1996 Annual Report 10-KSB40
December 31, 1996
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] 15, ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the fiscal year ended December 31, 1996
[ ] 15, TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ________________ to _________________
Commission file 02-69494
GLOBAL GOLD CORPORATION
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(Name of small business issuer in its charter)
Delaware 13-3025550
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
438 West 37th Street, Suite 5-G, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 563-5933
Securities registered under Section 12(b) of the Exchange Act:
Title of each class (Name of each exchange on which registered)
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None
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Securities registered under Section 12(g) of the Exchange Act:
None
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(Title of Class)
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to be best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year ending December 31,
1996 were $389.
The aggregate market value of the voting stock held by non-affiliates of
the Company computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days was $219,807.(1)
As of December 31, 1996 there were 2,198,074 Shares of the registrant's
Common Stock outstanding.(2)
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(1) The Company's Common Stock is not publicly traded. However, the Board
of Directors of the Company determined that fair market value of the Common
Stock was $0.10 per share.
(2) This number is computed after taking into account the 1 for 10 reverse
split of the shares of Common Stock of the Company, effective as of December 31,
1996 (the "Reverse Split").
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ITEM 1. DESCRIPTION OF BUSINESS
(A) General Overview
The Company is presently engaged in the development of a gold mining
project in Armenia, and is currently considering pursuing a gold and copper
mining project in Georgia (both of which countries are members of Commonwealth
of Independent States). The Company is currently in the pre-development stage
and has not received any revenues from mining activities. Prior thereto, the
Company did not engage in any substantial business activities, except as
described in the section 1(D) entitled "Prior History of the Company."
(B) Armenian Mining Project
(a) Armenian Joint Venture Agreement
The Company, the Ministry of Industry of Armenia and Armgold, S.E., the
Armenian state gold enterprise, executed and delivered the Armenian Joint
Venture Agreement, dated as of May 1, 1996. The Company thereafter assigned its
rights and obligations thereunder to Global Gold Armenia Limited, its
wholly-owned Cayman Islands subsidiary ("GGA"). The Armenian Joint Venture
Agreement contemplates the formation of the Armenian Gold Recovery Joint Venture
Co. Ltd., a limited liability company under Armenian law ("AGRC"), which will
construct, operate and market the gold production and provide capital and
financing in a multistage development of the Armenian gold industry. Stage 1 of
the Armenian Joint Venture Agreement involves the processing of an estimated 12
million tonnes of tailings from the Ararat processing plant, which the Company
believes average 1 gram of gold per tonne (based on the independent
metallurgical study obtained by the Company) (the "Tailings Project") and the
completion of a comprehensive feasibility study and business plans for the
development of the Zod mine. Based on the business plans to be approved by all
parties, Stage 2 will consist of engineering and building a gold processing
plant at the Zod mine, and Stage 3 will consist of engineering and building a
gold processing plant at the Meghradzor mine.
As an additional measure of legal authority, the Company requested that
the Government issue a decree confirming the right of the joint venture to
export gold and the power of the Ministry of Industry of Armenia and Armgold to
make the undertakings set forth in the Armenian Joint Venture Agreement,
including, without limitation, that such Armenian parties have good title and
unencumbered ownership of all property to be transferred to such joint venture
and the power to enter into the Armenian Joint Venture Agreement. The Armenian
Government issued such decree on June 29, 1996 requiring the Company to post a
$250,000 guaranty in favor of the Ministry of Finance insuring that it invests
at least $5,000,000 into the project within eight months of such date, and the
Company delivered such guaranty, which the Armenian Government advised counsel
to the Company orally and later in a letter from the Minister of Finance was
acceptable to it. Pursuant to the Joint Venture Agreement, the Ministry of
Industry and Armgold are responsible for obtaining all further permits or
decrees needed in connection with the project.
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Under the Armenian Joint Venture Agreement:
1. The profits or products of the AGRC will initially be used to pay any
applicable debt service and thereafter will be distributable to GGA and the
Armenian parties based on a sliding scale correlated to the percentage of gold
extracted from the tailings from 50% - 50% to 66 2/3% - 33 1/3%. By virtue of
the test results concerning the tailings ore, GGA anticipates that it will be
entitled to 66 2/3% of the profits of AGRC, while Armgold will be entitled to 33
1/3% thereof;
2. AGRC was granted a two-year tax holiday, followed by eight years at
half tax (which is equivalent to a 15% tax at current rates), as permitted under
Armenian law for foreign investment.
3. Each of GGA and Armgold owns 50% of the equity of the AGRC.
4. GGA has rights to participate in the development of the Zod and
Meghradzor mines, construction of a possible new refinery, the Ararat mill and
exploration work, in each case subject to certain conditions. However, GGA
rights in these projects depend on the approval of proposed business plans and
the conclusion of additional agreements with the Armenian authorities. In the
event that GGA does not conclude such agreements, it shall have a right of first
refusal with respect to each such project.
5. GGA was required to provide $5,000,000 of equipment for the project at
the Ararat tailings site and to provide through December 31, 1996 an additional
$4,500,000 in connection with the operation of the tailings processing plan.
6. In addition thereto, GGA has to provide a number of additional services
for the project, including management, modern western technology, engineering
and design services, marketing, trading and other ancillary services as set
forth in the Armenian Joint Venture Agreement.
(b) Tailings Project
The parties have begun to implement the Tailings Project. On October 7,
1996, the Armenian Government issued a license for a five-year period in
implementation of the development plan at the Ararat tailings site, effective
after the registration of the joint venture entity, AGRC, with the appropriate
Armenian governmental authorities in accordance with applicable Armenian law.
The registration of such entity occurred on November 8, 1996. In addition, the
mining engineering firm retained in connection with the project obtained bulk
ore samples from the tailings site for testing in Canada. An independent
laboratory, which analyzed such samples, advised the Company, in its written
report in February, 1997, that the test results showed that approximately one
and one-tenth gram of gold exists in each metric tonne of the ore at the site
covered by the Tailings Project and recovery of gold could be approximately .55
grams per tonne, although there can be no assurance thereof.
4
Pursuant to the decree issued in connection with the Armenian Joint
Venture Agreement, GGA was required to invest $5,000,000 in the Tailings Project
on or before February 1, 1997. Such requirement was met on or before such date,
and the Armenian Joint Venture Agreement's different financial requirements
(reflected in item 5 above) were waived by the parties. Thus, as of February 1,
1997, GGA had a definitive agreement authorized by an Armenian government decree
granting it fixed rights to process tailings from the Ararat site.
Pursuant to the Armenian Joint Venture Agreement, AGRC is now engaged in
the final engineering and initial construction for the Tailings Project. AGRC
entered into a Tailings Dam Construction Contract with Armhydro for $640,000 on
January 31, 1997. AGRC also retained a Canadian engineering firm, under a
contract for Engineering, Procurement and Construction Management Services
Agreement dated January 31, 1997, under which the compensation payable to the
contractor under Phase I of the project is $4,500,000. Operation of the tailings
processing plant is planned for September, 1997, although construction and other
contingencies exist which may delay meeting such target date.
While the Company has been advised that proven reserves exist in the
Tailings Project and that the mining thereof can be done on a profitable basis,
there can be no assurance of such result.
(c) Financing of the Armenian Mining Project - First Dynasty Mines Ltd.
Throughout 1996 and into January, 1997, the Company had discussions with
many unrelated parties in connection with arranging for the financing of the
Tailings Project. As of January 31, 1997, the Company and GGA reached an
agreement with First Dynasty Mines Ltd. ("First Dynasty"), a Canadian public
company whose shares are traded on the Toronto Stock Exchange and on NASDAQ.
The Company, GGA and First Dynasty entered into a preliminary agreement
dated January 27, 1997 whereby First Dynasty has the right, subject to certain
conditions, to advance funds in stages necessary for the implementation of the
Tailings Project and the preparation of engineering and business plan materials
for the remaining Armenian mining projects (the "First Dynasty Agreement"). The
principal terms of the First Dynasty Agreement are set forth below:
1. All funds advanced by First Dynasty will be advanced to GGA as debt,
which is convertible into stock of GGA, at First Dynasty's option, as follows:
(a) The first $6,480,000 of debt is convertible into 25% of the
capital stock of GGA.
(b) The next $3,520,000 of debt, together with the advance described
in 1(a) above, is convertible into 51% of the capital stock of GGA.
(c) For every additional $.5 million invested for expenditures
advanced in respect
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of the development of the Zod and Meghradzor mines (excluding the $10
million Tailings Project expenditure) as a loan to GGA, such debt is
convertible into an additional 1% of the capital stock of GGA, up to a
maximum of 80% of the issued and outstanding shares of capital stock of
GGA. Thus, upon advancing a total of $24,500,000 in the Armenian mining
projects, First Dynasty would be entitled to acquire 80% of the shares of
GGA, if First Dynasty elects to convert all of its debt into equity.
2. Upon obtaining 80% of the capital stock of GGA, First Dynasty would be
entitled to acquire the remaining 20% of the outstanding of capital stock of GGA
by issuance of $10,000,000 value of its common stock based on the market price
of such shares at a deemed price of $2.50 per share, except that such
$10,000,000 value of such shares will be increased proportionately to the extent
that the mineable reserves at the Zod and Meghradzor mines (which are
established after drilling at a depth at a particular time as agreed) exceed
five million ounces (such that the $10,000,000 value is based on mineable
reserves of 5 million ounces).
3. Appropriate employment arrangements would be entered into between GGA
and Messrs. Gallagher and Garrison on mutually agreeable terms.
4. The parties agreed to enter into a shareholders agreement (which will
be designed to govern the ongoing affairs of GGA) to provide, among other
things, that (i) from the date of the release of the escrow of the Initial
Commitments (as defined below), First Dynasty will be entitled to appoint two of
the five directors of GGA with the right to designate three of the five
directors if First Dynasty acquires 51% to 80% of the capital stock of GGA and
thereafter increase its representation of directors proportionate to its
ownership; (ii) GGA would appoint one representative of First Dynasty to the
AGRC board initially, increasing to two of three appointed by GGA if First
Dynasty acquires ownership of at least 51% of the capital stock of GGA; and
(iii) there would be certain matters requiring joint approval of the
shareholders of GGA, subject to the Company's entitlement to one representative
on the AGRC board for so long as it holds at least 20% of the capital stock of
GGA.
5. The Company, GGA and First Dynasty agreed to enter into definitive
agreements with respect to the financing of the Armenian mining projects as soon
as reasonably practicable after the end of First Dynasty's due diligence period.
Such due diligence period lasts until March 30, 1997 or such other mutually
agreeable date (but not beyond April 15, 1997 unless otherwise agreed by the
parties). Such definitive agreement will incorporate the terms and conditions of
the First Dynasty Agreement together with certain representation of warranties
and covenants related thereto.
Pursuant to the First Dynasty Agreement, First Dynasty carried out certain
initial commitments described below (collectively the "Initial Commitments"):
a. First Dynasty loaned $675,000 to GGA to repay 50% of the
outstanding payables of $1,350,000 incurred by the Company and GGA.
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b. Upon the signing of the $640,000 Tailings Dams construction
contract with Armhydro, First Dynasty funded $5,000, and on or before February
10, 1997, advanced an additional $91,000, and, thereafter, First Dynasty has
agreed to fund the balance.
c. First Dynasty agreed to guarantee or co-sign for up to $3,500,000
of the equipment purchase contract and up to $1,000,000 of the engineering,
procurement, construction management agreement between AGRC and a Canadian
engineering firm. Also, First Dynasty agreed to advance funding for expenditures
thereunder as jointly agreed by the Company and First Dynasty from time to time,
subject to certain cancellation provisions agreed to by First Dynasty.
d. First Dynasty further agreed to loan $675,000 to GGA, to cover
the balance of the outstanding payables, on March 31, 1997 (if sufficient
outstanding warrants to purchase First Dynasty common stock were exercised prior
to the first expiration date thereof of March 13, 1997) or 90 days after the
signing of the First Dynasty Agreement.
The initial payment of $675,000 was in fact advanced by First Dynasty and
disbursed according to the agreement.
The Company and GGA are now negotiating the terms of the definitive
agreement by and among them. While the Company believes that a definitive
agreement will be executed and delivered by such parties, there can be no
assurance of such result.
(d) Mining Plans
GGA, in conjunction with First Dynasty, is currently negotiating with the
Armenian Government to obtain for AGRC, or separate, similar joint venture
companies, rights to mine and process gold at the Zod and Meghradzor mines on a
schedule which is faster than anticipated by the May 1, 1996 Joint Venture
Agreement, although there can be no assurance of the outcome thereof.
The gold mine in Zod, one of the world's larger gold mines, has been in
operation since about 1975. The mine has a structure of over 5 kilometers in
length; only 2 kilometers of the gold structure has been explored and tested,
and reserves have been established by Armenia and Russian geologists. Zod is
located in eastern Armenia within fifteen kilometers of the Soviet border
between Armenia and Azerbaijan according to various maps. The de facto border is
substantially farther away and the Armenian Government has represented that it
has good title to the mine. The Azerbaijan Government has recently stated that
it had sent notes of protest to the U.S. Embassy in Armenia questioning the
appropriateness of an American company carrying on activities so close to
occupied territories at the Zod mine. The U.S. Embassy has no record of receipt
of such protests. Engineering studies undertaken by the Government Armenia state
that there are proven gold reserves of approximately 5,000,000 ounces of gold.
However, these reserve figures have not been independently confirmed by the
Company at this time and there can be no assurance that reserves in such amount
exist, or, if they exist, can be mined on a profitable basis.
The ore at Zod has been mined historically by open pit and underground
methods. The ore from the mine site has been shipped to the Ararat processing
plant located approximately 275 kilometers from the mine site. Mining had been
conducted at the Zod mine site at an average annual
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rate before 1996 of approximately 60,000 tonnes of ore per year by both
underground and open-cut operations, but such mining operations ceased in
November, 1996 due to lack of funding. The Company believes that such average
tonnage constitutes less than the mine's capacity.
The Meghradzor mine is situated in Central Armenia some 75 kilometers
north of Yerevan. The mine has produced approximately 300,000 tonnes of ore
since commencing production in 1987. The ore produced by the mine is hauled by
railroad approximately 100 kilometers to the Ararat treatment plant. Like Zod,
Meghradzor has the benefit of excellent regional infrastructure including sealed
road and railroad access to the site and connection to the Armenian Power Grid.
Current production levels are less than 2,000 metric tonnes per month due to
many similar issues which face the Zod mine including low re-investment, poor
equipment availability, lack of consumables and the high costs associated with
railing of crude ore to Ararat.
As with Zod, underground exploration has been accomplished by extensive
underground mine development in addition to drilling, with the result that over
60 kilometers of underground workings exist.
Engineering studies undertaken by the Government of Armenia state that
there are proven gold reserves of approximately 700,000 ounces of gold. However,
these reserve figures have not been independently confirmed by the Company at
this time and there can be no assurance that reserves in such amount exist, or,
if they exist, can be mined on a profitable basis.
Based on projections furnished by independent engineering firms, the
Company believes that approximately $10,000,000 is needed in the first phase of
the project, $80,000,000 in the second phase of the project and $100,000,000 in
the third phase of the project. The funds for the first phase would be used
primarily to construct a new tailings processing plant. The funds for the second
phase would be used to construct a new processing plant at the Zod mine site
with a capacity of processing 1,000,000 metric tonnes per year and to redesign
the mine. Of the sum of $100,000,000 for the third phase, $60,000,000 would be
used to increase the capacity of the Zod processing plant to 2,500,000 metric
tonnes per year. The additional $35,000,000 in phase three is proposed to be
used to construct a processing plant at the Meghradzor mine with a capacity of
processing 200,000 metric tonnes per year. Also, an additional $5,000,000 on
phase three is proposed to be used to build a gold refinery in Armenia with a
capacity of refining 300,000 ounces of gold annually. However, since the Company
has not conducted any feasibility study with respect to these projects, the
ultimate financing needs for these projects might vary substantially from that
set forth above.
(C) Georgia Mining Project
(a) Existing Agreements
1. Current Status
Pursuant to the Asset Purchase Agreement between Eyre Resources N.L.
("Eyre") and the
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Company dated as of June 30, 1995 (the "Agreement"), the Company, through its
wholly-owned subsidiary, Global Gold Georgia Limited, succeeded by an assignment
dated December 1, 1995 to all of Eyre's rights in the Georgian Project (as
defined therein, as further described in Item 12 hereof).
Eyre signed a Foundation Agreement(3), dated April 22, 1995, together with
the charter of the
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(3) The Foundation Agreement provided that:
1. Eyre was to have a 50% interest in the GJV Co.
2. RCPA was to contribute buildings and equipment and certain rights
under its license for development of the Madneuli deposit and pay the expenses
of formation of the GJV Co. and provide and guarantee access to ore material and
relevant information.
3. The Company or its wholly-owned subsidiary, upon the assignment
of Eyre's interest in the Foundation Agreement, was to provide capital
investments, management, control, engineering, construction and other technical,
marketing and other services.
4. Contributions to the Charter Fund were to be $10,000, to be made
by the Company or its wholly-owned subsidiary upon the assignment by Eyre of its
joint venture interest to it and be deemed to be a contribution of 50% by the
parties to the Foundation Agreement.
5. The Foundation Agreement provided for management of the GJV Co.
pursuant to a Board of Directors of four individuals, two of which were to be
designated by each party, with the Chairman to be appointed by the majority
shareholder.
6. Prior to recovery of capital by the non-Georgian party, net
profits of the GJV Co. after expenses were to be distributed as follows:
(i) RCPA - 9.75%
(ii) The Company - 9.75%
(iii) Panquest - .25%
(iv) Sinking Fund - .25%, and
(v) Capital Repayments - 80%.
7. After recovery of capital, the net profits were to be distributed
as follows:
(i) RCPA - according to shareholdings (i.e. share of the
Foundation Fund, which shares could be changed only by unanimous vote of the
participants), less 2.5% to the Sinking Fund, and
(ii) The Company (or its wholly-owned subsidiary) - according
to shareholdings less 2.5% to Panquest.
8. The GJV Co. was to be entitled to certain tax concessions
provided to certain foreign investments.
9
limited liability company to be formed (the "Foundation Agreement"), with
Research-Cum-Production Amalgamation "Madneuli" ("RCPA"), a legal entity formed
under Georgian legislation, pursuant to which the parties agreed to the
formation of a joint venture limited liability company called "Madneuli Copper
Gold J.V." (the "GJV Co.") under Georgian law to carry out the mining of the
Madneuli deposits and apply modern mining techniques in Georgia, including
carrying out prospecting activities, together with certain unrelated activities
that the Company currently has no plans to implement.
Legislation enacted by the Government of Georgia in 1995 required that the
license under which certain rights will be granted to the GJV Co. pursuant to
the Foundation Agreement to be re-registered with a newly-created licensing
bureau of the Ministry of Environmental Protection. The bureau in question
reviews the prior license and determines whether it was legally issued. If the
license holder fails to re-register, the license will be suspended until
re-registration occurs, which may result in the permanent suspension of the
license. However, no application for the re-registration of the license in
question was filed by Eyre. The director of RCPA who signed the Foundation
Agreement was removed from his position. Moreover, under newly enacted law, in
connection with re-registration of licenses, concessions may have to be obtained
from the Government of Georgia. Such concessions would be the subject of a
concessional contract requiring certain terms required under the new law.
As of the date hereof, neither the Company or Global Gold Georgia Limited
has any rights to the Madneuli mining project. The Company recently learned that
the Georgian Government is planning to privatize the development of the Madneuli
mine through a public bidding process which is slated to end on April 15, 1997.
Since the structure of the Madneuli mining project under the public tender
differs markedly from that contemplated under the Asset Purchase Agreement
between the Company and Eyre dated as of June 30, 1995, the Company has decided
not to submit a bid for the development of the Madneuli mining project. Thus,
there can be no assurance that the Company will be successful in acquiring any
rights or concluding any definitive agreements with respect to the Madneuli
mining project, or, if so, on terms acceptable to it. Furthermore, if the
Company does acquire any rights to the Madneuli mining project, there can be no
assurance that it will be able to obtain financing for the acquisition or
development thereof, or, if so, on terms acceptable to the Company.
(b) Madneuli Mine
The Madneuli deposit has been in operation since about 1975, and is
located approximately 75 kilometers to the southwest of Tiblisi, the capital of
Georgia. The ore body at Madneuli was discovered in 1952 and exploration
continued until production commenced in 1975. The mine currently employs
approximately 1400 people.
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9. Disputes arising under the Foundation Agreement were to be
subject to arbitration at the Arbitration Court in Stockholm, Sweden.
10
The mine is an open-pit operation. Engineering studies undertaken by the
Government of Georgia indicate that there are proved and probable reserves of
26,000,000 metric tonnes of ore with copper of 1% and .7% of gram of gold per
tonne at the Madneuli mine. However, these reserve figures have not been
independently confirmed by the Company at this time, and there can be no
assurance that reserves in such amount exist, or, if they exist, can be mined on
a profitable basis. The Company believes that the mine is operating at
substantially less than its planned capacity.
(D) Recent Activities
(a) Investment in Jet-Line Environmental Services, Inc.; Restructuring of
Investment
Jet-Line Environmental Services, Inc. ("Jet-Line") is a privately-held
Delaware corporation organized in 1970, and is engaged in providing various
environmental clean-up services for a variety of customers, including fuel
service, laboratory services, disposable services, transportation and safety and
compliance services. A copy of Jet-Line's compiled and unaudited financial
statement for the calendar year ended December 31, 1996 showed a loss of
approximately $377,000 for such year.
On April 21, 1993, the Company loaned $300,000 to Jet-Line, which is
evidenced by Jet-Line's promissory note that originally was convertible into 20%
of Jet-Line's common stock, and 25% of its common stock upon the payment (upon
conversion) to Jet-Line of $75,000, at the option of the Company, as provided
therein (the "Jet-Line Note"). The Jet-Line Note, which matured on April 21,
1996 and which was restructured on May 13, 1996, is secured by a pledge of
transportation equipment and machinery and equipment used in Jet-Line's business
and a Jet-Line owned warehouse and office laboratory building totalling 22,500
square feet located on one acre of land. The total appraisal value of the assets
when made in part in December, 1992 and in part in early 1993 was in excess of a
total of $1,500,000, but the Company does not know the appraised value of such
collateral at present since no updated appraisal of such assets has been made.
Prior to such transaction, Jet-Line had no affiliation of any kind with the
Company or its stockholders.
The Jet-Line note is subordinated to an SBA loan from the Business Loan
Center to Jet-Line in the original principal amount of $550,000 (the "SBA
Loan"), which has been reduced to approximately $500,000 as of the date hereof.
Payments are permitted to be made on the Jet-Line Note to the Company to the
extent permitted under the United States Small Business Administration
Authorization and Loan Agreement for the SBA Loan made. However, if Jet-Line has
a default under the SBA Loan or suffers an adverse change in its financial
condition, assets or business, Jet-Line will not then be permitted to make
payments of the Company on the Jet-Line Note. Thus, since Jet-Line is currently
in default on the SBA Loan, the Company is not receiving any payment on the
Jet-Line Note. Moreover, since the inception of the Jet-Line Note, the Company
has not received any interest or principal payments thereunder and has merely
accrued interest thereunder.
On May 13, 1996, the Company and Jet-Line executed and delivered an
agreement (the "Loan Extension Agreement") with respect to the Jet-Line Note
under which
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(a) the parties extended the maturity of the Jet-Line Note until
December 31, 1996, including all unpaid interest, except for the interim
interest payments described in (b) below;
(b) Jet-Line agreed to pay $2,000 a month in interest commencing
with June, 1996 through December, 1996 and, in addition, make an additional
interest payment equal to 5% of its earnings before income taxes and without
regard to depreciation and amortization, up to a ceiling amount of $7,500 per
month, each month during the above seven-month period;
(c) the parties recognized that the Jet-Line Note is convertible in
whole or in part at any time, unconditionally into 20% of common stock of
Jet-Line issued and outstanding after such conversion;
(d) the Company would have the right to convert the Jet-Line Note
into an additional five percent of the issued and outstanding common stock of
Jet-Line outstanding after its conversion (thereby bringing its interest to 25%
of such stock) upon payment of $37,500 (instead of $75,000) at the time of such
exercise; and
(e) the Company also obtained the right to convert the Jet-Line Note
into an additional five percent of the Jet-Line common stock issued and
outstanding after such conversion (thereby potentially bringing its interest to
30% of such stock) upon the payment of an additional $100,000 in cash at the
time of such exercise.
However, in June, 1996, Jet-Line advised the Company that the Business
Loan Center, which issued a U.S. Small Business Administration guaranteed loan
to Jet-Line, objected to the implementation of any payments required to be made
under the Loan Extension Agreement on the ground that Jet-Line was in default
under its SBA-guaranteed loan. Accordingly, Jet-Line has not made any of the
monthly payments required under the Loan Extension Agreement.
Since Jet-Line has been experiencing operating losses, and lacks adequate
liquid resources, it is highly unlikely that Jet-Line will be able to pay the
full amount of the principal and accrued interest on the Jet-Line Note. In
addition, Jet-Line advised the Company in early March, 1997 that it received a
notice of the revocation of its license to operate its business in
Massachusetts, and of a $100,000 fine, from the Massachusetts environmental
authorities, and Jet-Line contested such revocation and fine in the
Massachusetts state courts unsuccessfully. As a result, Jet-Line has been
requested by such authorities to sell its facility in Massachusetts, and
Jet-Line is now engaged in negotiations with a potential buyer with respect to
such sale. The Company sent Jet-Line a written notice of default and demand for
payment on March 14, 1997, and a further demand letter on April 2, 1997, and is
considering whether to sell the assets in which it holds a first security
interest. The Company has also requested Jet-Line to seek an additional
financing and to use part of the proceeds therefrom to satisfy the Jet-Line Note
in full. However, there can be no assurance that Jet-Line will be able to
consummate such sale or obtain such a financing. Thus, there can be no assurance
that the Company will ultimately be paid the full principal amount of, and
accrued interest on, the Jet-Line Note.
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(b) Loan to Envirotherm
The Company made a loan of $25,000 to Envirotherm on October 17, 1994.
Such loan was guaranteed by Jeffrey Aspacher and B. Ryland Wiggs, two
shareholders of Envirotherm, who in 1996 and 1995 filed bankruptcy proceedings,
respectively. In addition, such loan was secured by an interest in certain
patent rights held by Mr. Wiggs. Also, the Company provided certain
administrative services to Envirotherm, including the furnishing of office space
to one of its officers. Under the parties' agreement, the sum of $27,500 was due
and payable on November 17, 1995, the sum of $30,000 was due and payable on
December 17, 1994, the sum of $37,500 on January 17, 1995, $50,000 on April 17,
1995, and, in the event of a default, the sum of $100,000 would be payable on
October 17, 1995. The loan was not repaid despite the Company's attempts to
collect the same.
Envirotherm is a Delaware corporation organized in September, 1994 and was
engaged in manufacturing and selling geothermal heating and cooling units and
other products. The Company began its first shipment of the products in July,
1995, experienced operating losses and went out of business in early 1996. As of
March 1, 1996, Envirotherm was dissolved under Delaware law by virtue of its
non-payment of Delaware franchise taxes.
As a result of Envirotherm's dissolution and inability to pay the loan,
the Company treated such loan as worthless as of December 31, 1996.
Mr. Gallagher owns 4% of the common stock of Envirotherm, which he
received for consulting services rendered by him subsequent to and independent
of the loan transaction described above.
(c) Offering of Convertible Notes of the Company
Pursuant to the Confidential Private Offering Memorandum dated May 17,
1995, as amended, the Company sold the maximum of $500,000 principal amount of
its 10% Convertible Notes, which had a maturity date of September 30, 1996 (the
"Offering"). The Offering of Convertible Notes, Warrants and Common Stock was
offered pursuant to the Memorandum solely to persons who are "accredited
investors" as defined in Regulation D promulgated under the Securities Act of
1933, as amended (the "Securities Act"), in a transaction exempt from
registration thereunder. The final date of the closing of the Offering was
December 31, 1995.
The Company undertook the Offering in order to raise additional funds for
the Company to enable it to engage in the development and commercial
exploitation of the Armenian and Georgian Mining projects, in an attempt to
generate a potential and substantial asset base and potential future
profitability for the Company as part of the Company's long-term strategy to
develop profitable mining operations abroad.
13
All of the $500,000 principal amount of Convertible Notes was
automatically converted pursuant to their terms into an aggregate of 2,000,000
shares of Common Stock (prior to the Reverse Split) and warrants to purchase
4,000,000 shares of the Company's Common Stock (prior to the Reverse Split), at
an exercise price of $0.50 per share, which warrants will expire on December 31,
1997 after the several amendments made thereto extending the expiration date
thereof (the "Warrants"). Since all of the automatic conversion conditions were
satisfied in 1995, there were no Convertible Notes of the Company outstanding as
of December 31, 1995 or thereafter.
(d) Transaction with London & International Mercantile Limited.
On July 18, 1996, the Company, London & International Mercantile Limited
("LIM"), a financial institution organized under the laws of England and Wales
in 1980, and HCL Communications Ltd. ("HCL"), a newly formed corporation
organized under the laws of England and Wales in 1996, executed and delivered
two agreements with respect to the financing of the Company, which are
summarized below:
(1) Under Agreement 1, LIM issued a guarantee in the amount of
$250,000 in favor of the Ministry of Industry of Armenia guaranteeing the
performance of the Company's obligation with respect to the ordering of
$5,000,000 of equipment with respect to the Tailings Project.
(2) Under Agreement 2, LIM issued a guarantee in the amount of
$250,000 in favor of Kilborn SNC/Lavalin Inc. ("Kilborn") guaranteeing the
payment by the Company of any of its obligations to Kilborn in connection with
its performance of services related to the Company's implementation of the
Armenian Joint Venture Agreement.
(3) (x) As collateral security for undertaking each such guarantee,
the Company issued to LIM the following security for each guarantee: (a)
1,000,000 shares of the Company's Common Stock and (b) three warrants to
purchase 666,667, 666,667 and 666,666 shares of the Company's Common Stock,
respectively, or a total of 2,000,000 shares, at an exercise price of $3.00 per
share, (all computed prior to the Reverse Split) . The first warrant was to
expire on the earlier of (a) June 15, 1997, or (b) 60 days after the receipt by
the Company of the feasibility study from Kilborn reflecting that the Zod mine
in Armenia has proven reserves in excess of $1,000,000,000. The second warrant
was to expire on the earlier of (a) December 15, 1997 or (b) 60 days after the
receipt by the Company of the feasibility study from Kilborn reflecting that the
Zod mine in Armenia has proven reserves in excess of $1,000,000,000 (all
computed prior to the Reverse Split). The third warrant was to expire on the
earlier of (a) June 15, 1998 or (b) 60 days after the receipt by the Company of
the feasibility study from Kilborn reflecting that the Zod mine in Armenia has
proven reserves in excess of $1,000,000,000. Thus, the Company issued a total of
2,000,000 shares of its Common Stock and warrants to purchase 4,000,000 shares
of its Common Stock at an exercise price of $3 per share.
(y) Under each of the two Agreements, LIM was required to
return all of the shares of Common Stock of the Company and warrants to purchase
such stock issued to it as collateral if no payment was made under the
respective guarantees or, if HCL exercised its option to purchase a
14
portion of such shares and warrants, the portion of such shares and warrants as
to which HCL did not exercise its option. If LIM made any payment under its
guarantees, the Company would be liable to pay such amount, and, in the event it
failed to do so, LIM would be entitled to use the collateral security held by it
to satisfy the amount due it. In such circumstances, the number of shares of
Common Stock of the Company and warrants LIM would be entitled to retain or sell
to satisfy the Company's obligations to it would be determined in accordance
with applicable English law.
(z) As a condition to LIM's issuance of its two Company
guarantees, LIM required Drury J. Gallagher, the Company's President, and Robert
A. Garrison, the Company's Vice President to guarantee personally, on a joint
and several basis, the repayment of any amount paid by LIM pursuant to its
guarantees.****
(4) The collateral security issued by the Company with respect to
the guarantee issued by LIM in favor of the Ministry of Industry of Armenia was
held in escrow by an English attorney, subject to the receipt of the written
acceptance by the Ministry of Industry of Armenia of the guarantee issued by LIM
which is a condition only between LIM and the Company. Since there had never
been any such written acceptance of such guarantee, such property was held in
escrow, although the Tailings Project had been implemented by the Armenian
Government as discussed previously and oral acceptance of such guarantee was
given.
(5) The Company also paid LIM fees of $23,750 for issuing such
guarantees, and owes LIM $5,657.50 for its legal fees and other expenses related
to the issuance of such guarantees.
(6) LIM, in turn, granted HCL Communications Ltd. an option for 61
days from July 18, 1996 to purchase the 2,000,000 shares of the Company's Common
Stock at $1.50 per share and the warrants to purchase 4,000,000 shares of the
Company's Common Stock at $3 per share held as collateral security by it (all
computed prior the Reverse Split). Under the Agreements by and among the
Company, LIM and HCL, any proceeds received by LIM upon the exercise of such
option by HCL were to be held by it as additional collateral security until the
release of the guarantees without any payments being made by LIM thereunder.
(7) The Company gave LIM the right to arrange a lease-purchase
rental, borrowing or other facility for the Company to acquire the equipment
needed for the Tailings Project, and the
- ----------
**** In consideration therefor, the Company on July 19, 1996 granted
non-qualified options to each of Messrs. Gallagher and Garrison to purchase
250,000 shares of the Company's Common Stock (computed prior to the Reverse
Split) at an exercise price of $1.00 per share, which expire on July 18, 1999,
under the Company's 1995 Stock Option Plan. On November 4, 1996, the Company
amended such exercise price to $0.50 per share because of the Company's failure
to obtain the anticipated financing of the Tailings Project from LIM by such
date. Such options were cancelled as of January 3, 1997. See Item 12(A) for a
description of the transaction covering such cancellation.
15
Company undertook to accept such offer if the terms were commercially
competitive both as to the price of such equipment and the lease terms with
respect thereto.
(8) The Company also agreed, among other things, to use its best
efforts to arrange for the commencement of the public trading of its Common
Stock on the NASDAQ electronic bulletin board within 60 days from July 18, 1996
and to seek a NASDAQ Small Cap listing within 90 days of such date, provided
that the Company met the NASDAQ equity requirements in the latter case. However,
since the Company did not meet such NASDAQ equity requirements, it never sought
to have its stock traded on NASDAQ.
LIM advised the Company in October, 1996 that HCL would not exercise the
option described herein, that LIM had no intention to purchase any of the
Company's Common Stock or warrants to purchase such stock and that LIM did not
intend to arrange any financing or lease for the equipment needed in the
Tailings Project. Moreover, LIM's guaranty to Kilborn expired in error on
October 27, 1996. The Company decided not to implement the corrected extension
thereof for an additional three months, and instead obtained the return and
cancellation, pursuant to the applicable provisions of Agreement 2, of the
1,000,000 shares of the Company's Common Stock and warrants to purchase
2,000,000 shares of its Common Stock held as collateral security for such
guaranty by LIM (computed prior to the Reverse Split).
Moreover, since the Company and GGA met the terms of the decree issued by
the Armenian Government of the Armenian Joint Venture Agreement on or before
February 1, 1997, LIM had no liability under its second $250,000 guarantee. As a
result, the Company obtained the return and surrender, pursuant to the
provisions of Agreement 1, of the 1,000,000 shares of the Company's Common Stock
and warrants to purchase 2,000,000 shares of its Common Stock held as collateral
security by LIM for such guarantee (computed prior to the Reverse Split).
Thus, all shares of the Company's Common Stock and warrants to purchase
such stock issued to LIM as collateral security have been cancelled.
(e) Reverse Split
Various prospective investment banking firms and potential investors who
expressed an interest in providing funding for the Company's projects in 1996
requested that the Company undertake a reverse split of its Common Stock to
decrease the number of shares outstanding and thereby facilitate possible future
financings. Accordingly, the Company effected a 1 for 10 reverse split of its
common stock effective as of December 31, 1996. Such step was taken by the
written consent of the holders of a majority of the Company's issued and
outstanding shares of Common Stock. By virtue of the Reverse Split, each
stockholder's number of shares of Common Stock became 1/10th of the number
previously held. The Company filed its Certificate of Amendment to the
Certificate of Corporation with respect to the reverse split with the Delaware
Secretary of State on December 31, 1996.
(f) Employees.
16
As of December 31, 1996, the Company had two employees, one of whom was in
charge of the overall business of the Company on a part-time basis, and one who
is principally involved in overseeing the Company's proposed mining activities
on a part-time basis, and two independent contractors who provide administrative
and clerical services on a part-time basis.
(E) Special Considerations
The following risk factors should be considered in connection with an
evaluation of the business of the Company:
No Prior Operating History; Failure to File Reports with the SEC
The Company was incorporated on February 21, 1980, and closed a public
offering of the Common Stock in January, 1981. Several months after the closing
of such offering, the Company withdrew the listing of the Common Stock for
trading on NASDAQ because of the theft of substantially all of the cash funds of
the Company derived from the proceeds of the public offering by its then
president, Samuel McNell in July, 1981. After the consummation of the public
offering, the Company failed to file any further annual or periodic reports
required under the Exchange Act. While the Company filed its Form 10-KSB for the
calendar years 1994 and 1995 and its Form 10-QSB commencing with the quarter
ended ended March 31, 1995 and each quarter thereafter through and including
September 30, 1996 and filed audited financial statements with the Form 10-KSB
for calendar year 1994 covering calendar years 1987, 1988, 1989, 1990, 1992,
1993 and 1994, and covering calendar year 1995 with the Form 10-KSB filed for
such year, there can be no assurance that the SEC might not assert claims
against the Company and its present and former directors and officers, which
actions might adversely affect the future conduct of the Company's business or
prevent the future trading of the Company's stock on public markets.
Furthermore, the Company's past failure to file reports with the SEC may have an
adverse impact on the Company's ability to have the shares of Common Stock
listed for trading on NASDAQ in the event that the Company is otherwise able to
meet the NASDAQ Stock Market listing standards in the future.
Development Stage Company
Since the Company never engaged in the active of conduct of a trade or
business, it has not generated any revenues to date, with the exception of
interest income on the funds recovered by the Company it in the lawsuits
prosecuted by it as a result of the theft of the Company's funds. The Company
may encounter problems, delays, expenses and difficulties typically encountered
in the development stage, many of which may be outside of the Company's control.
These include, without limitation, unanticipated problems and additional cost
relating to the development, production, marketing, and competition. The Company
expects to incur operating losses for the near term future and, in any event,
until such time as it derives substantial revenues from the sale of concentrates
containing gold and copper, if any. There can be no assurance that the Company
will develop successful operations.
17
If, as anticipated, the Company, GGA and First Dynasty sign definitive
agreement covering the development of the contemplated Armenian mining projects,
the Company believes that it, in conjunction with First Dynasty, should be able
to obtain the financing needed for the development of such projects. However
there can be no assurance that the Company and GGA will be able to enter into a
definitive agreement with First Dynasty. Furthermore, even if such definitive
agreement is signed, there can be no assurance that such parties will be able to
obtain the requisite full financing needed for the projects, or, if so, on terms
acceptable to them.
Need for Additional Cash
The Company needs substantial additional funds to develop the mining
projects in Armenia (and Georgia as well if it obtains any definitive rights to
any mining project there) and to fund the operations thereof. If the Company
raises no additional financing either through First Dynasty or otherwise, the
Company still may be able to exploit certain opportunities to develop gold
projects in Armenia through the sale thereof. Although the Company believes that
such an opportunity is a valuable asset, there can be no assurance of such
result. If the Company and GGA do not enter into a definitive agreement with
First Dynasty, the Company and GGA may not be able to benefit in any significant
way from such project, and may be forced to sell its interest in such project to
other potentially interested parties. In addition, while the Company does not
intend to bid in the public tender concerning the Madneuli mining project, it,
in any event, does not have any financing for such purpose. Moreover, there can
be no assurance that any financing for the Armenian or Georgian projects will be
available for such purposes or that such financing, if available, would be on
terms favorable or acceptable to the Company.
Lack of Definitive Nature of the Company's Contracts for the Armenian Mining
Projects and Absence of Any Agreements with respect to any Georgian Mining
Project
At present, the Company and GGA, in conjunction with First Dynasty, is
negotiating for AGRC to develop the Zod and Meghradzor mines on definitive terms
acceptable to all parties. While the Company anticipates that a definitive
agreement will be obtained covering such development, there can be no assurance
of each result.
At present, neither the Company or its subsidiary, GGA, has any rights to
the Madneuli mining project in Georgia. Also, the Company has decided not to
submit a bid in the public auction thereof. Moreover, any agreement relating to
the Madneuli project may be subject to the approval of the various governmental
agencies and/or the legislature of Georgia. Furthermore, there can be no
assurance that any definitive agreements with the Government of Georgia will be
executed and delivered by the appropriate parties, or if so, will be approved by
all the required authorities or that, if approved, would be on terms and
conditions acceptable to the Company or GGA.
Lack of Adequate Insurance Protection of the Company's Potential Investments in
Georgia and Armenia
The Company plans to obtain insurance from Multilateral Investment
Guarantee Agency
18
("MIGA") or other like organization to insure any ownership it may have in the
Armenian (and possible Georgian) mining projects against three risks:
expropriation, inconvertibility of currency and acts of war, unrest or riots in
the country. MIGA typically issues insurance commitments equal to the amount
representing the original investment, debt on the project and retained earnings
with respect thereto. If obtained, such insurance will not provide complete and
adequate protection for any investment the Company may make in such countries.
Moreover, there can be no assurance that such insurance will be available, or,
if so, will be available on terms and conditions satisfactory to the Company.
Prices of Materials
Since the Company's future projected revenues will be derived almost
entirely from the sale of concentrates containing gold, the Company's future
earnings, if any, will be directly related to market prices for gold. The prices
for such commodity has historically fluctuated widely and are affected by
numerous factors beyond the Company's control. There can be no assurance that
the Company can enter into any price protection program adequate to prevent any
potential loss from such fluctuation.
Reserves
While the Company believes that, based on geology reports and mine
engineering data made available by Armenian state enterprises, there are
substantial proved reserves in the Armenian mining projects, it should be noted
that any such quantities may not actually be realized by the Company. Moreover,
except in the case of the provable reserves verified in the case of the Tailings
Project, any reserves pertaining to the other contemplated Armenian mining
projects have not yet been independently verified by the Company, although an
engineering firm is in the process of preparing a feasibility report with
respect to the Zod mine. The deposits from which such reserves are presently
being or are expected to be produced or developed may not conform to geological
or other expectations, with the result that the volume and grade of reserves
recovered and the rates of production may be more or less than anticipated.
Further, market price fluctuations in gold and changes in operating and capital
costs may render certain ore reserves uneconomical to develop. No assurance can
be given that any reserves proved or estimated will actually be produced.
Location and Industry Risks
The Company's proposed mining operations will be subject to a variety of
potential engineering, seismic and other risks, some of which can not be
predicted. Such factors may cause personal injury to personnel at the projects
or critical property damage or significant interruptions to production, and may
not be covered by insurance. The mines may also be subject to the usual risks
encountered in the mining industry, including unexpected geological conditions
resulting in cave-ins, flooding and rock-bursts and unexpected changes in rock
stability conditions. While it is contemplated that customary insurance will be
obtained, there can be no assurance that such insurance will provide adequate
protection against any or all of the risks in question. Also, the Company's
proposed mining operations may encounter problems in transporting any
concentrates to potential markets (including obtaining requisite governmental
approvals and licenses) and conducting mining activities as a result of lack of
19
fuel, electricity, water, equipment, spare parts or other necessary items.
Environmental Matters
While the Company intends to conduct its foreign mining operations in
compliance with all relevant environmental laws, rules and regulations of the
host countries, there can be no assurance that such laws, rules and regulations
will not be violated. Moreover, such operations are subject to the risk of any
future environmental laws, rules and regulations that the foreign countries or
subdivisions therein might impose, which could involve potentially onerous
restrictions on mining operations and significant increased operating and
engineering costs. The impact of any such possible changes cannot be predicted.
Holding Company Structure
The Company is a holding company which will conduct its business through
subsidiaries. As a result, the Company's cash flow and consequent ability to
make dividend payments and meet its debt obligations are primarily dependent
upon the earnings of its subsidiaries and on dividends and other payments
therefrom. Any right of the Company to participate in any distribution of the
assets of its subsidiaries upon the liquidation, reorganization or insolvency of
such subsidiaries would, with certain exceptions, be subject to the claims of
the creditors (including trade creditors) and preferred stockholders, if any, of
such subsidiaries, or may otherwise be restricted by virtue of a stockholder
agreement with respect thereto.
Competition
There is intense competition in the mining industry. If the Company does
engage in its proposed mining activities, it will be competing with larger
mining companies, many of which have substantially greater financial strength,
capital, marketing and personnel resources than those possessed by the Company.
Need for Key Personnel
The Company presently only has one employee intimately familiar with the
operation of mining projects or the development of such projects. While the
Company originally intended to rely on the management services to be provided by
a newly-formed mining management corporation, which has no history of
operations, Autosport (Asia) Pte. Ltd., a Singapore corporation controlled by
Eyre, to supervise the mining development services on behalf of the Company
pursuant to a mining supervision contract signed at the Eyre Closing, such
agreement was cancelled pursuant to the terms of the Initial Restructuring
Agreement. Accordingly, the Company now intends to rely on the services of
independent mining enterprises which will have a future interest in the
development of any mining project. There can be no assurance that any such
management corporation will have adequate resources or personnel to perform such
function. Although the Company believes that such management services which may
be provided by such independent mining company will be adequate to protect the
Company's
20
interest in, and oversee the day-to-day operation of, the mining projects, there
can be no assurance of such result. While the Company does not believe the loss
of its president or any other director or officer of the Company will materially
and adversely affect its long-term business prospects, the loss of any of the
Company's senior personnel might potentially adversely affect the Company until
a suitable replacement could be found. While the Company has employment
agreements with two of its officers, Drury J. Gallagher and Robert A. Garrison,
such agreements are for only three-year terms which expire on June 30, 1998.
There can be no assurance that such agreements will be renewed or, if renewed,
will be on terms mutually acceptable to all parties.
Failure to Satisfy Nasdaq Listing Rules
Effective in August, 1991, the SEC approved the adoption by the NASDAQ
Stock Market of new maintenance standards for companies whose securities are
traded on NASDAQ. Under these new standards, among other things, a corporation
must have $4 million in total assets and $2 million in capital and surplus and a
minimum bid price of $3.00 per share in order to be eligible for a Nasdaq
listing. At December 31, 1996, the Company had total assets of approximately
$2,042,322 and stockholders' equity of $571,603. Without increases in assets and
capital surplus, the Company may not be able to be eligible to have its
securities traded on NASDAQ. Moreover, recent regulations issued by NASDAQ have
increased the thresholds that have to be met in order for a security to be
traded initially on the NASDAQ Small Cap and National Markets, which may
adversely the Company's ability to have its common stock traded on the NASDAQ
Small Cap or National Markets. Furthermore, the Company could experience
difficulties in commencing the trading of its securities on NASDAQ. If the
Company is unable to have its securities traded on NASDAQ, its securities will
continue to be eligible for trading on the NASDAQ bulletin board, although the
market for shares of the Company's Common Stock may be reduced and, hence, the
liquidity of the shares of Common Stock and/or the Warrants may be reduced.
Restrictions on Transfer
Pursuant to the Stockholders Agreement, the current five principal holders
of the Company's Common Stock, Messrs. Gallagher, Hayman, Hayman, and Ryan and
the Seitz Family Limited Partnership have agreed not to sell the shares of
Common Stock owned by them for a period of 24 months following the date of the
final closing of the Offering (i.e., until December 31, 1997), except they each
have the right to pledge a portion of their shares and to make transfers within
their family or to certain family-controlled entities. In addition, Eyre and the
Parry-Beaumont Trust have also agreed not to sell, pursuant to the Stockholders
Agreements, the 600,000 and 400,000 shares of the Company's Common Stock owned
by them (after implementation of the Initial Restructuring Agreement) for a
period of 24 months from the date of the final closing of the Offering (i.e.,
until December 31, 1997), except that they each have the right to sell 150,000
shares to non-United States persons (as defined under the Act) (all of which
numbers have been computed after the Reverse Split). Moreover, each purchaser of
Convertible Notes pursuant to the Offering also agreed not to sell the Common
Stock issuable upon the conversion of the Convertible Notes or upon the exercise
of the Warrants issued pursuant to such conversion for a period of 24 months
from the date of the final closing of the Offering
21
(i.e., until December 31, 1997). Upon expiration of such agreements, up to
367,048 shares of Common Stock held by the five major existing shareholders,
600,000 shares of Common Stock held by the purchasers of the Convertible Notes
(assuming all the Warrants issued upon the prior automatic conversion thereof
are exercised in full) and 1,000,000 shares issued to Eyre and the
Parry-Beaumont Trust or a total of 1,967,048 (all computed after the Reverse
Split), may potentially be available for sale under Rule 144, subject in some
cases to a certain volume limitation. No prediction can be made as to the
effect, if any, that future sales of Common Stock or the availability of such
shares for sale will have on the market price of the Common Stock or the
Warrants prevailing from time to time. Sales of substantial shares of the Common
Stock or the Warrants, or the perception that such sales might occur, could
adversely affect the prevailing market price of the Common Stock or the
Warrants.
No Dividends
The Company currently anticipates that it will retain all of its future
earnings, if any, for use in the expansion and operation of its proposed mining
business, and does not anticipate paying any cash dividends for the near term
future. There can be no assurance that the Company will pay cash dividends at
any time, or that the failure to pay dividends for period of time will not
adversely affect the market price for the Company's Common Stock.
Control of the Company
Drury J. Gallagher, the Chairman Chief Executive Officer, and Robert A.
Garrison, the President and Secretary, currently own 1,108,451 and 1,000,000
shares, respectively, or a total of 2,108,451 shares of the Company's Common
Stock issued and outstanding as of January 31, 1996. In addition, Eyre and the
Parry-Beaumont Trust own 600,000 and 400,000 shares of Common Stock,
respectively, as of such date. As a result, if Messrs. Gallagher and Garrison
act in concert, they will be able to effectively determine the vote on any
matter being voted on by the Company's stockholders, including the election of
directors and any merger, sale of assets or other change in control of the
Company, since they will control together 2,108,451 of the 4,198,074 shares of
Common Stock outstanding as of February 3, 1997, or 50.2% of the issued and
outstanding shares of the Company's Common Stock. The same result wold follow if
Messrs. Gallagher and Garrison acted in concert with Eyre and the Parry-Beaumont
Trust.
Disagreement Among Significant Shareholders
In February, March and April, 1997, Eyre and the Parry-Beaumont Trust
questioned the validity of the issuance by the Company of 1,000,000 shares of
its Common Stock to each of Messrs. Drury J. Gallagher and Robert A. Garrison.
In addition, in February, March and April, 1997, Eyre and the Parry-Beaumont
Trust questioned the validity of the Second Restructuring Agreement (as defined
in Item 12(B)), including, without limitation, the waiver of their Acquisition
Warrants to purchase 400,000 shares of the Company's Common Stock (computed
after the Reverse Split). For a further description of the Second Restructuring
Agreement and such transfers, see Item 12(B) hereof.
22
However, the Company believes that the Company properly issued the shares
of its Common Stock to Messrs. Gallagher and Garrison in exchange for valuable
consideration and that the claim of invalidity of such action has no merit.
Furthermore, the Company believes that the Second Restructuring Agreement is
valid, that Eyre and the Parry-Beaumont Trust waived their rights covered
thereby and that any claim of invalidity with respect thereto has no merit.
Moreover, the Company does not believe that any legal proceeding will be
commenced by Eyre and/or the Parry-Beaumont Trust with respect to these claims,
because, among other things, of the existence of certain claims which the
Company may have against one or more of such parties. However, there can be no
assurance that no such legal proceedings will be commenced, or, if so, the
outcome thereof, although the Company believes that any of the above claims by
Eyre and the Parry-Beaumont Trust are without merit.
Political, Economic and Other Factors
(a) General.
The value of the Company's assets may be adversely affected by political,
economic, social factors and changes in law or regulations of Armenia or Georgia
or other nearby countries and the status of foreign relations of those
countries. Developments in the respective regions of operations may also affect
the value of the Company's assets. Despite privatization programs that have been
implemented in Armenia and Georgia, the Governments of these countries have
exercised and continue to exercise significant influence over many aspects of
the local economies, and the number of public sector enterprises in these
countries is substantial. Governments and their economic policies may have an
unpredictable impact on the economies of these countries and the mining projects
proposed to be undertaken there. Future actions by the Governments of Armenia or
Georgia could have a significant effect on the market conditions, the mining
projects proposed to be undertaken by the Company and the local economies.
The economies of Armenia and Georgia were tightly controlled by a
Communist government and composed almost exclusively of state-owned enterprises
until 1991. Since then, the Governments of Armenia and Georgia implemented
economic structural reform programs with the objective of liberalizing their
exchange and trade policies, privatizing state-owned companies, controlling
inflation, promoting sound monetary and fiscal policy, reforming the financial
sector, and placing greater reliance on market mechanisms to direct economic
activity. A significant component of the program is the promotion of foreign
investment in key areas of the economy and the further development of the
private sector. There can be no assurance that the economic reforms will
persist, and any reversal thereof by the current or any future Government of
these countries could adversely affect the Company's proposed mining projects
there.
Adverse developments in one major sector of the economies of Armenia or
Georgia could adversely affect the economy as a whole. In addition, the Armenia
and Georgia economies generally are dependent upon international trade and have
been and may continue to be adversely affected by trade barriers and other
protectionist measures, exchange controls and relative currency values. These
economies may also be adversely affected by economic or political developments
in or controversies
23
with neighboring countries and major trading partners. The economies of Armenia
and Georgia countries are heavily dependent on Russia and other neighboring
members of the Commonwealth of Independent States. Political or economic
difficulties in these states continue to result in difficulties in Armenia and
Georgia, which adversely affect the economic stability of those countries and,
consequently, the Company's proposed mining projects.
(b) Political Instability, Civil Unrest, Expropriation and
Inconvertibility of Currency
At present, Armenia and Georgia are experiencing civil unrest in regions,
which could adversely affect the mining projects proposed to be undertaken by
the Company in those countries. The continuing armed conflicts in the regions
may hinder, delay or make commercially impractical or impossible the development
and production of mining in those countries. Conflicts in the region exist,
particularly over the disputed territory of Nagorno-Karabakh for more than eight
years, over Abkhazia in Georgia more than three years, and over Chechnya more
than two years, and have occasionally resulted in attacks on and damage to
transportation corridors and gas and oil pipelines. Due to the significant risks
surrounding the volatile political situation and the shipment of goods to both
countries, investors bear the risk of project delays, including the commencement
of the further development of potential commercial operations.
In addition, there can be no assurance that the Armenia or Georgia will
not adopt policies adversely affecting the Company's proposed mining projects.
Lastly, there can be no assurance that the Company's proposed investments would
not be expropriated, nationalized or otherwise confiscated or that the
currencies of those countries would not become inconvertible or that
unanticipated taxes or other export duties would not be imposed, such as those
investors experienced by foreign-owned oil and gas projects in Russia.
(c) Exchange Controls; Export Restrictions
The ability of the Company to repatriate investment income, capital and
proceeds of sales realized from gold and copper concentrates or from its
investments in Armenia and Georgia is subject to regulation by government
authorities of those countries. There can be no assurance that the Governments
of these countries will not, whether for purposes of managing their respective
balance of payments or for other reasons, impose additional restrictions in the
future on foreign capital remittances abroad or otherwise modify the exchange
control regime applicable to foreign investors in such a way that may adversely
affect the ability of the Company to repatriate its income and capital or to
sell and/or refine the mined materials outside of those countries. The Company
could be adversely affected by delays in obtaining or the failure to obtain any
required government or central bank approval for repatriation of capital, or
proceeds from the sale of concentrates, as well as by the application to the
Company of any restrictions on investments.
(d) Financial Information and Standards; Regulatory Matters
Disclosure and regulatory standards in Armenia and Georgia are
substantially less
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stringent than United States standards. Issuers there are subject to accounting,
auditing and financial standards and requirements that differ significantly from
those applicable to United States issuers. Moreover, by virtue of significant
differences between the accounting practice in those countries and those in the
United States, the assets and profits appearing on a company's financial
statements in such countries may not reflect their financial position or results
of operations in the way they would be reflected had such financial statements
been prepared in accordance with United States generally accepted accounting
principles. Accordingly, the Company may experience delay and significant costs
in having financial statements prepared covering its proposed operations in
these countries.
(e) Governmental Concessions, Licenses and Permits Not Yet Received
While the Government of Armenia has granted various approvals and
licenses, and issued a decree, with respect to the Tailings Project, such
Government has not yet taken such action with respect to the Zod, Meghradzor and
exploration projects contemplated to be undertaken by the Company. The Company
cannot assure that the Governments of Armenia and Georgia will grant various
approvals, licenses, permits or concessions on a timely basis, and failure of
the Governments of Armenia and Georgia to do so could materially and adversely
affect the Company's investments. Moreover, the operations in such countries may
encounter other regulatory problems that could materially and adversely affect
the Company's operations there.
Withholding and Other Taxes
The Company's proposed mining operations in Armenia (and Georgia, if the
Company undertakes any project there) are subject to the income taxes of those
countries. Upon the repatriation of earnings from such operations, if any, such
income is subject to United States income tax. In addition, dividends
distributions of earnings from those countries may also be subject to
withholding taxes. The imposition of such taxes and the rates imposed are
subject to change. The income tax treaty with Russia may potentially reduce the
possible risks of double taxation in each of those countries and the United
States. Both Armenia and Georgia are currently negotiating separate income tax
treaties with the United States. While foreign income taxes paid or incurred by
the Company may be eligible for credit or deduction against the Company's United
States income tax, such benefits are subject to certain limitations and
restrictions. Although the Company expects that such foreign income taxes will
be available for credit for United States income tax purposes, there can be no
assurance of such result.
United States Income Tax Consequences Arising Out of the Agreement
The Company neither received a tax opinion nor sought a private letter
ruling from the Internal Revenue Service (the "Service") regarding the United
States income tax consequences arising out of the closing under the Asset
Purchase Agreement between the Company and Eyre on December 1, 1995 (see Item
12(B)). It is possible that the Service may contend that the Company and/or its
subsidiaries recognized substantial gain in such transaction, and there can be
no assurance of the outcome of such challenge. If the Service successfully
asserted such result, the amount due could have a material adverse impact on the
Company's business, assets and financial position.
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While the Company had a net operating loss carry forward as of December
31, 1994 of approximately $2,500,000 expiring in 1996, the closing of the
transaction under the Agreement and the Offering eliminated almost the entire
amount thereof as of December 31, 1995. Thus, if a substantial amount of gain
arose upon the closing under the Agreement, the Company's net operating loss
carry forward would not be available, in all likelihood, to offset such gain in
a material way.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company occupies office space of approximately 1,000 square feet, on a
month-to-month at-will tenancy basis, without the payment of any rent, on
premises owned by Penn-Med Consultants, Inc., whose sole stockholders are the
three largest stockholders of the Company, other than Eyre, the Parry-Beaumont
Trust and Robert A. Garrison. The Company has accrued rental payments of $3,000
a month, commencing as of January 1, 1996, for lease of space at the premises
and the provision of various administrative services, including telephone, fax
and xerox. There is no written agreement covering such arrangement.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject. However, Eyre and the
Parry-Beaumont Trust have questioned, in writing in February, March and April,
1997, the validity of the Second Restructuring Agreement (as defined in Item
12(B)) and the validity of the issuance by the Company of 1,000,000 shares of
its Common Stock to each of Messrs. Gallagher and Garrison. The Company believes
that the Second Restructuring Agreement is valid and that Eyre and the
Parry-Beaumont have waived the rights covered thereby. The Company further
believes that the Company properly issued the shares of its Common Stock to
Messrs. Gallagher and Garrison in exchange for valuable consideration and that
the claim of invalidity of such action has no merit. For a further description
of the Second Restructuring Agreement and such transfers, see Item 12 hereof.
The Company has also received requests from Panquest Lte. and from Eyre
relating to amounts alleged to be due to Panquest Lte. relating to the Company's
acquisition of rights from Eyre relating to the Armenian and Georgian projects.
No evidence has yet been supplied to the Company in this regard.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's stockholders approved the Reverse Split of Company's Common
Stock on the basis of one share of the Company's Common Stock for each 10 shares
of the Company's Common Stock issued and outstanding on December 31, 1996. Such
action was approved by a vote of the holders of more than a majority of its
issued and outstanding shares of Common Stock by a written consent executed by
such stockholders, effective as of December 23, 1996.
As a result, the number of the Company's issued and outstanding shares of
its Common Stock was reduced from 21,980,742 to 2,198,074, effective as of
December 31, 1996. The Company filed a Certificate of Amendment to the
Certificate of Incorporation with respect to the Reverse Split with the
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Delaware Secretary of State on December 31, 1996.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTER
(a) The Company's Common Stock is not publicly traded on any market.
(b) As of December 31, 1996, there were approximately 1,100 holders of
record of the Company's Common Stock.
(c) The Company did not pay or declare any cash dividends on its Common
Stock during its last two fiscal years ended December 31, 1995 and December 31,
1996.
(d) As of December 31, 1996, the Company was not prohibited from paying
any dividends on its Common Stock.
(e) The Company's transfer agent is American Registrar and Transfer
Company, with offices at 10 Exchange Place, Salt Lake City, Utah 84111.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
As at December 31, 1996, the Company's had net assets of $571,603, of
which $369 consisted of cash or cash equivalents.
The Company's plan of operation for calendar year 1997 is:
(a) To enter into definitive agreements with First Dynasty with
respect to all of the Armenian mining projects contemplated under the Armenian
Joint Venture Agreement, including, without limitation, completing any financing
needed for the Tailings Project;
(b) To commence the mining of gold pursuant to the Tailings Project;
(c) To earn the right to mine production and process gold at the Zod
mine in Armenia in accordance with the terms of the Armenian Joint Venture
Agreement and, in preparation therefor, conclude an engineering feasibility
study on the Zod mine;
(d) To collect payments of accrued interest and principal on and/or
restructure the $300,000 convertible note issued by Jet-Line to the Company; and
(e) To commence the public trading of the Company's Common Stock.
As of December 31, 1996, the Company had liquid assets consisting of cash
of approximately
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$369. It is anticipated that First Dynasty will provide or arrange for all of
the financing needed in connection with the Tailings Project and such initial
financing as is needed in connection with the development of the Zod and
Meghradzor mines (assuming GGA successfully negotiate rights to participate in
the development of such projects). However, without the additional financing as
described below, the Company would be unable to meet its monthly administrative
expenses which average approximately $10,000 per month (exclusive of accrued
officers' compensation), plus additional amounts for legal and accounting costs.
The Company expects to receive additional financing in 1997 from several sources
to cover the latter types of costs (and for general corporate purposes) and its
contemplated financing sources are as follows:
(i) Pursuant to the Offering of $500,000 principal amount of
the Convertible Notes of the Company, the Company issued Warrants to
purchase 4,000,000 shares of its Common Stock at an exercise price of
$0.50 per share. By virtue of the Reverse Split, the Warrants were
converted into Warrants to purchase 400,000 shares of the Company's Common
Stock at an exercise price of $5 per share. On January 23, 1997, the
Company amended the Warrants to reduce the exercise price to $1 per share
and to extend the expiration date until December 31, 1997. If the Warrants
were exercised in full, the Company would receive $400,000 in gross
proceeds. While the Company does not know with certainty whether the
Warrants will be exercised, it does anticipate that a substantial amount
thereof will be exercised, although there can be no assurance of such
result.
(ii) The Company anticipates that it will receive some
payments or interest on the Jet-Line Note, although there can be no
assurance of such result.
Nevertheless, there can be no assurance that any one or more of the above
financings will be provided, or, if so, on terms acceptable to the Company. In
the event that no contemplated financing is consummated, the Company does not
have sufficient financial resources to meet its obligations as of June 30, 1997.
Based on the Company's needs for additional financing of its operations,
Mr. Gallagher agreed to continue to advance funds to the Company for such
purpose through June 30, 1997 if he was paid in full by such date or earlier out
of the proceeds of any financing received by the Company in excess of $500,000
and provided that the Company also secured his loan with the Jet-Line Note,
which the Company agreed to do.
The Company does not intend to engage in any project research and
development during 1997 and does not expect to purchase or sell any plant or
significant equipment, except as contemplated in connection with the Tailings
Project and as additionally provided in the Armenian Joint Venture Agreement.
The Company does not expect to hire any additional full-time employees in
1997.
ITEM 7. FINANCIAL STATEMENTS
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The audited financial statements, notes thereto and reports of independent
certified public accountants thereon for the fiscal years of the Company ended
December 31, 1996 and December 31, 1995 (by Marks Shron & Company, LLP) are
attached hereto as part of, and at the end of, this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT AND FINANCIAL
DISCLOSURE
Not applicable.