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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, 2003
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: (225) 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, 2003
TOTH ALUMINUM CORPORATION
INDEX TO FORM 10-Q
For The Quarter Ended May 31, 2003
Page
Part I Financial Information
Balance Sheets - May 31, 2003
and August 31, 2002..............................
Statements of Operations - Nine Months
Ended May 31, 2003 and May 31, 2002..............
Statements of Cash Flows - Nine Months
Ended May 31, 2003 and May 31, 2002..............
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)
MAY 31, AUGUST 31,
2003 2002
ASSETS
CURRENT ASSETS:
Cash ............................... 550 430
Accounts receivable-other........... - -
Total current assets................ 550 430
OTHER ASSETS:
Property, Plant and
Equipment - Net..................... 0 0
Investments in and Advances
to Armant Partnership......... 0 0
Patents and Patent Rights (Net of
accumulated amortization...... 28,103 20,949
Total Other Assets.................. 28,103 20,949
TOTAL ASSETS........................ $ 28,653 $ 21,649
MAY 31, AUGUST 31,
2003 2002
LIABILITIES
CURRENT LIABILITIES:
Notes payable-related parties....... $ 23,100 $ 23,100
Notes payable-bank.................. - -
Notes payable-other................. 300,000 300,000
Accounts payable:
Trade ......................... 1,075,805 974,555
Officers and employees......... 1,030,527 934,826
Accrued salaries.................... 3,337,660 2,797,660
Accrued expenses.................... 917,335 863,920
Accrued interest payable............ 5,775,802 4,482,489
Total current liabilities........... 12,458,229 10,376,550
DEFERRED CREDIT..................... - -
Series "A-1" Convertible Promissory Note(1)
Related Parties
Principal...................... 12,080,096 12,080,096
Accrued Interest Payable....... 9,889,372 8,802,166
Non-Related Parties
Principal...................... 5,978,421 5,978,421
Accrued Interest Payable....... 8,642,466 8,104,410
Total Series "A-1" Notes............ 36,590,355 34,965,093
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.............. (87,483,238) (83,783,871)
Total stockholders' equity.......... (49,040,368) (45,341,001)
TOTAL LIABILITIES................... $ 28,653 $ 21,079
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,
2003 2002 2003 2002 2003
COSTS AND EXPENSES:
Research and
Development........ $ 1,840 $ 2,689 $ 3,930 $ 5,669 $ 7,786,318
Promotional, general and
administrative..... 263,455 366,021 790,366 850,016 20,351,781
Interest................ 805,525 1,055,357 3,722,100 2,680,507 28,821,423
Total................1,070,820 1,424,067 4,516,396 3,536,192 56,959,522
OTHER (INCOME) EXPENSE:
Loss in Investment and
advances to
Armant............ 17,661,102
Equity in loss of
Armant............ 1,100 12,862,614
NET LOSS...............$1,070,820 $1,424,067 $4,516,396 $3,537,292 $87,483,238
Loss Per Common Share.. $.03 $.04 $.12 $.09
See notes to financial statements.
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
Nine Months Ended From Inception
May 31, May 31, To May 31,
2003 2002 2003
OPERATING ACTIVITIES
NET LOSS.......................... ($4,516,396) ($3,537,292) ($87,483,238)
ADJUSTMENTS TO RECONCILE NET
INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and
amortization................. 1,214,879
Amortization and write
off of patents............... 768 442,499
Amortization of prepaid leases.... 302,424
Amortization of Financing......... 95,000
Loss on divestiture
of Subsidiaries.............. 912,586
Losses from joint venture......... 1,100 11,131,535
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................... 0
Decrease (Increase) in
prepaid expenses............. - - (27,371)
Increase in accounts payable and
accrued expenses............. 794,416 849,696 18,081,442
Increase in notes payable......... 3,722,100 2,680,507 34,517,392
120 (320) ($20,516,835)
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS - (Continued)
Nine Months Ended From Inception
May 31, May 31, May 31,
2003 2002 2003
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment........... ($1,159,046)
Acquisition of patents............. (17,140) (460,515)
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............ (17,600) (20,785,927)
Write off of Investment and Cash
advances to Armant............ 15,554 17,131,365
Redemption of Certificates
of Deposit.................... 3,995,000
Proceeds from sale of net
Profit interest............... $ 50,000
0 (1,586) (6,300,718)
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........ 120 (320) 120
CASH BEGINNING OF PERIOD........... 430 1,750
CASH END OF PERIOD................. $ 550 $ 1,430 550
See notes to financial statements
TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying condensed
financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
financial position of Toth Aluminum Corporation (the Company) as
of May 31, 2003, 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, 2002.
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, 2003, and
August 31, 2002, of $87,483,238 and $83,783,871, respectively.
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 investment partners 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.
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.
Costs capitalized and deferred by Armant consisted of the following:
May 31, August 31,
2003 2002
Direct carbo-chlorination plant costs:
Process equipment.................. $ 600,000 $ 770,000
Leasehold improvements.............
600,000 770,000
Self-construction and start-up costs:
Salaries:
Engineering........................
Plant construction and
operations..................... 55,000
Indirect labor and overhead.......
55,000
$ 600,000 $ 825,000
Presented below is summarized financial information of Armant.
May 31, August 31,
2003 2002
Assets:
Plant and equipment.............. $ 600,000 $ 825,000
Other............................
Total............................ $ 600,000 $ 825,000
Liabilities and Equity:
Notes payable - Toth Aluminum
Corporation.................... $ 3,240,000 $ 3,240,000
Payables - Toth Aluminum Corp.... 17,240,000 17,420,000
Other payables.............. 890,000 890,000
Equity - Toth Aluminum
Corporation................. (20,757,000) (20,712,000)
- Other.................... (13,000) (13,000)
(20,770,000) (20,725,000)
Total.......................... $ 600,000 $ 825,000
Nine Months Ended
May 31, May 31,
2003 2002
Statement of Plant Expenses
Direct plant costs............... 1,450
Interest expense................. 18,000 14,000
General and
administrative costs....... 18,000 15,500
Net loss $ 36,000 $ 31,000
May 31, August 31,
2003 2002
Payable to and Equity of Toth Aluminum
Corporation:
Notes payable...................... $ 20,013,000 $ 20,013,000
Payables........................... 4,689,000 4,689,000
Beginning equity of the Company...... (5,560,000) (5,560,000)
Less: Loss from Armant......... (10,989,000) (10,989,000)
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...... (2,533,000) (2,533,000)
Investment in and advances to
Armant......................... $ 0 $ 0
4. Notes payable consisted of the following:
May 31, August 31,
2003 2002
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 "A-1" Convertible
Promissory Notes
Payable to related parties........ 12,080,096 12,080,096
Payable to others................. 5,978,421 5,978,421
Interest Payable.................. 18,531,838 16,906,576
Total.................................. $ 36,913,455 35,288,193
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, 2003, 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 31,2003, total assets increased
to $28,653 from $21,649 at August 31, 2002, and current assets
decreased from $550 to $430. The primary asset of the Company is
its proprietary technology, commonly referred to as the TAC-ACS
process, the Clay-to-Aluminum Process. TAC has developed its
proprietary clay chlorination and purification technology, the TAC
Process, from laboratory, through bench scale, to large scale pilot
plant and is now poised to commercialize its breakthrough, low cost
continuous manufacturing process. Several prestigious engineering
companies have evaluated the technology, and have declared it ready
for commercialization.
TAC intends to combine the TAC Process with other aluminum
chloride smelting, ACS, technology, creating a new integrated
TAC-ACS Process, the Clay-to-Aluminum Process, to manufacture
primary aluminum and titanium tetrachloride from clays. TAC
protects part of the technology as Trade Secrets under Intellectual
Property Law. TAC has patented parts of the technology and applied
for a patent of the continuous process and other parts of the
Clay-to-Aluminum Process. Effectively, TAC has collected, created
and maintains unique control over the information that will enable
them to commercialize and exploit the Clay-to-Aluminum Process
Technology more efficiently than any other party.
Due to an oversight in the preparation and filing of an 8-K,
during January 2000, and in the filing of the 10-Q for the period
ended February 28, 2000, the following information is being
presented to properly reflect the fact that on December 28, 1999,
the corporation had filed an Act of Pledge, in the public records
of the Clerk of Court, Parish of St. James, Louisiana, the domicile
of the corporation, covering all of the domestic and foreign
Patents owned by the Corporation. The pledge was collateral to
secure outstanding obligations in the amount of $3,100,000, either
in the form of past, present, or future financial support incurred
or that may be incurred on behalf of the Corporation, and bearing
interest at the rate of twelve percent per annum, from date.
Total Liabilities, including the Series "A-1" Convertible
Promissory Note, increased from $45,341,643 to $49,048,584 during
the same period.
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, 2003, of approximately
$87,483,238. 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.
TAC is committed to provide the highest-grade technology to
empower the world's lowest cost, most energy efficient production
of primary aluminum metal and titanium tetrachloride, and
associated by-products, and to generate robust returns for its
investors. Today, the world consumes approximately 20 million
short tons of primary aluminum annually, with demand growing at
approximately 3% to 5% per year, creating a need for 600,000
additional tons of primary aluminum, every year. TAC's initial
goal is to capture the growth market with aluminum produced from
clay via its new chloride processing technology. In the future,
as existing Bayer-Hall aluminum plants eventually become
uncompetitive, TAC foresees that they will be replaced with new
Clay-to-Aluminum facilities.
TAC intends to be the catalyst for this evolutionary change
in the aluminum industry.
TAC's plans include not only the provision of processing
technology, but also the development and supply of operating know
how, engineering designs and construction expertise, in order to
accomplish this vision.
TAC is totally committed to producing the highest quality of
primary aluminum metal and associated chemical products, at
lowest cost through conservation of energy and the use of
abundant low cost raw materials. TAC intends that its Clay-
to-Aluminum processing will become the recognized technology
for manufacturing primary aluminum.
TAC's future plans call for expanding its technology into
other fields, including recovery of metals from wastes and
extraction of other metals from their ores.
TAC had endeavored to commercialize its technology since 1987
but despite the apparent advantages of clay based processing;
the technology has yet to be commercially implemented. There
are several reasons for TAC's lack of success in attracting
development Participants, but two hurdles are clearly evident.
Firstly, TAC is not a major player in aluminum and its
financial condition does not promote confidence in its perceived
ability to see the Project through to a successful conclusion.
Secondly, in its past commercialization efforts, TAC had
insisted on maintaining total ownership of the technology,
which was not acceptable to some prospective participants. A
third reason is that Clay-to-Aluminum technology does not enhance
today's bauxite and alumina based aluminum processes-it replaces
them instead. Successful commercialization of the Clay-to-
Aluminum process would mean that industry's hugh investments in
existing Bayer and Hall-Heroult plants would eventually be made
obsolete, and the value of industry's installed capital assets,
and the value of its bauxite reserves would be drastically
reduced. A fourth hurdle results from Alcoa's decision to
abandon its own chloride based ASP process. TAC's approach
to potential project Participants has invariably elicited
responses similar to the following: "Alcoa expensed enormous
resources on their aluminum chloride smelting process, and
yet they abandoned it. If the largest aluminum company in
the world, Alcoa, will not support the technology, why should I?"
While this is a logical response, Alcoa's approach was very
different from TAC's, and our approach has some very significant
cost and environmental advantages over Alcoa's, which make us
confident of success. There are fundamental technical
differences between TAC's Clay-to-Aluminum process and Alcoa's
ASP technology. There were also marked differences between
Alcoa's and TAC's research and development philosophies,
especially in regard to the crucial question of purification of
aluminum chloride. Several of the technical problems that
contributed to Alcoa's cost escalations do not occur in TAC's
processes.
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 multiple steps.
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.
In March 1998, the Company negotiated with and entered into
an Engagement Agreement with a Denver, CO based financial
brokerage firm, Mercantile Resource Finance, Inc. (MRFI) for the
sole purpose of accelerating the efforts to fully commercialize
the TAC Process. Through the end of the fiscal year, some interest
had been shown by prospective investors, but nothing significant
and as of this writing, nothing material or consequential has
materialized.
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 the generation of refined designs for
full-scale commercial smelting cells. This will be accomplished
by constructing and operating a complete ACS smelting facility
that 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 Phase 1. Initial tasks include 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 anticipates that
additional modules will be constructed in parallel in subsequent
years.
Results of Operations
TAC's Clay Chlorination Pilot Plant, at the Armant site in
Vacherie, was completed in 1983 and was operated in block
(continuous chlorination and condensation to produce crude
aluminum chloride, followed by continuous operation of the
purification system) mode through 1988. Approximately 150 pilot
plant runs were made, and tonnage lots of high purity aluminum
chloride and commercial grade silicon tetrachloride were
successfully marketed. TAC made several major breakthroughs in
systems operation, and the plant sections finally achieved
smooth, controlled operation in 1987. In l988, the Pilot Plant
was shut down and TAC planned to undertake the next stages of
its process commercialization program (higher capacity,
continuous mode clay chlorination, and aluminum chloride
electrolysis) in expanded facilities to be acquired from Alcoa.
The planned transaction with Alcoa was not completed, however,
and no furthers Pilot Plant operations have occurred since then.
TAC also undertook construction of an aluminum dross
chlorination plant in New Delhi, India, in partnership with
TACMA and a local secondary aluminum producer. The plant
succeeded in demonstrating dross chlorination and the production
of crude aluminum chloride from secondary aluminum dross, but the
crude product was never purified. Due to a lack of local investor
financing, the purification system and other sections of the
plant were never completed, and TAC withdrew from the project.
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, 2003, was
$4,516,396 compared to $3,536,192 for the corresponding period in
2002.
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.
PART II. Other Information
Item 1. Legal Proceedings
See Item 10 of the Company's Form 10-K for the year ended
August 31, 2002, concerning legal proceedings.
Item 6. Exhibits and reports on Form 8.
None
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 15, 2003
Charles E. Toth
Treasurer
BY: Charles Toth Date: July 15, 2003
Charles Toth
Chairman of the Board of Directors
Chief Executive Officer