into 3,175,000 shares of common stock, no par value, of the Company. The purchase price of each Debenture was $1,000, payable in cash. No minimum offering of Debentures was established and offerees were apprised of the fact that the proceeds of the offering would not be placed into escrow, but would be applied directly to the Company. The Debenture offering was closed as of May 31, 1986, resulting in net proceeds of $3,852,963 (after deducting offering costs of $467,037). As of November 30, 1988, 4,298 debentures were converted into 3,152,995 shares of the Company's common stock, resulting in an increase in common stock of $3,833,307 (net offering costs of $464,693) and a balance in debentures payable of $20,437 (net offering costs of $1,563). The Board of Directors of the Company learned that not all of the Debentures were sold for cash. Instead of the maximum offering of $4,320,000, $2,014,137 of Debentures were purchased in exchange for the cancellation of pre-existing debt which the Company owed to these purchasers. Of the $2,014,137 of Debentures sold in exchange for the cancellation of indebtedness, $1,957,137 or 97%, was sold to or through directors, officers or affiliates of the Company. As a result of the sale of Debentures for consideration other than cash, the proceeds of the Debenture offering were not directly applied in the manner that the Company intended, or as the Company would have applied the proceeds had the Debentures been sold entirely for cash. The Debenture offering contemplated that net proceeds (after deduction of sales commissions and offering costs) of $3,842,000 would be applied approximately $2,882,000 toward a loan to the Armant Partnership (A Louisiana Partnership of which the Company is the General Partner) for the repayment of the partnership's loan, capital expenditures, and working capital, with the balance of $960,000 for the Company's working capital and development expenses. Instead, the net proceeds of the Debenture offering were directly applied as follows: (I) $1,939,000 toward the retirement of debt, of which $1,045,000 was to retire the Company's debt and the balance of which was to retire the partnership's debt, and (ii) $1,902,000 was loaned to the Partnership for its working capital and for capital expenditures. This discrepancy is a result of the considerable delay which was experienced in bringing the Debenture offering effective. As a result, the Company, wishing to continue the operations of the Armant facility, and to continue the Company's research activities, borrowed funds from directors, affiliates and outside lenders, relying on the guarantee of certain directors and affiliates for Armant and corporate purposes. When the Debenture offering became effective, the proceeds of the offering were used substantially to retire this debt. Consequently, the Company believes that the net proceeds of the Debenture offering were applied, albeit indirectly, in the matter contemplated by the Debenture offering. However, if it were subsequently determined that this variance in the terms of the offering would require the Company to make an offer of rescission of the debenture offering, the Company has made no provision in the financial statements for such an offering. To date, there have been no claims against the Company with respect to this issue and the Company is not aware that any such claims are planned or contemplated. Because of the complex nature of securities law, legal counsel has not formed an opinion on whether there is any potential or actual liability to the Company. The Company, as general partner of Armant, has granted a continuing guarantee of Armant's outstanding bank debt of approximately $525,000 plus accrued interest. During the year ending August 31, 1997, the Company wrote down $17,254,352 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, 1997, of approximately $65,593,361. 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 Plans at Armant and Canada. As in the previous years, the principal goal of the Company is to commercialize its process to produce aluminum metal 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 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. 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 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 underway 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 three months ended November 30, 1997, was $615,472 compared to $1,133,302 for the corresponding period in 1996. 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, 1997, was $16,009, 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. 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. Date: January 28, 1998 Charles E. Toth Jr. Treasurer BY: Charles Toth Date:January 28, 1998 Charles Toth Chairman of the Board of Directors and Chief Executive Officer EX-27 2 ARTICLE 5 FIN. DATA SCHEDULE FOR 1ST QTR 10-Q 1996.
5 3-MOS Aug-31-1998 Sep-01-1997 Nov-30-1997 326 0 0 0 0 326 509,888 425,895 172,100 4,763,609 0 38,258,096 0 0 0 172,100 0 0 0 (615,472) 99,160 0 497,112 0 0 0 0 19,200 0 (615,472) .01 .01
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