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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
FOR THE THREE MONTHS ENDED JUNE 30, 1999
COMMISSION FILE NUMBER: 33-1507-NY
AMERICAN CORPORATE INVESTORS, INC.
(Name Of Small Business Issuer In Its Charter)
<TABLE>
<S> <C>
Delaware 13-3437739
(State Or Other Jurisdiction Of Incorporation (IRS Employer Ident. No.)
or Organization)
2424 North Federal Highway, Suite 350, Boca Raton, FL 33431
(Address Of Principal Executive Offices) (Zip Code)
</TABLE>
Issuer's Telephone Number: (561) 338-5611
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or 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___
Indicate the number of Shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date. As of August 10, 1999, there
were outstanding 5,749,098 shares of Common Stock.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed consolidated financial statements:
Balance sheet as of June 30, 1999 and
December 31, 1998 3
Consolidated Statement of Operations for the six
months ended June 30, 1999 and 1998 4
Consolidated Statement of cash flows for the six months
ended March 31, 1999 and 1998 5
Notes to consolidated condensed financial statements 6
Item 2. Management's discussion and analysis of financial
Condition 11
PART II. OTHER INFORMATION
Signatures 19
</TABLE>
2
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AMERCIAN CORPORATE INVESTORS INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash in banks $ 47,979 $ 5,681
Trade accounts receivable 1,654,883 556,972
Inventories 264,845 250,175
Other accounts receivable 0 89,423
Total current assets 1,967,707 902,251
Other assets:
Due from affiliates 437,497 671,140
Taxes refunds receivable 232,675 280,466
Other assets 118,728 164,874
Note receivable (Note 4) 2,000,000 2,000,000
Property, plant, and equipment
(net of accumulated depreciation) 6,569,787 5,439,647
Goodwill (net of accumulated amortization) 190,722 242,306
Total assets $ 11,517,016 $ 9,700,684
LIABILITIES & OWNERS' EQUITY
Current liabilities
Accounts payable 2,125,886 1,385,609
Deferred sales 0 0
Other liabilities 48,536 336,704
Total current liabilities 2,174,422 1,722,313
Long term liabilities:
Equipment loans and notes payable 3,120,328 1,175,130
Pensions and benefits payable 14,892 385,845
Total liabilities 5,309,642 3,283,288
Common stock, par value $.0001 per share, 300,000,000
authorized, 5,643,017 issued and outstanding 564 564
Contributed capital in excess of par value 12,396,495 12,396,495
Cumulative translation adjustment (Note 2) 175,883 42,852
Accumulated deficit (6,365,568) (6,022,515)
Total liabilities & owners' equity $ 11,517,016 $ 9,700,684
</TABLE>
PLEASE SEE THE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
3
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AMERICAN CORPORATE INVESTORS INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Quarter Quarter Six months Six months
June 30, June 30, June 30, June 30,
1999 1998 1999 1999
<S> <C> <C> <C> <C>
Revenues:
Gross sales $ 982,574 $ 939,873 $ 1,427,297 $ 1,445,606
Less cost of goods sold (632,605) (417,276) (857,816) (568,848)
Net profit on sales 349,969 522,597 569,481 876,758
Operating expenses:
General administration 403,360 451,475 667,609 804,322
Depreciation & amortization 39,984 31,192 78,086 62,384
Total operating expenses 443,344 482,667 745,695 866,706
Net income (loss) before other
Items: (93,375) 39,930 (176,214) 10,052
Other revenues & expenses:
Interest income 0 4,030 11,878 4,303
Loss on fixed assets sold 0 (3,052) 0 0
Interest expense (115,413) (5,408) (166,837) (15,087)
Pretax income (loss) (208,788) 35,500 (331,173) (1,005)
Provision for income taxes 0 0 0 0
Net income (loss) ($ 208,788) $ 35,500 ($ 331,173) ($ 1,005)
Earnings per share:
Basic ($.04) $ .01 ($.06) $ 0.00
Diluted ($.04) $ .01 ($.06) $ 0.00
Weighted average of common shares:
Basic 5,643,017 4,652,699 5,643,017 4,562,699
Diluted 5,643,017 4,562,699 5,643,017 4,562,699
</TABLE>
PLEASE SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
4
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AMERICAN CORPORATE INVESTORS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDING JUNE 30, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income (loss) ($ 331,173)
Adjustments to reconcile net loss to cash
provided by operating activities; add back
depreciation & amortization 78,086
Net cash provided (used) by operating activities (253,087)
Cash flows from other operating activities:
Increase in trade accounts receivable (1,097,911)
Decrease in other accounts receivable 89,423
Increase in ending inventories (14,670)
Increase in receivables from affiliates 233,743
Decrease in taxes refunds receivable 47,791
Decrease in other assets 46,146
Increase in accounts payable 740,277
Decrease in other liabilities (288,168)
Increase in equipment loans & notes payable 1,945,198
Decrease in pensions and benefits payable (370,953)
Net cash provided (used) by other operating activities 1,077,789
Cash flows from financing activities:
Purchase of City Mix equipment (762,419)
Capitalized engineering costs of Ramoil Towers project (406,104)
Change in cumulative translation adjustment 133,031
Net cash provided (used) by financing activities (1,035,492)
Increase (decrease) in cash during 1999 42,297
Cash balance at December 31, 1998 5,681
Cash balance at June 30,1999 $ 47,978
</TABLE>
PLEASE SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
5
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AMERICAN CORPORATE INVESTORS, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1- GENERAL DESCRIPTION AND NATURE OF BUSINESS
OUTSTANDING COMMON STOCK
American Corporate Investors, Inc. (the Company) is a Delaware corporation
organized on December 30, 1986 for the purpose of engaging in and acquiring
profitable business opportunities in the United States and overseas. On June 10,
1996, the Company effected a 1-for-10 reverse split of its issued common stock
reducing its outstanding common shares from 16,670,000 to 166,700.
Simultaneously, the Company acquired 100% of the outstanding shares of Ramoil
Management Company, Inc. (RMC) in exchange for 3,135,000 newly issued shares of
the Company's stock.
Simultaneous to this transaction, the Company issued common stock warrants where
each warrant entitled the holder to purchase one share of common stock. A total
of 800,000 warrants were issued with an exercise price of $2.50 and 450,000
warrants were issued with an exercise price of $5.00. The warrants expired in
July 1998. During the exercise period of the warrants, 450,000 of the $2.50
warrants had been exercised.
In September 1998, the two majority shareholders of the Company elected to
convert outstanding loans to RMC amounting to $5,667,217 into 1,889,771 shares
of common stock. In addition, 37,000 shares were issued, as a result of warrants
exercised at $2.50 prior to the warrants expiration date.
As a result of the above transactions, the Company has 5,749,098 issued and
outstanding shares at June 30, 1999.
COMPANY HOLDINGS
Ramoil Management Company, (RMC) was incorporated in 1992 in Boca Raton, Florida
and is in the business of providing consulting and managerial services to its
subsidiary companies, Ramoil Engineering S.P.A. (RME) and City Mix Concrete Inc.
(CMIX) and, until December 31, 1997, to its affiliate, Ramoil Holdings, Inc.
(RMH). In late 1996, RMC opened a branch office in Abu Dhabi, United Arab
Emirates (UAE) in order to manage the various projects that RMC was engaged in.
Ramoil Engineering S.P.A. (RME) was established in 1993 under Italian law and
provides construction supplies and services. Its principal line of business
consists of the manufacture and sale of commercial furniture and aluminum frames
for windows, doors, and other uses. RME is also involved in providing
engineering services for various construction projects in Italy.
City Mix Concrete, (CMIX) was established in 1998 in Abu Dhabi, United Arab
Emirates and will process and sell concrete to various building projects in the
UAE. Although not yet active, the plant project is under construction and
management expects the plant to be on line in November 1999. CMIX is owned by
RMC through a consulting agreement with its majority shareholder, Rodoljub
Radulovic.
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NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements included the accounts of RMC, RME, and
CMIX. All intercompany accounts and intercompany sales and purchases have been
eliminated in these consolidated financial statements.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amount of assets and liabilities and the reported amount of revenue
and expenses during the period reported. Actual results could differ from those
estimates.
REVENUE RECOGNITION
RME recognizes revenue upon shipment of the related goods or performance of
services.
INVENTORIES
Inventories are stated at lower of cost or market. Cost is determined by using
the first-in, first-out method ("FIFO") or by the specific identification method
where feasible. As of March 31, 1999, inventory detailed as follows:
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<S> <C>
Work in process $ 80,112
Finished goods 184,733
--------
Ending inventory $264,845
</TABLE>
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are calculated on the straight-line method based upon the following
estimated useful lives:
<TABLE>
<S> <C>
Buildings and Plant 33 years
Leasehold improvements Lease term
Machinery and equipment 7-9 years
Furniture and fixtures 5-8 years
Office equipment 3-5 years
Vehicles 4-5 years
</TABLE>
7
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At June 30, 1999, the property, plant, and equipment account details as follows:
<TABLE>
<S> <C>
Buildings and Plant $ 3,004,881
Leasehold improvements 438,152
Machinery and equipment 3,168,172
Furniture and fixtures 331,127
Office equipment 58,043
Vehicles 206,323
Towers project 406,104
Accumulated depreciation (1,043,015)
-----------
Total property, plant, and equipment $ 6,569,787
</TABLE>
Goodwill is the excess of funds paid over cost by RME to purchase Artifex Inc in
1995. The goodwill account is being amortized over a forty-year period on a
straight-line basis.
OTHER ASSETS
Other assets include prepaid rent and sponsorship fees in the Company's Abu
Dhabi branch.
INCOME TAXES
The Company utilizes Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", which requires the Company to compute deferred
income taxes based upon the difference between the financial statement and tax
bases of the assets and liabilities using the tax rates in effect for the year
in which the differences are expected to reverse.
FOREIGN CURRENCY TRANSLATION
The financial statements of RME are prepared in Italian lire and the financial
statements of CMIX are prepared in Arabian dirhams. Assets and liabilities are
converted at the exchange rate in effect as of the balance sheet date. Income
and expense items are translated at the average rate in effect over the time
period reported. The capital accounts of RME and CMIX are translated at the rate
prevailing at inception. The resulting differences caused by these translation
adjustments have been accumulated in a separate component of stockholders equity
called the "cumulative translation adjustment".
NOTE 3- RELATED PARTY TRANSACTIONS
The Company had provided management services to Ramoil Holding Co. LTD (RHC); a
company affiliated through common ownership by the Company's majority
shareholder. Under the terms of the management agreement, the Company received a
minimum annual fee of $1,000,000 with additional amounts due based on other
services. The Company has accounted for these fees as "Due from Affiliates".
Funds that were subsequently remitted by the majority shareholder directly to
the Company or to third parties on behalf of the Company were then netted
against this receivable balance.
8
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During fiscal 1998, management had decided to cancel this consulting agreement
for fiscal 1997 and 1998. The majority shareholder has agreed to a formal
payment plan where the balance of this account will be received over a
three-year period with interest compounded monthly at the floating prime rate.
As of June 30, 1999, RHC had an outstanding receivable balance owed to the
Company of $437,397.
NOTE 4- COMMITMENTS
The Company leases its office facilities in Boca Raton, Florida under a
five-year lease agreement, which commenced in August 1997. Future annual
commitments are as follows:
1999 $222,000
2000 $296,000
The rent on the office facilities in the Abu Dhabi Emirate is prepaid on an
annual basis and is paid for through September 1999 and is recorded as a prepaid
expense in these consolidated financial statements.
In addition, RMC had entered into an agreement to provide financing for the
construction of 83 apartment and villa units in Al Ain City, Abu Dhabi, United
Emirates with the licensed owner of the land being developed. Under the terms of
the agreement, RMC was obligated to finance the total construction costs of the
project, including licensing fees, while in return receiving a mortgage on the
property developed. The contracted cost of the project is $11,475,410. The
Company has provided $2,000,000 in funding for this project through December 31,
1998.
On April 20, 1999, the parties mutually agreed to cancel this financing
agreement whereby the Company is relieved of its financing obligation and has
received an unsecured promissory note for $2,000,000 payable at 12/31/2001 from
the owner of the land being developed.
NOTE 5- CONTINGENCIES
Substantially all the operations of the Company are conducted in Italy and the
United Arab Emirates. Such operations are affected by the domestic and political
developments occurring there. The degree of theses occurrences and their overall
affect on the Company cannot be predicted but could be material in nature.
In addition, all business activity of a foreign corporation in Abu Dhabi
requires the corporation to be sponsored by an Abu Dhabi national. The Company's
sponsorship agreements in effect will expire in late 1999 and early 2000.
Normally, the sponsorship agreement provides for an annual fee to be prepaid to
the sponsor and for the sponsor to share in the proceeds of a completed project
on a percentage basis. The agreements are cancelable, at will, by the sponsor.
Cancellation of the sponsorship agreements could have a material adverse affect
on the Company's ability to operate as a going concern in the United Arab
Emirates.
9
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NOTE 6 - LEGAL MATTERS
In May 1996, legal actions were filed against the Company and its principal
stockholder. A Russian entity has alleged that it is owed $12 million from a
former affiliated entity's failure to comply with the terms of an oil-trading
contract. The Company has vigorously defended itself against this action and it
is management's position that the eventual disposition of this matter will not
have a material adverse affect on the Company's financial position. Accordingly,
no provision for any loss as a result from the resolution of this matter has
been made.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL - FORWARD LOOKING STATEMENTS.
Certain statements made in this report on form 10Q are "forward looking'
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements involve known and unknown risks, uncertainties, and other
factors that may cause actual results, performance, or achievements of the
Company to be materially different from any future results implied by such
forward looking statements. Although the Company believes that the expectations
reflected in such forward looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from those set
in the forward-looking statements. Certain factors that might cause such a
difference might include the following: the securing of additional or the
renewal of existing construction contracts, the growth of the market for the
Company's services, the effects of the European economic unification upon the
Company's ability to secure additional business, the ability of the Company to
secure significant additional financing to meet the Company's financing
obligations of various real estate and construction projects the Company has
entered into in the UAE.
RESULTS OF OPERATIONS
Revenues for the first half of fiscal 1999 were slightly higher than the
comparable period for 1998 ($982,574 as compared to $939,873), or an increase of
slightly more than 4.5%. Revenues consist of a mix of engineering services
performed by, and the sale of construction goods by, Ramoil Engineering S.p.a.
(RME), Registrant's wholly owned Italian subsidiary. Corresponding costs of
revenues increased more significantly ($632,605 in the first half of fiscal
1999, as compared to only $417,276 in 1998) by almost 52%, with gross profits
also dropping to $349,969 in fiscal 1999 from $522,597 in the prior year, a drop
of 33%. Expressed as a percentage of gross revenues, gross profits dropped to
just under 36% in the first half of fiscal 1999, compared to just under 56% in
the same period last year. The decrease in gross margins is due primarily to the
elimination of management fees that had, in prior years, been charged to Ramoil
Holding Corp., an affiliated company. Without including management fees in the
first half of fiscal 1998, gross sales figure and gross profit percentage for
the first half of both fiscal 1998 and 1999 are roughly equal. The increase in
gross revenues during this period is due to increased sales of both engineering
services and construction goods rather than to increases in prices.
Total operating expenses were $403,360 during the first half of fiscal 1999,
continuing the decline experienced during the first quarter of fiscal 1999. For
the first half of the fiscal year, operating expenses were approximately 11%
lower than for the comparable period in fiscal 1998. This is primarily due to
the continued effects of the significant cuts in staff and overhead expenses
made by the Company according to its restructuring plan implemented in 1997.
Pursuant to this plan, the Company has cut its workforce from 42 employees to 12
employees during fiscal years 1997 and 1998. The resultant savings associated
with this work force cut has served to significantly reduce the Company's
overall overhead costs. In addition, Ramoil Engineering's management plan has,
and continues to call for emphasizing engineering services as opposed to
manufacturing of finished goods. This has resulted in lower overhead costs and
greater flexibility of operation.
11
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As previously reported, in September 1996, the Company opened a branch office in
Abu Dhabi, United Arab Emirates in order to conduct business and explore new
markets in the region. In early 1997 Registrant entered into a sponsorship
agreement with Ayuco International, an Abu Dhabi entity owned by Sheikh Hazza
Bin Zayed Al-Nahyan, Chairman of National Security for the UAE and Chairman of
Saadiyat Free Zone. Under its terms, the sponsor provides consulting and
mediation services in the emerging markets of Abu Dhabi. The salaries and
overhead of the branch office are funded by the Company on a monthly basis. The
total cost of the Abu Dhabi branch office was $149,113 for the three months
ended June 30, 1999, an increase over the cost of $133,331 for the three months
ended March 31, 1999. The cost of this branch office was significantly higher
than the in the same period in fiscal 1998 as the branch office was still in the
developmental stage in the first half of fiscal 1998. The office consists of two
engineers and support staff. Management feels that the development of the Abu
Dhabi branch office is now complete and has budgeted $135,000 for the overhead
cost of this branch office for fiscal 1999.
During the first and second quarters of 1999, the Company received non interest
bearing advances from two investors in the amount of $2,192,209 that was used to
fund further construction of the City Mix plant which are recorded in the
financial statements as "Equipment loans & notes payable." These loans are
expected to be converted into common shares upon completion of the City Mix
project.
DISCUSSION OF FINANCIAL CONDITION
On a consolidated basis, as of March 31, 1999 the Company had total assets of
$11,517,016, as compared with $9,700,684 at December 31, 1999, with total
liabilities of $5,309,642, compared to $3,283,288 for December 31, 1998. Of the
Company's assets at June 30, 1999, cash and cash equivalent accounted for
$47,979 and $1,654,883 represents trade accounts receivable (compared to $5,681
and $556,972 respectively at December 31, 1998). The increase in the Company's
current assets at June 30, 1999 was principally due to the increases in cash,
trade accounts receivable, and a minor increase in inventory. However, the
overall increase in total assets resulted, for the most part, from a significant
increase in property, plant and equipment attributable to City Mix project. Of
the Company other assets, it should be noted that the item listed as "tax refund
receivable" represents government incentives received from the Italian
government due to the Company's investment in a depressed area. This amount,
which is accrued over the course of the year, represents an incentive payment
that is later credited by the Company against taxes owed. As of June 30, 1999,
this item was $232,675.
At June 30, 1999, the Company reflected an increase in current liabilities,
attributable primarily to increases in accounts payable and accrued expenses, as
compared to December 31, 1999. Further, long term liabilities also increases due
principally to increases in equipment loans and notes payable, including the
interest free advances discussed above.
At June 30, 1999, the Company's total stockholders' equity decreased to
$12,414,748, as compared to $12,834,792 at December 31, 1998, due to the
Company's continued operating losses, which increased to $208,788 in the first
half of fiscal 1999 compared to an operating profit of $35,500 in the same
period last year. This resulted in the Company's accumulated deficit increasing
to $6,365,568 as compared to $6,022,515 at the end of 1998. The principal source
of funds for the Company's operations have been, and continue to be, revenues
earned by Engineering and the continued financial
12
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support of the Company's major shareholders, both of which factors are essential
to the Company ability to continue operations.
During the fiscal year ending December 31, 1999, the Company will face
substantial expenditures in connection with the projects now committed to in the
UAE. In addition, the Company will require approximately $210 Million in order
to pay for the shares of EGCC, including appropriate allocations for related
costs and fees associated with the contemplated financing of the share purchase.
In addition, the Company has substantial financial commitments in connection
with the Company's other pending commercial projects in the UAE. See "BUSINESS
MATTERS - FINANCING COMMITMENTS AND RELATED MATTERS" below.
Based upon available cash on hand and expected revenues from the operations of
Engineering, management is of the opinion that it will not have adequate
available funds to meet its anticipated capital expenditures and cash needs for
fiscal 1999. Therefore, unless adequate funding is secured in a timely fashion,
of which there can be no assurance, it is likely that the Company will not be
able to meet its funding commitments for the projects now under way in the UAE,
except, in management's opinion, the funding needs for the City Mix Project
which is expected to be completed in the fourth quarter of fiscal 1999. However,
it is uncertain as to what effect a default in any of its funding commitments in
the UAE will have. It is possible that the Company's sponsor will terminate its
sponsorship and support of the Company, in which event the Company will be
required to locate a new sponsor in order to conduct any operations in the UAE.
BUSINESS MATTERS - GENERAL
In September 1996, Ramoil Management Company ("RMC") terminated all pending
contracts relating to its international trade operations with Russia due to the
failure of the Russian companies involved to make certain payment requirements.
At the same time, Ramoil Engineering also terminated all existing supply
contracts with Russian entities for similar reasons. These decisions eliminated
much of the revenue producing operations for RME and all of the revenue
producing operations for RMC.
Following the termination of its business operations in Russia, management
decided to concentrate on establishing a new business plan centered around
operations in the Middle East and in the United Arab Emirates (UAE) in
particular. Pursuant to local regulations, any foreign corporation that desires
to engage in business in the UAE is required to have a local sponsor. Through
its former business contacts, the Company was able to enter into a sponsorship
agreement with a company owned by Sheik Hazza Bin Zayed Al-Nahyan, Chairman of
National Security for the UAE and Chairman of Saadiyat Free Zone. Pursuant to
this agreement, the Company has been introduced to various projects throughout
the UAE. Under the terms of the agreement, the sponsor will assist the Company
with all aspects of doing business in the UAE including assistance in compliance
with local registration requirements under UAE law. Although not obligated to do
so, the Company's sponsor has provided the Company with virtually all of the
business opportunities being presently developed. In consideration of bringing
these projects to the Company, the Company is obligated to pay a base annual fee
to the Sponsor and a percentage commission on all business generated by projects
introduced. As required by UAE law, Ramoil has established a registered branch
office in Abu Dhabi.
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To date, the Company has secured several contracts for diverse projects in the
UAE. The following is a discussion of these projects:
A. HOTEL AND OFFICE COMPLEX. The Company has entered into a
contract to serve as developer for the construction of a hotel
and office complex in the UAE. To date, initial architectural
plans have been completed and, although formal contracts have
not yet been entered into, negotiations with the Ritz Carlton
Corp. have been completed. Under the agreement in principal
reached by the parties, Ritz Carlton would operate the hotel
portion of the project upon completion. In 1998, the Company
entered into an agreement with the owner of the land site
whereby it has received a concession to the land site to be
developed for a twenty-year period. The concession right
includes the right to mortgage the land but not the right to
sell the land. The fair market value of this land site at
December 31, 1998 was estimated to be $36,800,000. The
agreement provides that the Company will retain title to the
assets developed on this land site during the concession
period. At the end of the twenty-year concession period, the
Company has agreed to pass the title of all assets and
improvements on the land developed to the original owner.
The net profits from this project will be divided 80% to the
Company and 20% to the landowner. Current estimates indicate
that this project will require approximately $80.5 million to
complete. As of the date of this Report, construction has
begun on this project. Engineering and pre-development costs
of $406,104 have been capitalized as of June 30, 1999. The
Company continues its negotiations to secure suitable funding
to undertake construction of this project. See, " - FINANCING
COMMITMENTS AND RELATED MATTERS" below.
B. CITY MIX CONCRETE. City Mix Concrete LLC is a UAE limited
liability company registered for the purpose of constructing
and operating a concrete plant in the UAE. The Company has
been granted an assignment of this UAE company, together with
its operating licenses, which will operate under a license
that will permit it to construct a concrete plant and sell
concrete for a twenty-year period in the UAE. All equipment,
including the plant itself, will remain the property of the
Company at the conclusion of the license period. The license
is transferable to third parties at the Company's discretion.
Under this agreement, the Company will be obligated to pay a
12% royalty on net profits generated from this operation for
the use of this license. As of June 30, 1999, the Company has
invested $3,968,465 towards the construction and assembly of
this plant detailed as follows:
Plant parts and assembly $1,927,250
Trucks and equipment 2,543,008
Engineering costs 672,118
----------
Total project investment $5,142,376
Management's estimate for completing the purchase, equipping,
and assembly of this plant is approximately $8.5 Million,
including approximately $4 Million in working capital
reserves. During the first quarter of 1999, management
postponed the estimated completion date for this plant from
July 199 to November 1999. Management expects the November
completion estimate to accurate as of June 30, 1999. Assembly
of the plant has been ongoing and when completed, the plant
will have the capacity to produce 3,000 cubic
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meters of concrete per day. Through the efforts of the
Company's sponsor, the Company has received preliminary
approval as the exclusive concrete supplier for a new port and
free trade zone development project in the UAE. Of course,
finalizing this contract must await completion of the plant
and there is no assurance that the Company will be able to
fulfill its obligations thereunder.
C. SAADIYAT FREE TRADE ZONE. The UAE is currently completing
plans for the construction of a new port facility and free
trade zone. This project, known as the Saadiyat Free Trade
Zone Authority (SFTZA) is scheduled to be constructed on
Saadiyat Island in Abu Dhabi and is estimated to require
approximately $3.3 billion to complete. Final approval for the
project was given by the UAE Executive Council earlier this
year. Plans to raise the necessary capital required for
construction are now under way. It is planned that this
financing will be completed through a combination of private
placement and institutional offerings in the UAE and a global
public offering of shares. Through the efforts of its sponsor,
the Company has been offered an opportunity to purchase shares
as a "founder" along with six other major participants. In
connection with its role as a founder, the Company will be
required to invest $165 million to purchase 60,625,000 Class A
Ordinary Shares of Emirates Global Capital Corporation, Ltd.
(EGCC) which is the corporation formed for the purpose of
development of the Saadiyat project. Upon purchasing the Class
A Shares, the Company will have the right to one seat on the
Board of Directors of EGCC and will be pre-qualified to tender
as a "main contractor" for various projects in connection with
development of the Saadiyat Project. Although no assurances
can be given, management believes that the Company will win
the tender for a portion of these project, and in particular
for the delivery of cement, and will derive substantial
revenues therefrom.
Finally, in evaluating the Company's ability to establish viable commercial
operations, it must be remembered that, at present, the only revenue generating
operation of the Company is those of Ramoil Engineering. However, in terms of
the future growth of this segment of the Company's operations, great emphasis
has been placed on the future success of the Company's projects in the UAE.
- - FINANCING COMMITMENTS AND RELATED MATTERS
In discussing its financing needs with American Pastime Holdings, Inc., a firm
that represents a potential lender, it became apparent that as a result of
Ramoil's uncertain financial condition, ongoing operating losses and pending
lawsuits of a potentially material nature, it would be impossible for the Ramoil
to secure commitments for the necessary funding. In order to overcome the
objections of potential lenders and secure in a timely manner the financing
needed to complete the purchase of the Class A EGCC Shares, the Company formed a
new, wholly owned subsidiary, Ramoil Middle East Acquisitions, Inc.
(Acquisitions), under the laws of Delaware, through which the acquisition of the
Class A EGCC Shares is not planned to proceed. In connection with this change,
the original subscription to purchase the Class A Shares by Ramoil was cancelled
and a new subscription in favor of Acquisitions was granted by EGCC. It should
be noted that the transfer or sale of the Class A Shares will be restricted for
a period of one following completion of the planned public offering by EGCC.
15
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Based upon discussions with the lender approving the funding through
Acquisitions, on August 6, 1999, Acquisition signed a formal Agreement with
American Pastime Holdings, Inc. (APH) pursuant to which APH has committed to
arrange financing for the purchase of the Class A EGCC Shares in the principal
amount of $210 Million, which includes the share purchase price of approximately
$165 Million and $25 Million estimated for related costs, interest expense
during the 18 months of the contemplated loan and other commitment and
transactional costs. A preliminary understanding has now been reached with the
lender identified by APH and formal loan agreements are expected to be executed
shortly.
Although an agreement in principal has been reached between Acquisitions and the
lender, there are a number of conditions precedent that must be satisfied before
the loan will be funded. Certain of these conditions relate to matters that are
not within the control of the Company and, therefore, no assurance can be given
that they will in fact be met. Certain of these conditions require the approval
by EGCC of certain modifications to restrictions placed upon the Class A Shares
being sold. Although no assurance can be given, management is confident that
EGCC will cooperate in meeting these conditions precedent. Further, although no
assurance can be given, management believes that funding of this loan and
completion of the acquisition of the Class A EGCC Shares will be completed prior
to the end of August 1999.
Among the conditions precedent is the requirement that EGCC grant a right of
redemption in the event that EGCC is not able to complete its planned financing
in the aggregate amount of US$3.3 Billion through a combination of the sale of
the founder Class A Shares to Acquisition and others, a second tier private
placement and a planned public offering. Should this financing not be completed
as planned, Acquisition will have the right to have EGCC redeem the Class A
Shares for the full purchase price thereof. However, should this occur, EGCC
will only be required to pay the original purchase price of approximately $165
Million. The remaining $45 Million (representing fees, commitment fees and
related transactional charges in connection with the financing) will not be
recoupable by Acquisition and will then become immediately due and payable. Such
an occurrence will have a materially adverse impact upon the Company's financial
condition and its future operations.
As further security for the loan being made to Acquisition, the Company is being
required to provide to the lender an assignment of Ramoil's financial interest
in City Mix, with the right to have Ramoil assign all of its other interest in
City Mix to lender, in order to pay any balance due on the loan. In the event of
a redemption of the Class A Shares, the City Mix assets will be lost to the
lender and will, in all likelihood be a total loss to the Company. This will
result in the loss of a major portion of the Company's assets as well as the
loss of the only currently viable commercial operations within the foreseeable
future. In such event, it is unlikely that the Company will be able to recover
from the loss or be able to establish any commercial operations in the future.
As of the date of this Report, the Company is continuing discussion with APH to
provide the required financing in connection with its hotel and office complex
project discussed above. Although serious interest has been expressed by both
APH and the lending group providing the funding for the purchase of the Class A
EGCC Shares, no final understanding has yet been reached. At present, a number
of issues relating to the provisions of UAE law as they pertain to securing any
financing for this project must be resolved. Management is confident that these
issues will be concluded shortly and that a final
16
<PAGE>
decision will be made before the end of August 1999. Of course, until the
pending issues are resolved, no assurance can be given that any funding
commitment will be forthcoming.
In connection with the foregoing financing agreement, as of August 1, 1999 Mr.
Radulovic, the Company's CEO, became a director of Mensor Real Estate Limited
(Mensor), a foreign corporation located in Monaco. Through an introduction made
by Mr. Radulovic, Mensor has acquired the right to purchase 30,312,500 Class B
Ordinary Shares of EGCC (Class B Shares), which Class B Shares are intended to
be a part of the planned public offering of shares by EGCC. Mensor has also
signed an agreement with APH who is arranging approximately $100 Million in
financing for Mensor to complete its purchase of the Class B Shares.
In consideration of the introduction provided by Mr. Radulovic, Mensor has
agreed to pledge the Class B Shares it will acquire as collateral for both the
loan being made to Mensor as well as for the loan to Acquisition for the
purchase of the Class A Shares. Although final particulars have not yet been
resolved, in general, Mensor has agreed that the Class B Shares, which will be
freely tradeable, may be sold based upon certain predetermined benchmarks
relating to trading price being reached, with the proceeds from such sale being
used to repay both the Mensor loan and the Acquisitions loan. However, with
respect to serving as collateral for the Acquisitions loan, it must be
remembered that at the time of that loan the Class B Shares will not yet have
been purchased by Mensor and will not yet exist. Provided that the EGCC public
offering is successfully completed, of which there is no assurance, the Class B
Shares will collateralize the Acquisitions loan and the risk of loss as to the
City Mix collateral will be less. It must also be remembered that in the event
the Class B Shares are sold and the proceeds used to repay the obligation of
Acquisitions, Acquisitions will be liable to Mensor for such amount. As of the
date of this Report, the conditions and obligations of such potential liability
to Mensor have not been resolved.
TRENDS AFFECTING LIQUIDITY, CAPITAL RESOURCES AND OPERATIONS
Over the past decade, economic conditions worldwide have favored the development
of business oriented projects designed to meet the needs of developing business
and financial interests in many developing areas. Among the fastest growing
areas in the world is the Middle East. Combining the great wealth that come from
extensive oil-related interests with diminished threats of war and terrorist
activities, the UAE has emerged as a leader in this region. Management believes
this trend, coupled with the support of the Company's sponsor, who himself is a
recognized leader in the region, has situated the Company in a position to
participate in the growth of the UAE. Provided the Company can meet its
financial obligations under the various projects discussed above, management
believes it can be an integral part of the growth being experienced in the UAE
and that the benefits to the Company will be a major factor in its growth over
the foreseeable future.
With the collapse of traditional political and ideological barriers, the demand
for products from all parts of the world has increased perceptibly with many
developing and third world nations now looking for products from many different
countries. This has been particularly true of countries with "soft" currencies
(i.e. currencies not readily exchangeable into established currencies such as
British pounds, US dollars, etc.), which at present are unable to pay for their
purchases in US dollars. Management believes that the greatest demand for all
kinds of foreign products will come from these new developing third world
countries over the foreseeable future. This is but one factor that favors the
17
<PAGE>
development of a free trade zone in the Middle East, such as the Saadiyat Free
Trade Zone proposed by the UAE.
Management knows of no other trends reasonably expected to have a material
impact upon the Company's operations or liquidity in the foreseeable future.
INFLATION.
During the past few years inflation worldwide has been relatively stable which,
coupled with the relative strength of the economic conditions in the Middle
East, including the UAE, discussed above, is expected to have a beneficial
effect upon the Company's planned operations in the UAE. In management's
opinion, these favorable conditions are expected to continue for the foreseeable
future and management does not anticipate that inflation will have an adverse
impact upon its operations in the foreseeable future.
YEAR 2000 COMPLIANCE.
The Year 2000 issue is the result of computer programs being written using two
digits, rather than four to define the applicable year. Any of the Company's
computer programs that have data-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based upon an assessment made during fiscal 1998, the Company has begun to
update all versions of operations and financial software so that all of its
systems will utilize dates beyond December 31, 1999 properly. In addition, the
Company is evaluating its auxiliary computer application systems for Year 2000
compliance, a process which is expected to be completed during the first half
of 1999. The Company believes that the planned modifications and conversions
will allow it to mitigate the Year 2000 issue.
The Company also is in the process of contacting its significant suppliers,
financial institutions and major customers to determine the extent to which
the Company may be vulnerable to any third parties' failure to remediate their
own Year 2000 issues. The financial impact to the Company of bringing its
equipment and systems into Year 2000 compliance is not anticipated to be
material to its financial position or results of operations.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
None during this period.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 18, 1999
AMERICAN CORPORATE INVESTORS, INC.
BY: /s/ Aleksandr Taflevich
------------------------
President
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