============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: August 31, 1999 Commission File Number: 0-7568 TOTH ALUMINUM CORPORATION (Exact name of registrant as specified in its charter) LOUISIANA 72-064658 (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: (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 receding 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 State the aggregate market value of the voting stock held by non- affiliated of the registrant as of September 30, 1999; $531,500. The aggregate market value was computed using the average between the closing bid and ask prices as reported by NASDAQ and does not take into account the fact that many of the outstanding shares of common stock are restricted and may not be freely traded. 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 Sept. 30, 1999 ============================================================================== PART I. Item 1. Description of Business. (a) General development of business. Since inception in 1966, the Company has been engaged in the research and development of a commercial process(es) for the production of aluminum metal, alumina and aluminum trichloride (commonly referred to as aluminum chloride), silicon tetrachloride, titanium tetrachloride and other commercial grade byproducts by means of patented chemical and engineering processes. The principal raw materials used in the Company's proprietary processes are aluminum bearing materials, such as kaolin and flint clays, of which there are extensive deposits in North America and throughout the world. A variety of such clays has been tested by the Company, demonstrating the feasibility of producing commercial grades of aluminum chloride, silicon tetrachloride, titanium tetrachloride, alumina and aluminum from these clays. It is the Company's belief that its proprietary clay carbo-chlorination process (the "TAC Process") will be more economical, and consume less energy in the production of aluminum chloride, silicon tetrachloride, titanium tetrachloride, alumina and aluminum than conventional methods. The Company promotes it's technology through the formation of joint ventures. To date, the Company has constructed two pilot plant facilities. From inception through August 31, 1999, the Company has derived no continuing revenues from the operations. The Company, which has devoted itself primarily to the research and development of the TAC Process, has incurred a net loss of approximately $71,713,335 from inception through August 31, 1999. The Company has obtained its working capital almost exclusively from the private placement of its securities, a public stock offering, a public offering of its convertible debentures and related party and non-related party debt. The Company's continued existence is dependent upon its ability to (1) generate sufficient cash flow to meet its continuing obligations on a timely basis, (2) obtain additional financing as may be required and (3) ultimately to attain successful operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company was incorporated under the laws of the State of Louisiana on August 25, 1966, under the name Applied Aluminum Research Corporation and was changed to the Company's present name on August 20, 1973. The principal office of the Company is located at 2141 Toth Street, Highway 18, River Road, P. O. Box 250, Vacherie, LA 70090, and its telephone number is (225) 265- 8181, fax number is (225) 265-7795. The Company's Standard Industrial Classification Code Number is 8890. - Narrative description of business. (1) Description of business done and intended to be done. The Company had been engaged in the research and development of processes and methods relating to clay carbo-chlorination technology for the production of aluminum metal and aluminum intermediates and other valuable separable metal and chemical products. The Company is currently focusing on commercializing a combination of its clay chlorination technology with aluminum chloride smelting ("ACS") processing to manufacture aluminum metal from clay. The principal raw materials used in the TAC Process are aluminum bearing materials, such as kaolin and flint clays, of which there are extensive deposits in North America and throughout the world. In the U.S., extensive deposits of kaolin and flint clay occur in Georgia, South Carolina, Ohio, Pennsylvania and Colorado and in western Canada. Extensive deposits occur on all continents in the world, as for an example in England, France, Germany, Russia and India. A variety of such clays have been tested by the Company, demonstrating to the Company the feasibility of producing a commercial grade of metal chlorides from these clays. It is the Company's belief that utilization of the TAC Process will be more economical, and consume less energy in the production of aluminum chloride, silicon tetrachloride, titanium tetrachloride, alumina and aluminum than conventional methods currently used. From its formation in 1966 until 1974, the Company directed its research and development activities toward the development of alternative methods of producing aluminum directly from raw materials, other than bauxite. Much of this work was done at the University of Veszprem, and other institutions in Budapest, Hungary during the period 1970 to 1987. In 1974, the Company shifted its research and development focus to emphasize the production of aluminum chloride, the principal intermediate product in the manufacture of aluminum metal from clay via the TAC Process. Laboratory and mini-plant facilities were constructed and operated in New Orleans during the period 1974 to 1978. It was during this period that the technology known today as the TAC Process was developed. Development Plans As in 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 engaged in pursuing options 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. 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. The initial agreement has matured and was renewed, with a new expiration date of December 31, 1998. 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. Plan for Aluminum Metal The principal business goal of the Company is the commercialization of its Clay-to-Aluminum technology. This will involve the incorporation of electrolytic cells for the direct conversion of aluminum chloride to metallic aluminum. Such electrolytic conversion has already been demonstrated successfully on large scale, by other companies. Due to the large scale of the commercialization effort, the company is attempting to attract industrial partners, in a corporate venture, suitable to all concerned, to employ this technology. The TAC Process Currently, aluminum is produced from bauxite and alumina by the conventional Bayer and Hall processes. Metal chlorides, such as aluminum chloride, silicon chloride and titanium chloride, are made from a variety of materials by several different methods. The TAC Process is designed to produce aluminum and other metal chlorides from aluminum-bearing materials, such as kaolin or flint clays, bauxite or certain fly ash, with low grade lignite or bituminous char and coke, chlorine, and certain other materials. The Company considers all such raw materials utilized in the TAC Process to be in adequate supply and readily available in North America, and around the world. In the TAC Process, wet clay is heated in a dryer until the free moisture is evaporated. The dried clay is then mixed with lignite char and a catalyst then sent to a calciner where heating drives off the remaining moisture and activates the clay. The calcined clay, together with lignite char, is fed continuously into a fluid bed chlorinator where it reacts with chlorine gas. The oxide compounds, present in the clay, react with chlorine and form gaseous chloride compounds. These are condensed and separated into aluminum chloride, silicon chloride and titanium chloride. Aluminum chloride may be smelted by electrolysis to produce aluminum, or it can be oxidized to produce alumina and chlorine. Alumina is utilized as feed stock in the conventional Hall process to produce aluminum. Alternatively, in the past the Alcoa smelting process utilized aluminum chloride itself as feed stock for producing aluminum, thus making the oxidation of aluminum chloride unnecessary in aluminum production. It is management's belief that the TAC Process will ultimately produce aluminum and other metal intermediates at less cost, and at lower energy consumption, than conventional production methods currently used. The Products The products from commercial application of TAC's technology will include aluminum metal, aluminum chloride, high performance alumina, silicon tetrachloride, titanium tetrachloride and other metal chlorides and oxides. The market for aluminum is well-known and includes structural items, automobile parts, bus and trailer bodies, food wrapping, beverage cans and many other items. At present, in management's belief, substantially all of the domestic annual consumption of aluminum chloride and high- purity alumina are used in applications outside the aluminum industry. Aluminum chloride is commonly used as a catalyst to make detergents, dyes, pigments and pharmaceuticals. The primary end-products of non metallurgical alumina are abrasives (corundum), catalysts, high-grade ceramics, and refractories (heat and corrosion-resistant bricks and liners for smelters, kilns and chemical reactors). Silicon tetrachloride is used principally as a feed stock for fumed silica, which has a number of commercial applications. Today, it is used most commonly as a component in silicon rubbers and household caulking compounds, as a additive in powdered foods, and as a thickening agent in products, such as paint and cosmetics. Additionally, high purity silicon tetrachloride can be a source of high purity polycrystalline silicon metal, which has electrical/electronic applications in the semiconductor industry. Titanium tetrachloride is used in the manufacture of titanium metal and alloys and for production of titanium dioxide pigment for paper and paints. A 1995 market assessment concluded that the market for aluminum chloride, silicon tetrachloride and titanium tetrachloride is sufficiently large for the Company to market the projected production of these products from a commercial metal chlorides plant. The Armant Plant Under the terms of the Partnership agreement, the Company has a 2% ownership interest and under a separate non-exclusive license agreement, a right to royalty payments based on 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 interest has received its respective investment. Thereafter, royalty payments to the Company increase to 49% of net positive cash flow. The Company applies the equity method in accounting for its investment in the Armant Partnership. Competition Competing producers of aluminum metal, alumina, aluminum trichloride, silicon tetrachloride and titanium tetrachloride include larger, more established firms, some of which are divisions of international corporations. These firms have established markets, and proven technologies. In addition, neither of the plants utilizing the TAC Process has yet to achieve sustained commercial production. There can be no assurance that the plants will ultimately achieve such production, or if such production is achieved, it will be at competitive costs. Government Regulation The manufacture, sale and installation of equipment in chemical manufacturing facilities in the United States and abroad are subject to stringent and broad regulations by federal, state and local authorities concerning the environment, occupational safety and health. Any plant that TAC would construct will be in full compliance with all relevant federal, state, and local permitting statutes. Patents The Company had been issued patents on significant aspects of the TAC Process in the United States, and intends to apply for a significant number of additional patents and/or Continuations in Part. Of the Company's current patents, three will still be in force after the year 2000. As in most countries, a United States patent prevents anyone from making, using or selling the patented process in the United States, without a valid license. Once the Company has attained a source of steady funding, it intends to vigorously pursue patenting of new process improvements and designs which would be aimed at preventing others from potentially competing against the Company. In addition to patent protection, the technical know how and experience the Company has attained shall remain private and part of its Intellectual property, which serves as a hindrance to others who would attempt to utilize this Clay-to-Aluminum technology. Research and Development Activities From inception, the Company's primary business has been research and development of the TAC Process. For the three years ended August 31, 1999, the Company has spent and depreciated an aggregate of $55,800 in continuing research and development in the United States, Canada and overseas. These expenditures are shown by year in the following table: Fiscal Years Ended August 31, 1999 1998 1997 Research and development $13,700 $ 12,400 $29,700 Employees At September 30, 1999, the Company had 4 full time employees. Item 2. Properties. The Company believes that its current offices are sufficient to house its existing operations. See "BUSINESS-The Armant Plant; TACMA" for a description of the properties utilized by the Armant Partnership and by TACMA, respectively. Item 3. Legal Proceedings. See Item 8 - "Involvement in Legal Proceedings." PART II Item 4. Market for Common Stock and Related Security Holder Matters. The Company's common stock is traded on the NASDAQ Bulletin Board Market. The table below sets forth the closing high and low bid prices for the common stock. The prices shown represent prices between dealers and do not include retail mark-up, mark-down, or commission. They may not represent actual transactions. Bid Price Low High ----- ------ 1999: First Quarter, 1/32 3/32 Second Quarter, 1/32 3/32 Third Quarter, 1/32 1/8 Fourth Quarter, 1/32 1/8 1998: First Quarter, 1/32 3/32 Second Quarter, 1/32 3/32 Third Quarter, 1/32 1/8 Fourth Quarter, 1/32 3/32 As of September 30, 1999, there were approximately 12,000 shareholders of record of the Company's common stock. It is estimated that an equal number of stockholders's shares are held in "nominee" or "street" name. Item 5. Selected Financial Data. The following selected financial data has been derived from the Company's unaudited financial statements. This selected financial data should be read in conjunction with the financial statements of the Company and notes related thereto appearing elsewhere herein. The 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 a net loss from its inception in 1966 through August 31, 1999 of approximately $71,713,335. Although the Company's investee (Armant) has constructed a facility that will employ the Company's patented processes, Armant has not achieved sustained commercial production, and the commercial viability of the processes has not been demonstrated. The recover ability of the Company's investment in and receivables from Armant is dependent on the applicable investee 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 recover ability 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements of the Company and Notes thereto. Selected Financial Data Years Ended August 31, 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Total Assets..... $ 38,158 $108,042 $195,040 $1,045,282 $4,507,997 Net loss.........$ 3,239,325 $3,496,071 $3,927,866 $6,864,124 $16,157,338 Loss per share of common stock.... $.09 $.09 $.11 $.19 $.46 Long-term debt: Convertible Debenture....... $20,437 $ 20,437 $20,437 $20,437 $20,437 Long term debt: Series "A-1" debt........... $19,866,905 $19,866,905 $19,866,905 $19,866,905 $17,292,937 Total stockholders equity.........($33,270,465) ($30,031,090)($26,535,019)($22,607,153) ($15,743,029) The significant decrease in the Total Stockholders Equity in 1996 is directly attributed to the Company's forced write down of its investment in Armant, thereby increasing its loss, while it sought funding for either its Armant and its Canadian Operations. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources During the fiscal year ended August 31, 1999, total assets decreased to $35,158 from $108,042 at August 31, 1998 and $195,040 at August 31, 1997. The recoverability of the Company's investment in and advances to Armant of $15,254 is dependent on the Armant Partnership achieving and sustaining sufficiently profitable commercial operations (see note 2 of Notes to Financial Statements). Total liabilities, including the new Series "A-1" Convertible Promissory Note increased from $26,709,622 at August 31, 1997 to $30,139,132 at August 31, 1998 to $33,288,186 at August 31, 1999. Cash on hand decreased from $918 at August 31, 1998 to $440 at August 31, 1999. Working Capital Meeting Operating Needs and Commitments 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 August 31, 1999, of approximately $71,713,335. 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. 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, and is to be undertaken in multiple 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 the 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 Phase 1. 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 start-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. In light of the Company's net operating loss carry-forwards of approximately $57,908,338 at August 31, 1999, management believes that none of the provisions of the Tax Reform Act of 1986 will, in any respect, have a material impact upon the Company's liquidity or earnings for the foreseeable future. Results of Operations The Company had no operating revenues and reported net losses. The Company had been considered a development stage enterprise; start-up activities have commenced, but the Company has received no continued revenue therefrom. 1999 Compared to 1998 The net loss for the fiscal year ended August 31, 1999 was $3,239,375 compared to $3,496,071 in 1998. The decrease was due to an decrease in Loss in Investment and advances to Armant. The Company has nearly written of its entire investment in the Armant Partnership. Cost and Expenses decreased to $3,147,457 in 1999 from $3,320,510 in 1998. During the same period, promotional, general and administrative expenses increased to $634,138. During the year ended August 31, 1999, the company recognized $2,499,619 in interest expense, compared to $2,838,598 in 1998. Also, during fiscal year ended August 31, 1999, the company recognized $43,206 in loss from Armant. Armant has had no operation during this year, except for routine maintenance and upkeep, and the Company recognizes the related loss. 1998 Compared to 1997 The net loss for the fiscal year ended August 31, 1998 was $3,496,071 compared to $3,927,866 in 1997. The decrease was due to an decrease in Loss in Investment and advances to Armant. The Company has nearly written of its entire investment in the Armant Partnership. Total expenses increased to $3,320,510 in 1998 to $1,732,823 in 1997. During the same period, promotional, general and administrative expenses increased to $469,512. During the year ended August 31, 1998, the company recognized $2,838,598 in interest expense, compared to $1,732,823 in 1997. Also, during fiscal year ended August 31, 1998, the company recognized $51,800 in loss from Armant. Armant has had no operation during this year, except for routine maintenance and upkeep, and the Company recognizes the related loss. 1997 Compared to 1996 The net loss for the fiscal year ended August 31, 1997 was $6,864,124 compared to $16,157,338 in 1996. The loss in 1996 occurred because the Company, due to prolonged delays in attaining funding, was forced to write off a major part of its investment in the Armant Partnership. Total expenses decreased from $2,490,204 in 1996 to $2,393,685 in 1997. During the same period, promotional, general and administrative expenses decreased to $375,421. During the year ended August 31, 1997, the company recognized $1,974,483 in interest expense compared to $2,000,363 in 1996. Also, during fiscal year ended August 31, 1997, the company recognized $4,470,439 loss from Armant. Again due to the prolong delays in attaining the necessary funding to restart the Armant Plant the company was force to write off a major part of its investment in the Armant Partnership. Armant has had no operation during this year, except for routine maintenance and upkeep, and the Company recognizes the related loss. Item 7. Financial Statements and Supplementary Data. Please refer to the Company's unaudited Financial Statements attached. PART III Item 8. Directors and Officers of the Company. The directors and officers of the Company and their ages are as follows: Name Age Position with the Company ------------------ ---- --------------------------- Charles Toth 67 Chairman of the Board of Directors and Chief Executive Officer Gervase M. Chaplin 62 Sr. Vice President Engineering and Technology Glenn A. Nesty 87 Director Calvin J. Laiche 68 Director Russell F. Haas 62 Director and Chief Financial Officer Charles Toth, the Company's Chairman of the Board, founded the Company in 1966. Mr. Toth served as President from 1966 to 1974, when he resigned as President and was elected Chairman of the Board of Directors. Gervase M. Chaplin has been with the Company since January 1976, and currently holds the position of Senior Vice President, Engineering and Technology. He had previously been Manager of Process Development. Dr. Chaplin has B.S. degrees in Chemistry, Geology, and Metallurgical Engineering and holds a Ph.D. in Chemical Engineering. He had previously served as Plant Manager for Newmont Mining and as Senior Research Specialist with Exxon Production Research of Houston. Glenn A. Nesty, a director since 1979, was Vice President for Research at International Paper Company between 1969 and 1976, when he retired. Between 1955 and 1968 he was Vice President for Research and Development and a member of the Board of Directors of Allied Chemical Corporation. Dr. Nesty holds a Ph.D. in Organic Chemistry. Calvin J. Laiche, Director and Attorney at Law, Member of Louisiana Bar, Civil Practice, State and Federal Attorney for Jefferson Parish, City of Westwego Housing Authority Attorney and Magistrate for the Town of Jean Lafitte, Registered Mechanical Engineer State of Louisiana, Registered Patent Attorney, House Counsel for Toth Aluminum Corporation, and former Project Engineer for Shell Chemical Corporation. Russell F. Haas, Director and Chief Financial Officer, has served as bank president for two local banks, during his 36 year tenure in the industry. For the past 7 years, Mr. Haas has turned his attention to management consulting, performing work for local entrepreneurs. He brings to the board, a vast array of knowledge in the financial and management field. In July of 1999, Mr. Haas, filed personal bankruptcy, in an effort to settle outstanding liability issues. Involvement in Legal Proceedings Under little known prior law, insiders of a corporation could not buy and sell any company's stock within a six month period of time. Such a transaction, at that time, was considered a violation of Rule 16 (b) of the Securities Exchange Act of 1934. This provision has since been re-enacted and this type of transaction is now completely in compliance with the new Rule 16 (b). Between 1983 and 1989, this Corporation has been unable to raise sufficient capital from any outside source to keep it in operation. Consequently, its CEO, while holding substantial amounts of stock at the time, sold his private stock, under the "Dribble Out Rules", shares that were released from Escrow after almost 12 years, where he could only sell small amounts of stock at a time, and loaned proceeds to the Corporation and/or purchased equipment needed in the Corporation's operation. Several years later, a new minority stockholder purchased less than 50 shares of the Corporation's stock, and employed an attorney, who specialized in Rule 16 (b) violations, filed a suit in Federal Court, challenging this procedure. Our research indicated that the new and now current law was not made retroactive upon re-enactment, because this opposing attorney lobbied Congress and prevailed, keeping the old law in tact, for existing cases. Today, there are legal provision in Rule 16 (b) for transactions of this nature, making them in total compliance of the law. Even under the old Rule 16 (b) law, various exceptions existed, such as the sale of Stock that was acquired in good faith in connection with a debt previously contracted, as was urged in the legal proceeding by the Corporation's CEO. While the transaction was very legal, only the recordation of the transaction on the Corporate books was not specific enough to comply with this complicated, archaic Rule 16 (b), which has since been modified. Because the specific language was not employed between the CEO and the Corporation, an oversight on the part of the Corporate Secretary, this allowed the minority stockholder to argue against the exception that the Corporation had relied upon in support of these transactions, after having expended considerable legal fees and having filed many legal proceedings prior to the trial. A Settlement Agreement was reached, whereby the Corporation's CEO agreed to reimburse the Corporation the amount of $1,700,000, for which the Board of Directors approved indemnification of the Corporation's CEO, pursuant to the Article of Incorporation. For more details, see the appropriate section of the 10K, for the prior year. Item 9. Executive Compensation (a) Cash Compensation. The following table sets forth, as of the fiscal year ended August 31, 1999, all remuneration paid by the Company during the last fiscal year to each officer whose aggregate cash compensation exceeded $60,000 to all officers of the Company, as a group. Other Compensation Cash Securities Name of Individual Compensation Properties or NO. of Persons Capacities in Salaries, Personal in Group which served Fees, Bonus Benefits ------------------ -------------- ----------- ------------- Gervase M. Chaplin Sr. Vice. President $120,000 (1) Technology & Development Charles Toth Chairman of the $150,000 (1) Board & CEO Russell F. Haas Director and CFO $1 (1&2) (1) Due to the company's chronic cash shortage, these officers elected to accrue all of their salaries. (2) Mr. Haas works for a management company that currently performs work for the Company, on the basis of $120,000 annually, but due to the company's cash position, elected to accrue all of the fee, except for $4,000 per month. (b) Compensation of Directors. The Company does not have a standard arrangement for compensation of directors. Except for services performed for the Company, other than normal attendance at board meetings, they will be compensated at a per diem rate equal to their normal business compensation. (c) Termination of employment and change of control arrangement. There are no arrangements for termination of employment or change of control. Item 10. Security Ownership of Certain Beneficial Owners and Management. (a) Security ownership of certain beneficial owners. The following table sets forth certain information as of September 30, 1999, with respect to the beneficial ownership of the Company's common stock by all stockholders known by the Company to be the beneficial owners of more than 5% of its outstanding common stock, by directors who own common stock and by all officers and directors as a group: Number of Percent Name Shares Owned (1) of Class ---------------------- ---------------- --------- Charles Toth 1,416,750 (2) 4.0% Dr. Gervase M. Chaplin 140,000 * Glenn A. Nesty 34,000 * Calvin J. Laiche 0 * Russell F. Haas 20,000 (3) * All officers and directors as a group (5 persons) 1,519,000 4.5% *Less than 1% 1 All shares are beneficially owned and the sole investment and voting power is held by the person, except as otherwise indicated. 2 Includes 91,570 shares originally issued and owned by Mr. Toth but for which Mr. Toth no longer holds certificates. Neither Mr. Toth's nor the Company's stock transfer records indicate a disposition of these shares. 3 The 20,000 shares listed under Mr. Haas are owned by his son. Item 11. Certain relationships and related transactions. As of August 31, 1999, Charles Toth, the Company's founder and Chairman of the Board, had loaned the Company an aggregate of $2,763,200 cash plus accruing interest of $1,743,613. The total outstanding balance is accruing interest at twelve (12.0%) percent and is payable on December 31, 2001, payable in Common Stock of TAC and as provided in accordance with the separate document identified as Series "A-1" Stock Rights Certificate. Also, see section Part III item 9, subsection (b) "Other Compensation". PART IV Item 12. Exhibits and financial statements. a) Exhibits: Exhibits numbered one through eight and nine for Toth Aluminum Corporation are incorporated by reference to the Annual Report on 10-K of the Company filed for the fiscal years ended August 31, 1983 and 1985 respectively. 1. Amended and Restated Articles of Incorporation of the Registrant, dated January 31, 1972. 2. Amendment to Articles of Incorporation of Registrant dated April 24, 1973. 3. Amendment to Articles of Incorporation of Registrant dated August 20, 1973. 4. Amendment to Articles of Incorporation of Registrant date November 17, 1976. 5. By-Laws of Registrant dated November 22, 1976. 6. Specimen certificate of the Registrant's Common Stock, no par value. 7. Specimen certificate of the Registrant's 6% Convertible Participating Preferred Stock. 8. Promotion Agreement between Registrant and Indian Magsee Alloy, Inc. 9. Stock Option Waiver Agreement dated December 4, 1985. SIGNATURE Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. TOTH ALUMINUM CORPORATION BY: Charles Toth CHARLES TOTH CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Charles Toth December 9, 1999 Charles Toth Chairman of the Board of Directors and Chief Executive Officer Charles Ernest Toth Jr. December 9, 1999 Charles Ernest Toth Jr. Treasurer Glenn Nesty December 9, 1999 Glenn Nesty Director Calvin J. Laiche December 9, 1999 Calvin J. Laiche Director Russell F. Haas December 9, 1999 Russell F. Haas Director and CFO TOTH ALUMINUM CORPORATION FORM 10-K ITEMS 8, 14(a)(1) AND (2) INDEX OF FINANCIAL STATEMENTS AND SCHEDULES The following financial statements, of the Registrant, required to be included in Item 8 and 14(a)(1), are listed below: Page Financial Statements: Balance Sheets...................... Statements of Operations and Deficit Accumulated During the Development Stage........... Statements of Stockholders' Equity. Statements of Cash Flows........... Notes To Financial Statements...... The following financial statement schedule of the Registrant is included in Item 14(a)(2): IV - Indebtedness of and to Related Parties.................... Schedules, other than the above mentioned, are omitted because the conditions requiring their filing do not exist or because the required information is given in the financial statements, including the notes thereto. TOTH ALUMINUM CORPORATION COMBINED BALANCE SHEETS, AUGUST 31, 1999 AND 1998 (Unaudited) 1999 1998 ------ ------ ASSETS CURRENT ASSETS: Cash .................................... $ 440 $ 918 Accounts receivable: Officers and employees................ Other................................. 0 0 Prepaid: Leases ............................... Other................................. Total current assets..................... $ 440 $ 918 INVESTMENTS IN AND ADVANCES TO: TACMA India Limited................... Armant Partnership.................... $ 15,254 $ 58,460 Total.................................... $ 15,254 $ 58,460 PROPERTY, PLANT AND EQUIPMENT - Net....................... $ 22,654 $ 48,354 PREPAID LEASES .......................... PATENTS AND PATENT RIGHTS (net of accumulated amortization: ............ $ 110 $ 320 ========= ========== TOTAL................................... $ 38,158 $ 108,042 See notes to financial statement TOTH ALUMINUM CORPORATION COMBINED BALANCE SHEETS, AUGUST 31, 1999 AND 1998 (Unaudited) 1999 1998 LIABILITIES ------ ------ CURRENT LIABILITIES: Notes payable-related parties............ $ 23,100 $ 23,100 Notes payable-bank....................... - - Notes payable-other ..................... 300,000 300,000 Accounts payable: Trade................................. 594,631 498,300 Officers and employees................ 458,467 357,491 Accrued salaries ........................ 2,644,995 2,246,955 Accrued expenses ........................ 337,585 243,000 Accrued interest payable................. 2,729,972 1,855,552 Total current liabilities................ 7,088,690 5,524,398 DEFERRED CREDIT ......................... 0 0 SERIES "A-1" Convertible Promissory Note (CPN)1 CPN Related Parties Principal........................... 7,398,265 7,398,265 Accrued interest payable............ 6,846,628 5,958,838 CPN Other Parties Principal........................... 5,978,421 5,978,421 Accrued interest payable............ 5,976,182 5,258,773 Total Series "A-1" Notes............$ 26,199,496 $ 24,594,297 CONVERTIBLE DEBENTURES PAYABLE (net of discounts, commissions, and offering costs of)...............$ 20,437 $ $20,437 STOCKHOLDERS' EQUITY: Common stock - no par value; Authorized 36,000,000 shares; issued and outstanding: 35,466,193 shares in 1998 and 35,466,193 shares in 1997.........$ 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.................. (71,713,335) (68,473,960) Total stockholders' equity............... (33,270,465) (30,031,090) =========== ========== TOTAL....................................$ 38,158 $ 108,042 *See section 11 of the "Notes to Financial Statements" TOTH ALUMINUM CORPORATION STATEMENTS OF OPERATIONS AND DEFICIT FOR THE YEARS ENDED AUGUST 31, 1999, 1998, AND 1997 AND CUMULATIVE FOR THE PERIOD FROM INCEPTION (AUGUST 1966) TO AUGUST 31, 1999 (Unaudited) FROM INCEPTION TO .......FOR THE YEARS ENDED AUGUST 31 ... AUGUST 31, 1999 1998 1997 1999 ---- ----- ---- ---- COSTS AND EXPENSES: Research and development...... $ 13,700 $ 12,400 $ 29,700 $7,743,240 Promotional, general and administrative... 634,138 469,512 379,271 16,534,376 Interest........... 2,499,619 2,838,598 1,323,852 17,241,537 --------- --------- --------- ---------- Total.............. 3,147,457 3,320,510 1,732,823 41,519,153 ========== ========== ========== ========== OTHER (INCOME) EXPENSE: Loss in Investment and advances to Armant...........(A) 43,206 51,800 784,175 17,462,369 Equity in Loss in Armant........ 48,712 123,761 1,410,868 12,731,813 -------- ---------- ---------- ----------- NET LOSS........... 3,239,375 3,496,071 3,927,866 71,713,335 ========= ========== ========== =========== DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE, BEGINNING OF PERIOD............ $68,473,960 $64,977,889 $61,050,023 ------------ ----------- ----------- DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE, END OF PERIOD..... $71,713,335 $68,473,960 $64,977,889 $71,713,335 =========== =========== =========== =========== LOSS PER COMMON SHARE $.09 $.09 $.11 =========== =========== =========== (A) Due to the prolonged delay in attaining the necessary funding, the company was forced to write down $17,419,163 of its investment and advances in Armant. See notes to financial statements. TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED AUGUST 31, 1999, 1998, AND 1997 AND CUMULATIVE FOR THE PERIOD FROM INCEPTION (AUGUST 1966) TO AUGUST 31,1999 (Unaudited) ..............FOR THE YEARS ENDED AUGUST 31........................ FROM INCEPTION .......1999...................1998....................1997 ........ TO AUGUST 31, 1999 SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARES AMOUNT PREFERRED STOCK: Balance beginning of period .... -------- $ ------ ----- $ ----- ----- $ ----- ----- $ ---- Issued for cash to Louisiana residents ($25 per share)............... 10,656 266,400 Issued to officers, employees and consultants for services (assigned value of $25 per share)....... 1,344 33,600 Conversion of preferred stock to common stock......... (11,989) (299,725) Redeemed for cash .............. (11) (275) ------- ------ ------ ------ ----- ----- -------- --------- Balance, end of period.......... - 0 - - 0 - - 0 - - 0 - - 0 - - 0 - - 0 - - 0 - ======= ====== ====== ====== ===== ===== ======== ========= COMMON STOCK: Balance, beginning of period.................... 35,446,193 38,428,176 35,446,193 38,428,176 35,446,193 38,428,176 35,446,196 38,428,176 Issued at inception (August 1966) to the founders for patent rights and services.... 4,400,000 27,500 Issued for cash on initial offering to Louisiana residents.......... 80,000 4,875 Issued for cash pursuant to offering under Regulation A of Securities Act of 1933.................. 232,740 290,925 Issued for Cash................ 11,417,494 17,538,195 Issued to officers, employees, directors and consultants for services.................. 2,462,576 2,225,807 Issued for merchant banking services.............. 98,800 247,000 Issued for underwriting commissions of common stock sale............ 87,860 233,806 Issued for commission on sales of Armant Partnership units............ 26,812 53,625 Issued in the acquisition of subsidiary................ 500,000 1,830,000 Returned on divestiture of subsidiary................ (500,000)(1,400,000) Issued upon divestiture of subsidiary................ 131,854 482,586 Issued upon cancellation of indebtedness.............. 4,139,731 4,936,561 Issued upon conversion of debenture................. 3,222,479 3,946,307 Issued upon exercise of warrants and options......... 6,253,950 6,473,943 Issued for prepaid leases...... 497,353 778,706 Issued upon conversion of preferred stock to common stock........ 1,195,940 299,725 Issued for the acquisition of assets......... 118,934 89,200 Issued in satisfaction of prepaid royalties.......... 200,000 172,760 Issued in settlement of litigation ................... 130,000 157,000 Common stock subject to rescission................. 1,096,900 1,371,125 ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- Common stock subscribed......... ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- Balance, end of period..........35,466,193 38,428,176 35,466,193 38,428,176 35,446,193 38,428,176 35,466,193 38,428,176 ========== ---------- ========== ---------- ========== ---------- =========== ---------- See notes to financial statements. TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS EQUITY (Continued) (Unaudited) .............FOR THE YEARS ENDED AUGUST 31............................. FROM INCEPTION .........1999.......................1998................1997........... TO AUGUST 31, 1999 SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARES AMOUNT COMMON STOCK WARRANTS: Balance, beginning of period................ --- --- Warrants issued for cash................ 727,966 72,718 Warrants exercised........ (26,594) (3,577) Warrants expired.......... (701,372) (69,141) _____ _____ _____ _____ _____ _____ ________ _______ Balance, end of period.... - 0 - - 0 - - 0 - - 0 - ===== ----- ===== ----- ===== ----- ======== ------- PAID IN CAPITAL: Balance, beginning of period................. 164,774 164,774 164,774 In conjunction with financing........... 95,000 In connection with acquisition of subsidiary. 140,356 In connection with divestiture of subsidiary. (140,356) Common stock warrants expired and exercised..... 69,774 ________ ________ ________ ________ Balance, end of period..... 164,774 164,774 164,774 164,774 ________ ________ ________ ________ DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE: Balance, beginning of period................ (68,473,960) (64,977,887) (61,050,023) New Loss................... (3,239,375) (3,496,071) (3,927,866) (71,713,335) ------------ ------------ ------------ ------------ Balance, end of period..... (71,713,335) (68,473,960) (64,977,887) (71,713,335) TOTAL STOCKHOLDERS EQUITY.. (33,270,465) (30,031,090) (26,535,019) (33,270,465) TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31, 1999, 1998,AND 1997 AND CUMULATIVE FOR THE PERIOD FROM INCEPTION (AUGUST 1966) TO AUGUST 31, 1999 FROM INCEPTION .......FOR THE YEARS ENDED AUGUST 31.... TO AUGUST 31, 1999 1998 1997 1999 ------ ------ ------ ------ OPERATING ACTIVITIES NET LOSS................ $(3,239,375) $(3,496,071) $(3,927,866) $(71,713,335) ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization.......... 25,700 31,384 31,384 1,192,225 Amortization and write off of patents........ 210 620 31,264 440,708 Amortization of financing costs....... 95,000 Loss on divestiture of subsidiaries....... 912,586 Amortization of prepaid leases................ 302,424 Losses from joint venture.............. 48,712 123,761 1,410,868 11,189,335 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: Decrease (Increase) in accounts receivable. (10,787) Decrease (Increase)in prepaid expenses...... (27,371) Increase (Decrease) in accounts payable...... 1,506,129 952,022 853,283 14,864,935 Increase (Decrease) in notes payable......... 1,605,199 2,295,840 539,563 21,913,974 --------- ----------- --------- ---------- $(92,396) $(92,444) $(1,039,663) $(20,544,289) TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS - (Continued FROM INCEPTION ......FOR THE YEARS ENDED AUGUST 31.... TO AUGUST 31, 1999 1998 1997 1999 ------ ------ ------ ------ 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 investments in and advances to TACMA..... (1,076,595) Cash investments in and advances to Armant.... 9,741 37,450 257,820 (20,760,548) Write off of Investments and Cash advances to Armant................ 43,206 51,800 782,175 17,115,802 Redemption of certif.- cates of deposit...... 3,995,000 Proceeds from sale of net profit interest... 50,000 --------- ---------- ---------- ---------- 52,947 89,250 1,040,025 (6,273,862) --------- ---------- ---------- ---------- FINANCING ACTIVITIES: Stock issued 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 costs......... (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 $ (478) (3,194) 362 (478) CASH BEGINNING OF PERIOD 918 4,112 3,750 --------- --------- ---------- ----------- CASH END OF PERIOD $ 440 $ 918 $ 4,112 $ 440 ========= ========= ========== =========== TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 1999, 1998 AND 1997 AND CUMULATIVE FOR THE PERIOD FROM INCEPTION (AUGUST 1966) TO AUGUST 31, 1999 (Unaudited) 1. ORGANIZATION AND ACCOUNTING POLICIES Going Concern Basis 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 August 31, 1999, and August 31, 1998, of $71,713,335 and $68,473,960, respectively. 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 August 31, 1999, of approximately $71,713,335. 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. 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 several steps. 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 Phase 1. 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. In light of the Company's net operating loss carry-forwards of approximately $56,172,863 at August 31, 1999, management believes that none of the provisions of the Tax Reform Act of 1986 will, in any respect, have a material impact upon the Company's liquidity or earnings for the foreseeable future. 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, and to fund the purposed projects and ultimately to attain successful 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. Related Party Transactions A significant aspect of the Company's business activities consists of transactions with related parties. The following summarizes significant assets at August 31, 1999 and 1998 arising from transactions with related parties: August 31, 1999 1998 ------- ------- Advances to Armant (Note 2) $ 17,131,056 $17,127,870 Less write off due to the Prolonged delay in Obtaining funding (17,115,802) (17,069,420) Prepaid leases (Note 4) --- --- ---------- ----------- Total $ 15,254 $ 58,450 ========== =========== Development Stage Enterprise The Company was incorporated in August 1966. Since inception, the Company's activities have consisted primarily of the development of processes for the commercial production of aluminum intermediates together with marketable byproducts. The Company is considered to be a development stage enterprise; start-up and pre- operating activities have commenced at the Armant facility, but the Company has received no revenues therefrom. Property and Depreciation Property, plant and equipment is stated on a cost basis. Depreciation for book purposes is provided by use of the straight- line method over the estimated useful lives of the assets, which range from 4 to 20 years. Depreciation for tax purposes is provided by use of the MACRS method for the current year and ACRS method for previous years. Improvements on leased property are amortized over the lesser of the lease term or useful life of the asset. Renewals and betterments of property and equipment are capitalized and maintenance and repairs are charged to operations as incurred. Upon retirement or sale of property, the cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Investment tax credits are accounted for using the flow-through method. Patents Patent costs include legal and other costs incurred in filing for and obtaining patents; such costs are amortized using the straight-line basis over the lesser of the legal or estimated useful life of the patent. Disclosure of Year 2000 Issues The Company is engaged in the commercialization of its patented carbo-chlorination processes for the production of aluminum, alumina and aluminum trichloride, silicon tetrachloride, titanium tetrachloride. At present the company has no ongoing manufacturing operation, therefore no revenues are derived from its operation. Recent market surveys indicate a continued growth and demand for these products beyond the year 2000. Management has conducted an extensive assessment of the Year 2000 issues, and has concluded there will be no material effects on the company's business, there will be no material effects on the results of operations, and there will be no material effects on its financial condition. The Company is in a 100% state of readiness for the year 2000. The Company has conducted extensive testing of its computer and other date related systems, and has determined that nearly all are year 2000 complainant. Those systems which are not year 2000 complainant, have been discarded. Furthermore, the Company has conducted an informal surveyed on its utility companies, telephone company, and its banking institutions to verify they are year 2000 complainant as well. The Company anticipates little to no ill effects from the Year 2000. The demand for its products continue to grow, thereby making the prospects of a future joint venture very pausable. The worst case scenario, would be a total collapse of the US Capital Markets where by funding for the Company's future commercialization of its process could not be achieved. The Company has prepared a contingency plan in the event of a disruption in its ability to continue funding of its ongoing operation. The Company has secured a personal commitment for its operating capital needs. However, in the event of a major disruption of the Financial Markets, the Company's continued existing would be in doubt. Loss Per Common Share Loss per common share is computed based upon the weighted average number of shares of common stock outstanding. The weighted average number of shares outstanding for the fiscal years ended August 31, 1999, and 1998 was 35,466,193, and 35,466,193, respectively. The Company has options outstanding that are common stock equivalents which are not considered in the computation of loss per share since the effect would be anti-dilutive. Common Stock Issued in Exchange for Assets Acquired or Services Rendered The Company at times issues common stock in exchange for assets acquired or services rendered. The amounts recorded for assets acquired or services rendered are based on the estimated fair value of the assets or services, or if such fair value is not readily determinable, on the estimated fair value of the common stock issued. All issuances of common stock are approved by the Company's Board of Directors. Statement of Cash Flows In November, 1987, the Financial Accounting Standards Board issued Statement No. 95, "Statement of Cash Flows". The Company adopted provisions of the statement in its 1988 financial statements and restated previously reported statements of changes and are reflected in financial position for 1999, 1998 and the statement from inception to August 31, 1999. The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 2. INVESTMENTS General 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 collectibiilty of the advances to and the recovery of the investment in Armant depends upon the affiliate achieving successful commercial operations. 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 1/2%. 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 1/2%. 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, 1988 and 1987, 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 collectibiilty 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 1994 they have requested action requiring the Company to replace or supplement its interest in TACMA. During 1995 the company issued a Series "A-1" Convertible Promissory Note to the Swiss Corporation for the original $50,000 plus accrued interest of $98,200 for a total of $148,000. 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, 1988, has cost approximately $22.9 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. The Company is leasing the land from ELSA, as more fully described in Note 4. 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, 1988, 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, 1988, the Company had made additional cash advances to the Armant Partnership totaling $16,819,407, 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. The Company's equity in the loss of Armant for the years ended August 31, 1988 and 1987, was $2,880,165 and $2,177,562, respectively. All of the loss for 1988 and $1,999,562 in 1987 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. Since the plant was shutdown in 1988 due to insufficient capital to maintain operations, the Company had attempted 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 1996 to securing funding from the DOE under the "Steel and Aluminum Energy Conservation and Technology Competitiveness Act of 1988". Presently, the Company has postponed its efforts to up-grade the Armant Plant. During fiscal years 1998 and 1999, the prolonged delay in securing the necessary funding to restart the Armant Pant forced the Company to write off a significant portion of the Armant assets. Costs capitalized and deferred by Armant consisted of the following: August 31, 1999 1998 ------ ------ Direct carbo-chlorination plant costs: Process equipment............. $ 1,740,000 $2,950,000 Other equipment............... 0 0 Leasehold improvements........ 37,000 72,000 ----------- ---------- 1,777,000 3,022,000 Self-construction and start-up costs: Salaries: Engineering .................. 17,000 40,000 Plant construction and operations................ 420,000 720,000 Indirect labor and overhead.................. 17,000 35,000 ----------- ---------- 454,000 777,000 ----------- ---------- $ 2,231,000 $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. Prior to September 1, 1986, all costs were capitalized and deferred. August 31, 1999 1998 ------ ------ Assets: Plant and equipment........ $ 2,231,000 $ 3,799,000 Other...................... 72,000 100,000 ----------- ----------- Total.................. $ 2,303,000 $ 3,899,000 =========== =========== Liabilities and Equity: Notes payable - Toth Aluminum Corporation................. $ 3,240,000 $ 4,740,000 Notes payable - Bank.... 0 0 Payables - Toth Aluminum Corp......... 17,420,000 16,970,000 Other payables.......... 790,000 710,000 Equity - Toth Aluminum Corporation........... (19,134,000) (18,508,000) - Other............... (13,000) (13,000) (19,147,000) (18,521,000) ----------- ----------- Total.................... $ 2,303,000 $ 3,899,000 =========== =========== Year Ended August 31, 1999 1998 ------ ------ Statement of Plant Expenses Direct plant costs........... $ 33,000 $ 14,000 Interest Expense.......... 274,000 195,000 General and administrative costs.... 76,000 98,000 ---------- ----------- Net loss $ 383,000 $ 307,000 ========== =========== August 31, 1999 1998 ------ ------ Payable to and Equity of Toth Aluminum Corporation Notes payable.................... $20,013,000 $ 19,842,000 Payables......................... 4,689,000 5,240,000 Beginning equity of the Company................... (5,560,000) (5,560,000) Less: Loss from Armant.......... (10,989,000) (11,650,000) 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...... (2,518,000) (2,310,000) ----------- ------------ Investment in and advances to Armant...................... $ 15,254 $ 58,450 =========== ============ 3. PROPERTY, PLANT AND EQUIPMENT At August 31, 1999 and 1998, the Company's property, plant and equipment consisted of the following: 1999 1998 ------ ------ Equipment........................ $ 15,325 $ 15,325 Furniture and fixtures........... 99,636 99,636 Leasehold improvements........... 355,127 355,127 Autos, tractors and trucks....... 39,800 39,800 -------- -------- 509,888 509,888 Accumulated depreciation and amortization................... (487,234) (453,330) -------- -------- Property, plant and equipment - net............ $ 22,654 $ 56,558 ========= ========= 4. PREPAID LEASES During 1982, the Company was leasing from ELSA 16 acres of land, together with certain improvements, at the Armant site. The Company had prepaid the first four years' rent on these five year leases, which commenced June l, 1981, by issuing common stock to ELSA. In August 1983, the Company and ELSA agreed that ELSA would purchase 281,353 shares of the Company's common stock for $562,706, with the stipulation that the Company would repay the balance of ELSA's mortgage note on the Armant property, which was approximately equal to the funds received and would receive a ten year lease of 104 acres and improvements, together with the right to pledge the leased property as security for a bank loan. In September 1983, the Company paid the balance of ELSA's mortgage note and obtained a ten year lease on the property commencing September 1983 and the right to pledge the property as security for a bank loan. The Company had an option to purchase the leased property, at a price determined by independent appraisal, at any time during the ten year lease term. The prior five year leases were canceled upon execution of the ten year lease, and ELSA retained the common stock it had received in prepayment of the five year leases. Management concluded that the transactions described above were essentially a non-monetary transaction consisting of the acquisition of a ten year lease and the right to pledge the property in exchange for common stock and the cancellation of the five year leases, and should be recorded based on the fair value of the ten year lease. An independent appraisal of the ten year lease established that its fair value was between $600,000 and $700,000. Since the aggregate of the unamortized prepayment of the canceled five year leases (approximately $95,000 at August 31, 1983) and the balance (approximately $562,000) of ELSA's mortgage note paid by the Company was within the range of the ten year lease's fair value established by appraisal, management used $657,000 as the basis for recording the transactions. The Company has contributed to Armant a lease of 25 acres and improvements for a period of approximately five years, commencing in September 1983, and has retained for its use the remainder of the lease. Of the $657,000 aggregate discussed above, the Company allocated $138,000 to its capital contribution to Armant, and $519,000 to prepaid leases at August 31, 1983. During fiscal years 1985 and 1984 the Company, in its capacity as general partner, negotiated loans of approximately $2.4 million for the Armant Partnership using the property as collateral. 5. NOTES PAYABLE Notes payable consisted of the following: August 31, 1999 1998 ------ ------ Notes payable to bank, collateralized(A): At 12% ......................... $ - $ - Demand notes payable to other parties, unsecured (A): At 12% ......................... - - Demand notes, and payable to related parties, unsecured (A): At 12%.......................... 323,100 323,100 ---------- ---------- Series "A-1" Convertible Promissory Notes Payable to related parties...... 7,398,265 6,726,150 Payable to others............... 5,978,421 5,575,742 Interest Payable................ 12,822,810 11,217,611 =========== =========== Total............................... $ 26,522,596 $24,917,397 A) Partial or full collateralized by a pledge of personal assets owned by the Company's Chairman of the Board. Bank borrowings and applicable interest rates were as follows: 1998 1997 1996 Balance at end of period........ $ -0- $ -0- $ -0- Maximum amount outstanding...... -0- -0- -0- Weighted average amount outstanding.................. -0- -0- -0- Weighted average interest rate during the year.............. - - - Weighted average interest rate at year end.................. - - - The weighted average interest rate during the year was computed by dividing applicable interest expense by average bank borrowings outstanding. 6. INCOME TAXES The Company has net tax operating loss carry-forwards available which may be used to offset future taxable income. Potential tax benefits of the loss carry-forwards have not been recognized for accounting purposes since realization of the carry- forwards is not assured. The principal differences between losses recognized for tax and book purposes are research and development expenses, which are capitalized for tax purposes and the method of calculating the Company's equity in loss of Armant. At August 31, 1999, the amounts and expiration dates of the net operating loss carry-forwards were as follows: Expires in Year Ending August 31, Amount ------------------ ---------- 2000 377,500 2001 1,608,600 2002 1,407,200 2003 8,045,300 2004 1,931,000 2005 1,524,000 2006 1,234,000 2007 3,618,000 2008 2,204,000 2009 2,313,000 2010 16,157,300 2011 6,864,124 2012 3,927,868 2013 3,496,071 2014 3,239,375 ------- ------------ Total $ 57,908,338 =========== 7. STOCK OPTIONS AND WARRANTS Stock Option Plans: The Company's Board of Directors has, at various dates, awarded options to individuals to purchase the Company's common stock. During fiscal year 1999 no options were exercised. The following information is furnished with respect to options and warrants outstanding. Number of Shares at August 31, August 31, 1999 1998 -------- --------- Exercise Price Options: $2.00-2.84 30,000 30,000 $4.00-5.00 5,000 5,000 Warrants: ---------- ---------- Total 35,000 35,000 ========== ========== 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 August 31, 1988, the Company had sold 919,981 units and had issued option rights to purchase 919,981 shares with an exercise price ranging from $0.75 per share to $0.95 per share. 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, 2001. 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, 2001, and the exercise price of the option, bearing interest at the rate of 1% per month until paid. 8. COMMON STOCK ISSUANCES On September 29, 1986, the shareholders of the Company approved an increase in the authorized common stock of the Company from 23,976,000 to 36,000,000. Refer to "Involvement in legal proceedings", Part III, Item 10, for additional information on certain lawsuits related to potential recoveries from alleged securities law violations. The table below sets forth common stock issuances from inception of the Company to August 31, 1998, and together with the nature of the consideration received, the range of per share prices, and the average per share price. The number of shares issued and per share prices have been adjusted, where applicable, for stock splits. Number of Total Dollar Price Per Share Shares Issued Consideration Range Average ------------- ------------- ----- ------- From September 1, 1992 to August 31, 1999: Beginning Balance.............. 35,466,193 $38,428,176 Issued for cash................ Issued to officers, employees, directors and consultants for services...................... Issued upon payment of common stock subscribed.............. Total ---------- ----------- Total at August 31, 1999 35,466,193 $38,428,176 ========== =========== 9. CONVERTIBLE DEBENTURES 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 apprized 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 August 31, 1988, 4,298 debentures were converted into 3,152,955 shares of the Company's common stock, resulting in an increase in common stock of $3,833,307 (net of offering costs of $464,693) and a balance in debentures payable of $20,437 (net of offering costs of $1,563). 10. SERIES "A-1" CONVERTIBLE PROMISSORY NOTE In May of 1995, the Company elected to convert the majority of its indebtedness into shareholder equity. At that time there existed a Convertible Promissory Note, which provided for the existing indebtedness to be converted into stock based upon the conversion price of $.50 per share plus a warrant to purchase an additional equal number of shares at $.75 per share. The new Series "A-1" Convertible Promissory Note's conversion price remains the same at $.50 per shares, with a warrant to purchase an additional equal number of shares, however, the price has changed and is now at $.30 cents per share. There are several limitations, primarily, the Company does not have sufficient shares of Common Stock authorized to permit conversion of the Series "A-1" Notes. Accordingly, the Notes is not convertible into Common Stock, until such time as there has been an amendment to the Articles of Incorporation of the Company, approved by its shareholders, increasing the number of authorized shares of Common Stock to an amount sufficient to cover the number of shares subject to conversion under the Series "A-1" Notes. This Series "A-1" Convertible Promissory Note had a maturity of 5 years, which has subsequently been extended for an additional 5 years by the Board of Directors. If as intended the holders of the Series "A-1" Convertible Promissory Note were to convert today, this conversion would enhance the Stockholder's Equity section by increasing the Common Stock by $26,199,496 thereby increasing the Common Stock to 87,865,185, eliminating the same dollar value from the Company's liability. Management believes that of the total outstanding debt, more than 90% will eventually convert their debt into shareholder equity. Of the 10% who will not convert are companies or individuals which can not accept payment of the company's equity, such as lawyers and auditors. If at the next regular shareholders meeting the Company has failed to amend its Articles of Incorporation to authorize the issuance of additional shares of Common Stock, the Note holder shall have the right and option to tender the Series "A-1" Note to the Company to be exchanged for a new non-convertible promissory note payable on demand in cash in a principle amount equal to the greater of the principal amount and interest due under this Note, or the product of the total number of shares of Common Stock into which the Note is convertible multiplied by the average of the mean bid and ask prices of the Company's Common Stock at the close of business over the ten business days immediately preceding the date of tendering of this Note. TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) Schedule IV - Indebtedness of and too Related Parties - Not Current COL. A COL. B COL. C COL. D COL.E ----------------------Indebtedness of------------------------ Name of Balance at Balance Related Party Beginning Additions Deductions at End For the fiscal years ended August 31, 1999 Armant $ 5,240,000 $ - $ 4,689,000A $ 551,000 TACMA* $ - $ - $ - $ - 1998 Armant $ 8,494,000 $ - $ 5,240,000A $ 3,254,000 TACMA* $ - $ - $ - $ - 1997 Armant $ 25,788,136 $ - $ 17,294,136A $ 8,494,000 TACMA* $ - $ - $ - $ - A -Due to the continued delay in obtaining the necessary funding the company wrote off this amount. * -Due to continued delay in obtaining government approval, the receivable from TACMA was reversed during the fiscal year ended August 31, 1987. TOTH ALUMINUM CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) Schedule IV - Indebtedness of and to Related Parties - Not Current (Continued) Col. F Col. G Col.H Col. I ------------------------Indebtedness to--------------------------- Name of Balance at Balance Related Party Beginning Additions Deductions at End For the fiscal years ended August 31, 1999 Armant $ - - - - TACMA $ - - - - 1998 Armant $ - - - - TACMA $ - - - - 1997 Armant $ - - - - TACMA $ - - - -