December 31, 1997
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, 1997 [ ] 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 ----------------------- (Name of small business issuer in its charter) Delaware 13-3025550 - -------------------------------------------------------------------------------- (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 --------------------------------------------------------- (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) ------------------- ------------------------------------------- None ------------------- ------------------------------------------- Securities registered under Section 12(g) of the Exchange Act: None ------------------------------------------ (Title of Class) ------------------------------------------ (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, 1997 were $-0-. 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 $123,966(1) As of December 31, 1997 there were 4,348,114 Shares of the registrant's Common Stock outstanding.(2) - ---------- (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"). ITEM 1. DESCRIPTION OF BUSINESS (A) General Overview The Company is presently engaged in the development of a gold mining project in Armenia, a member of the Commonwealth of Independent States. The Company is currently in the pre-development stage and has not received any revenues from mining activities as of December 31, 1997. 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 ("Armgold"), 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 formed the Armenian Gold Recovery Joint Venture Co., LLC, 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 calls for the rehabilitation of the Ararat Gold Processing Plant and for mine development and operation as well as engineering and building a gold processing plant at the Zod mine, and Stage 3 calls for mine development and operation at the Meghradzor mine, a feasibility study for a gold refinery, and exploration activity. 2 The Company, the Ministry of Armenia and Armgold executed and delivered the Second Armenian Gold Recovery Company Joint Venture Agreement, dated as of September 30, 1997, (sometimes referred to as the "Amended Armenian Joint Venture Agreement") which, among other things, provides for the right of new joint venture companies to mine and process gold at the Zod and Meghradzor mines and which also eliminated certain specific exploration sites from the original agreement, while still recognizing AGRC's right to participate in exploration activity at a future date. However, such amendatory agreement does not become operative until passage of an Armenian government decree approving such agreement. The parties originally anticipated that such decree would be issued within the next several months after September 30, 1997, but currently there is no assurance whether such decree will be passed, or, if so, when it will be passed. While the Company is hopeful that such impasse will be resolved, there can be no assurance that such governmental decree will be passed. If such decree is not passed, the joint venture companies will not have the right to mine and process gold at the Zod and Meghradzor mines. (b) Tailings Project The parties have begun to implement the Tailings Project. 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 as well as a license and environmental approval for construction. Pursuant to the Armenian Joint Venture Agreement, AGRC completed the construction of 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 was $4,500,000, which was later increased to up to $10,000,000 Operation of the tailings processing plant commenced in February, 1998 and the first gold bars therefrom were poured at such time. Production at the tailings plant is continuing despite the impasse existing by virtue of the Armenian Government's above-mentioned position with respect to the Amended Armenian Joint Venture Agreement. In addition, an independent engineering firm had been engaged in preparing a definitive feasibility report with respect to the reserves at the Zod and Meghradzor mines which the Company anticipated would be completed in the Spring of 1998. There can be no assurance that such feasibility report will be completed within then the next several months, although the Company is hopeful of such result. While the Company has been advised that proven reserves exist in the Tailings Project (see (B)(d) Mining Plans) 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. Under such preliminary agreement, First Dynasty acquired 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 Company, GGA and First Dynasty entered into a definitive agreement 3 dated May 13, 1997 reflecting the final agreement of the parties with respect to the above projects (the "FDM Agreement"). The principal terms of the FDM Agreement are set forth below: 1. First Dynasty agreed to advance a maximum of $24,510,000 to GGA under the FDM Agreement, which amounts will be advanced as debt, which is convertible into stock of GGA, at First Dynasty's option, or is automatically converted into such stock under certain circumstances, as described below: (a) Upon First Dynasty's making advances of $6,490,000, such amount will then be automatically converted into 25% of the capital stock of GGA (which occurred in October, 1997). (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, at First Dynasty's option. (c) For every additional $.5 million invested for expenditures advanced in respect 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, at First Dynasty's option, 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 $24,510,000 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. (a) Upon obtaining 80% of the capital stock of GGA or upon making aggregate advances of $24,510,000, First Dynasty would be required to acquire the remaining 20% of the outstanding of capital stock of GGA, within 18 months after making such total of advances, by issuance of 4,000,000 shares of its common stock except that such number of shares will be increased proportionately to the extent that the mineable reserves at the Zod and Meghradzor mines (which are established at the end of such 18-month period) exceed 5,000,000 ounces. (b) First Dynasty further agreed to use its best efforts to issue freely tradeable FDM shares to GGA if it is feasible to do so in connection with a contemporaneous public offering of shares of FDM stock or, alternatively, special warrants to acquire shares of common stock of First Dynasty without payment therefor (each of which would be exercisable into one share of First Dynasty common stock) in a form and substance satisfactory to all parties, pursuant to a prospectus filed with the applicable Canadian securities regulatory authorities. (c) In the event of a violation of First Dynasty's obligations to pay the Company 4,000,000 shares of its Common Stock or greater amount or to arrange for the issuance of freely tradeable shares pursuant to the mechanisms contemplated in the FDM Agreement, the Company would be able to require First Dynasty to specifically perform its obligations pursuant to the grant of an injunction or other appropriate decree of specific performance by any court having equity jurisdiction over the parties. 3. (a) First Dynasty's agreement to continue funding under the FDM Agreement is subject to the following conditions: (i) all of the representations and warranties of GGA were true as of the date of the execution and the delivery of the FDM Agreement; (ii) neither the Company nor GGA (prior to the actual implementation of the appointment of First Dynasty's designees as three directors of GGA) will have breached in any material respects any of its covenants under the FDM Agreement, and (iii) with respect to any advances in excess of $10,000,000 or the issuance of any shares of First Dynasty stock, First Dynasty will have obtained the approval of The Toronto Stock Exchange. (b) First Dynasty right's under the FDM Agreement remain exclusive 4 for so long as First Dynasty continues to fulfill its obligations under the FDM Agreement and GGA continues to fulfill its obligations under any joint venture agreement in Armenia, except that FDM's rights will cease to be exclusive if (i) the Company notifies First Dynasty in writing that First Dynasty is in default under the FDM Agreement or that GGA is in default under any Armenian joint venture agreement and (ii) First Dynasty fails to cure such default within 45 days thereafter, but, in any event, prior to the expiration of any cure period to which GGA is subject if First Dynasty's default results in a default by GGA under any joint venture agreement. 4. (a) First Dynasty agreed to pay the Company $400,000 for use, at its option, to defray its expenses in participating in the negotiation of the second Armenian joint venture agreement, of which $200,000 was paid upon the execution and the delivery of the FDM Agreement and the balance of $200,000 will be paid on June 30, 1998. (b) Although not reflected in the FDM Agreement, First Dynasty also agreed to pay up to $150,000 to defray the expenses incurred by GGA during the three-month period ending March 31, 1997. Such reimbursement in the amount of $141,155 occurred in June, 1997. 5. Upon the formation of AGRC Exploration, a limited liability company to be formed under the laws of Armenia, and ending on December 31, 2009, the Company will be entitled to elect to participate with GGA in any exploration projects undertaken by AGRC Exploration up to a level of 20% of GGA's rights in any exploration project. GGA and the Company also agreed to enter into a mutually acceptable participation agreement in respect of any exploration project. 6. GGA agreed to retain Robert A. Garrison as a consultant for a three-year period commencing February 1, 1997 pursuant to the terms of the consulting agreement entered into between such parties. Under such agreement, Mr. Garrison will serve as a Senior Vice President of GGA, will assist it in furtherance of its business interests under the supervision of the board of directors of GGA and provide ongoing management as the board of directors of GGA reasonably requests of him from time to time. Mr. Garrison agreed to devote 50% of his time and attention to the performance of his services under such agreement, in his capacity as an independent contractor. Such agreement is terminable by the consultant upon 90 days prior written notice to GGA (or lesser notice if GGA agrees to such shorter period) or for cause (as defined therein) or without cause, which, in such latter case, would require GGA to pay Mr. Garrison the amount of his consulting fees remaining unpaid under such agreement. 7. The parties also entered into a shareholders agreement providing for, among other things, the following: (a) From the inception of the agreement and until First Dynasty shall acquire 80% of the issued and outstanding common stock of GGA, First Dynasty's designees serve as three of the five directors of GGA, including Marcus Randolph, the President of First Dynasty, and Drury J. Gallagher and Robert A. Garrison, the Company's Chairman and Chief Executive Officer and the President and Chief Operating Officer, respectively, serve as the Company's designees. If the size of the board is increased thereafter, each party will have the right to designate such number of its designees as members as the board of directors as shall be proportionate to the number of designees established under such agreement. As a result of this provision, First Dynasty now controls the board of directors of GGA. (b) The board of directors of GGA will act by the vote of majority of its members, except that the unanimous vote of the board is required to take action on the following matters: (i) the sale, lease or any disposition of substantially all of the assets of GGA; (ii) the sale or assignment of any interest of GGA in any joint venture company in which GGA is a shareholder or equity participant or has provided financing in excess of $250,000 or (iii) the financing of any of the projects contemplated under 5 the FDM Agreement other than when such financing is provided solely by FDM. (c) In the event that the FDM Agreement becomes non-exclusive pursuant to the provisions thereof, then First Dynasty shall have the right to designate only one director of GGA, the Company shall have right to designate one director of GGA and the party or parties who provide financing required under the then applicable provisions of the contemplated second Armenian joint venture agreement will have the right to appoint three designees to the board of directors of GGA, simultaneously with the execution and delivery of any financing agreement relating thereto or upon the payment of the first funding thereunder (and the Company will have the right to participate in the financing described in such provision). (d) Each party cannot sell, transfer or pledge its shares of ordinary shares of GGA, except that each party may transfer its interest to a corporation, partnership or limited liability company which is wholly owned by the transferring party. During the period that First Dynasty rights under the FDM Agreement remain exclusive, neither shareholder has any right to sell or transfer the shares of GGA stock owned by it. Furthermore, if a stockholder receives a bona fide offer to sell its GGA's shares, GGA and thereafter the non-selling stockholder has the right to purchase the stock in question at the offered price, each for successive 30-day periods. If such right of first refusal is exercised, the purchaser is required to pay the full purchase price in immediately available funds or by wire transfer. Alternatively, the non-selling shareholder may exercise so-called tag along rights and participate on a pro rata basis in the sale of shares of GGA of both the recipient of the offer and the non-selling shareholder to the offeror. If such right of first refusal or tag along right is not exercised, than the seller may sell its shares of GGA to the offeror on the terms described in the offer within 120 days after receipt of such offer and provided further that such third party signs an instrument in writing agreeing to be bound by all of the terms and conditions of the stockholders agreement. The Company, GGA and FDM amended the shareholders agreement, as of May 13, 1997, to provide, among other things, that it will be governed by the New York (instead of Cayman Islands) law. 8. Each party is entitled to engage in any other activities or business or mining or other investments outside of Armenia and will not be required to account to any other party for any profits derived from such permitted activities, businesses or investments. Pursuant to the First Dynasty Agreement, First Dynasty carried out certain initial commitments described below: a. First Dynasty loaned $1,350,000 to GGA in two installments of $675,000 each to repay such amount of payables attributable to GGA and such amounts were disbursed according to the agreement. b. Upon the signing of the $640,000 Tailings Dams construction contract with Armhydro, First Dynasty funded $96,000, 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. As of December 31, 1997, First Dynasty had advanced at least $17,510,000 in total project costs, of which approximately $12,800,000 related to the construction and start-up of the tailings plant, approximately $3,700,000 related to the Zod and Meghradzor feasibility report and $1,000,000 consisted of a loan to Armgold for operating costs, and became the owner of 66 2/3s of the issued and outstanding stock of GGA as of such date. 6 (d) MINING PLANS GGA, in conjunction with First Dynasty, negotiated with the Armenian Government to obtain for AGRC the 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, which culminated in the execution and the delivery of the Amended Armenian Joint Venture Agreement, subject to the prior approval thereof by an Armenian parliamentary decree. In addition, GGA engaged an independent engineering firm to conduct a feasibility report with respect to the reserves at such mines, and production is continuing at the tailings plant. 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 of Armenia state that there are proven gold reserves of approximately 5,000,000 ounces of gold. In addition, a pre-feasibility report recently undertaken on behalf of AGRC confirmed that there are at least a total of 3,000,000 ounces of gold (based on a specified grade per ton of ore) at the Zod and Meghradzor mines which can be economically mined at current gold prices and mining costs (although such prices and costs may change). However, there can be no assurance that reserves in such amount will finally be determined to 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 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. The mine is closed 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, no final feasibility report has been prepared. Accordingly, there can be no assurance that reserves in such amount exist will finally be determined to exist, or, if they exist, can be mined on a profitable basis. Based on projections furnished by independent engineering firms, the Company believed 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 (which exceeded the original estimate) were 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 7 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 final 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) Current Status As of December 31, 1997, the Company abandoned its pursuit of any mining project in Georgia. The material set forth herein describes the prior background with respect to the development of a gold and mining project in such country. (b) Prior Background Pursuant to the Asset Purchase Agreement between Eyre Resources N.L. ("Eyre") and the 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 - ---------- (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%. 8 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. The 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(4) 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. 9. Disputes arising under the Foundation Agreement were to be subject to arbitration at the Arbitration Court in Stockholm, Sweden. 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 learned in early 1997 that the Georgian Government planned to privatize the development of the Madneuli mine through a public bidding process which was 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 decided not to submit a bid for the development of the Madneuli mining project. As a result of these and other unfavorable developments, the Company abandoned the Georgian mining project as of December 31, 1997. (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. The Company further believes that Jet-Line incurred an operating loss for the year ended December 31, 1997 but has not received a financial statement to such effect. _________________ (4) 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. 9 On April 21, 1993, the Company loaned $300,000 to Jet-Line, which is evidenced by Jet-Line's promissory note that is convertible into 20% of Jet-Line's common stock, and 25% of its common stock upon the payment (upon conversion) to Jet-Line of $37,500, at the option of the Company, and 30% of its common stock upon the payment (upon conversion) to Jet-Line of $100,000, at the Company's option, 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, had initially been secured by a pledge of transportation equipment and machinery and equipment used in Jet-Line's business and a purported Jet-Line owned warehouse and office laboratory building totaling 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 believes that the fair market value of such collateral at present is negligible. Prior to such transaction, Jet-Line had no affiliation of any kind with the Company or its stockholders. Since Jet-Line experienced operating losses, and lacked adequate liquid resources, Jet-Line defaulted under the May 13, 1996 loan extension agreement between the parties. 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. Jet-Line then attempted to sell its facility in Massachusetts but could not do so. As a result, the Massachusetts environmental authorities ordered the waste treatment facility in Stoughton, Massachusetts to be closed and assumed the environmental clean-up responsibility at the plant. In addition, the Business Loan Center, another creditor of Jet Line, is now attempting to sell certain trailer and other automotive assets of Jet-Line in which it holds a security interest, and anticipates realizing between $30,000 and $40,000 from such sale. Such creditor advised the Company that it believes that such creditor has senior rights to the assets being sold. The Business Loan Center made a U.S. Small Business Administration guaranteed loan of approximately $550,000 to Jet-Line in 1994 and obtained a first lien on certain enumerated assets of Jet-Line, and the Company at such time subordinated its lien thereto, except with respect to certain machinery and equipment assets as to which the Company retained its first security interest. The Company is currently disputing the Business Loan Center's position that such creditor has a senior security interest in the assets being sold, but there can be no assurance as to the outcome thereof. Moreover, the Company believes that the value of the assets held by it as collateral is negligible. Thus, there can be no assurance that the Company will ultimately be paid any amount of principal, or accrued interest on, the Jet-Line Note. Consequently, the Company treated such loan as worthless as of December 31, 1997. (b) 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. 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 10 4,000,000 shares of the Company's Common Stock (prior to the Reverse Split), at an exercise price of $0.50 per share (the "Warrants"). As of December 31, 1997, there were Warrants to purchase 400,000 shares of the Company's Common Stock issued and outstanding. As to the Warrants, each Warrant now has an exercise price of $.125 per share and expires on December 31, 1998 pursuant to several amendments made thereto, including the one made on December 1, 1997 extending the expiration date as shown above and reducing the exercise price thereof to $.125 per share. 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. (c) 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. (d) Employees. As of December 31, 1997, the Company had two employees, one employee who is in charge of the overall business of the Company on a part-time basis, and one consultant who is principally involved in overseeing the Company's proposed mining activities on a part-time basis, and one employee 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 March 31, 1995 and each quarter thereafter through and including September 30, 1997 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 years 1995 and 1996 with the Form 10-KSB filed for each 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 11 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, if any. There can be no assurance that the Company will develop successful operations. Although the Company, GGA and First Dynasty have a definitive agreement covering the development of the contemplated Armenian mining projects, 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 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 Amended Armenian Joint Venture Agreement is not implemented by the Armenian Government, the Company and First Dynasty may be forced to sell its interest in such project in Armenia to other potentially interested parties. Moreover, there can be no assurance that any financing for the Armenian 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 Cessation of Pursuit of any Georgian Mining Project At present, the Company and GGA, in conjunction with First Dynasty, negotiated for AGRC to develop the Zod and Meghradzor mines and concluded the Amended Armenian Joint Venture Agreement, subject to the passage of a parliamentary decree approving it. However, the Armenian government has not passed any such parliamentary decree. Moreover, there can be no assurance that any Armenian parliamentary decree approving the Amended Armenian Joint Venture Agreement will be passed, or, if so, when such decree will be passed. While the Company is hopeful of achieving such result, there can be no assurance of such result. As of December 31, 1997, the Company ceased pursuing the development of any Georgian mining project. Lack of Adequate Insurance Protection of the Company's Potential Investments in Armenia The Company plans to obtain insurance from Multilateral Investment Guarantee Agency ("MIGA") or other like organization to insure any ownership it may have in the Armenian 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 12 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 only been independently verified by the Company through a pre-feasibility report, although an engineering firm had been engaged to prepare a definitive feasibility report with respect to the Zod and Meghradzor mines. 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 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. 13 Need for Key Personnel The Company presently only has one officer 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 had no history of operations, Autosport (Asia) Pte. Ltd., a Singapore corporation controlled by Eyre Resources, N.L.("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 canceled pursuant to the terms of the Initial Restructuring Agreement. Accordingly, the Company planned to rely on the services of independent mining enterprises which will have a future interest in the development of any mining project, and, through the FDM Agreement, is relying on First Dynasty for such purpose. However, there can be no assurance that First Dynasty or any other any mining 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 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 an employment agreement with one of its officers, Drury J. Gallagher, such agreement is only for a three-year term which expires on June 30, 2000. 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, 1997, the Company had total assets of approximately $266,345 and stockholders' equity of $105,856. 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 then current five principal holders of the Company's Common Stock, Messrs. Gallagher, Hayman, Hayman, and Ryan and the Seitz Family Limited Partnership 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 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 (i.e., until December 31, 14 1997). Upon the expiration of such restrictions, which occurred, 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 and Chief Executive Officer, and Robert A. Garrison, the President and Chief Operating Officer, 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 December 31, 1997. In addition, Eyre and the Parry-Beaumont Trust own 600,000 and 400,000 shares of Common Stock, respectively, as of such date. If Messrs. Gallagher and Garrison act in concert they only control 49% of the issued and outstanding Common Stock of the Company. However, if they act in concert together with the owner or owners holding slightly more than 1% in total of the Company's Common Stock issued and outstanding, 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. In such case, such group would own more than 2,174,057 of the 4,348,114 shares of Common Stock outstanding as of December 31, 1997, or more than 50% 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 - Litigation 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. In January, 1998, the Company brought an action against Eyre, the Parry-Beaumont Trust and Kevin Parry, individually, in the United States District Court for the Southern District of New York, bearing Docket No. 98 Civ. 0009, seeking damages in excess of $81,000,000 arising out of the alleged fraud committed by the defendants. The defendants denied such claims and asserted counterclaims against the Company seeking damages in an underdetermined amount against the Company and seeking a declaratory judgment voiding the Second Restructuring Agreement (as defined herein in Section 12(A)). In addition, Eyre and the Parry-Beaumont Trust brought a third-party complaint against Drury J. Gallagher and Robert A., Garrison, individually, seeking, among other things, damages in excess of 15 $75,000 and directing Mr. and Mrs. Garrison to return the 2,000,000 shares of the Company's Common Stock issued to them by the Company in January, 1997. 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. The Company intends to prosecute such litigation to completion. However, there can be no assurance as to the outcome of the above litigation between the parties. 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 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, the Government of Armenia has exercised and continues to exercise significant influence over many aspects of the local economy, and the number of public sector enterprises in that country 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 Government of Armenia could have a significant effect on the market conditions, the mining projects proposed to be undertaken by the Company and the local economies. The economy of Armenia was tightly controlled by a Communist government and composed almost exclusively of state-owned enterprises until 1991. Since then, the Government of Armenia 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 Armenia could adversely affect the Company's proposed mining projects there. Adverse developments in one major sector of the economy of Armenia could adversely affect the economy as a whole. In addition, the Armenian economy generally is 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 with neighboring countries and major trading partners. The economy of Armenia is 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, which adversely affect the economic stability of that country and, consequently, the Company's proposed mining projects there. (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 Armenia. 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 16 of the further development of potential commercial operations. In addition, there can be no assurance that Armenia 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 currency of Armenia 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 concentrates or from its investments in Armenia is subject to regulation by government authorities of that country. There can be no assurance that the Armenian Government 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 that country. 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 are substantially less 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. Moreover, the Armenian Government, the Company and First Dynasty have reached an impasse with respect to the implementation of the Amended Armenian Joint Venture Agreement, and there can be no assurance that such impasse will be resolved, or, if so, on terms acceptable to First Dynasty and the Company. The Company cannot assure that the Government of Armenia will grant various approvals, licenses, permits or concessions on a timely basis, and failure of the Government of Armenia to do so could materially and adversely affect the Company's investments. Moreover, the operations in such country 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 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. Armenia is currently negotiating a separate income tax treaty 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 17 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. 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 In January, 1998, the Company brought an action against Eyre, the Parry-Beaumont Trust and Kevin Parry, individually, in the United States District Court for the Southern District of New York, bearing Docket No. 98 Civ. 0009, seeking damages in excess of $81,000,000 arising out of the alleged fraud committed by the defendants. The defendants denied such claims and asserted counterclaims against the Company seeking damages in an underdetermined amount against the Company and seeking a declaratory judgment voiding the Second Restructuring Agreement (as defined herein in Section 12(A)). In addition, Eyre and the Parry-Beaumont Trust brought a third-party complaint against Drury J. Gallagher and Robert A., Garrison, individually, seeking, among other things, damages in excess of $75,000 and directing Mr. and Mrs. Garrison to return the 2,000,000 shares of the Company's Common Stock issued to them by the Company in January, 1997. The respective parties have served notices to take the deposition of the other parties in the action and made requests for the production of documents. A meeting is scheduled with the District Court on April 21, 1998 to discuss a scheduling order. The Company intends to prosecute the litigation to completion and believes that the defendants' claims asserted against the Company and Messrs. Gallagher and Garrison are without merit, although there can be no assurance as to the outcome thereof. 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. 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The holders of a majority of the issued and outstanding Common Stock of the Company approved the Company's entry into the financing agreement with First Dynasty in January, 1997. 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, 1997, 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, 1996 and December 31, 1997. (d) As of December 31, 1997, 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 OR PLAN OF OPERATION As at December 31, 1997, the Company's had net assets of $266,345, of which $66,344 consisted of cash or cash equivalents, and had current liabilities of $160,489. Thus, the Company's current liabilities exceeded its current liabilities as of such date. The Company's plan of operation for calendar year 1998 is: (a) To continue the mining of gold pursuant to the Tailings Project; (b) To conclude the transfer of the right to mine production and process gold at the Zod and Meghradzor mines in Armenia in accordance with the terms of the Amended Armenian Joint Venture Agreement; and (c) To attempt to collect payments of accrued interest and principal the $300,000 convertible note issued by Jet-Line to the Company. As of December 31, 1997, the Company had liquid assets consisting of cash of approximately $66,344. With respect to the Company's mining projects in Armenia, the Company initially contemplated that First Dynasty would provide or arrange for all of the financing needed in connection with the continued operation of the Tailings Project and such additional financing as is needed in connection with the development of the Zod and Meghradzor mines. However, there can be no assurance that First Dynasty will carry out such financial support by virtue of the Armenian Government's failure to abide by the terms of the Amended Armenian Joint Venture Agreement and to pass a parliamentary degree approving the transfer of the rights to the Zod and Meghradzor mines to the joint venture companies. If First Dynasty does not finance such operations, there can be no assurance that the Company will be able to find alternative financing for such operation and development, or, if available, on terms and conditions acceptable to the Company. In addition, the Company needs financing to meet its anticipated monthly administrative expenses of $5,000 (exclusive of accrued officers' compensation), plus additional amounts for legal and accounting costs. Prior to the commencement of the litigation described in Item 3 hereof, the Company anticipated that it might additional financing in 1998 from several sources to cover the latter types of costs (and for general corporate purposes) and its contemplated financing sources were and 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 19 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. Again, on December 1, 1997, the Company again amended the Warrants to reduce the exercise price to $0.125 per share and to extend the expiration date until December 31, 1998. If the Warrants were exercised in full, the Company would receive $50,000 in gross proceeds. However, the Company does not believe that the Warrants will be exercised under existing circumstances, and thus does not anticipate that any amount thereof will be exercised, although there can be no assurance of such result. (ii) The Company had anticipated receiving some payments of the principal or on the Jet-Line Note, but the Company now believes it will not receive any recovery from Jet-Line based on the existing circumstances described in Item 1(D) above, or merely a negligible amount, if any. Except as described below, in the event that no contemplated financing is consummated from the above sources, the Company does not have sufficient financial resources to meet its obligations as of April 30, 1998. Accordingly, based on the Company's needs for additional financing of its operations, Messrs. Gallagher and Garrison agreed to continue to advance funds to the Company for such purpose through July 31, 1998 if they were paid in full by such date or earlier out of the $200,000 amount receivable from First Dynasty due on June 30, 1998 and provided that the Company also agreed not to encumber such receivable in any way, which the Company agreed to do. The Company does not intend to engage in any project research and development during 1998 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 Amended Armenian Joint Venture Agreement. The Company does not expect to hire any additional full-time employees in 1998. ITEM 7. FINANCIAL STATEMENTS The audited financial statements, notes thereto and reports of independent certified public accountants thereon for the fiscal years of the Company ended December 31, 1997 and December 31, 1996 (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.