ANDEAN DEVELOPMENT CORPORATION
1,200,000 Shares of Common Stock and
1,200,000 Redeemable Common Stock Purchase Warrants
--------------------
Andean Development Corporation (the "Company" or "ADC") is offering
1,200,000 shares of Common Stock, par value $.0001 per share (the "Common
Stock") and 1,200,000 Redeemable Common Stock Purchase Warrants (the
"Warrants"). The Common Stock and the Warrants (collectively, the "Securities")
are being offered separately and not as units, and each are separately
transferable. Each Warrant entitles the holder to purchase one share of Common
Stock at $5.00 per share (subject to adjustment) during the five-year period
commencing on the date of this Prospectus. The Warrants are redeemable by the
Company for $.05 per Warrant, on not less than thirty (30) nor more than sixty
(60) days written notice if the closing bid price for the Common Stock for
twenty-one (21) trading days during any thirty (30) consecutive trading day
period ending not more than fifteen (15) days prior to the date that the notice
of redemption is mailed, equals or exceeds $10.00 per share subject to
adjustment under certain circumstances during a period of thirty (30)
consecutive trading days ending not earlier than ten (10) days of the date of
the Warrants are called for redemption and provided there is then a current
effective registration statement under the Securities Act of 1933, as amended
(the "Act") with respect to the issuance and sale of Common Stock upon the
exercise of the Warrants. Any redemption of the Warrants during the one-year
period commencing on the date of this Prospectus shall require the written
consent of Barron Chase Securities, Inc., the representative of the Underwriters
(the "Representative"). See "Description of Securities."
Prior to this Offering, there has been no public market for the Common
Stock or the Warrants. The initial public offering prices of the Common Stock
and Warrants and the exercise price and other terms of the Warrants have been
determined through negotiations between the Company and the Representative and
are not related to the Company's assets, book value, financial condition or
other recognized criteria of value. Although the Company has applied for the
inclusion of the Common Stock and the Warrants on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") National Market System
under the symbols "ADCC" and "ADCCW," respectively, there can be no assurance
that an active trading market in the Company's securities will develop or be
sustained.
--------------------
THESE ARE SPECULATIVE SECURITIES, AN INVESTMENT IN THE SECURITIES OFFERED HEREBY
INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION
AND SHOULD BE CONSIDERED ONLY BY INVESTORS WHO CAN AFFORD
TO SUSTAIN A LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" ON PAGES 7-16 AND "DILUTION."
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)(3)
- -------------------------------------------------------------------------------
Per Share........... $5.00 $.50 $4.50
- -------------------------------------------------------------------------------
Per Warrant......... $.125 $.0125 $.1125
- -------------------------------------------------------------------------------
Total (3)........... $6,150,000 $615,000 $5,535,000
===============================================================================
*SEE FOOTNOTES ON FOLLOWING PAGE
The shares of Common Stock and the Warrants are being offered by the
Underwriters on a firm commitment basis, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters, and subject to approval of
certain legal matters by their counsel and to certain other conditions. It is
expected that delivery of the certificates representing the Common Stock and the
Warrants will be made against payment therefor at the offices of the
Representative at 7700 West Camino Real, Suite 200, Boca Raton, Florida 33433 on
or about November 18, 1996.
-------------------
BARRON CHASE FIRST LONDON
SECURITIES SECURITIES CORPORATION
The date of this Prospectus is November 12, 1996
<PAGE>
(1) Does not include additional underwriting compensation to be received
in the form of (i) a non-accountable expense allowance equal to 3% of
the gross proceeds of the offering of which $30,000 has been paid to
date; (ii) Representative's Purchase Warrants to purchase 120,000
shares of Common Stock and 120,000 Warrants exercisable for a five-year
period commencing from the effective date of the offering at an
exercise price of 150% of the price at which the Common Stock and the
Warrants are sold to the public, subject to adjustment; and (iii) a
financial advisory agreement for the Representative to act as an
Investment Banker for the Company for a period of three (3) years at a
fee of $108,000, payable at the closing of the Offering. In addition,
the Company has granted to the Representatives certain registration
rights with respect to registration of the shares of Common Stock and
the Warrants underlying the Representatives' Purchase Warrants and the
shares of Common Stock issuable upon exercise of the Warrants issuable
upon exercise of the Representative's Purchase Warrants and to
indemnify the Underwriters against certain liabilities arising under
the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $444,898,
including the Representative's non-accountable expense allowance.
(3) The Company has granted the Representative an option (the
"Representative's Over-Allotment Option"), exercisable within 30 days
from the date of this Prospectus, to purchase up to 120,000 additional
shares of Common Stock and up to 120,000 additional Warrants at an
exercise price of $5.00 solely to cover over-allotments, if any. If the
Representatives' Over-Allotment Option is exercised in full, the total
Price to Public, Underwriting Commissions, and Proceeds to Company will
be $6,765,000, $676,500 and $6,088,500, respectively. See
"Underwriting."
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form SB-2, pursuant to the
Securities Act of 1933, as amended, with respect to the securities offered by
this Prospectus. This Prospectus does not contain all of the information set
forth in said Registration Statement, and the exhibits thereto. THE STATEMENTS
CONTAINED IN THIS PROSPECTUS AS TO THE CONTENTS OF ANY CONTRACT OR OTHER
DOCUMENT IDENTIFIED AS EXHIBITS IN THIS PROSPECTUS ARE NOT NECESSARILY COMPLETE,
AND IN EACH INSTANCE, REFERENCE IS MADE TO A COPY OF SUCH CONTRACT OR DOCUMENT
FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT, EACH STATEMENT BEING
QUALIFIED IN ANY AND ALL RESPECTS BY SUCH REFERENCE. For further information
with respect to the Company and the securities offered hereby, reference is made
to such Registration Statement and exhibits which may be inspected without
charge at the Commission's principal office at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549.
Upon consummation of this Offering, the Company will become subject to
the reporting requirements of the Securities Exchange Act of 1934 and in
accordance therewith will file reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; at its New York Regional Office,
Room 1400, 7 World Trade Center, New York, New York 10048; and at its Chicago
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and copies of such material can be obtained from the Public
Reference Section at prescribed rates. The Company intends to furnish its
shareholders with annual reports containing audited financial statements and
such other reports as the Company deems appropriate or as may be required by
law.
The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request of such person, a copy of any of the
information that was incorporated by reference in the Prospectus (not including
exhibits to the information that was incorporated by reference unless the
exhibits are themselves specifically incorporated by reference). Such requests
may be directed to Pedro P. Errazuriz, President and Chief Executive Officer,
c/o Andean Development Corporation, 835 Lakeside Drive, Boca Raton, Florida
33434, telephone number (407) 482-6336.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE- COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND MUST BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE
OF THE REPRESENTATIVE'S OVER-ALLOTMENT OPTION, THE REPRESENTATIVE'S PURCHASE
WARRANTS, THE WARRANTS, WARRANTS TO PURCHASE 21,000 SHARES OF COMMON STOCK (THE
"BRIDGE WARRANTS") ISSUED TO A BRIDGE LENDER IN CONNECTION WITH CERTAIN BRIDGE
FINANCING RECEIVED BY THE COMPANY IN APRIL, 1996 (SEE "BRIDGE FINANCING"), UP TO
250,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER THE COMPANY'S STOCK
OPTION PLAN OR DIRECTORS STOCK OPTION PLAN (SEE "MANAGEMENT - INCENTIVE AND
NON-QUALIFIED STOCK OPTIONS PLAN"); (II) ASSUMES A PUBLIC OFFERING PRICE OF
$5.00 PER SHARE OF COMMON STOCK AND $.125 PER WARRANT; AND (III) GIVES EFFECT AS
OF DECEMBER 31, 1994, TO A REORGANIZATION (THE "REORGANIZATION") WHEREBY
ERRAZURIZ Y ASOCIADOS INGENIEROS S.A. ("E&A") AND IGENOR ANDINA S.A. ("INA"),
BOTH CORPORATIONS DOMICILED IN SANTIAGO, CHILE WILL BECOME SUBSIDIARIES OF THE
COMPANY EFFECTIVE UPON CLOSING OF THIS OFFERING AND WHEREBY THE SHAREHOLDERS OF
THESE AFFILIATED COMPANIES WILL EXCHANGE THEIR SHARES FOR SHARES IN THE COMPANY.
THE COMPANY
Andean Development Corporation was organized in 1994 as a holding
company to acquire Errazuriz y Asociados Ingenieros S.A. ("E&A") and Igenor
Andina S.A. ("INA"), both corporations domiciled in Santiago, Chile. Andean
Export Corporation, ("ADX"), domiciled in Boca Raton, Florida, U.S.A., is a
subsidiary of Andean Development Corporation. Andean Development Corporation,
E&A, INA, and ADX are collectively referred to as the "Company" or "ADC".
E&A, organized in February 1991, specializes, as an agent, in the sale
of major electrical and mechanical equipment and the representation of foreign
manufacturers of electrical and mechanical equipment in Chile. E&A also offers
technical assistance to, and prepares tender (bid) documents on behalf of its
customers in connection with turnkey and non-turnkey public works and
development projects to be constructed in Chile. Since 1991, E&A has facilitated
the sale of more than $415 million of equipment including generators, turbines
and conveyors (see "Business - Major Projects"), which has generated more than
$5 million of commissions for the Company. See "Business-Core Business."
INA, organized in 1986, provides engineering, consulting and project
management services for electric generating facilities and civil construction
projects including hydroelectric and other electric power plans, tunneling
projects and water treatment facilities located principally in Chile. Since
1986, INA alone and in conjunction with Norconsult International, A.S. of Norway
("Norconsult"), an international engineering company, has provided engineering,
consulting and project management services relating to engineering projects
valued at $19 million which services generated approximately $8.6 million in
revenues for the Company. See "Business - Core Business."
The Company's strategy is two-fold. First, the Company intends to
continue to grow and expand its core business presently being conducted through
E&A and INA. To facilitate this growth the Company will immediately establish a
sales and marketing office in the United States and in the latter part of 1996
will establish a second sales and marketing office in Spain which may also be
used for sales and marketing throughout Europe. The Company believes that its
future growth will be a natural consequence of the Company's historical
participation in the electric utility sector, ecology-oriented projects and the
potable and waste water treatment fields. The Company intends to expand its
marketing focus to include medium sized utilities, private mining companies and
large industrial companies. The Company believes that these businesses will
require the services of the Company, either to acquire new equipment, to
optimize and/or upgrade their existing installations or to comply with the
increasing ecological regulations of the government.
The Company believes that creating a U.S. holding company and
establishing a U.S. sales and marketing office will enhance its ability to do
business with U.S. companies and other North American
3
<PAGE>
companies. As part of this strategy, the Company will seek to take advantage of
the relative stability of the Chilean peso to the U.S. dollar. The Company
believes that, as a result of this relative stability, certain U.S., as well as
Canadian and Mexican, manufactured equipment and products may now be marketed to
customers in Chile at prices competitive with other foreign manufacturers(See
"Exchange Rates"). The Company also believes that many U.S. manufacturers may be
unfamiliar with the conditions and the qualifications required to bid on
projects in Chile. By establishing a U.S. office, the Company believes that it
will be able to act as a representative (both on an exclusive and non-exclusive
basis) of U.S. manufacturers both in the U.S. and Chile for projects located in
Chile by providing local expertise and understanding of the Chilean business
environment. The Company currently intends to employ one engineer and one
marketing person on a full-time basis in Boca Raton, Florida.
Second, the Company intends to capitalize on opportunities in the
current Chilean economy by acquiring equity interests in certain
ecology-oriented and electrical utility-related projects in Chile as well as by
providing management and other services to these projects. The Company also
intends to take advantage of the continuing privatization of businesses in
Chile, which has increased investment in Chile and increased Chilean industrial
and agricultural output. As an example of this strategy, the Company, through an
affiliate, has entered into an agreement with Empresa de Servicios de
Antofagasta, S.A. ("ESSAN"), a Chilean government-owned corporation that
provides water utility services to the municipality of Antofagasta, Chile, (See
"Business - Bayesa Project") to invest in a waste water treatment facility
located in Antofagasta, Chile (the "Bayesa Project"). In addition, the Company
is exploring potential equity participation in other ecology-oriented and
electric utility-related projects such as small to medium-sized hydroelectric
generating plants, electrical utilities, waste water treatment facilities and
other water-related projects. See "Business - Strategy for Equity
Participation." As of the date of this Prospectus, however, the Company has not
entered into any agreements with respect to acquiring equity interests in any
projects other than the Bayesa Project. The Company, pending completion of its
research and due diligence, intends to enter into formal negotiations in other
ecology-oriented and electrical utility projects in Chile, leading to formal
agreements.
The Company was incorporated on October 19, 1994, under the laws of the
State of Florida. The Company's offices are currently located at 835 Lakeside
Drive, Boca Raton, Florida, U.S.A. and its telephone number is (407) 482-6336.
4
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Common Stock Offered..................1,200,000 Shares
Warrants Offered......................1,200,000 Warrants
Common Stock Outstanding:
Before the Offering..........1,700,100(1)(2)
After the Offering...........2,800,100 Shares(1)(2)
Warrants Outstanding:
Before the Offering..........None
After the Offering...........1,200,000
Estimated Net Proceeds ...............$5,090,111(3)
Use of Proceeds:......................Purchase equity interests in ecology-oriented and electric utility-related
projects in Chile, establish offices in the U.S. and Spain, general and
administrative expenses and additional working capital. See "Use of
Proceeds."
Nasdaq Symbols(4):
Common Stock ................ADCC
Warrants.....................ADCCW
Risk Factors(5).......................The Common Stock and the Warrants offered hereby are speculative and
involve a high degree of risk. Investors should carefully consider the risk
factors enumerated hereafter before investing in the Common Stock and
the Warrants. See "Risk Factors" and "Dilution."
</TABLE>
- --------------------
(1) Gives effect to the Reorganization. The remaining 100 shares of Common
Stock are promotional shares held by Mr. Pedro P. Errazuriz, the
President, CEO and Chairman of the Board of ADC and were issued to
comply with Chilean law.
(2) Does not include Common Stock reserved for the Company's Stock Option
Plan and Directors Plan. See "Management - Incentive and Non-Qualified
Stock Option Plans."
(3) After subtracting the Underwriting discounts and commissions and
estimated offering expenses payable by the Company including a 3%
non-accountable expense allowance to the Representative.
(4) Nasdaq symbols do not imply that an established public trading market
will develop for any of these securities, or if developed, that any
such market will be sustained.
(5) See "Risk Factors-Possible Applicability of Rules Relating to
Low-Priced Stock; Possible Failure to Qualify for Nasdaq National
Market Listing."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth selected financial information
concerning the Company qualified by reference to the historical consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31, Period ended June 30,
-------------------------- -------------------------
(unaudited)
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED EARNINGS DATA:
Revenues $ 2,042,884 $ 2,717,341 $ 1,355,266 $ 1,472,037
Cost of Operations 296,896 697,599 266,753 318,167
Selling and Administrative
Expenses 460,775 509,563 321,050 227,300
Other Income (Expenses) (223,963) (520,543) (350,758) (131,061)
Income before Income Taxes 1,061,250 989,636 416,705 795,509
Income Taxes (Credit) 51,780 50,636 64,613 119,326
Net Income 1,009,470 939,000 352,092 676,183
Net Income per
common share $ 0.67 $ 0.63 $ 0.24 $ 0.45
Weighted average shares
outstanding 1,500,100 1,500,100 1,500,100 1,500,100
</TABLE>
<TABLE>
<CAPTION>
Period Ended
Period Ended Period Ended June 30, 1996
December 31, 1995 June 30, 1996 As Adjusted(1)
----------------- ------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
SUPPLEMENTAL CONSOLIDATED
BALANCE SHEET DATA:
Working capital $ 173,329 $ 753,121 $ 5,783,512
Total assets 3,960,481 4,415,134 9,445,525
Total long-term Liabilities 706,624 646,359 646,359
Total liabilities 2,194,564 1,897,434 1,832,434
Stockholders' equity 1,765,917 2,517,700 7,548,091
<FN>
- -----------------------
(1) Adjusted to reflect sale of 1,200,000 shares of Common Stock and
1,200,000 Warrants offered hereby and the receipt of the net proceeds
therefrom (assuming an initial public offering price of $5.00 per share
of Common Stock and $.125 per Warrant, respectively, and after
deducting underwriting discounts and commissions and estimated offering
expenses). Does not include receipt of net proceeds from the
exercise of the Warrants, the Representatives' Purchase Warrants, the
Representative's Over-Allotment Option or the Bridge Warrants.
</FN>
</TABLE>
6
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussion in this Prospectus contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
significantly from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," as well as those discussed elsewhere
in this Prospectus. Statements contained in this Prospectus that are not
historical facts are forward-looking statements that are subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. A number
of important factors could cause the Company's actual results for 1996 and
beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These factors include, without
limitation, those listed below in "Risk Factors."
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK AND THE WARRANTS OFFERED HEREBY
INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN
INVESTMENT DECISION, SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS (INCLUDING THE FINANCIAL STATEMENTS AND
NOTES THERETO), THE FOLLOWING FACTORS:
LIMITED OPERATING HISTORY AND RISK OF INVESTMENT.
ADC was recently organized as a holding company to acquire E&A and INA,
both corporations domiciled in Chile. All the revenues shown in the financial
statements are attributable to operations of E&A and INA during the relevant
periods. By itself, the Company has only begun limited operations since its
inception on October 19, 1994, and has no revenue through the date hereof
although its operating companies, E&A and INA, have been in business for five
years and ten years, respectively. The Company anticipates that it will have
increased operating overhead as a result of its expanded operations resulting
from the implementation of its planned business strategy, strategic plan to
develop a stronger asset base, including acquisition of equity interests in the
Bayesa Project and other projects, which may adversely impact the Company's
profitability. Additionally, certain of the Company's proposed operations are
subject to all risks inherent in the establishment of a new business enterprise
in Chile. See "Business - Core Business and Strategy for Equity Participation."
RISK OF NEW PHASE OF DEVELOPMENT
Historically, the Company's operations and revenues have been based
primarily on services provided in connection with the sale of major electrical
equipment and engineering and other consulting services. While the Company has
been profitable during the fiscal years ended December 31, 1994 and 1995 and the
first and second quarters of the 1996 fiscal year, based upon its
service-oriented business, the Company is dependent on the proceeds of this
Offering to expand its operations in order to implement its strategic plan to
develop a stronger asset base and establish its presence in the U.S. and expand
its presence in Europe. "See Business - Major Projects."
Results of operations in the future will be influenced by numerous
factors, including market acceptance of the Company's future projects and
investments in Chile, the Company's capacity to develop and manage the projects
and businesses within which it invests, competition, and the ability of the
Company to control costs. There can be no assurance that revenue growth will be
sustained or that these projects or businesses will be profitable. Additionally,
the Company will be subject to all the risks incidental to a business entering
new markets in which such business has limited history or experience.
Accordingly, there can be no assurances that the Company will be able to
implement its business plan, expand its operations, or develop and sustain
profitable operations following the completion of this Offering. See "Business."
7
<PAGE>
NEED FOR ADDITIONAL FINANCING
Based on the Company's internal projections and budgets, as well as its
results for 1994, 1995, and the first and second quarters of 1996 the Company
believes that the net proceeds of this Offering, in addition to funds generated
from (i) anticipated cash flow from operations, (ii) additional equity
participation by third parties in certain of the Company's projects, and (iii)
project debt financing for certain of current projects, will enable the Company
to satisfy all of its anticipated financing needs for at least 12 months
following the closing of this Offering. See "Use of Proceeds" and "Business -
Strategy for Equity Participation."
The Company currently owns 4.5% of Bayesa S.A ("Bayesa"), the owner of
the Bayesa Project, through its 45% equity interest in Aguas y Ecologia S.A.
("A&E"). A&E currently owns 10% of the equity in Bayesa. The Company will
acquire an additional 2.25% interest in Bayesa by purchasing an additional 22.5%
interest in A&E pursuant to an agreement to purchase A&E shares from Inversiones
y Desarrollo Demco, S.A. ("Invdemco"), for $141,750, using a portion of the net
proceeds from this Offering (See "Use of Proceeds"). The Company may also
purchase additional equity in Bayesa from Biwater International Ltd. ("Biwater")
depending on the cost of the shares compared to other potential projects.
Biwater is a major international corporation domiciled in the U.K. and is
engaged in, among other businesses, the construction and operation of waste
water treatment facilities and currently owns 90% of the equity in Bayesa. It is
estimated that the cost to complete the Bayesa Project is $8 million and that
the Bayesa Project will be completed in approximately 14-16 months after the
effective date of this Prospectus. Of the $8 million needed to complete the
Bayesa Project, Bayesa has entered into a credit line agreement with Banco
Security to finance $4 million. In addition, Empresa de Servicios Sanitarios de
Antofagasta, S.A. ("ESSAN"), a governmentowned entity in charge of the water
system for the Province of Antofagasta, Chile, will fund approximately $2
million through the payment of construction and management fees pursuant to the
terms of the contract between ESSAN and Bayesa to construct and operate the
Bayesa Project. Banco Security has been granted a lien on the flow of payments
from ESSAN as well as the equipment and machinery contained in the Bayesa
Project. During the term of its contract with ESSAN, Bayesa will receive a total
of approximately $19 million plus an inflation factor from ESSAN over 150
months. The balance of approximately $2 million necessary for construction of
the Bayesa Project has been funded by the shareholders of Bayesa, who include
Biwater and A&E, in the form of equity contributions to Bayesa. Biwater has
provided approximately $1,800,000, and A&E has provided $200,000. Following the
purchase of additional shares in A&E from Invdemco using a portion of the
proceeds from this Offering, the Company will be a 67.5% shareholder in A&E.
The Company believes that Bayesa has sufficient commitments from
financial institutions and other sources for both debt and equity financing for
the Bayesa Project. There can be no assurances, however, that financing will be
available for future projects when needed or, if available, that it will be on
terms acceptable to the Company or in the best interests of its shareholders.
See "Use of Proceeds," "Business - Strategy for Equity Participation,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements."
RELIANCE ON THIRD PARTY MANUFACTURERS MAY DISRUPT OPERATIONS
The Company does not manufacture or sell any equipment. In its core
business, the Company, on a contract basis, relies on third-party manufacturers
for the equipment sold. Reliance on such manufacturers may subject the Company
to various risks associated with scheduling and timely production and delivery
of equipment, availability of completed products, as well as administrative
problems dealing with one or more manufacturers or suppliers. These risks
include, among others, the possibility of a change in the amount of commission
payable and a postponement when a commission owed to the Company may be due.
While the Company has never been subject to any material disruptions in its
operations, any such disruption could have a material adverse effect on the
Company. See "Business - Core Business."
8
<PAGE>
COMPETITION
In its core business, the Company is engaged in a highly-competitive
segment of an industry which is very active and consistently attracts new
competitors. The Company competes directly or indirectly with a number of
companies, many of which are larger, better capitalized, more established and
have greater access to resources necessary to produce a competitive advantage.
The Company's major competitors may be deemed to be those who represent
well-known manufacturers in Chile and include Gildemeister S.A.C. (Caterpillar),
Sigdo Koppers Comercial S.A.C. (Dresser International, Bridgestone), Pfeninger
and Co. (Sulzer Escher Wyss, Joy Manufacturing) and the local offices of larger
manufacturers or traders such as Marubeni, Babcock Wilcox, Mitsubishi, General
Electric, and GEC Alsthom. The Company believes, however, that the majority of
these competitors do not provide the range of services that the Company provides
to its customers, including arranging financing, local support and procuring
local materials and products, and coordinating suppliers with the customer
engineering departments. See "Business - Major Projects; Selected
Representations - Non-Exclusive; Competition."
CONTROL BY MANAGEMENT AND PRESENT SHAREHOLDERS OF THE COMPANY
Prior to this Offering, Mr. Pedro P. Errazuriz, the President, Chief
Executive Officer and Chairman of the Board of ADC, and his immediate family,
directly or indirectly, owned approximately 100% of the Company's issued and
outstanding Common Stock. After this Offering, Mr. Errazuriz and his immediate
family will directly or indirectly own approximately 71% of the outstanding
shares of Common Stock. See "Principal Shareholders." Since holders of the
Common Stock do not have any cumulative voting rights and directors are elected
by plurality vote, Mr. Errazuriz is in a position to control the election of
directors as well as the other affairs of the Company. See "Management" and
"Principal Shareholders."
DEPENDENCE ON KEY PERSONNEL
The success of the Company is highly dependent upon the continued
services of Mr. Pedro P. Errazuriz, who is the founder, President, CEO and
Chairman of the Board of ADC, and of Mr. Jose Luis Yrarrazaval, Mr. Gonzalo
Cordua, Mr. Juan Phillips and Mr. Juan Andres Errazuriz who are ADC's Treasurer
and Secretary, Operations Vice President, Technical Vice President and General
Manager, respectively. Although the Company currently has employment agreements
with Mr. Pedro P. Errazuriz, Mr. Yrarrazaval, Mr. Phillips, Mr. Cordua and Mr.
Juan Andres Errazuriz, the loss of the services of any of these individuals
could eventually have a material adverse effect on the business of the Company.
The Company intends to obtain a $1,000,000 key man life insurance policy, of
which the Company will be the beneficiary, on the life of Mr. Pedro P.
Errazuriz, effective as of the closing of the Offering. See "Management."
With the implementation of the Company's business strategy, it may
become necessary for the Company to hire additional experienced professional
individuals to meet its expanding needs. The Company intends to use certain of
its existing staff to perform a number of these duties and to participate in the
selection of new personnel, as required. Such individuals may include engineers,
technicians, management, marketing personnel or specialized consultants. While
the Company believes that by offering competitive salaries and benefit packages,
it will be able to solicit and hire qualified individuals, no assurances can be
made that such individuals will accept employment with the Company or will
continue to be employed by the Company, or that qualified individuals will
always be available to the Company when needed.
RELATED PARTY TRANSACTIONS
The Company has entered into transactions and may do so in the future
with officers, directors and shareholders of the Company, as well as their
affiliated companies. The terms of these transactions were no less favorable to
the Company than those available from and to unaffiliated parties. To the extent
9
<PAGE>
that the Company enters into transactions with these affiliated persons and
entities in the future, it will do so only on terms no less favorable to the
Company than those available from and to unaffiliated parties. See "Certain
Transactions."
ASSETS AND USE OF PROCEEDS TO BE HELD OUTSIDE THE U.S.; ENFORCEABILITY OF CIVIL
LIABILITIES AGAINST FOREIGN PERSONS
While ADC is a U.S. corporation, it is a holding company for E&A and
INA, both domiciled in Chile. For the foreseeable future, substantially all of
the assets of the Company, including approximately 87.5% of the net proceeds
from this Offering, will be held or used outside the United States (primarily in
Chile). See "Use of Proceeds" and "Business - Strategy For Equity
Participation."
Enforcement by investors of civil liabilities under the U.S. Federal
securities laws may adversely be affected by the fact that while ADC is located
in the U.S., two of its principal subsidiaries are located in Chile. The
Company's current officers, directors and management are residents of Chile, and
substantially all of the assets of the Company and of the officers, directors
and management of the Company are located outside the United States.
Additionally, the Company's major shareholders, Errazuriz y Asociados
Arquitectos, Ltda. (which currently owns approximately 40% of the Company before
the Offering) is domiciled in Chile and Igenor, Ingenierie et Gestion, S.A.
(which currently owns approximately 60% of the Company before the Offering) is
domiciled in Switzerland. See "Principal Shareholders."
DISCRETION IN USE OF PROCEEDS
The Company presently intends to use the net proceeds from this
Offering for the purposes set forth in "Use of Proceeds." However, management of
the Company has broad discretion to adjust the application and allocation of the
net proceeds of this Offering in order to address changes in circumstances or
opportunities. Up to approximately 44% of the net proceeds has been allocated to
Bayesa and other projects. In addition, approximately 28% of the net proceeds
are allocated to working capital, including expansion of marketing and sales and
hiring of personnel. As a result of the foregoing, the success of the Company
will be substantially dependent upon the discretion and judgment of the
management of the Company with respect to the application and allocation of the
net proceeds of this Offering. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION
This Offering involves immediate dilution of approximately $2.20 per
share of Common Stock (or approximately 44% dilution) to new investors, without
giving effect to the exercise or issuance of the Warrants, the Representative's
Over-Allotment Option, the Representative's Purchase Warrants, the Bridge
Warrants, or up to 250,000 shares of Common Stock reserved for issuance under
the Company's Stock Option Plan and Directors Plan. See "Dilution" and
"Management - Incentive and Non-Qualified Stock Option Plans."
ARBITRARY OFFERING PRICE AND EXERCISE PRICE OF WARRANTS
The public offering price of the Common Stock and the Warrants and the
exercise price of the Warrants, as well as the exercise price of the
Representative's Purchase Warrants, have been determined solely by negotiations
between the Company and the Representative. Among the factors considered in
determining these prices were the Company's current financial condition and
prospects, market prices of similar securities of comparable publicly-traded
companies, and the general condition of the securities market. However, the
public offering price of the Common Stock and the Warrants, and the exercise
price of the Warrants and the Representative's Purchase Warrants do not
necessarily bear any relationship to the Company's assets, book value, earnings
or any other established criterion of value. See "Underwriting."
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<PAGE>
NECESSITY TO MAINTAIN CURRENT PROSPECTUS
The shares of Common Stock issuable upon exercise of the Warrants and
the Securities issuable upon exercise of the Representative Purchase Warrants
have been registered with the Commission. The Company will be required, from
time to time, to file post-effective amendments to its registration statement in
order to maintain a current prospectus covering the issuance of such shares upon
exercise of the Warrants. The Company has undertaken to make such filings and to
use its best efforts to cause such post-effective amendments to become
effective. If for any reason a required post-effective amendment is not filed or
does not become effective or is not maintained, the holders of the Warrants may
be prevented from exercising their Warrants. See "Description of Securities -
Warrants."
STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS
Holders of the Warrants have the right to exercise the Warrants only if
the underlying shares of Common Stock are qualified, registered or exempt from
registration under applicable securities laws of the states in which the various
holders of the Warrants reside. The Company cannot issue shares of Common Stock
to holders of the Warrants in states where such shares are not qualified,
registered or exempt. The Company has undertaken, however, to qualify on NASDAQ
National Markets which provides for blue sky registration in substantially all
states. See "Description of Securities - Warrants."
CALLABLE WARRANTS AND IMPACT ON INVESTORS
The Warrants are subject to redemption by the Company in certain
circumstances. The Company's exercise of this right would force a holder of the
Warrants to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holder to do so, to sell the Warrants at the then
current market price when the holder might otherwise wish to hold the Warrants
for possible additional appreciation, or to accept the redemption price, which
is likely to be substantially less than the market value of the Warrants in the
event of a call for redemption. Holders who do not exercise their Warrants prior
to redemption by the Company will forfeit their right to purchase the shares of
Common Stock underlying the Warrants. The foregoing notwithstanding, the Company
may not call the Warrants at any time that a current registration statement
under the Securities Act of 1933, as amended, is not then in effect. Any
redemption of the Warrants during the one-year period commencing on the date
of this Prospectus shall require the written consent of the Representative. See
"Description of Securities - Warrants."
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET
It is anticipated that a significant amount of the Common Stock and the
Warrants will be sold to customers of the Representative. Although the
Representative has advised the Company that it intends to make a market in the
Common Stock and the Warrants, it will have no legal obligation to do so. The
prices and the liquidity of the Common Stock and the Warrants may be
significantly affected by the degree, if any, of the Representative's
participation in the market. No assurance can be given that any market making
activities of the Representative, if commenced, will be continued. See
"Underwriting."
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<PAGE>
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE COMPANY
The Company has agreed that after the effective date of this
Prospectus, the Representative may designate a person to attend meetings of the
Board of Directors.
POSSIBLE APPLICABILITY OF RULES RELATING TO LOW-PRICED STOCKS; POSSIBLE FAILURE
TO QUALIFY FOR NASDAQ NATIONAL MARKET SYSTEM OR SMALLCAP MARKET LISTING
The Commission has adopted regulations which generally define a "penny
stock" to be any equity security that has a market price (as defined) of less
than $5 per share, subject to certain exceptions. While the price at which the
shares of Common Stock offered to the public pursuant to this Offering will be
at $5.00, the Warrants offered hereby will initially be deemed to be
"penny stocks" and thus will become subject to rules that impose additional
sales practice requirements on broker/dealers who sell such securities to
persons other than established customers and accredited investors, unless the
Common Stock and the Warrants are listed on the Nasdaq SmallCap Market or the
Nasdaq National Market. There can be no assurance that the Company will be able
to satisfy the listing criteria of the Nasdaq SmallCap Market or the Nasdaq
National Market System or that the Common Stock or the Warrants will trade for
$5 or more per security after the offering. Consequently, the "penny stock"
rules may restrict the ability of broker/dealers to sell the Company's
securities and may affect the ability of purchasers in this Offering to sell the
Company's securities in a secondary market.
Although the Company has applied for listing of the Common Stock and
the Warrants on the Nasdaq National Market, there can be no assurance that such
application will be approved or that a trading market for the Common Stock and
the Warrants will develop or, if developed, will be sustained. Furthermore,
there can be no assurance that the securities purchased by the public hereunder
may be resold at their original offering price or at any other price. If the
Common Stock and the Warrants are not approved for listing on the Nasdaq
National Market, the Company intends to apply for listing of the Common Stock
and the Warrants on the Nasdaq SmallCap Market, however, there can be no
assurance that such application would be accepted.
In order to qualify for initial listing on the Nasdaq SmallCap Market,
a company must, among other things, have at least $4,000,000 in total assets, $2
million net worth, $1 million "public float," and a minimum bid price for its
securities of $3 per share. For continued listing on the Nasdaq SmallCap Market,
a company must maintain $2 million in total assets, a $200,000 market value of
the public float and $1 million in total capital and surplus. In addition,
continued inclusion requires two market-makers and a minimum bid of $1 per
share; provided, however, that if a company falls below such minimum bid price,
it will remain eligible for continued inclusion on the Nasdaq SmallCap Market if
the market value of the public float is at least $1 million and the Company has
$2 million in capital and surplus. The failure to meet these maintenance
criteria in the future may result in the discontinuance of the inclusion of the
Common Stock and Warrants on the Nasdaq SmallCap Market.
If the Company is or becomes unable to meet the listing criteria
(either initially or on a continued basis) of the Nasdaq SmallCap Market and is
never traded or becomes delisted therefrom, trading, if any, in the Common Stock
and the Warrants would thereafter be conducted in the over-the-counter market in
the so-called "pink sheets" or, if then available, "Electronic Bulletin Board"
administered by the National Association of Securities Dealers, Inc. (the
"NASD"). In such an event, the market price of the Common Stock and the Warrants
may be adversely impacted. As a result, an investor may find it difficult to
dispose of, or to obtain accurate quotations as to the market value of the
Common Stock and the Warrants.
12
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock of the
Company, or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock. Upon completion of this Offering,
the Company will have a total of 2,700,100 shares of Common Stock outstanding
(without giving effect to the exercise of the Warrants, the Representatives'
Over-Allotment Option, the Representative's Purchase Warrants, the Bridge
Warrants, or up to 250,000 shares of Common Stock reserved for issuance under
the Company's Stock Option Plan and Directors Plans), of which 1,500,100
represent shares of Common Stock which will be "restricted" securities within
the meaning of Rule 144 under the Act and, generally, may be sold only in
compliance with Rule 144 under the Act. Under Rule 144 a person who has held
restricted securities for a period of two years may sell a limited number of
such securities into the public market without registration of such securities
under the Act. Rule 144 also permits, under certain circumstances, persons who
are not affiliates of the Company to sell their restricted securities without
quantity limitations once they have satisfied the Rule's three year holding
period. See "Risk Factors - Shares Eligible for Future Sale." Sales made
pursuant to Rule 144 by the Company's existing shareholders may have a
depressive effect on the price of the shares of Common Stock in the public
market, should a public market for the shares of Common Stock develop. Such
sales could also adversely affect the Company's ability to raise capital at that
time through the sale of its equity securities. No prediction can be made as to
the effect, if any, that future sales of Common Stock, or the availability of
Common Stock for future sales, will have on the market price of the Common Stock
from time to time or the Company's ability to raise capital through an offering
of its equity securities in the future. The holders of the Company's outstanding
shares of Common Stock have agreed, however, not to sell or otherwise dispose of
for a 24-month period from the date hereof any of the Common Stock without the
prior consent of the Company and the Representative. The Representative has
no agreements or understandings with respect to granting such consent and, in
general, determine whether to grant such consent based on the facts and
circumstances of a specific request.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and
Bylaws may be deemed to have anti-takeover effects and may delay, defer or
prevent a takeover attempt of the Company, which include when and by whom
special meetings of the Company may be called. In addition, certain provisions
of the Florida Business Corporation Act also may be deemed to have certain
anti-takeover effects which include that control of shares acquired in excess of
certain specified thresholds will not possess any voting rights unless these
voting rights are approved by a majority of a corporation's disinterested
shareholders.
Additionally, the Company's Articles of Incorporation, Bylaws and
Florida law authorize the Company to indemnify its directors, officers,
employees and agents and limit the personal liability of corporate directors for
monetary damages, except in certain instances. See "Description of Securities -
Certain Florida Legislation; Anti-takeover Effects of Certain Provisions of the
Company's Articles of Incorporation and Bylaws."
EXERCISE OF REPRESENTATIVE'S PURCHASE WARRANTS
In connection with this Offering, the Company will sell to the
Representatives, for nominal consideration, warrants to purchase 120,000 shares
of Common Stock and 120,000 Warrants from the Company. The Representative's
Purchase Warrants will be exercisable for a five year period commencing from the
effective date of the offering price of 150% of the price at which the Common
Stock and the Warrants are sold to the public subject to adjustment. The
Representative's Purchase Warrants may have certain dilutive effects because the
holders thereof will be given the opportunity to profit from a rise in the
market price of the underlying shares with a resulting dilution in the interest
of the Company's other shareholders. The terms on which the Company could obtain
additional capital during the life of the Representative's Purchase Warrants may
be adversely affected
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<PAGE>
because the holders of the Representative's Purchase Warrants might be expected
to exercise them at a time when the Company would otherwise be able to obtain
comparable additional capital in a new offering of securities at a price per
share greater than the exercise price of the Representative's Purchase Warrants.
The Company has agreed that, at the request of the holders thereof
under certain circumstances, it will register under federal and state securities
laws the Representative's Purchase Warrants and/or the securities issuable
thereunder. Exercise of these registration rights could involve substantial
expense to the Company at a time when it could not afford cash expenditures and
may adversely affect the terms upon which the Company may obtain additional
funding and may adversely affect the price of the Common Stock. See
"Underwriting."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF SECURITIES PRICES
Prior to this Offering, there has been no public market for the Common
Stock or the Warrants. Although the Company has applied to list the Common Stock
and the Warrants for quotation on the Nasdaq National Market System, there can
be no assurance that a regular trading market will develop (or be sustained, if
developed) for the Common Stock or the Warrants upon completion of this
Offering, or that purchasers will be able to resell their Common Stock or
Warrants or otherwise liquidate their investment without considerable delay, if
at all. Recent history relating to the market prices of newly public companies
indicates that, from time to time, there may be significant volatility in their
market price. There can be no assurance that the market price of the Common
Stock or the Warrants will not be volatile as a result of a number of factors,
including the Company's financial results or various matters affecting the stock
market generally.
CONSIDERATIONS RELATING TO CHILE
RISKS INHERENT IN INVESTING IN SOUTH AMERICAN COUNTRIES
In the past, geopolitical frictions have existed between countries
located in the southern area of South America, which includes Argentina, Brazil,
Bolivia, Chile, Paraguay, Peru and Uruguay (the "Southern Cone" countries). This
tension has resulted in difficulties in foreign trade, and particularly the
inherent adverse effects that may develop when goods (including equipment sold
through the Company) are delayed by customs. Additionally, there have been
problems with citizens of one Southern Cone country freely traveling to other
Southern Cone countries. Furthermore, countries have been reluctant to hire
nationals of one country for executive positions in other Southern Cone
countries.
While over the past five years, travel and commerce among the Southern
Cone countries have become increasingly easier and the Company has not been
adversely affected by geopolitical, economical, legal or other problems inherent
in doing business with foreign countries, there can be no assurances that such
problems will not occur in the future. However, the Company currently does not
import or export products or equipment from or to foreign countries (including
Southern Cone countries). Nonetheless, to the extent that the Company does
decide to become involved in projects in foreign countries and particularly with
Southern Cone countries in the foreseeable future, it will do so primarily with
Chilean-based companies that are developing projects outside of Chile, but who
make their bidding decisions and payments in Chile.
INFLATION
A number of reforms have been introduced by the Chilean government over
the past 20 years to achieve macroeconomic stability and to increase economic
growth, while controlling inflation. The average annual inflation rate in Chile,
as of December 1993, December 1994, and December 1995, has been 12.2%, 8.9% and
8.2% (based on information provided by the Banco Security). These economic and
inflationary reforms which have had a direct impact on the country and,
therefore, the Company
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<PAGE>
include (i) implementing a monetary stabilization program, which decreases the
public sector deficit and keeps a tight control on monetary expansion while
maintaining a flexible, but controlled, exchange rate with foreign currencies;
(ii) privatization of public utilities; and (iii) trade, labor market and social
security reforms including the free interchange of foreign and Chilean capital,
elimination of many trade and custom barriers and modification and privatization
of the Chilean social security system. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Based on its recent experience, the Company believes, but there can be
no assurances, that moderate inflation in Chile will have no material adverse
effect on the Company's operations because (i) substantially all of the
Company's bids and agreements are made in UF (Unidad de Fomento), an indexing
mechanism used in Chile that ties most of the payments and obligations owed to
the Company to Chile's consumer price index; (ii) a number of agreements are
tied to tariffs regulated by the Chilean government which also contain other
indexing mechanisms intended to neutralize the effects of inflation; and (iii)
other agreements include other inflationary controls in the event of a
devaluation of the Chilean peso against other foreign currencies. See "Use of
Proceeds," "Exchange Rates" and "Business."
While Chilean inflation has not had a material adverse effect on the
operations of the Company over the past three years, there can be no assurance
that changes in the performance of the Chilean economy will not adversely affect
the Company or the securities offered hereby.
CURRENCY FLUCTUATIONS
The Chilean government's economic policies and any future changes in
the value of the Chilean peso against the U.S. dollar could adversely affect the
value of the Common Stock and Warrants. The Chilean peso has been subject to
large devaluations in the past and may be subject to significant fluctuations in
the future. In the period from January 1, 1994 to March 31, 1996, the value of
the peso relative to the U.S. dollar declined approximately 5% (from 397.87 to
411.61 Chilean pesos for one U.S. dollar) in nominal terms, based on the Tipo de
Cambio Observado (Observed Exchange Rate), an exchange rate value supplied daily
by the Central Bank of Chile which corresponds to the medium rate at which the
U.S. dollars were freely sold or bought by the banks to any customer the day
before. See "Exchange Rates."
Currency fluctuations may have an effect on the Company's current
activities by the fact that the Company's operational expenses (costs) are tied
to the UF, while revenues are generally tied to the U.S. dollar or other foreign
currencies (depending from whom equipment is purchased or for whom services are
provided). See "Exchange Rates." A weakening of the U.S. dollar (or other
foreign currencies) against the Chilean peso means that while the Company's
revenues may remain unaffected by the weakening of the U.S. dollar against the
Chilean peso, the Company's costs (which are paid in Chilean pesos) will
increase. Conversely, if the Chilean peso is weak against foreign currencies,
the cost of local goods and services are less expensive. While currency
fluctuations have not had a material effect on the financial condition of the
Company during the past three years (see "Financial Statements") because most of
the Company's contracts and agreements (both with foreign and domestic entities)
either are tied (i) directly to the UF; (ii) to both the UF and U.S. dollar in
parity; or (iii) are regulated by government controlled tariffs with internal
mechanisms to control currency fluctuations, no assurances can be made that any
such currency fluctuation will not adversely affect the Company. See "Exchange
Rates" and "Management's Discussion and Analysis of Financial Condition and
Results of Operation."
FOREIGN CORRUPT PRACTICES ACT
Substantially all of the Company's operations are transacted in South
America. To the extent that the Company conducts operations and sells its
products outside the U.S., the Company is subject to the Foreign Corrupt
Practices Act which makes it unlawful for any issuer to corruptly pay or offer
to pay, any money or anything of value to any foreign official, foreign
political party or official thereof or any candidate for foreign political
office ("Foreign Officials") or any person with knowledge that all or a portion
of such money or thing of value will be offered, given, or promised, directly or
indirectly, to any Foreign Official.
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While the Company has not made any offers, payments, promises to pay,
or authorization of any money or anything of value to any foreign officials, the
Company has implemented a policy to be followed by the officers, directors,
employees and anyone acting on behalf of the Company, that no such payments can
and will be made. The Company has made all employees cognizant of the need for
compliance with the Foreign Corrupt Practices Act and any violation of the
Company policy will result in dismissal. Further, the Company conducts periodic
reviews of this policy with all employees to ensure full compliance.
TAXES ON DIVIDENDS
Upon distribution of a dividend, a foreign or a Chilean shareholder of
a Chilean corporation is subject to a 35% percent withholding tax less a credit
for any corporate taxes paid by the Chilean corporation. However, the payment of
foreign (Chilean) taxes may be credited against U.S. federal income tax. Persons
investing in Chilean corporations have the right to be exempt from any
contribution, tax or other obligation on the net proceeds resulting from the
sale of stock of such Chilean corporation or the sale or liquidation of entities
acquired with proceeds of such investment, up to the amount of capital brought
into Chile through the investment. This is accomplished by entering into a
foreign investment contract with the Chilean government.
In addition, persons investing in Chilean corporations have the right
to opt for a system of tax invariability that fixes the tax laws applicable to
the investment to the laws applicable at the time of the investment (See "Risk
Factors - Restrictions on Repatriation with Respect to Investment in Underlying
Shares").
Through the Reorganization and the use of net proceeds of this Offering
by the Company to conduct operations in Chile, the Company will be making
investments subject to the aforementioned taxes. Potential purchasers of the
Common Stock and the Warrants should consult their own tax advisors regarding
the impact of these taxes.
RESTRICTIONS ON REPATRIATION WITH RESPECT TO INVESTMENTS IN UNDERLYING SHARES
Equity investments in Chile by persons who are not Chilean residents
are legally protected and cannot be generally subject to exchange-control
regulations which restrict the repatriation of the investments, if not expressly
agreed otherwise at the moment of investing in the country. Earnings follow the
same rule, but are subject to profit taxes (See "Risk Factors - Chilean Taxes on
Dividends"). Although there have been no cases of deviations from this rule for
more than 21 years, there is no assurance that such a deviation could not occur
in the future. The Company intends to enter into a foreign investment contract
with the government which stays the laws concerning foreign investments as of
the date of the contract and permits income to flow outside Chile. Through the
Reorganization and the use of net proceeds of this offering to conduct
operations in Chile, the Company will be making investments subject to the
aforementioned restrictions. There can be no assurances that the aforementioned
restrictions will not have a material adverse impact on the Company and its
shareholders. See "Business - Government Regulations."
It is not possible to foresee all risk factors which may affect the
Company. Moreover, there can be no assurance that the Company will successfully
effectuate its business plan. Each prospective investor should carefully analyze
the risks and merits of an investment in the Common Stock and the Warrants and
should take into consideration when making such an analysis, among others, the
risk factors discussed above.
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USE OF PROCEEDS
The gross proceeds from the sale of the 1,200,000 shares of Common and
1,200,000 Warrants offered hereby are estimated to be $6,150,000 assuming an
initial public offering price of $5.00 per share of Common Stock and $0.125 per
Warrant. The proceeds of this Offering are estimated to be $5,090,111 after
deducting from the gross proceeds of this Offering underwriting discounts and
commissions, a non-accountable expense allowance payable to the Representative
equal to 3% of such gross proceeds. This does not include Offering expenses
payable by the Company estimated to be approximetely $260,961. Approximately
$4,327,079 (85%) of the net proceeds will flow to Chile. The Company intends to
use the proceeds of this Offering, during the 12 months following the date of
this Prospectus, approximately as follows:
<TABLE>
<CAPTION>
Anticipated Use of Net Proceeds Approximate Amount Percentage of Proceeds
- ------------------------------- ------------------ ----------------------
<S> <C> <C>
Acquisition and Development of
other Projects(1)(3)................................ $2,158,250 42.4%
Purchase of Additional Shares of Bayesa(2).......... $ 141,750 3%
Retirement of Debt(4)............................... $ 700,000 14%
Establishment of a U.S. office(5).................. $ 425,000 8.3%
Establishment of an office in Spain(5).............. $ 425,000 8.3%
Repayment of Bridge Loan . ......................... $ 65,000 1%
---------- ----
Working capital(6).................................. $1,175,111 23%
---------- ----
Total............................................... $5,090,111 100%
========== ====
</TABLE>
- -----------------
(1) The aggregate amount of proceeds that directly or indirectly flow to
affiliates include the purchase of an additional equity interest in the
Bayesa Project through the purchase of A&E shares from Invdemco for
$141,750 and the retirement of the outstanding mortgage on the
Villarrica Property ($700,000) upon the purchase of the Villarrica
Property by Invdemco. Invdemco is owned by Mr. Errazuriz, President,
CEO and Chairman of the Board of ADC, and other members of his family.
Mr. Errazuriz is a 50% shareholder of Invdemco. See notes (2) and (4)
herein and "Certain Transactions".
(2) The Bayesa Project includes the design, construction and management of
a waste water treatment facility in Antofagasta, Chile and the right to
sell reclaimed industrial grade water. To facilitate the acquisition of
an additional equity interest in Bayesa, the Company will purchase an
additional 22.5% interest in A&E which translates into a 2.25% equity
interest in Bayesa for $141,750, pursuant to an agreement to purchase
A&E shares from Invdemco consummated in March of 1996 with the
shareholders of Invdemco. Invdemco is owned by Mr. Errazuriz,
President, CEO and Chairman of the Board of ADC, and other members of
his family. Mr. Errazuriz is a 50% shareholder of Invdemco. During
December, 1995, the Company completed a similar transaction, and
purchased 45% of A&E which equals a 4.5% equity interest in Bayesa for
$283,500. The valuation of the shares of A&E acquired and to be
acquired from Invdemco was determined by an unrelated third party
valuation consultant, Ingesis Ltd., and was based upon the projected
revenues for the Bayesa Project. The Company may consider purchasing
additional equity in Bayesa from Biwater depending on the cost of such
equity as compared to other potential projects. The cost of the Bayesa
Project is estimated to be $8 million, of which $6 million or 75% is
expected to come from sources other than capital contributions to
Bayesa, including bank financing ($4 million) and from the payment of
construction and management fees ($2 million). The remaining $2 million
for the Bayesa Project has been funded by the shareholders of Bayesa in
the form of capital contributions to Bayesa ($1,800,000 by Biwater and
$200,000 by A&E). See "Risk Factors - Need for Additional Financing."
(3) The Company is presently reviewing various projects for acquisition and
development. However, as of the date of this Prospectus, the Company
has not entered into any agreements with respect to acquiring equity
interests in any projects other than the Bayesa Project.
(4) Retirement of Debt relates to retirement of the outstanding mortgage on
the Villarrica Property which is being sold to Invdemco for $1,212,063.
Invdemco is owned by Mr. Errazuriz, President, CEO and Chairman of the
Board of ADC, and other members of his family. Mr. Errazuriz is a 50%
shareholder of Invdemco. See "Management Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" and "Certain Transactions" and "Supplemental Consolidated
Financial Statements-Note 9."
(5) A total of $850,000 will be used to establish Company offices in Spain
and the U.S.
(6) The working capital will be used, primarily, in Chile.
The amounts set forth above are estimates developed by management of
the allocations of the net proceeds of this Offering based upon the current
state of the Company's business operations, its plans and current economic and
industry conditions. The proposed application of the net proceeds is subject to
changes in operating circumstances and financial conditions in general not
presently anticipated and
17
<PAGE>
not deemed to represent a substantial departure from the allocations set forth
above. There can be no assurance that the Company's estimates will prove to be
accurate or that unforeseen expenses will not occur. The Company expects that
the net proceeds from this Offering, combined with funds generated from on-going
business operations, will be sufficient to enable the Company to continue to
pursue its present and proposed business activities for a period of at least 12
months from the date of the completion of this Offering. Any additional proceeds
realized from the exercise of the Representative's Over-Allotment Option or the
Warrants will be used for working capital in Chile to develop an equity
participation by the Company in the hydroelectric sector in Chile. Pending use
of the net proceeds of this Offering, the Company may make temporary investments
in bank certificates of deposit, interest bearing savings accounts, prime
commercial paper, United States Government obligations and money market funds.
Any income derived from these short term investments will be used for working
capital.
DIVIDEND POLICY
ADC has never paid dividends on its common stock since its inception on
October 19, 1994; however, both INA and E&A paid dividends in the aggregate to
their shareholders during 1993, 1994 and 1995, of $835,737, $866,256 and
$300,000, respectively, based on net revenues and net income for those years.
The Company does not intend to pay cash dividends in the foreseeable future. See
"Principal Shareholders" and "Description of Securities."
18
<PAGE>
DILUTION
The net tangible book value of the common stock at June 30, 1996 was
$2,517,700 or $1.68 per share. "Net tangible book value per share" represents
the amount of total tangible assets less total liabilities, divided by the
number of total shares of Common Stock outstanding. After giving effect to the
sale of the 1,200,000 shares of Common Stock at an assumed initial public
offering price of $5.00 per share, with no value being attributable to the
Warrant, and the initial application of the estimated net proceeds therefrom,
pro forma as adjusted net tangible book value of the Company at June 30, 1996,
would have been $7,548,711 or $2.80 per share, representing an immediate
increase in net tangible book value of $1.12 per share to existing shareholders
and an immediate dilution of $2.20 per share (or approximately 44% dilution) to
purchasers of shares of Common Stock in this Offering as illustrated in the
following table:
Assumed initial public offering price per share(1)............. $5.00
Net tangible book value per share before Offering............ $1.68
Increase in value per share attributable to new investors... 1.12
----
Pro forma net tangible book value per share after Offering(2).. 2.80
----
Dilution per share to new investors............................ $2.20
Percent of Dilution to new investors........................... 44%
The following table sets forth as of June 30, 1996, (i) the number of shares of
Common Stock purchased from the Company by the existing shareholders (giving
effect to the exchange of shares of Common Stock for all of the issued and
outstanding equity interests of INA and E&A to be effective upon closing of this
Offering), the total consideration paid and the average price per share paid for
such shares by the existing shareholders; and (ii) the number of shares of
Common Stock to be sold by the Company in this offering, the total consideration
to be paid and the average price per share.
<TABLE>
<CAPTION>
Shares Purchased Total Cash Consideration Average Price
---------------- ------------------------ -------------
Number Percentage Amount Percentage Per Share
------ ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders 1,500,110 56% $ 749,722 10.87% $ 0.50
New Investors 1,200,000 44% $6,150,000(2) 89.13% $5.125(1)
--------- ---- ---------- ------ ======
Total 2,700,100 100% $6,899,722 100.0% $2.555
========= ==== ========== ======
</TABLE>
- -------------------
(1) Offering price before deduction of underwriting discounts and
commissions payable by the Company.
(2) Does not include exercise or issuance of the Warrants, the
Representatives's Over-Allotment option, the Representative's Purchase
Warrants, the Bridge Warrants, or up to 250,000 shares of common stock
reserved for issuance under the Stock Option Plan or the Directors
Plan. See "Management - Incentive and Non-Qualified Stock Option
Plans."
19
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1996, the capitalization
of the Company, actual and as adjusted for the issuance and sale of the
1,000,000 shares offered hereby assuming an initial public offering price of
$6.00 per share of Common Stock and $.25 per Warrant and after deducting
estimated offering expenses payable by the Company and underwriting discounts
and commissions and after giving effect to the initial application of the net
proceeds therefrom.
<TABLE>
<CAPTION>
Historical
Historical(1) As Adjusted(1)(2)
------------- -----------------
<S> <C> <C>
Long-term Debt(3)................................................... $628,243 $252,965
Retirement benefit obligation....................................... 18,116 18,116
Stockholders' equity:
Common Stock ($.0001 par value) 20,000,000 shares authorized;
1,500,100 issued and outstanding (actual) and 2,700,100
(as adjusted)(2)................................................. 150 270
Additional paid-in capital.......................................... 749,722 5,856,213
Retained earnings................................................... 1,813,919 1,738,319
Cumulative translation adjustment................................... (46,091) (46,091)
---------- ----------
Total shareholders' equity.......................................... 2,517,700 7,548,711
Total capitalization............................................. $3,164,059 $7,819,789
</TABLE>
- -------------------
(1) Gives effect to the Reorganization and excludes the issuance of (i)
1,200,000 shares of Common Stock upon exercise of the Warrants (ii) up
to 120,000 shares of Common Stock issuable pursuant to the
Representative's Over-Allotment Option or that underlie the Warrants
contained therein; (iii) up to 120,000 shares issuable pursuant to the
Representative's Purchase Warrants or that underlie the Warrants
contained therein and (iv) up to 21,000 share of Common Stock issuable
upon exercise of the Bridge Warrants and (v) up to 250,000 shares of
Common Stock reserved for issuance under the Company's Stock Option
Plans and Directors Stock Option Plan, of which no shares of Common
Stock are currently subject to outstanding options. See "Underwriting,"
"Management - Incentive and Non-Qualified Stock Option Plans," and
"Description of Securities.
(2) Gives effect to the issuance of 1,200,000 shares of Common Stock and
1,200,000 Warrants offered hereby and the receipt of the net proceeds
therefrom.
(3) Includes the deduction of long-term debt on the Villarrica property.
See "Supplemental Consolidated Financial Statements - Note 9."
20
<PAGE>
EXCHANGE RATES
Unless otherwise specified, references herein to "U.S. dollars",
"dollars", "$", or "U.S.$" are to United States dollars and references to
"Chilean pesos," "pesos" or "Ch$" are to Chilean pesos, the legal currency of
Chile, and peso-denominated monetary unit. The Unidad de Fomento (UF) rate is
set daily against the Chilean peso in advance based upon the changes in the
previous month's inflation rate. The UF is a monetary unit indexed daily with
the Chile Consumer Price Index (CPI). As of July 11, 1996, the exchange rate was
31.77 U.S. dollars to 1 UF.
For the convenience of the reader, this Prospectus contains
translations of certain peso amounts into U.S. dollars at specified rates.
Unless otherwise indicated, information regarding the U.S. dollar equivalents of
amounts in pesos is based on the Observed Exchange Rate (as defined herein under
"Exchange Rate") reported by the Banco Central de Chile (the "Central Bank of
Chile" or the "Central Bank") for July 11, 1996, which was Ch$411.29 =
U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying
rate for pesos. No representation is made that the peso or U.S. dollar amounts
shown in this Prospectus could have been or could be converted into U.S. dollars
or pesos, as the case may be, at such rate or at any other rate.
Chile's Ley Organica Constitucional del Banco Central de Chile No.
18.840 (the "Central Bank Act") enacted in 1989, liberalized the rules that
govern the ability to buy and sell foreign exchange. Prior to 1989, the law
permitted the purchase and sale of foreign exchange only in those cases
explicitly authorized by the Central Bank of Chile (the "Central Bank"). The
Central Bank Act now provides that the Central Bank may determine that certain
purchases and sales of foreign exchange may be exercised by the banks and other
entities so authorized by the Central Bank.
For the purposes of certain operations at the Formal Exchange Market,
the Central Bank sets a reference exchange rate (dolar acuerdo) (the "Reference
Exchange Rate"). The Reference Exchange Rate is reset monthly by the Central
Bank, taking internal and external inflation into account, and is adjusted daily
to reflect variations in parities between the peso and each of the U.S. dollar,
the Japanese yen and the German mark. In January 1992, the Central Bank revalued
the Reference Exchange Rate by 5%. The Central Bank, in order to keep the
average exchange rate within certain limits, intervenes by buying or selling
foreign exchange on the Formal Exchange Market. The daily observed exchange rate
or spot rate for a given date (the "Observed Exchange Rate") is the average
exchange rate at which commercial banks conduct authorized transactions on such
date as determined by the Central Bank. The Central Bank is authorized to carry
out its transactions at those rates. It generally carries out its transactions
at the Reference Exchange Rate and at the spot market rate. However, when
commercial banks exceed their own regulations and responsibilities and need to
buy U.S. dollars from the Central Bank, or need to sell U.S. dollars to the
Central Bank, such sales are made by the Central Bank not above 10% of the
Reference Exchange Rate and such purchases are made by the Central Bank not
below 10% of the Reference Exchange Rate. Authorized transactions by banks are
generally transacted at the spot market rate which may fluctuate between 10%
over and 10% under the Reference Exchange Rate as a maximum, but has a steady
movement with daily fluctuations which usually do not exceed 0.5% of the
previous day's price.
Purchases and sales of foreign exchange which may be affected outside
the Formal Exchange Market can be carried out in the Mercado Cambiario Informal
(the "Informal Exchange Market"). The Informal Exchange Market and its
predecessor, the "Unofficial Market," reflect the supply and demand for foreign
currency. There are no limits imposed on the extent to which the rate of
exchange in the Informal Exchange Market can fluctuate above or below the
Observed Exchange Rate. The Company estimates that since 1989, the rate of
exchange for pesos into U.S. dollars on such markets has usually fluctuated
between approximately 0.2% below and 1.5% above the Observed Exchange Rate.
21
<PAGE>
The following table sets forth the annual high, low, average and
year-end Observed Exchange Rate for U.S. dollars for each year starting in 1990
as reported by the Central Bank. The Federal Reserve Bank of New York does not
report a noon buying rate for pesos.
Year Observed Exchange Rates of Ch$ per U.S.$
---- ----------------------------------------
Low(1) High(1) Average(2) Period End
------ ------- ---------- ----------
1990 280.88 337.75 304.90 336.86
1991 336.67 374.87 349.21 371.93
1992 343.93 382.33 362.58 382.33
1993 382.12 431.04 404.17 431.04
1994 397.87 433.69 420.18 404.09
1995 385.78 409.40 396.73 395.89
1996 (1st Quarter) 404.76 413.86 410.35 411.61
Source: CENTRAL BANK OF CHILE
- -------------------
(1) Exchange rates are the actual high and low, on a day-to-day basis, for
each period.
(2) The average monthly rates during the period.
22
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth below contain selected consolidated
financial data as of and for the dates indicated, which have been derived from
the Company's historical consolidated financial statements which have been
audited by Mutnick & Associates, P.A., independent auditors for the years ended
December 31, 1994 and 1995, and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements and the notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31, Period ended June 30,
-------------------------- -------------------------
(unaudited)
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED EARNINGS DATA:
Revenues $ 2,042,884 $ 2,717,341 $ 1,355,266 $ 1,472,037
Cost of Operations 296,896 697,599 266,753 318,167
Selling and Administrative
Expenses 460,775 509,563 321,050 227,300
Other Income (Expenses) (223,963) (520,543) (350,758) (131,061)
Income before Income Taxes 1,061,250 989,636 416,705 795,509
Income Taxes (Credit) 51,780 50,636 64,613 119,326
Net Income 1,009,470 939,000 352,092 676,183
Net Income per
common share $ 0.67 $ 0.63 $ 0.24 $ 0.45
Weighted average shares
outstanding 1,500,100 1,500,100 1,500,100 1,500,100
</TABLE>
<TABLE>
<CAPTION>
Period Ended
Period Ended Period Ended June 30, 1996
December 31, 1995 June 30, 1996 As Adjusted(1)
----------------- ------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
SUPPLEMENTAL CONSOLIDATED
BALANCE SHEET DATA:
Working capital $ 173,329 $ 753,121 $ 5,783,512
Total assets 3,960,481 4,415,134 9,445,525
Total long-term Liabilities 706,624 646,359 646,359
Total liabilities 2,194,564 1,897,434 1,832,434
Stockholders' equity 1,765,917 2,517,700 7,548,091
</TABLE>
- -----------------------
(1) Adjusted to reflect sale of 1,200,000 shares of Common Stock and
1,200,000 Warrants offered hereby and the receipt of the net proceeds
therefrom (assuming an initial public offering price of $5.00 per share
of Common Stock and $.125 per Warrant, respectively, and after
deducting underwriting discounts and commissions and estimated offering
expenses). Does not include receipt of net proceeds from the exercise
of the Warrants, the Representative's Purchase Warrants, the
Representative's Over-Allotment Option.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto appearing
elsewhere in this Prospectus.
OVERVIEW
The Company was organized in 1994 to acquire E&A and INA which, since
1991 and 1986, respectively, have been engaged in Chile in the sale, as agent,
of foreign electrical and mechanical equipment, representation of foreign
manufacturers of these types of equipment and products in Chile, and providing
engineering, consulting and project management services in Chile.
Commencing in or about 1991, the Company directly focused its efforts
in the mining and energy sectors believing that representation and services in
such areas would offer greater efficiency and profitability to the Company. To
facilitate this change in focus which required more highly qualified
technological services, the Company changed the composition of its personnel to
include civil and industrial engineers with special expertise in the mining and
energy areas.
While the Company's revenues and earnings have increased from 1992
through June 30, 1996, management believes that in addition to growing its core
business, it can maximize its growth and profitability, as well as increase its
asset base, by establishing equity positions in various projects.
Decisions by management have been made in the context of changes in the
Chilean political and economic environment. Today, Chile is one of the fastest
growing economies in Latin America, with a 6.9% growth rate in 1995 marking its
12th year of growth in a row. The transformation of the Chilean economy, which
started in the mid-1970's following the assumption of power by the military
government and a return to democracy in 1984, has continued over the past twenty
years with reforms being made in various areas. As they relate to the Company,
the more significant areas of reform include:
1. Monetary stabilization program aimed at reducing inflation;
2. Public sector reforms seeking to reach macroeconomic stability
and improving the efficiency of the public sector and economy
as a whole;
3. Privatization programs to remove the government from
activities that the private sector could undertake and to
expand activities where the public sector has a role to play
such as basic health and education services;
4. Trade reforms to provide appropriate incentives to export
oriented and import competing activities and increasing the
integration of Chile with the rest of the world; and
5. Social security reforms.
Coupled with these five areas, the Chilean government has attempted to
grant foreigners greater access to all sectors and markets of the economy. As a
result, the amount of foreign private investment has significantly increased,
particularly during the 1990's.
24
<PAGE>
The Chilean government is also pursuing various trade initiatives which
are as follows:
* EU (European Union) Market: The Chilean government has been
advised by the committee of EU ambassadors that the EU
organization is considering the request of the Chilean
government for Chile to become an associate member of the EU.
However, because the EU is presently focusing on agreements
with eastern European countries, the Chilean government does
not expect any actions to be taken by the EU in the near
future.
* MERCOSUR: The Chilean government has recently been admitted as
a full member of Mercosur, an alliance of Argentina, Brazil,
Paraguay and Uruguay that eliminates tariffs in order to
create free trade among its member nations. However, as a
precondition to its joining Mercosur, the Chilean government
has required that the other member countries comply with the
Chilean system, which is oriented to a market type of economy.
This would mean that the Mercosur countries would diminish
their custom duties to no more than 11% (with certain minor
exceptions) and accept products from Chile consisting of
imported components. The Chilean government has not received
any indication that these conditions will occur within the
foreseeable future.
* NAFTA (the North American Free Trade Agreement): The Chilean
government has anticipated that it will become a signatory to
NAFTA which will bring the country into the
U.S.-Mexican-Canadian free trade zone, once the treaty is
resubmitted to and approved by the U.S. Congress to accept
Chile as a signatory to NAFTA. As a result of the economic
crisis in Mexico, during 1995 the current U.S. administration
temporarily shelved the vote on Chile to become a member
nation of NAFTA, and there are indications that it will be
resubmitted following this year's U.S. elections. There can be
no assurance, however, that such treaty will be approved by
the U.S. Congress or the Chilean government in the foreseeable
future.
Management believes that the reforms and programs that have been
implemented by the Chilean government over the past twenty years have been
positive for the Company. Although increased competition may arise from
companies providing similar services, the Company, for reasons stated herein,
(see "Business Competition") believes that demand will continue for its
services. As an example, the total amount of electrical power on line in Chile
is approximately 5,500 megawatts (MW). It is projected that the need for
electrical power will continue to increase by at least 5% annually, and the
Company, which has historically been involved in the construction of most
electrical generation projects in Chile, will continue to be so involved.
Additionally, and as an adjunct to the growth of electrical generation projects
in Chile, there are plans for two natural gas pipelines: one in the north and
one in the south of Chile, to be used as a source for energy. The Company has
received a written agreement from Westinghouse Electric Corporation, whereby the
Company is to act as special agent on behalf of Westinghouse for the first of a
number of electrical generation projects fueled by natural gas in Chile.
The Company believes that, as a result of currency and other monetary
reforms, the government of Chile has reduced the risk of fluctuations of
currency on its business. Generally the Company's commission revenue is in the
foreign currency of the primary manufacturer of the equipment (generally U.S.
dollars or Swiss francs) although approximately one-third of its income comes
from local sources and is received in foreign contracts denominated in pesos
(typically UF). See "Exchange Rates."
Moreover, should the various trade initiatives result in trade
agreements, the Company believes that it will be well positioned to take
advantage of these agreements, since the Company would have a wider array of
potential manufacturers to represent on specific bids and there may be
additional opportunities to sell products and services in South America.
However, since the current import duty levied on goods and services
25
<PAGE>
in Chile from most foreign manufacturers is 11%, the Company is not dependent on
any of these initiatives resulting in a trade agreement(s).
The Company has represented foreign manufacturers and engineering
companies in the sale of products and services to the majority of the electric
utilities, mining, oil and cellulose companies in Chile, which are both
privately owned and government owned. In selling equipment and services to these
companies, there is normally a pre-qualification process that results in a list
of qualified bidders. Therefore, if the manufacturers and engineers represented
by the Company have the proper qualifying credentials, the Company is assured of
being able to present a bid on behalf of these companies. Additionally, while
the concentration of potential customers is limited by the size of Chile per se,
historically companies requesting bids have multiple bids throughout the course
of the year.
PLAN OF OPERATIONS
In addition to the growth of its core business, the Company's plan of
operation for the next 12 months involves the establishment of equity positions
in some projects, as well as participation in the management of these projects.
While requirements and issues of liquidity are described below, the Company does
not expect a significant change in the number of employees after the closing of
this Offering, except for the staffing of the U.S. and European offices and the
Company does not anticipate the purchase or sale of plant and significant
equipment.
RESULTS OF OPERATIONS
In the past, the Company's core operations have been focused on three
areas (i) engineering services and the sale of minor equipment and parts for
projects throughout Chile; (ii) project management and the sale, as agent, of
major equipment for three to five large projects during any given year and (iii)
the preparation of business for third parties. While the period between the
payment by the Company for the goods and services and the receipt of revenues in
connection with the goods and services described in (i) above is typically close
in time, this is not necessarily so with regard to payments and receipts for
those goods and services described in (ii) and (iii) above. Often the interval
between payments by the Company for equipment and services for major projects
and receipt of revenues in connection with the same equipment and services is
spread out over a longer period of time. Thus, the fluctuation in the results of
operations for each quarter may vary greatly, depending on the timing of
payments for major equipment (both by and to the Company).
DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
Gross revenues for the fiscal year ended December 31, 1995, increased
$674,457 over the fiscal year ended December 31, 1994 from $2,042,884 to
$2,717,341, an increase of approximately 33%. This increase is due primarily to
being awarded certain projects such as the Mitsubishi/Endesa Quillota Combined
Cycle Gas powered electrical generating plant (the "Endesa Quillota Project")
and the Westinghouse Gas Turbine in Peru and the billing for work associated
with the research and design of the Macul Project.
Cost of Operations for the fiscal year ended December 31, 1995,
increased $400,703 from $296,896 to $697,599 for the fiscal year ended December
31, 1994, an increase of 135%. This significant increase in cost of operations
and consequently the decrease in gross margins is attributable to start-up costs
associated with the Macul Project (including engineering studies costing
$75,000, and fencing and signage costs of $20,000), increased technical
consulting services associated with the Endesa Quillota Project, and costs of
other projects ;which required the use of outside consultants. (approximately
$150,000).
Selling and administrative expenses for the fiscal year ended December
31, 1995, were $509,563, versus $460,775 for fiscal year ended December 31,
1994, an increase of $48,788. This increase is attributable to the increase in
total revenues which required an additional support staff for various bids and
other core business projects.
26
<PAGE>
Other expenses for the fiscal year ended December 31, 1995, were
$520,543, versus $223,963 for fiscal year ended December 31, 1994, an increase
of $296,580. This increase is attributable to an increase in interest payments
on corporate debt and $276,506 in non-operating curtailed offering costs as
reflected as a seperate line item in the financial statements.
Net income for the fiscal year ended December 31, 1995, was $939,000,
versus $1,009,470 for fiscal year ended December 31, 1994, an increase of
$70,470. This decrease is attributable to the Company having a non-operating
expenses of $276,506 associated with the curtailed public offering against the
efforts of the Company successfully presenting bids for manufacturers it
represented and receiving commissions and consulting fees for such work.
SIX MONTH PERIOD ENDED JUNE 30, 1996 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30,
1995
Gross revenues for the six month period ended June 30, 1996, increased
$106,771 from that of the six month period ended June 30, 1995, from $1,355,266
to $1,427,037 or 7%. This increase is attributable to the Company being awarded,
contracts for the six month period ended June 30, 1996, including a contract on
behalf of Siemens Corporation, of the Limache Combined Cycle Power Plant for
Colbun S.A., which offset revenues from contracts that concluded in the first
six month period end June 30, 1995. The result is an overall increase of
$106,771. Because of the nature of the Compnay's business (based on the timing
of regognition of revenues), it is possible that there can be significant
differences from one quarter to the next.
Cost of Operations for the six month period ended June 30, 1996,
increased $51,414 over the same period ended June 30, 1995, from $266,753 to
$318,167 or 21%. This increase is attributable to the use of outside consultants
for the Colbun, S.A. projects.
Selling and Administrative Expenses for the six month period ended
June 30, 1996 were $227,300, a decrease of $93,750 or 29% over the amount of
$321,050 for same period ended June 30, 1995. This decrease is attributable to a
reduction in staffing that was required previously to develop and sell the Macul
Project, and additionally because of the transfer of some of the staff from
employment by the Company to employment by the new owners of the Macul Project.
Other expenses for the period ended June 30, 1996 were $131,061
versus $350,758 of other expenses for the period ended June 30, 1995 or a
decrease of $219,697 or 62.6%. This decrease is attributable to the fact during
the six months of 1995, the Company was able to earn other income from rental
charges it made to a non-affiliate in its establishment of a restaurant on the
site of the Macul project and the Company had non-operating expenses of $276,506
associated with the curtailed public offering which resulted in a net of other
expenses of $350,758 as reflected as a separate line item in the financial
statements.
Net income for the period June 30,1996, was $676,183 versus $352,092
for June 30, 1995, an increase of $324,091 or 92%. During the first six months
ending June 30, 1996, there was other income of $59,267 associated with the
Macul project and there was also an increase expense during the period of
$15,886. This 92% increase is attributable to an overall increase in gross
revenues.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, accounts receivable increased by $365,522 to
$1,768,523 from $1,403,001 as of year ended December 31, 1995. The amount of the
receivables outstanding and the number of days outstanding is attributable to
the timing of recognition of revenues as compared to the date of payment. In
particular, in the case of equipment sales, the Company recognizes revenues on
the sale of the equipment or on a turnkey project, where the contract between
the purchasing company and the manufacturer is signed by both parties or an
"order to proceed" is issued by the buyer. While the schedule of payment is set
by contract, the time of payment is determined by practices of the exporting
country involved in the transaction as well as unanticipated delays caused by
obtaining permits and export licenses and as a result, it is not unusual for
a transfer of funds to take 60-180 days. The Company normally receives its
commissions, which are fully earned at the time the award is made, 30 days after
receipt of funds by the manufacturer it represents and generally payment terms
conform to the payment schedule between the buyer and the seller. Therefore, as
in the case of the Polpaico project, which was awarded to Mitsubishi in December
of 1995 and which was initially in excess of $1,000,000, payment for this
project which accounts for $537,927 of the outstanding receivables at June 30,
1996 was delayed because of changes in the export license. While 50% of the
initial receivable of in excess of $1,000,000 was paid to the Company in June
1996, the Company anticipates that it will be paid the balance of the receivable
from Mitsubishi in December 1996. In addition, at June 30,1996, the Company had
a receibable from Siemens, A.G. of $1,022,038. Payment of $840,000 is to be
received on or about September 15, 1996, while the balance of approximately
$160,000 is to be paid in December 1996. The timing of the receipt of payment
may from time to time affect the Company's liquidity. In the past, the Company
has utilized its short term lines of credit to satisfy its financial
requirements. In the future, the Company anticipates it will have proceeds from
this offering which may be used in additon or in lieu of tis lines of credit.
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Based upon the historical collectability of its receivables and the nature of
the companies and/or entities with which it engages in business (e.g. Mitsubishi
Corporation and Siemens A.G., among others) management believes that all of its
receivables are collectible.
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Accounts payable decreased $119,824 from $384,282 as of fiscal year
ended December 31, 1995 to $269,458 as of June 30, 1996. This decrease is
attributable to receipt of certain outstanding accounts receivable.
Due from related parties remained relatively unchanged from $5,696 at
December 31, 1995 to $0 at June 30, 1996.
Current obligations with banks increased to $387,361 at June 30, 1996
from $367,658 at December 31, 1995, a decrease of $12,206. This increase is
attributable to the Company need for increased capital required for other
projects. Short term obligations with banks are current as of June 30, 1996.
Current other assets decreased to $91,961 at June 30, 1996 from
$177,489 at December 31, 1995, a decrease of $85,528 or 48%. This decrease is
attributable to a reduction in deposits to suppliers and other advances to
subcontractors required for various core projects.
Income taxes expense increased to $119,326 at June 30, 1996 from
$50,636 at December 31, 1995, an increase of $68,690 or 136%. This increase is
attributable to a reduction in foreign income and reflects the profit from the
period ended June 30, 1996 being taxed at the maximum Chilean rate of 15%.
The Company's balance sheet reflects undeveloped real estate in the
amount of $481,278. This property, located in Villarrica, Chile, was previously
categorized as "property for sale." The property as of March 31, 1996 has been
taken off the market indefinitely, but may still be utilized for various bank
guarantees. In addition to this undeveloped real estate, the Company owns real
estate which includes a house (the "Villarrica Property") which has a carrying
value of $1,212,063 (reflecting depreciation for the three months ended March
31, 1996). This property was formerly categorized as "under construction" has
now been completed and has been used to secure various loans. Concurrent with
the closing of this Offering, Mr. Errazuriz, the Company's President, Chief
Executive Officer and Chairman of the Board will acquire this house and property
from the Company for $1,212,063. The Company intends to pay off all outstanding
mortgages on this property (approximately $700,000) from the proceeds of this
Offering. Therefore, the Company will divest itself of a non-performing asset
and will receive cash and a note which will enhance the Company liquidity.
In December, 1995, the Company purchased a 45% interest in A&E for
$283,500 which translates into a 4.5% equity interest in Bayesa. This investment
is being accounted for on the financial statements of the Company using the
equity method (See Note - to the Consolidated Financial Statements of the
Company).
In addition, during the period ended March 31, 1996, the Company sold
the balance of its ownership in ITL (Macul Project) at its cost of $199,918.
Management does not intend to invest in leisure projects in the future, although
it may develop projects on a fee basis for unrelated third parties.
With the exception of mortgage financing, the Villarrica Property,
which debt will be repaid in conjunction with the sale of the Villarrica
Property as described above, and other limited bank financing, the Company has
financed its operations through internally generated funds. While the Company's
core business can continue without additional financing, the Company has
determined that to facilitate its plan of operations it will use certain of the
proceeds of this Offering together with additional equity and bank financing for
certain projects.
Additionally, the Company's liquidity has been historically affected
because of the distribution to its shareholders of dividends of $835,737,
$866,256 and $300,000 during 1993, 1994 and 1995, respectively, as well as the
cost of the non-performing Villarrica Property. Up to the closing of this
Offering, the Company, which
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built the Villarrica Property for the personal use of Pedro P. Errazuriz, the
President, CEO and Chairman of the Board of ADC, and his family, also used the
Villarrica Property as a guaranty for the payment of certain lines of credits
and other short term debt financing.
With the change in the Company's strategy to establish equity
positions, together with the management and consulting services, the Company
will be dependent upon the proceeds of this Offering and additional financing as
described herein.
The Company's cost of capital, to the extent determinable, is TAB plus
3% (TAB is the average rates Chilean banks pay on deposits which varies between
6%-8%. While cash flow from the Company's current business may provide a cushion
vis-a-vis the operating expenses to be incurred in connection with its asset
based expansion, management intends to provide separate sources of funding for
the present and proposed projects.
BAYESA PROJECT
The Company participated with Biwater in the design of the Bayesa
Project and the negotiations leading to the award of the Bayesa Project to
Bayesa. The Company currently owns 4.5% of Bayesa, through its ownership of a
45% interest in A&E. To facilitate the acquisition of an additional equity
interest in Bayesa in March 1996, the Company entered into an agreement with
Invdemco to purchase A&E shares that would result in an additional 22.5%
interest in A&E, which translates into an additional 2.25% interest in Bayesa
for $141,750. The Company may also purchase additional equity in Bayesa from
Biwater depending on the cost of such shares as compared to other potential
projects. See "Use of Proceeds."
It is estimated that the cost of completion of the Bayesa Project is $8
million and will be completed in approximately 14-16 months from the date of
this Prospectus. Bayesa has entered into a credit line agreement with Banco
Security to finance $4 million. ESSAN, the governmental entity in charge of the
water system for the municipality of Antofagasta where the Bayesa Project is
located, will fund approximately $2 million through the payment of construction
and management fees pursuant to the terms of Bayesa's contract with ESSAN. The
Banco Security credit line agreement provides in pertinent part for a nine-year
term loan at TAB plus 3%. The bank has required a lien on the flow of payments
from ESSAN, undertakings to specify that the Bayesa Project will be exclusive to
ESSAN and that Bayesa's debt to equity ratio shall not exceed two until 1998 and
shall be reduced thereafter. Additionally, Banco Security has received a
security interest in and to the equipment and machinery owned by Bayesa
Furthermore, the funding by Banco Security is subject to Bayesa receiving $2
million in equity contributions from its shareholders which funding has been
received by Bayesa as discussed above.
Commencing in January 1995 and continuing for 150 months thereafter,
pursuant to its contract with ESSAN, Bayesa will receive monthly payments of
$129,544 for the design and construction of the Bayesa Project. The total value
of this aspect of its contract with ESSAN is approximately $19,431,600.
Additionally, commencing in July 1995, Bayesa began receiving approximately
$40,000 per month (which is adjustable) for 360 months, which amount covers
Bayesa's costs which include personnel, electricity, repairs, etc.
The total cost of design and construction for the Bayesa Project is
estimated at approximately $8 million, plus interest and fees of approximately
$2 million, for a total of approximately $10 million. Therefore, the net pre-tax
profit for the design and construction is approximately $9 million (based upon
$19,431,600 less $10 million).
Additionally, commencing in July 1995, Bayesa began selling reclaimed
water at the rate of 70 liters per second to new agricultural developments in
the Antofagasta area of Chile. Commencing in January 1997, Bayesa anticipates
that it will sell 220 liters per second and based upon these assumptions, the
gross revenues will reach approximately $410,000 per month. The net pre-tax
profit from the sale of this reclaimed water
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at this assumed rate is anticipated to be approximately $125,000 per month or
$1.5 million per year. Over the 28-year period, net profits are anticipated to
be approximately $42 million.
MACUL PROJECT
In March 1995, the Company organized Inversiones Tiempo Libre S.A.
("ITL") as a wholly-owned subsidiary to develop, build, market, own and manage a
family-oriented multi-faceted entertainment project. During November 1995, the
Company sold 70% of its interest in this project and in March 1996 the balance
of its interest was sold.
OTHER INVESTMENTS
The Company will use approximately $425,000 from the proceeds of this
Offering to immediately establish a sales and marketing office in Boca Raton,
Florida. The Company will also use approximately $425,000 of this Offering to
establish an office in Spain during the latter part of 1996. The Company
believes that this amount, in addition to cash generated from its core business,
will be sufficient to operate these offices for at least 12 months. The Company
believes that it will continue to operate its core business with cash generated
from this aspect of the business. The Company does not have any plans to
increase the operating costs of its core business in any material respects.
Management does not foresee any need for additional financing as a
result of the Company's equity participation in any of its currently proposed
projects, either to purchase the Company's equity interest or to fund the
proposed projects. Furthermore, the Company will not engage in hedging
activities and does not intend to offer equity participation in any of these
projects other than as set forth in the "Use of Proceeds".
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BUSINESS
INTRODUCTION
Andean Development Corporation was organized in 1994 as a holding
company to acquire E&A and INA, both corporations domiciled in Santiago, Chile.
ADX, domiciled in Boca Raton, Florida, U.S.A., is a subsidiary of Andean
Development Corporation. Andean Development Corporation, E&A, INA, and ADX are
collectively referred to as the "Company" or "ADC".
E&A, organized in February 1991, specializes, as an agent, in the sale
of major electrical and mechanical equipment and the representation of foreign
manufacturers of electrical and mechanical equipment in Chile. E&A also offers
technical assistance and prepares tender (bid) documents for both turnkey and
nonturnkey public works and development projects to be constructed in Chile.
Since 1991, E&A has facilitated in the sale of more than $415 million of
equipment including generators, turbines and conveyors (see "Major Projects" on
p. 41), which has generated more than $5 million of commissions for the Company.
See "Business - Core Business."
INA, organized in 1986, focuses on providing engineering consulting
services and project management for hydroelectric power plants and civil
construction projects generally related to hydroelectric power plants, tunneling
projects and water treatment plants in Chile. Since 1986, INA alone and in
conjunction with Norconsult International, A.S. of Norway ("Norconsult") an
international engineering company, has provided engineering, consulting and
project management services relating to engineering projects valued at $19
million of which approximately $8.6 million was revenues the Company has
realized. See "Business - Core Business."
The Company's strategy is two-fold. First, the Company intends to
continue to grow and expand its core business presently being conducted through
E&A and INA. To facilitate this growth the Company will immediately establish a
sales and marketing office in the United States and in the latter part of 1996
will establish a second sales and marketing office in Spain which may also be
used for sales and marketing throughout Europe. Management of the Company
believes that its future growth will be a natural consequence of the Company's
historical participation in the electric utility sector, ecology oriented
projects and the potable and waste water treatment fields. The Company intends
to expand its marketing focus to include medium sized utilities, private mining
companies and large industrial companies. Management believes these businesses
will require the services of the Company, either to acquire new equipment, to
optimize and/or upgrade their existing installations or to comply with the
increasing ecological regulations of the government.
The Company believes that creating a U.S. holding company and
establishing a U.S. sales and marketing office will enhance its ability to do
business with U.S. companies and other North American companies. As part of this
strategy, the Company will seek to take advantage of the relative stability of
the Chilean peso to the U.S. dollar. As a result of this relative stability, the
Company believes that certain U.S.,
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as well as Canadian and Mexican, manufactured equipment and products are now
available at prices competitive with other foreign manufacturers. See "Exchange
Rates." The Company also believes that many U.S. manufacturers may be unfamiliar
with the conditions and the qualifications required to bid on projects in Chile.
By establishing a U.S. office, the Company believes that it will be able to act
as a representative (both on an exclusive and non-exclusive basis) of U.S.
manufacturers both in the U.S. and Chile for projects located in Chile by
providing local expertise and understanding the Chilean business environment.
The Company currently intends to employ one engineer and one marketing person on
a full-time basis in Boca Raton, Florida.
Secondly, the Company intends to capitalize on opportunities in the
current Chilean economy by taking an equity position in certain ecology-oriented
and electrical utility related projects in Chile as well as by providing
management and other services to these projects. The Company also intends to
take advantage of the continuing privatization of businesses in Chile, which has
increased investment in Chile and increased industrial and agricultural output.
As an example of this strategy, the Company, through an affiliate, has entered
into an Agreement (See "Business - Bayesa Project") to invest in a waste water
treatment facility located in Antofagasta, Chile (the "Bayesa Project"). In
addition, the Company is exploring potential equity participation in
ecology-related and electric utility-related projects such as small to
medium-sized hydroelectric generating plants, electrical utilities and other
water-related projects. See "Business - Strategy for Equity Participation."
Although, as of the date of this Prospectus, the Company has not entered into
any agreements with respect to acquiring equity interests in projects other than
the Bayesa Project. The Company, pending completion of its research and due
diligence, intends to enter into formal negotiations in other ecology-oriented
and electrical utility projects in Chile, leading to formal agreements.
E&A was organized on February 28, 1991, in Santiago, Chile as a limited
partnership under the name "Errazuriz y Asociados Ingenieros Limitada." On
September 21, 1994, pursuant to Chilean law, E&A was reorganized as a Chilean
corporation and its name was changed to "Errazuriz y Asociados Ingenieros, S.A."
INA was organized on June 11, 1986, in Santiago, Chile as a limited partnership
under the name "Ingenieria Norconsult Andina Limitada." On September 15, 1994,
pursuant to Chilean law, INA was reorganized from a limited partnership to a
Chilean corporation, and its name was changed to "Igenor Andina S.A."
The Company, under the name "Igenor U.S.A., Inc.," was incorporated on
October 19, 1994, under the laws of the State of Florida. On January 10, 1995,
its name was changed to "Andean Development Corporation." The Company's offices
are currently located at 835 Lakeside Drive, Boca Raton, Florida, U.S.A. and its
telephone number is (407) 482-6336.
CORE BUSINESS
E&A specializes as an agent in the sale of major electrical and
mechanical equipment through the representation of foreign manufacturers of
these types of equipment and products. A substantial amount of its sales are for
equipment relating to the electrical utilities, mining, and materials handling
industries which include medium and high voltage generators, transformers,
controls, cables, gas and steam turbines and industrial boilers, as well as
other materials such as cranes, unloading facilities, coal handling systems,
crushers, air cleaning systems and ventilators. Additionally, E&A offers
technical assistance to bidders during the preparation of tender (bid) documents
for turnkey and non-turnkey projects as well as throughout a project, once bids
have been awarded. E&A has been successful in obtaining and maintaining its
representations of foreign equipment manufacturers by offering engineering and
sales support by experienced civil and industrial engineers. These individuals
are knowledgeable in both the technical and sales aspects of a project and also
have the contacts and networks in Chile necessary to successfully compete with
larger international companies. While many of the services offered by the
Company are comparable to those of its competitors, because of the Company's
historical presence in Chile and reputation for quality services, it can
effectively compete with larger competitors and offer additional services not
available from its competitors. See "Business - Core Business; Competition."
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The services offered by E&A include, but are not limited to:
1. * Forecasting of market trends
* Market research
* Financing (expertise in local and foreign loans)
* Packaging with other manufacturers
* Knowledge of the decision making procedures and the scheduling
of projects
2. * Local engineering support (by the Company's employees or
through subcontractors)
* Procurement of local materials and products
* Construction and plant erection capabilities
* Project managing capabilities
* Coordination with customer and customer engineering
While E&A does not charge any fee for the services described in item 1
above and funds the related operating costs, the services described in item 2
above are developed for a customer on a fee basis once a project is secured.
Additionally, equipment manufacturers pay E&A a commission upon receipt of the
award of the project. The commission is typically based on a percentage of the
amount of the sale, which varies depending upon the size and scope of the
project.
In preparing bid documents for various projects, E&A has and will
continue to form consortiums of various equipment manufacturers who provide
products on competitive terms and conditions. E&A intends to assist in obtaining
financing of projects through both domestic (Chile) and international financial
institutions.
INA was initially organized in 1986 as a joint venture between
Norconsult, a worldwide engineering consulting company based in Oslo, Norway and
Errazuriz y Asociados Arquitectos S.A. ("EAA"). EAA is a major shareholder of
ADC whose shareholders include Berta Dominguez (58%), the Chairman and CEO of
E&A and the wife of Pedro P. Errazuriz, the President, CEO and Chairman of the
Board of ADC, and each of their six children (7% each). See "Principal
Shareholders." Norconsult, which subsequently sold its participation to Igenor
Ingenierie et Gestion, S.A. a holding company which is a majority shareholder of
the Company and whose shareholders include Mr. Errazuriz (50%), his wife
(49.25%), their son Pedro Pablo Errazuriz (.25%) and M. Claude Mermier (.25%) a
director of ADC. See "Principal Shareholders."
INA focuses primarily on providing engineering consulting services for
hydroelectric plants and civil construction projects (tunneling projects). Most
of the engineering services provided by INA result from INA's exclusive
representation of Norconsult. Currently, one or two hydroelectric plants are
built in Chile every year, while each year Norconsult participates world-wide in
the design of 10 to 15 of such plants. As a result, INA's relationship with
Norconsult provides INA with the ability to offer its customers state-of-the-art
knowledge for these types of projects while, at the same time, associating with
local engineering companies in preparing bid documents for such projects. INA
also offers most services relating to hydroelectric power plants, from the
pre-construction stage through the commissioning of the project. As an example,
in conjunction with Cade-Idepe (Chile's largest engineering company), INA was
recently awarded a feasibility study for the Rucue Project, a new hydroelectric
power plant of 100 MW to be built by Colbun S.A., a government owned utility, in
Chile.
While Chile builds approximately 20 to 30 kilometers of tunnels each
year, Norconsult has designed and inspected approximately 700 kilometers per
year for the past 20 years. This experience, along with the sophistication of
the projects in which Norconsult has been involved (which include water pressure
tunnels), gives the Company an added advantage of having a knowledgeable
resource for these types of projects in Chile. As an example, on May 15, 1995,
INA and Norconsult had Andrade Gutierrez, a large Brazilian contractor and
investor, design the pre-feasibility study for the first segment of 40
kilometers of pressure tunnels for a 400 MW hydropower project for Cortaderal.
See "Major Projects" and "1995/1996 Proposed
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Projects" for an overview of the types of services for which INA intends to
provide both in connection with hydroelectric power plants and tunneling
projects.
Additionally, INA erects electro-mechanical installations and material
handling systems. As a project manager, INA coordinates with a consortium of
equipment manufacturers in the preparation and delivery of turnkey projects
after a bid has been awarded. INA also provides local engineering support to its
clients.
Both E&A and INA believe they have built excellent reputations in their
specific areas of expertise, having been involved in the greater majority of all
hydroelectric plants built in Chile since 1985, as well as other major
electro-mechanical projects. See "Major Projects." A major part of the Company's
know-how is its understanding of the customer's needs and being able to offer
its customers goods and services that deviate only to the extent that such
deviations or substitutions make a bid more competitive. The Company believes
that in order to be awarded a bid, a bidder needs to know the end-user and
through the years, the Company has obtained this knowledge by working with the
major companies in Chile (both private and public) who request these bids. See
"Major Projects".
With a portion of the proceeds of this Offering, the Company will seek
to further grow its core business by expanding in North America and Europe as
well as to seek additional representation of U.S. and other North American based
companies for sales to be made in Chile. To facilitate this growth, the Company
has decided to establish permanent offices located in Boca Raton, Florida and
Spain. The Company believes that by establishing its presence in the U.S. and
Europe, it will be more competitive because it will have more direct access to
foreign manufacturers located in the U.S., as well as other countries in North
America and in Europe. For example, manufacturers such as Rapid Power, Inc.
(formerly represented exclusively by the Company), a U.S. based manufacturer of
rectifiers, are well known in the U.S. as manufacturers of energy-related
equipment, but to the Company's knowledge, many Chilean customers are not aware
of companies such as Rapid Power. As a result, many of these U.S. manufacturers
provide little, if any, documentation that explains their experience or the
performance of their products to companies requesting bids for Chilean projects,
and most Chilean companies will not qualify manufacturers in the list of bidders
without such documentation. Because of the Company's understanding of these
dynamics, it believes it is able to offer U.S. manufacturers as well as other
foreign manufacturers who wish to enter into the Chilean market, expertise that
other companies, who offer services similar to those of the Company, do not
possess.
MARKETING AND SALES
The Company's marketing and sales are presently managed by the
Company's management, in-house engineers and other technical employees. A
substantial amount of the marketing accomplished is by word of mouth, personal
visits and solicitations by the Company's management and employees. The Company
uses brochures and does limited advertising in trade journals and publications
in Chile. The Company will initiate a more formal sales and marketing program
upon the opening of its new offices in the U.S. and Spain.
HISTORY AND ECONOMIC OVERVIEW
From the inception of INA in 1986, the Company has transitioned itself
from small equipment sales into commercial work and procuring large turnkey
projects as a consultant to and representative of international consortiums.
Commencing in or about 1991, the Company has specialized in the energy and
mining sector, as well as in port installations for coal and other material
handling systems. In connection with these activities, the Company has also
acted as a project manager and a supplier of specialized engineering services.
Generally, all services related to engineering, design, consulting, supervising
and inspecting of construction projects have been initiated by INA and those
related to sale of equipment for construction projects have been initiated by
E&A.
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The Company has not experienced any significant differences between
dealing with governmental agencies or with private companies, whether national
or international, nor does the Company believe that the continuing trend of
privatization in Chile will have an adverse effect on its core business and, in
fact, will likely continue to affect its core business in a positive manner. The
Company's services have historically been provided to both private companies and
governmental agencies, with more than half of the Company's total revenues
coming from the private sector during 1995.
While prior to 1980 the greater majority of equipment for the mining
and the utilities industries in Chile was purchased from U.S. manufacturers, due
to the strength of the U.S. dollar in relationship to other currencies during
the 1980's, the cost of goods and services from the U.S. became less competitive
than that of other foreign manufacturers. Additionally, during the 1980's, many
U.S. manufacturers reduced their international initiatives which made it very
difficult to deal with U.S. manufacturers. However, due to both stabilization of
the U.S. dollar and the Chilean peso in the late 1980's, prices of U.S. produced
equipment became more competitive in Chile. Now with the possible inclusion of
Chile as a signatory to NAFTA, which reduces tariffs among member nations and
therefore increases trade, the potential for additional relationships between
the Company and North American companies may increase. Regardless of whether
Chile is included as a member of NAFTA, management believes that as a result of
the privatization and growth of the Chilean economy, foreign investment
(including from the U.S.) in Chile will continue to increase. To enhance its
success rate in both private and public tenders (bids), the Company is seeking
to obtain additional exclusive representation of U.S., Canadian and Mexican
manufacturers in specific market areas. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview." With the
establishment of a sales and
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marketing office in Boca Raton, Florida, which will initially include at least
one engineer and one marketing person, as well as an office in Spain, the
Company will more aggressively pursue opportunities with North American and
European manufacturers and other companies who wish to do business in Chile.
While the Company acknowledges that large international power and
utility companies have invested directly in Chile and that certain manufacturers
have established local offices in Chile, management believes that the Company's
growth should continue because of its local knowledge and experience with
Chilean projects. In particular, the Chilean economy is currently at a point
where several large international power and utilities companies including
Southern Electric Corp. (USA), Transalta Corp. (Canada), Iberduero S.A. (Spain)
and Andrade Gutierrez S.A. (Brazil) have invested directly in major
hydro-electrical power plants in Chile. The Company believes that because of its
experience in a majority of the hydro-electrical plants constructed in Chile
over the past 10 years, the Company has and will continue to work with these
large power and utilities companies by offering their engineering and sales
services and support. Furthermore, international companies will not necessarily
participate in smaller projects because of the economics of size and cost and
the Company will continue to aggressively bid for these projects.
Additionally, while several foreign manufacturers have established
offices in Chile, the Company continues to represent these manufacturers on a
case by case basis. For example, Babcock Wilcox Espanola hired E&A, as its
representative, to sell its 150 MW coal fired thermopower plant to Southern
Electric Corp. while maintaining a local office in Chile; Endesa S.A., the
largest electric utility in Chile, has hired INA to provide engineering services
for specialized projects in rock mechanics while maintaining their own in-house
engineering staff through INGENDESA, the wholly-owned engineering subsidiary of
Endesa S.A., of more than 350 engineers; and Biwater Ltd. (UK) has asked the
Company to represent them and become equity partners in the Bayesa Project. See
"Business-Strategy for Equity Participation and The Bayesa Project."
Moreover, the trend in the private sector has been to specialize in a company's
core business and subcontract for services and supplies from other companies
that may be more efficient in those areas. For example, the Company has been a
supplier of equipment, spare parts and engineering services for most of the
largest utilities in Chile (ENDESA, S.A., Chilgener S.A., Minera, Valparaiso
S.A., CREO (Cooperativa Regional Electrica de Osorno), and Edelnor S.A., which
are private companies; and Codelco (Corporacion Nacional del Cobre de Chile),
Colbun S.A., and Petrox S.A. (Electricidad del Aysen S.A.) which are
government-owned). See "Major Projects." Management believes that the trend
toward specialization, which includes segregating the generation, distribution
and transmission of electricity, enhances the role of specialized companies such
as E&A (as agents or representatives) and INA (as engineers). The ability of the
Company to adapt to the changes in the Chilean economy has permitted it to
develop new contacts with Westinghouse, Mitsubishi and Marubeni where the
Company has participated in four new combined power cycle plant projects in
Chile which are Renca 1 and 2 (Chilgener); Polpaico and Bocamina (Endesa) and El
Rodeo, now called Limache (Colbun). The Company is also working with
Westinghouse and Mitsubishi in a consultant capacity on projects in Argentina.
1995 PROJECTS
During 1995, the Company was involved, in a consultant or
representative capacity, in the following significant projects within their core
business:
RENCA I - CHILGENER
The second largest utility in Chile had a tender offer for a combined
cycle thermo-electric plant to be located in Santiago. Because of the scope and
complexity of this tender, Mitsubishi engaged the Company to act as their
consultant to advise as to the engineering interpretation of the tender
documents, the development of a financial strategy and to act as their
representative in all negotiations with Chilgener. Although Mitsubishi was not
successful in this tender, the Company received a substantial fee for their
consultancy. More importantly, this engagement marked the first time that the
Company was engaged by a customer whereby the fee was not contingent on the
success of the bid.
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LOMA ALTA
Empresa Electrica Hydrovevey Pehuenche, S.A., a subsidiary of Endesa,
the largest electrical utility in Chile, requested tender offers for the supply
and construction of a 80MW hydroelectric plant. The Company acted as the
representative for the Siemens Hydrovevey Consortium, who were the successful
bidders at approximately $16.7 million.
ENDESSA
The Company, in their representative capacity, successfully represented
a joint venture on behalf of Mitsubishi/Westinghouse in a tender offer to Endesa
S.A. for a 350MW natural gas-fired power plan to be installed 50 kilometers
south of Santiago. The total value of this award winning turnkey bid was
approximately $150 million.
PUERTO VENTANAS CEMENT HANDLING PROJECT
Cemento Melon, the leading cement company in Chile, called for tender
offers to build a cement and clinker unloading system in Puerto Ventanas, 120
miles from Santiago, with a stock capacity of 45,000 metric tons and a value of
$15 million. The contract has been awarded to General Electric Engineering
Services, for which the Company acted as consultant.
1996 PROJECTS
During 1996 the Company has identified and has submitted bids or
intends to submit additional bids on behalf of various foreign manufacturers
and/or consortiums. No assurance can be given, however, that the Company and the
companies it represents will be awarded any bids. The various projects are
listed below:
PILMAIQUEN S.A. (RUCATAYO PROJECT)
Pilmaiquen S.A. plans to construct a 60MW hydroelectric plant. The
Company, as representative of Norconsult, has presented a bid for engineering
services regarding the construction of a dam on the Pilmaiquen River. The
Company, in a representative capacity, will also present a bid on behalf of
Kvaener Turbine A.B., which will include one Kaplan Turbine. The total cost, as
a turn-key project, is estimated to be $20 million. The anticipated date of the
award for engineering services is August 30, 1996. The anticipated date for the
award of the turnkey project is December 15, 1996. Moreover, should Norconsult
and Kvaener be the successful bidders, then the Company would be in position to
provide civil works support and construction management services.
CHILQUINTA S.A. (TINQUIRIICA AND SAN JOSE PROJECTS)
Chilquinta S.A., an electric utility, is developing plans to build two
98MW and one 12MW hydroelectric power plants. The Company has been consulted by
potential investors from the U.S. who intend to develop a strategy and conduct
negotiations with Chilquinta regarding a joint venture relative to these
projects.
ANDRADE GUTIERREZ S.A. (CORTADERAL/ALTO PROJECT)
Andrade Gutierrez S.A. is developing a 400MW hydropower plant which is
currently in the pre-construction stage. The Company represented Kvaener Energy
A.S. for the sale of four (4) turbine generator sets and other relevant
equipment estimated to be $60,000,000 to $70,000,000. The project was awarded to
this group during September 1996. A contract was signed during September, 1996.
37
<PAGE>
COLBUN S.A. (LIMACHE COMBINED CYCLE POWER PLANT)
Colbun S.A. is building a combined cycle 350MW plant. The Company
represents Siemens Corp. in this bid of $140,000,000. Siemens Corp. was awarded
the bid by Colbun S.A. on May 8, 1996.
HACIENDA SAN LORENZO S.A. (MAMPIL Y PEUCHEN POWER PLANT)
Elecnor S.A., along with Iberdrola (Spain), have been awarded the bid
for the construction, operation and partial ownership of a group of small power
plants in the south of Chile. The Company has been invited to submit bids on
behalf of Kvaerner Turbin A.B., Siemens, and Ateliers Mecaniques de Vevey S.A.
for the equipment to be used in connection with the power houses. During
October, the electrical side of the project was assigned to Siemens and the
contract is pending the successful completion of contractual negotiations.
CEMENTO MELON S.A. (PUERTO VENTANAS CEMENT HANDLING PROJECT)
The Company successfully acted as a representative of General Electric
Engineering Services in this bid, which was awarded to General Electric during
1995. In addition, during 1996, the Company, as consultant, will provide local
project coordination and will continue to do so through completion of the
project which is estimated to be April 1997.
CENTRAL PUERTO S.A. (BUENOS AIRES, ARGENTINA)
Chilgener S.A. is the majority owner of Central Puerto S.A. Chilgener,
S.A. requested bids for the supply of a 350MW, gas-fired combined cycle
powerstation estimated to have a value of approximately $150 million. Siemens
requested the Company to be their representative for the presentation of this
bid. The bid was submitted on June 30, 1996 and the estimated date of award is
November, 1996.
CENTRAL COSTANERA S.A. (BUENOS AIRES, ARGENTINA)
This company, a subsidiary of Endesa S.A. of Chile, has called for bids
to be submitted by August 30, 1996 for equipment similar to that of Central
Puerto. The Company will represent Mitsubishi Corporation in this matter.
PUERTO PATACHE CONCENTRATE AND COAL HANDLING SYSTEM
Endesa is currently constructing a thermo-electrical plant to supply
energy to the Collahuasi Copper Mine. A port, both for unloading coal for the
thermo-electrical plant is going to be built and will be equipped with a coal
unloading crane, conveyor belts and a solid/liquid separation plan to treat the
concentrate. The project value is estimated to be $8 million. The Company has
successfully participated in the tender for a turnkey project representing
Babcock Wilcox of Spain ("BWE"). BWE was awarded this tender during October,
1996.
CREO - LA FLOR
A 12MW hydropower project upstream from the Capullo project, for which
the Company is currently providing all electromechanical equipment on a turnkey
project. La Flor has the same characteristics and dimensions as the Capullo
project for which the Company founded a consortium and was project coordinator.
The expected date of the award of the equipment is December 15, 1996, and the
anticipated completion date is May 30, 1998. The estimated value of this project
is $12 million.
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<PAGE>
MAJOR PROJECTS
The following table is a representative list of the main equipment,
turnkey projects and engineering sales made by the Company during the last 10
years.(1)(2)(3)
<TABLE>
<CAPTION>
Equipment or Gross Value
Name of Project Year Customer Supplier Service Sold Size US$ Millions
- --------------- ---- -------- -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Los Quilos 1984 Guardia Vieja General Electric Company of England Generator 12.6 MVA 3.6
Los Bajos 1984-85 Caemsa General Electric Company of England Generator 2.2 MVA 0.8
Los Morros 1985 Carbomet Ateliers Mecaniques de Vevey S.A. (of Hydro Turbine 0.8 MW 1.2
Switzerland) in consortium with Mecanica
de la Pena S.A. (of Bilbao, Spain)
Tocopilla Cranes 1986 Codelco Tocopilla Boetticher y Navarro, S.A. 2 Level Luffin 2x750 T/hr 4.6
Cranes
Trafo Andina 1986 Codelco Andina Sumitomo Corporation Transformer 25 MW 0.8
Colbun 1987 Colbun Machicura Boetticher y Navarro, S.A. Gate 17mx17m each 6.9
Int. Tocopilla 1987 Codelco Tocopilla Consonni, S.A.(4) Interchanger 0.8
mata Turbines
TG. Chuqui 1987-88 Codelco Chuqui- Westinghouse Electric Revamping of 3 gas 0.4
camata turbines
Submarine Cable 1988 Endesa Sumitomo Corporation Three Phases Cable 8.6
TG Methanex 1989 Capehorn Methanol Ruston Gas Turbines Inc., a subsidiary of Gas Turbine 6 MW 3.1
GEC, General Electric Company of England
TG Petrox 1989-90 Petrox Ruston Gas Turbines Inc., a subsidiary of 2 Diesel Turbines 2x3 MW 3.2
General Electric Company of England
Puerto Ventanas 1990 Chilgener Babcock & Wilcox Espanola S.A. 2 L. Luffin Cranes 2x750 T/hr 8.0
Cranes
Puerto Ventanas 1991 Chilgener Babcock & Wilcox Espanola S.A. in System of 8 Belt 3000m/1500 2.1
Conveyors consortium with INGEMAS S.A. Conveyors T/hr
Curillinque 1991 Pehuenche Hydro Vevey S.A. in consortium with Turn-key 85 MW 28.5
ABB, Asea Brown Bovery S.A.
La Florida 1991-92 Canal de Maipo Kvaerner Energy A.S.(5) 2 Hydro Turbines 2x9.5 MW 3.0
Aconcagua I 1992 Minera Valparaiso Kvaerner Energy A.S.(5) Hydro Turbine 56 MW 3.6
Aconcagua II 1992 Minera Valparaiso Kvaerner Energy A.S.(5) Hydro Turbine 33 MW 3.1
Mejillones I 1992-93 Edelnor(6) Consortium formed by Babcock & Turn-key 150 MW 150.0
Wilcox Espanola S.A. and Siemens A.G.
Capullo 1993 Creo Babcock Hydro S.A. Turn-key 15 MW 5.5
Pangue 1993-94 Endesa Kvaerner Energy A.S.(5) Turn-key 450 MW 69.3
Antofagasta 1994-95 Essan/Bayesa Biwater(7) Turn-key 600 1/seg 7.7
Renca I 1995 Mitsubishi Mitsubishi Combined Cycle TG Finance & 340 MW 120.0
Coordination
Loma Alta 1995 Pehuenche S.A. Siemens/Hidrorevey Hydropower Plant Turn-key 80 MW 16.7
Quillota 1995 Endesa/San Isidro/ Mitsubishi Combined Cycle Gas Powered Turn-key 370MW 126.0
Electric Plant
Limache 1995 Colbun/Mehueulo/ Siemens Combined Cycle Gas Turbine Coordinator 370MW 130.0
Santa Rosa, Peru 1995 Edegel Westinghouse Open Cycle Gas Turbine Turn-key 100MW 30.0
</TABLE>
- -------------------
(1) There are approximately 40 major utilities and mining companies in
Chile. Not all of these companies are noted above as the products
purchased by some of these companies have been inconsequential to the
Company's overall revenues. One of the reasons that the Company is
expanding its business to include an asset base is to make it less
dependent on the limited number of its major customers. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition
and Result of Operations" and "Business - Introduction."
39
<PAGE>
(2) Many of the bids awarded for the projects set forth above were awarded
to a group of bidders forming a consortium.
(3) As a general rule, for projects valued in excess of $100 million, the
Company will earn a commission from between 0.03% to 1% of the bid
price of the project; for projects valued between $20 million and $100
million, from 1% to 3.5%; and from $1 million to $20 million, between
3% and 5%. For sales less than $1 million, the commission ranges from
between 5% and 10%. Factors that determine the amount of commission
include the amount of engineering service provided and the difficulty
and sophistication of the project.
(4) Mr. Pedro P. Errazuriz, the President, CEO, and Chairman of the Board
of ADC, owns 53% of Consonni, S.A., a Spanish corporation.
(5) The Company is the exclusive agent for Kvaerner Energy A.S. in Chile
and Mr. Pedro P. Errazuriz had the power of attorney in Chile to
execute agreements and sign checks on behalf of Kvaerner Energy A.S.
which he resigned in May of 1996.
(6) One of the current directors of ADC was President of Edelnor from March
1990 through March 1994.
40
<PAGE>
<TABLE>
<CAPTION>
SALES OF ENGINEERING (DESIGN, ADVISING, SUPERVISION AND INSPECTION OF
CONSTRUCTION):
Gross Value
Project Year Customer Supplier Equipment or Service Sold US$ Thousand
- ------- ---- -------- -------- ------------------------- ------------
<S> <C> <C> <C> <C> <C>
Alfalfal 1985-91 Chilgener Norconsult(1)(2)(3) Engineering, supervision & inspection of a 160 MW power 14,000
International A.S. plant and 30 miles of tunnels systems
Pehuenche 1988 Pehuenche Norconsult(1)(2)(3) Design of the Inspection System for the construction of 340
International A.S. a 500 MW hydroelectric plant
1990 Pehuenche Norconsult(1)(2)(3) Design and inspection of measures in a case of rock 68
International A.S. explosion in their tunnel system
1992 Pehuenche Norconsult(1)(2)(3) Quality assessment and repair measures in the two Neyrpic 21
International A.S. Turbines (250MW each)
Pehuenche 1991 Bank of INA Study of the profitability of the Pehuenche Project 12
America
Maitenes 1988 Chilgener Norconsult(1)(2)(3) Study to modernize three power plants: Maitenes, Volcan 30
International A.S. and Queltehues in Maipo River Valley
Alfalfal II 1989 Chilgener Norconsult(1)(2)(3) Pre-construction study for a 400 MW hydropower plant 120
International A.S.
Mapocho River 1989 Biwater INA Study of the Mapocho contamination impact over Santiago region 70
Aconcagua 1992 Bank of INA Study of the profitability of Aconcagua Project 20
America
Thermal Plants 1989 Chilgener Raytheon Company Study to upgrade three old thermal plants called: Renca, 35
Study Ventanas and Laguna Verde
TG Chilgener 1989-90 Chilgener Raytheon Company Inspection and quality assessment of a Gas Turbogenerator 21
Canutillar 1990 Endesa Norconsult(1)(2)(3) Design and inspection of Underwater Lake piercing and 71
International A.S. intake for a hydropower plant
1993 Endesa Norconsult(1)(2)(3) Redesign of the tunnel reinforcements after some problems 65
International A.S. with their original design (10-mile tunnel)
Ortiga Tunnel 1990 Exxon Norconsult(1)(2)(3) Design and inspection of the construction of a tunnel 170
International A.S.
Conveyor Belts 1992 Chilgener INA Coordination and supervision for erection of a conveyor 60
Puerto Ventanas belt system and unloading facility
Mejillones 1993 Babcock INA Rate of Exchange analysis and risk coverage for a US$ 90M 12
Power Plant Wilcox loan for Edelnor S.A.
Capullo 1993-95 Creo INA Project management of the construction of a 15 MW plant 450
Pangue 1994-97 Endesa INA Coordination office and local engineering along the 389
construction of Pangue Power Plant, a project of US$
70M in investments
Pangue 1994-97 Endesa Norconsult(1)(2)(3) Coordination of Manufacturers 2,700
International A.S.
Melon Tunnel 1995 Endesa Norconsult(1)(2)(3) Ventilation system study 20
International A.S.
Alto Cachapoal 1995 Andrade Norconsult(1)(2)(3) Prefeasibility for Tunnel System 25
Gutierrez International A.S.
Rucue 1995 Colbin S.A. INA Basic and detail engineering for power house 70
Ventana 1996 GEC INA Coordination of manufacturers 160
</TABLE>
- --------------------
(1) The Company is the exclusive agent for Norconsult in Chile and Mr.
Pedro P. Errazuriz had the power of attorney in Chile to execute
contracts and sign checks on behalf of Norconsult which he resigned in
May of 1996.
(2) When the Company acts as the representative of Norconsult, the
commissions paid to the Company range from 4% to 5%.
(3) There are certain projects in which the engineering is performed by INA
for which the entire fee is paid directly to the Company.
41
<PAGE>
<TABLE>
<CAPTION>
MAJOR REPRESENTATIONS (EXCLUSIVE):
Name of Company Country of Origin Sector
- --------------- ----------------- ------
<S> <C> <C>
Accusonic, Inc./O.R.E. U.S.A. Ecology & water treatment
Intl. Inc.
Berdal Stromme A.S. Norway Engineering
Consonni S.A. Spain Energy and electricity
Indar S.A. (AEG License) Spain Electricity
Kvaerner Energy A.S. Norway Energy
Kvaerner Turbin A.B. Sweden Mech. equipment for energy
Linde A.G. Germany Mining processor, chemical plants
Norconsult
International A.S. Norway Engineering
Trandes S.A. Spain Electricity
Union Espanola de
Explosivos Spain Mining explosives
SELECTED REPRESENTATIONS (NON-EXCLUSIVE):
Name of Company Country of Origin Name of Project
- --------------- ----------------- ---------------
ABB-Air Preheater U.S.A. Ventanas Power Plant
ABB-Sweden Sweden Pangue
ABB-Switzerland Switzerland Curillinque
ABB-Solyvent Ventec Spain Various mines (Exxon)
AEG Germany Pangue
Babcock & Wilcox
Cranes Division Spain Ventanas Cranes
Babcock & Wilcox
Espanola, S.A. Spain Mejillones Power Plant
Baedeker y Navarro
(BYNSA) Spain Tocopilla Cranes
Combustion Engineering U.S.A. Chuquicamata
G.E.C. Large Machines U.K. Guardia Vieja
G.E.C. Mechanical
Handling U.K. Cement Storage and Conveyor
Ingemas Spain Ventanas Conveyor System
Marubeni Corp. Japan Copper Concentrates Distr.
Mitsubishi Japan Polpaico
National Drying
Machinery Co. U.S.A. Invertec
Siemens A.G. Germany Mejillones Power Plant/Loma Alta
Sumitomo Corp. Japan Submarine Cables
Westinghouse Electric Company U.S.A. Turbines/Edegel, Peru
</TABLE>
STRATEGY FOR EQUITY PARTICIPATION
Although, both E&A and INA have been profitable for more than the past
four years, the ability to expand their businesses and to increase profitability
is limited by the nature of their core service businesses, as their activities
depend exclusively on the number of bids that are awarded to each of them.
Income from these businesses requires that first, new projects are developed;
second, appropriate equipment is available to offer to the project at
competitive prices; and third and most important, that the businesses are
successful in selling the equipment and services. To expand the businesses of
E&A and INA the Company through consolidation may require higher fixed costs and
less flexibility. Alternatively, increasing the number of employees does not
necessarily mean increased sales and profitability to the Company.
Management believes that by establishing an equity position in certain
projects, it will be able to grow a more solid asset base which will provide the
Company with the following: (a) steady profitable growth; (b) stabilized cash
flow; and (c) the ability to further capitalize on the dynamics of the Chilean
economy. There are two emerging areas in which the Company intends to focus:
ecology-related projects, specifically in sewage treatment and water supply,
both of which are starting to be developed by and through private companies in
Chile and projects primarily undertaken by smaller electric utilities.
Therefore, in addition to its core business, the Company seeks to raise
sufficient capital to establish equity positions in certain projects. See "Use
of Proceeds."
42
<PAGE>
WATER SUPPLY AND WASTEWATER TREATMENT FACILITIES
While Chile has made significant economic gains over the past 10 years
in terms of foreign trade, development of electrical utilities and export of
agricultural and cellulose products, the efforts of the Chilean government to
take actions in the sanitary services and waste water treatment have been slower
in coming. The first steps toward waste water treatment commenced in 1987 when
the Ministry of Public Works called for bids to clean the Mapocho River Systems
(which account for 30% of all the waste water in Santiago), however a number of
political stalemates halted development in this area until 1993. It is the
announced intent of the Chilean government to privatize the water utility
industry. As part of standard bid documents, the purchaser of various water
utilities projects will be required to install water treatment facilities or
subcontract to companies, such as the Company, specializing in this area.
Since 1993, Chile has commenced an ecological-oriented development that
includes not only waste water management, but also other areas of pollution
control, committing large sums of money, particularly for the mining and oil
refinery sector owned by the government. It is estimated that Corporacion del
Cobre (Codelco), the state-owned copper mine company which owns Codelco Mining
will spend $500 million over five years; Enami, the state-owned minerals
refining company, will spend $200 million over five years; and the larger
sanitary-related companies such as EMOS, in charge of the water system for
Santiago, should spend $500 million to $1 billion over the next 10 years.
Additionally, other areas close to Santiago and other major cities, are now
starting to develop plans to develop water resources and install wastewater nets
and treatment plants. In connection with this growth, the Chilean government has
issued Decree Law 351 that regulates the constitutional right of a citizen to
live in an environment free of contaminants and in particular, addresses issues
concerning potable water.
Realizing that there appeared to be an emerging business in water
purification and treatment due to the Chilean government's announced plans to
privatize the water utilities and its initiatives to ensure clean water and air
for its citizens, the Company sought relationships with foreign entities that
have experience in water purification. Effective January 1993, the Company
entered into a representation agreement with Biwater, a major international
company engaged in waste water treatment and facilities whose principal office
is located in Surrey, England to develop one project in the waste water
treatment in the North area of Chile.
In connection with this Agreement, the Company researched and will
continue to research and develop the market in the north of Chile for both its
own services and those of Biwater's in Chile. The results of this research
concluded that Chile was initially slow to react to its citizen's needs for
better sanitary conditions. Additionally, based on its research, the Company
believes that an investment of up to $2 billion by both the private and public
sector over the next 10 years will be necessary in order to bring the sanitary
facilities up to international standards (See discussion above).
BAYESA PROJECT
Late in 1993, Corporacion de Fomento ("CORFO"), the Chilean agency for
the development of the country, decided to commence with three new waste water
treatment facility projects which would place the treatment of water and the
sale of reclaimed water in the private sector by means of a subcontract through
a public entity. In April 1994, CORFO, through Empresa de Servicios Sanitarios
de Antofagasta, S.A. ("ESSAN"), a wholly-owned subsidiary of CORFO in charge of
the water system for the Province of Antofagasta, called for public bids to
construct and manage a waste water treatment facility (the "Bayesa Project").
The Company, on behalf of Bayesa, S.A., a consortium owned by Biwater (90%) and
A&E (10%), was the successful bidder for the Bayesa Project. The contract
included design, construction and management of the waste water facility, as
well as the right to sell reclaimed industrial grade water. During 1995 the
Company acquired a 45% interest in A&E, which translates into a 4.5% interest in
Bayesa from Invdemco and with a portion of the proceeds ($141,750) will acquire
A&E shares from Invdemco an additional 22.5% interest in A&E, which will
translate into an additional 2.25% interest in Bayesa The Company may also
purchase additional equity in Bayesa from Biwater depending on the cost of the
shares compared to other potential projects. See "Use of Proceeds" and "Certain
Transactions."
43
<PAGE>
The agreement dated September 1, 1994, between ESSAN and Bayesa is
divided into three separate, although related, segments. The first is the
construction of an interceptor of 3.6 miles of waste water recovery pipelines,
pumping stations and a treatment plant connected to an emergency sea outfall.
During this segment, Bayesa will act as a contractor, performing construction
services for ESSAN. Income from ESSAN to Bayesa is based on 150 monthly
installments, commencing in January 1995, of approximately $129,000 per month.
The second part of the contract consists of the operation of the waste
water disposal and treatment system. Income from ESSAN to Bayesa will be in
fixed monthly installments of approximately $40,000 for a period of 30 years,
plus a variable monthly rate based on the amount of treated water of $18.60 per
1,000 cubic meter. The third segment of the contract is the sale of treated
(purified) waste water for irrigation and industrial purposes. The Company
believes that upon completion of the pipelines and pumping station (estimated to
be 14-16 months), Bayesa will be able to sell the industrial and agricultural
grade water for $.60 per cubic meter. The drinkable water price is $1.10 per
cubic meter.
Bayesa has signed a letter of intent with the Antofagasta Municipality
to provide water to local parks. Additionally, the Chilean Ministry of
Agriculture is planning a new farming facility in this area which may purchase a
significant amount of the industrial grade water to be produced by the Bayesa
Project. However, there can be no assurance that Bayesa will be able to sell all
the treated water for farming or industrial purposes that the sewage waste water
facility of Antofagasta will be able to provide.
44
<PAGE>
Additionally, the Company believes that anticipated profits to Bayesa
from the sale of reclaimed water may also be significant because of the location
of the Bayesa Project in Antofagasta. Antofagasta is a seaside city
approximately 1,000 miles north of Santiago. It serves as the beach resort and
the port for the Chuquicamata copper mine, currently the world's largest open
pit copper mine, and many other large mines located approximately 200 miles to
the east in or around the city of Calama. The Antofagasta region is primarily
desert and therefore receives very little, if any, precipitation. The region,
however, has had significant growth, more than doubling its mining activity and
population over the past 10 years, and has an anticipated population growth rate
of 3-5% per year. This population growth rate is directly attributable to the
increased economic development in the area. In addition to the continual
expansion of the Chuquicamata mine, there are now more than three additional
copper mines under development, which are anticipated to be similar in size to
the Chuquicamata mine.
While the Chilean government is currently pursuing the implementation
of pollution-control technologies in new state-owned and private mining
companies to minimize the need for end-of-pipe solutions such as the Bayesa
Project, these new technologies are geared to the mines themselves and not to
the waste resulting from the cities that may surround these mines. Therefore,
the Company believes that there will be a continued population growth that will
create an increased need for more water which will be available through the
Bayesa Project, and other future waste water and potable water projects on which
the Company intends to bid.
The Bayesa Project will terminate after 30 years of operation as the
written agreement between the parties foresees the transfer of all installations
to ESSAN for no consideration. The Company took the reversion of the Bayesa
Project back to ESSAN into consideration when deciding to take an equity
position in the Bayesa Project, and concluded to that it made economic sense to
invest in the Bayesa Project because of its potential profitability during the
30-year term of the contract. The Company intends to participate, in a joint
venture with Biwater, in bidding for the full property of ESSAN (or a percentage
thereof), once the Chilean government and Parliament have determined the method
to privatize the sanitary section of the government. The ability of the Company
to participate in this bidding process will depend on its future cash flow.
Bayesa typically will require the services of E&A for future
engineering studies and administrative decisions related to the economy of the
Bayesa Project, as well as to supply equipment and spare parts for the project.
Additionally, Bayesa will require the support of E&A to sell treated water and
will pay E&A a commission for these sales. There is no written obligation from
Bayesa to continue to use E&A for these services. Nonetheless, because of its
position as an equity participant in Bayesa, the Company
45
<PAGE>
does not foresee any change in the current oral agreements between Bayesa and
E&A. See "Use of Proceeds" and "Certain Transactions."
IQUIQUE WATER PROJECT - "AGUAS DE IQUIQUE"
The city of Iquique is located in the middle of a desert area, 1,100
miles north from Santiago. It is a fast growing city due to the copper, gold,
Nitrate and Iodine mining projects that have been and are being constructed in
the area. Water sources are as far away as 150 miles inland in the Andes
Mountains. The Chilean Military owns a property 25 miles away from Iquique. This
property contains underground streams that could produce 100 liters per second
of water. The military, however, is precluded from any commercial activities.
The Company is presently in negotiations with the Army to acquire the rights to
the underground water. The basis of the potential contract is a concession for
25 years. During that period, the Company will be able to commercialize the
water, selling it for housing or industrial purposes. The Company will pay the
Army a tariff for each cubic meter sold (around .05 USD/m3). The Company will
perform the works and provide the investment needed to carry the water to the
consumption centers (digging wells, pumping, eventually treatment, piping).
The current price of the water in Iquique is around $0.80 USD per cubic
meter. Annual production is estimated to be $1,900,000. Net profit to the
Company after taxes from this project could be more than $400,000 annually.
Additionally, if more water resources are found in the Army's land, the Company
intends to negotiate an option to include these sources in the future contract
at the same price and conditions.
The Company is currently in the process of studying the cost of the
project in order to determine if it will proceed. If the Company makes a
determination to proceed and depending on costs, it intends to seek additional
equity partners for this project.
In addition to those projects referenced above, Chilgener, the second
largest electrical generating company in Chile, is developing a strategy to
diversify its investments. Among the key areas that it is seeking to diversify
into are water treatment, sewage treatment and water supply. In this regard,
Chilgener has engaged the Company as a consultant to study various possibilities
in this area. The Company has identified the following geographic areas for
Chilgener.
Antofagasta has a population of 250,000 in a desert area 1,000 miles to
the north from Santiago. It is the center of the largest copper mining projects
in the country and, as a consequence of the very active investments in this
field, is growing at rate of 3% to 5% annually. The need for water resources,
water supply and distribution and additional sewage treatment is anticipated to
be very critical in the next few years and is seen as a significant business
opportunity.
Colina is one of the main suburbs for Santiago. Currently, many first
class real estate projects are under development in this area. It is expected
that, in 10 years the population will grow to 600,000. Water is currently a
limitation and is expected to become a major problem in the near future. The
Company has been asked to analyze a water business in this sector for Chilgener
and will be interested in participating in that business, if one develops.
A similar situation has occurred in Temuco, the fastest growing city in
Chile. In 1995, the population increase in Temuco was 23% and currently it has
around 300,000 inhabitants. Chilgener has requested the Company to investigate,
a water supply project that could be developed in that city.
These studies have recently begun and therefore while the Company would
consider a joint venture and equity participation with Chilgener on any of these
possibilities, it will require more research and analysis.
ESSAT (ARICA WATER SUPPLY)
The city of Arica, Chile's most northern city, has a potential water
shortage of between 100 and 200 liters per second. However, the local farmers of
the Azapa Valley situated in close proximity to Arica,
46
<PAGE>
have between 400 and 600 liters per second of industrial grade water for farming
that could be treated by Essat (the local water authority). The Company is
organizing a plan to build a treatment plant, negotiate an agreement among the
parties and a negotiate a contract with Essat to buy approximately 200 liters
per second of potable water from the farmers and replace it with treated water
from the city of Arica. Biwater, is expected to participate in this project. The
anticipated date of the award is October 31, 1996, and the anticipated date of
completion is March 30, 1998. If awarded the bid, the Company would provide
engineering services as well as a fee. Additionally, the Company would consider
purchasing an equity position in the project, which terms have not been
determined. There are no current agreements at this time.
PROJECTS RELATED TO ELECTRICITY
EDELAYSEN S.A.
During 1983, CORFO (the state-owned development corporation)
incorporated Empressa Electrica de Aysen, S.A. (Edelaysen) to consolidate
various electric grounding and distribution systems located in the south of
Chile, into one company. Today, Edelaysen S.A. has a present demand of 9,000 KW
and more than 19,000 customers. CORFO intends to sell this utility by public
tender on or about August 30, 1996. The Company is currently reviewing various
financial and other documents and anticipates that it will render a bid to
purchase this utility. There cannot, however, be any assurances that the Company
will be the successful bidder.
COMPETITION
The Company believes that each aspect of its business is competitive
and that competition is based not only on price but also on quality of service.
The Company's competitors include a number of international companies with local
offices in Santiago, Chile, many of which are larger and better capitalized than
the Company. While a majority of these larger competitors may bid on the same
projects as the Company, and although there can be no assurances that the offers
will be competitive, the Company believes that it has and will continue to
participate effectively in the bid process.
Most of the Company's competitors are Chilean based intermediaries with
some "local" know-how with respect to the Chilean market, but who do not
actively engage in the electric utility, mining and materials handling
industries in Chile. More typically, the Company's competitors have local
offices which consist of a small administrative and sales staff who, in most
cases, are not engineers. To the Company's knowledge, these competitors rely on
the engineering expertise of local subcontractors (such as the Company) or on
engineers who are not Chilean-based. On the other hand, the Company's staff is
comprised of Chilean-based civil and industrial engineers who have an
understanding of the intricacies of bid documents, the nuances of Chilean
projects, and who have the ability to source local manufacturers to complement
the equipment to be purchased from foreign manufacturers, in order to present a
competitively priced package. Additionally, the Company's engineers are also its
sales force, so the Company is able to provide continued sales and engineering
support throughout the entire scope of the project.
The Company believes it has demonstrated its ability to seek and enter
into relationships with those manufacturers whose products are most
competitively priced, not only in terms of dollars, but also in terms of overall
product efficiency and support for specific projects. Moreover, the Company has
been successful in putting together consortiums of manufacturers, whereby it has
been able to quote on the large multi-faceted projects. Nonetheless, the Company
believes that each area of the new projects and investments in which the Company
intends to become involved is highly competitive. Its competitors may be larger,
better capitalized, may have more experienced management, and may have greater
access to resources which may be deemed necessary to produce a competitive
advantage and there can be no assurance that the Company will continue to
operate at its current level, enabling it to be profitable.
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GOVERNMENT REGULATIONS
GENERAL
The Company's business is subject to the full range of governmental
regulation and supervision generally applicable to companies engaged in business
in Chile, including labor laws, social security laws, public health,
environmental laws, securities laws and anti-trust laws.
ENVIRONMENTAL REGULATIONS
Bayesa's agreement with the Municipality of Antofagasta for the Bayesa
Project provides that certain water, once treated at the Bayesa Project, will be
disposed of in the ocean. In order for the Bayesa Project to discard this water
into the ocean, the amount of contaminants remaining must meet the requirements
mandated by Chilean environmental laws.
FOREIGN INVESTMENT LAWS AND REGULATIONS
The Chilean Constitution establishes that any Chilean or foreigner may
freely develop any activity in Chile so long as the activity does not contravene
existing laws dealing with public morals, public safety or national security. It
also establishes the principle of non-discrimination, thus guaranteeing foreign
investors equal protection under Chilean law. Additionally, Chilean law
prohibits any discretionary acts by the Chilean government or other entities
against the rights of persons or property in derogation of this principle.
Foreign investors may transfer capital and net profits abroad. There are no
exchange control regulations which restrict the repatriation of the investment
or earnings except that the remittance of capital may take place starting a year
after the date the funds were brought into the country, but net profits can be
remitted at any time. Therefore, equity investments in Chile by persons who are
not Chilean residents follow the same rules as investments made by Chilean
citizens.
These principles are the basis for the Foreign Investment Law of 1974
(commonly known as DL 600) by which foreigners are guaranteed to receive equal
treatment access to all segments of the economy subject to a limited number of
internationally-accepted exceptions. Based on DL 600, the foreign investor and
the government sign a legally-binding investment contract which may only be
modified by mutual consent. The contract sets forth the current law as it
relates to the specific investments by that investor in Chile. Thus, the
investor is protected against any subsequent changes in the law which could
adversely affect the investor or his investments in Chile. Although the Chilean
Government has been successful in keeping this principle in place for the last
21 years, there is little information regarding the unilateral breach of an
investment contract by the Government and there can be no assurances that a
breach by the Government will not occur in the future or that it would not
adversely affect the rights of the Company to do business in Chile. Moreover,
while there has been no precedent that political changes had determined changes
in these rules, no assurances can be made that such changes will not occur in
the future. The Company intends to enter into an investment contract with the
Government of Chile on or around the closing of this Offering.
CONTROLS ON FOREIGN INVESTMENTS
Equity investments in Chile by persons who are not Chilean residents
follow the same rules as the investments of the citizens of the country. Foreign
investors may transfer abroad capital and net profits that they generate. There
are no exchange control regulations which restrict the repatriation of the
investment or earnings therefrom except that the remittance of capital may take
place starting a year after the date the funds were brought into the country,
but net profits can be remitted at any time. Although there has been no
precedent that political changes had determined changes in these rules, no
assurance can be given that this situation will not occur in the future.
EMPLOYEES
As of June 15, 1996, the Company employed 18 full-time employees, nine
of whom are managers/engineers and nine of whom are administrative staff.
Employees of the Company are not represented by labor unions. The Company
considers its relationship with its employees to be good.
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PROPERTIES
The Company leases a 3,300 square foot office in Santiago, Chile
pursuant to a month-to-month lease at a monthly rate of $4,351.20 per month.
The Company currently owns a house located near Villarrica in the south
of Chile situated on approximately 13.5 acres. the Villarrica Property. As of
March 31, 1996, the book value of the 13.5 acre Villarrica Property was
$1,212,063 and had outstanding mortgages of approximately $700,000. The Company
intends to sell the Property to a related entity (Invdemco), and will satisfy
the outstanding mortgage on the property upon the closing of this Offering. See
"Use of Proceeds" and "Certain Transactions."
The Company, through INA, also owns a farm located in Villarrica
consisting of two lots of an aggregate of approximately 107.75 acres. The farm
is used as a guarantee for bank loans and other financing operations.
LEGAL PROCEEDINGS
The Company is not a party to any pending litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of ADC are as follows:
Name Age Position
- ---- --- --------
Pedro Pablo Errazuriz 59 President/Chief Executive Officer/Chairman of
the Board
Jose Luis Yrarrazaval 56 Chief Financial Officer/Treasurer/Secretary/
Director
Alberto Coddou 57 Director
Sergio Jimenez 60 Director
Claude Mermier 60 Director
PEDRO PABLO ERRAZURIZ has served as Chief Executive Officer and
Chairman of the Board of Directors of Andean Development Corporation ("ADC")
since October 19, 1994, and its President since January 11, 1995. He has also
served as the President and sole Director of Andean Export Corporation since
February 9, 1995. Mr. Errazuriz founded Ingenieria Norconsult Andina, the
predecessor company of INA in 1986 as a continuation of his activities in the
sales of equipment, project management and procurement for electricity
generation projects and has served as its president since its inception and
through March 20, 1995. In 1991, Mr. Errazuriz founded E&A and served as its
president since its inception through March 20, 1995. Mr. Errazuriz has also
served as Chairman of the Board of Kvaerner Chile S.A., a subsidiary of Kvaerner
A.S., a Norwegian-based manufacturer of electrical and mechanical equipment)
since 1992 and as the exclusive agent for Kvaerner Turbin A.B. (Sweden) since
1994. Since 1986, Mr. Errazuriz has acted as an exclusive agent in Chile for
Norconsult. Mr. Errazuriz is a civil engineer, having received his engineering
degree from the Catholic University of Chile in 1959.
JOSE LUIS YRARRAZAVAL has been a member of the Board of Directors of
ADC since March 20, 1995 and its Chief Financial Officer, Treasurer and
Secretary since March 20, 1995. He also serves as Chief Executive Officer and a
Director of INA and Chief Financial Officer, Treasurer, Secretary and a Director
of E&A since March 20, 1995. Since November 1993, Mr. Yrarrazaval has served as
the general manager of both E&A and INA, which responsibilities include all
financial matters and personnel management. From April 1988 through October
1993, Mr. Yrarrazaval served as the project manager for INA, supervising the
projects of INA. From 1973 through 1988, Mr. Yrarrazaval was a partner and
technical manager of a construction company, including the construction of
industrial plants, buildings, and housing developments. He also acted as
supervisor in the construction of agro-industrial and cold storage plants. Mr.
Yrarrazaval has a Civil Engineering and Construction Degree from the State
Technical University in Santiago, Chile.
ALBERTO CODDOU has served as a member of the Board of Directors of the
Company since March 20, 1995, and as a member of the Board of Directors of E&A
since March 20, 1995. Mr. Coddou has been a partner with the law firm of
Figueroa & Coddou in Santiago, Chile since 1965. He has also been an Assistant
Professor of Law at the University of Chile, School of Law from 1959 through
1982. In May 1995, Mr. Coddou was appointed Chairman of the Board and Legal
Representative of Consorio Periodistico de Chile S.A., the owners and editors of
a Chilean newspaper called La Epoca.
SERGIO JIMENEZ has served on the Board of Directors of ADC since March
20, 1995. As of June 1995, Mr. Jimenez has been appointed as a member of the
Board of ENAP (Empresa Nacional del Petroleo) the Chilean oil company owned by
the government. Mr. Jimenez served as President of Edelnor S.A. from March
1990 to March 1994. Edelnor, which generates and transmits electricity in the
northern regions of Chile, was a subsidiary of CORFO, the holding company of
Chilean state-owned companies before it was privatized in 1994. From 1990
through 1992, Mr. Jimenez was President and Chief Executive Officer of Metro
S.A., also a subsidiary of CORFO, which operates the Santiago subway system. Mr.
Jimenez is also a partner and Managing Director of Consultora Jimenez y Zanartu
Limitada, which consults on engineering projects for segments of the Chilean
government related to public works. Mr. Jimenez is a civil engineer, having
received his degree from the University of Chile, in Santiago and has a post
graduate degree in project evaluation from the University of Chile.
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<PAGE>
CLAUDE MERMIER has served on the Board of Directors of ADC since March
20, 1995. Mr. Mermier has served as the Chairman of the Board of INA since March
20, 1995. Mr. Mermier has also served as Chairman of Igenor Ingenierie & Gestion
S.A., a principal shareholder of the Company, since its inception in March 1992.
Since 1979, Mr. Mermier has been the President of Compagnie Financiere pour le
Commerce Exterieur S.A., a Swiss company involved in property development
throughout Europe.
Directors are elected at the Company's annual meeting of shareholders
and serve for one year or until their successors are elected and qualified.
Officers are elected by the Board of Directors and their terms of office are,
except to the extent governed by employment contract, at the discretion of the
Board. All of the Company's executive officers are full-time employees of the
Company. The Company intends to pay non-employee directors a fee of $1,000 per
meeting attended, and will reimburse all directors for their expenses in
connection with their activities as directors of the Company. Directors of the
Company who are also employees of the Company will not receive additional
compensation for their services as directors. The Company intends to purchase
directors and officers insurance to the extent that it is available and cost
effective to do so.
The Company has agreed that after the effective date of this
Prospectus, the Representative may designate a person to attend meetings of the
Board of Directors. The Company may elect additional Board Members following the
completion of this Offering.
Upon completion of this Offering, the Company will establish separate
audit and compensation committees consisting of at least two independent
directors.
DIRECTORS AND OFFICERS OF THE SUBSIDIARIES
JUAN ANDRES ERRAZURIZ, age 28, has been a member of the Board of
Directors of INA since March 20, 1995, and its Treasurer and Secretary since
March 20, 1995. He has served as a member of the board of directors of
Inversiones Tiempo Libre S.A. (ITL) since March 1995, the company which
presently owns the Macul Project. Mr. Errazuriz joined INA in October 1993 as
Development Manager and as a coordinator between the different areas and
activities. Before joining the Company, Mr. Errazuriz worked as a manager of
Chile's largest pulp and paper company (CMPC), executing feasibility and market
studies for the company's projects from May 1992 through September 1993. He has
prepared economic and financial feasibility studies for several companies in
Chile and in Spain. From July 1991 through May 1992, Mr. Errazuriz was employed
by Proyectos y Equipos, S.A., an affiliate of the Company as its marketing and
strategy director. Mr. Errazuriz graduated from Catholic University of Chile in
1991, with a Civil Engineering Degree, specializing in industrial engineering
systems, administration and finance.
BERTA DOMINGUEZ, age 57, has served as the Chairman of the Board of E&A
since 1988 and its Chief Executive Officer since March 20, 1995. Mrs. Dominguez
has served as a Director of Errazuriz y Asociados Arquitectos Limitada, one of
the principal shareholder of the Company since 1990.
Mr. Juan Andres Errazuriz is the son of Mr. Pedro P. Errazuriz, the
Chief Executive Officer, President, and Chairman of the Board of the Company and
Mrs. Berta Dominguez, the Chairman of the Board and CEO of E&A. Mrs. Berta
Dominguez is the wife of Mr. Pedro P. Errazuriz and the mother of Juan Andres
Errazuriz.
KEY EMPLOYEES
GONZALO CORDUA, age 36, has been operations vice president in charge of
all new projects undertaken by INA since July 1993. Since March 1995, he has
served as president of Inversiones
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Tiempo Libre S.A. (ITL), the company which presently owns the Macul Project.
From December of 1992 through July 1993, Mr. Cordua was manager for industrial
cooperation of Fundacion Empresarial Communidad Europea-Chile ("FECEC"), where
his duties included the company's services to European business in Chile and to
Chilean business in Europe. From August 1991 through November 1992, Mr. Cordua
worked as an expert for FECEC in industrial cooperation as part of the team in
charge of designing and implementing the project. From June 1990 through July
1991, he worked for the Agencia de Cooperacion Internacional as an expert in
industrial cooperation where he was in charge of cooperation and development
programs for the Chilean productive sectors. From August 1988 through May 1990,
Mr. Cordua was employed as a project manager for INA. Mr. Cordua received his
B.S. in Civil Engineering from the University of Chile, his M.S. in Civil
Engineering from the University of California at Berkeley, his Masters of
Engineering in Water Resources Management from the University of California at
Berkeley and a degree in Business Administration from the Fonds Leon A. Bekaert,
Brussels, Belgium.
JUAN PHILLIPS, age 51, has been Technical Vice President and manager of
engineering department of E&A. His duties have included project director of the
Capullo Hydroelectric Power Generating Plant as well as procurement of equipment
for that project. He also organized the liaison office for the Pangue Hydropower
Plant equipment supply. From 1986 through 1989, Mr. Phillips was project manager
for INA. Mr. Phillips received his degree in Civil Engineering from the Catholic
University in Santiago, Chile.
EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The following table sets forth compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and each executive officer whose
compensation exceeded 60,000 for the years ended 1995. The Company did not grant
any stock options, restricted stock awards or stock appreciation rights or make
any long-term incentive plan payments during 1995 and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Other Annual
Name and Principal Position Year Salary($)(1)(2) Bonus ($) Compensation($)
- --------------------------- ---- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Pedro P. Errazuriz 1995 $97,801(3) $92,000 $79,104(4)
Chief Executive Officer, 1994 $90,000 $78,481(5) $92,112(3)
President, Chairman
Jose L. Yrarrazaval 1995 $56,886(3) $30,000 $17,700(6)
Chief Financial Officer/ 1994 $58,077(3) $30,000 $17,700(6)
Treasurer/Secretary/Director
Juan Andres Errazuriz 1995 $48,000(3) $12,000 None
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Gonzalo Cordua Hoffman 1995 $48,000(3) $16,000 None
Juan Phillips Davila 1995 $48,000(3) $16,000 None
</TABLE>
(1) Payment of the compensation to the persons set forth above was
apportioned among the following subsidiaries and affiliated companies
as follows: E&A - 35%; INA 25%; Electromecanica Osorno S.A. - 20%, a
Chilean corporation currently owned by Errazuriz y Asociados
Arquitectos Ltda. ("EAA") and by Igenor, Ingenierie et Gestion, S.A.
("Igenor"), each principal shareholders of the Company; and Proyectos y
Equipos, S.A. a Chilean corporation owned by EAA, Igenor, and a family
member of Mr. Pedro P. Errazuriz, the Chief Executive Officer,
President and Chairman of the Board of ADC. See "Principal
Shareholders." The proportions established as compensation to be paid
by the different companies was arbitrarily determined, intended to
minimize tax payments and to indicate the involvement of the Company's
executives in all related companies. Upon the closing of this Offering,
the Company's management will be employed by ADC.
(2) The gross salary includes social security and retirement benefits.
Social Security in Chile was established as a private system, that
requires all companies to retain 20% of the gross salaries of its
employees which is used to pay both Administrators of Pension Funds
Companies ("AFP") and Institutions of Previsional Health ("ISAPRE").
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The allocation of this 20% to each service is as follows:
(a) 10% to the AFP: This amount is deposited in an individual
interest-bearing account of each employee to cover their
retirement. In Chile, the age of retirement is 60 years in
case of women and 65 years for men.
(b) 3% to the AFP: This amount covers any partial or permanent
disability and, in the case of death, will provide a monthly
amount to the deceased's spouse. The amount paid corresponds
to 70% of an employee's average salary, based upon the last 10
years of the employee's life.
Both items (a) and (b) are limited to approximately $1,700 per month.
(c) 7% to the ISAPRE: This amount covers medical fees,
hospitalization and clinical examinations, although in many
instances it may be necessary to pay additional costs for
health care.
Chilean law requires the payment of one month salary for each year
worked by the employee when he is dismissed. When the employee
terminates his or her employment, no compensation is legally required.
(3) Paid in full from the Company to the employee.
(4) Includes an annual allowance of $15,000 for automobile costs and
maintenance; an annual housing/vacation allowance of $10,500; $7,200
for domestic employees; and $46,404, based upon a percentage of profit
of the Company. This profit percentage was based on 2% of the total net
profits of all related companies for 1995, calculated to Chilean
accounting standards. In the future, all accounting standards will be
pursuant to U.S. GAAP.
(5) Includes an annual allowance of $15,000 for automobile costs and
maintenance; an annual housing/vacation allowance of $10,500; $7,200
for domestic employees and $45,781 based upon a percentage of profit of
the Company for 1994.
(6) Includes $15,000 car allowance.
EMPLOYMENT AGREEMENTS
On March 15, 1996, the Company entered into employment agreements with
Messrs. Pedro P. Errazuriz, Jose Luis Yrarrazaval, Juan Phillips and Gonzalo
Cordua. Each of the employment contracts are for one year. The salaries and
social security benefits will not be less than those for fiscal year 1995, which
shall be determined by the Company's Board of Directors. Additionally, these
individuals will also be entitled to a bonus, as determined by the Company's
Board of Directors.
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLANS
Under the Company's Stock Option Plan (the "Stock Option Plan") and
Directors Stock Option Plan (the "Directors Plan"), 175,000 shares of Common
Stock and 75,000 shares of Common Stock, respectively, are reserved for issuance
upon exercise of options. The Plans are designed to serve as an incentive for
retaining qualified and competent employees and directors. Both the Stock Option
Plan and the Directors Plan apply to Andean Development Corporation and each of
its subsidiaries. No options have been issued under the Plans.
The Company's Board of Directors, or a committee thereof, administers
and interprets the Stock Option Plan and is authorized to grant options
thereunder to all eligible employees of the Company, including officers and
directors (whether or not employees) of the Company. The Stock Option Plan
provides for the granting of "incentive stock options" (as defined in Section
422 of the Internal Revenue Code), non-statutory stock options and "reload
options." Options may be granted under the Stock Option Plan on such terms and
at such prices as determined by the Board, or a committee thereof, except that
in the case of an incentive stock option granted to a 10% shareholder, the per
share exercise price will not be less than 110% of such fair market value. The
aggregate fair market value of the shares covered by incentive stock options
granted under the Plans that become exercisable by a grantee for the first time
in any calendar year is subject to a $100,000 limit.
The purchase price for any option under the Stock Option Plan may be
paid in cash, in shares of Common Stock or such other consideration that is
acceptable to the Board of Directors or the committee thereof. If the exercise
price is paid in whole or in part in Common Stock, such exercise may result in
the issuance of additional options, known as "reload options," for the same
number of shares of Common Stock surrendered upon the exercise of the underlying
option. The reload option would be generally subject to the same provisions and
restrictions set forth in the Stock Option Plan as the
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<PAGE>
underlying option except as varied by the Board of Directors or the committee
thereof. A reload option enables the optionee to ultimately own the same number
of shares as the optionee would have owned if the optionee had exercised all
options for cash.
Only non-employee directors are eligible to receive options under the
Directors Plan. The Directors Plan provides for an automatic grant of an option
to purchase 3,000 shares of Common Stock upon a person's election as a director
of the Company and an automatic grant of an option to purchase 3,000 shares of
Common Stock at each annual meeting through which a director's term continues.
Upon consummation of this Offering, the Company will grant to each of Messrs.
Coddou and Mermier options to purchase an aggregate of 6,000 shares of Common
Stock under the Directors Plan at an exercise price equal to the initial public
offering price of the Common Stock offered hereby.
Options granted under the Stock Option Plan will be exercisable after
the period or periods specified in the option agreement, and options granted
under the Directors Plan are exercisable immediately. Options granted under the
Plans are not exercisable after the expiration of five years from the date of
grant and are not transferable other than by will or by the laws of descent and
distribution. The Plans also authorize the Company to make loans to optionees to
enable them to exercise their options.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Florida Business Corporation Act (the "Corporation Act") permits
the indemnification of directors, employees, officers and agents of Florida
corporations. The Company's Articles of Incorporation (the "Articles") and
Bylaws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by the Corporation Act. Insofar as indemnification
for liabilities arising under the Act may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable. See "Principal Shareholders" for a listing of the
shareholders of EAA and Igenor.
CERTAIN TRANSACTIONS
During 1995 the Company acquired a 45% interest in A&E, which
translates into a 4.5% interest in Bayesa from an affiliate of the Company,
Invdemco, a Chilean investment company. The Company has also agreed to purchase
an additional 22.5% interest in A&E from A&E shares held by Invdemco, which
translates into an additional 2.25% interest in the Bayesa Project for $141,750.
The shareholders of Invdemco are Mr. Pedro P. Errazuriz (50%), President, CEO,
and Chairman of the Board of ADC; Mr. Errazuriz' wife (45%), Berta Dominguez;
and Berta Errazuriz (5%), a daughter of Mr. Errazuriz and Mrs. Dominguez. See
"Use of Proceeds" and "Business - Strategy for Equity Participation - the Bayesa
Project." A&E, as of the date of the closing of this Offering, will own 10% of
Bayesa. Biwater, a major international company engaged in waste water treatment
and facilities, owns 90%. The purchase price for Invdemco's interest in the
Bayesa Project is based upon a valuation of the Invdemco stock prepared by an
independent consultant, Ingesis Ltd. and was based upon the projected revenues
from the Bayesa Project. As of the date of this Prospectus, the Company has not
entered into any agreements with respect to acquiring equity interests on
projects other than the Bayesa Project. The Company, pending completion of its
research and due diligence, intends to enter into formal negotiations in other
ecology-oriented and electrical utility projects in Chile, leading to formal
agreements.
At the closing of this Offering, the Company will sell to Invdemco a
non-performing asset of the Company consisting of a house located near
Villarrica, Chile in the south of Chile, situated on approximately 13.5 acres
(the "Villarrica Property"). The Villarrica Property which is carried at a cost
of approximately $1,212,063 on the financial statements of the Company at March
31, 1996, was subject to mortgages totalling approximately $663,045. However,
the Villarrica Property is used as a guarantee
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<PAGE>
for payment of certain loans (similar to revolving or preferred line of credit
or a home equity loan) and as of the closing of this Offering, it is estimated
that the outstanding mortgages on the Villarrica Property will be approximately
$700,000. See "Use of Proceeds" and "Financial Statements." At closing, the
Company will transfer title to the Villarrica Property to Invdemco, and will
satisfy the outstanding mortgages on the property.
Invdemco will pay $606,031.50, (50% of the purchase price) of the
Villarrica Property in cash at closing with the balance being paid in four
annual installments of principal together with interest at the rate of 8-1/2% on
the unpaid balance.
EAA and Igenor, the principal shareholders of the Company, also own, in
the aggregate, controlling interests in Proyectos y Equipos S.A. and
Electromecanica Osorno S.A., two Chilean corporations which specialize in the
sale of air compressors and ventilators and related products and small
electrical equipment, respectively. The Company, from time to time, intends to
enter into agreements with these companies to perform certain services, based
upon competitive bids received from these companies.
Mr. Pedro P. Errazuriz, the President, Chief Executive Officer and
Chairman of the Board of Directors of ADC, also owns a 57% interest in Consonni,
S.A., of Spain. Consonni manufactures and sells electronic controls and
switchgear. The Company currently is the exclusive representative of Consonni in
Chile.
All transactions between the Company and its officers, shareholders and
each of their affiliated companies have been made on terms no less favorable to
the Company than those available from unaffiliated parties. In the future, the
Company intends to handle transactions of a similar nature on terms no less
favorable to the Company than those available from unaffiliated parties.
Igenor Ingenierie et Gestion, S.A., a swiss corporation, and Errazuriz
y Asociados Arquitectos, Limitada, a Chilean limited partnership, are
shareholders of the Company. See "Principal Shareholders".
Invdemco, a Chilean investment company, is involved in transactions
relating to the Bayesa Project and the Villarrica Property. See "Business -
Bayesa Project and Properties."
Inversiones Tiempo Libre, S.A. was a Corporation organized for the
Macul Project. The Company sold the balance of its ownership. See "Management
Discussion and Analysis of Financial Condition - Results of Operations and
Liquidity and Capital Resources."
Norconsult has provided engineering, consulting and project services is
conjunction with the Company. See "Business - Core Business."
Mr Pedro P. Errazuriz was on the Board of Directors and had power of
attorney for Kvaerner Chile, S.A. and Kvaerner Hydro, Agencia de Kvaerner Turbin
Aguas y Ecologia, S.A., corporations involved in the manufacturing and selling
of electrical materials. Mr. Errazuriz has resigned from the Board of Directors
and has relinquished his power of attorney.
Biwater is represented by the Company is various transactions and is
involved in transactions relating to the Bayesa Project. See "Business - Bayesa
Project and Strategy for Equity Participation."
Tacora was previously represented by Mr. Pedro P. Errazuriz in a
business relation with a French company with mining interests in Chile. They are
no longer related to the Company.
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BRIDGE FINANCING
During April 1996, the Company borrowed $65,000 from LeNoble and
Associates and First Capitol Resources, Inc. (the "Lenders"), the proceeds of
which were used to pay certain expenses of this offering. The loan, which bears
interest at the rate of 8-1/2% per annum, will be due at the earlier of January
15, 1997 or the effective date of this offering. In connection with the loan,
the Lenders will also receive warrants (the "Bridge Warrants") to purchase
21,000 shares of the Company's Common Stock at 1/3 of the initial offering
price. While the Company has granted certain registration rights, the Lenders
have agreed that the shares underlying the warrants cannot be publicly sold
until six months from the effective date of this Offering.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
Company's common stock beneficially owned as of the date of this Prospectus (i)
by each person who is known by the Company to own beneficially 5% or more of the
Company's common stock; (ii) by each of the Company's directors; and (iii) by
all executive officers and directors as a group. As of the date of this
Prospectus, there were 1,500,100 shares of Common Stock outstanding, after
giving effect to the Reorganization, which will be effective as of the date of
closing of this Offering. See "Certain Transactions." The number of shares
discussed below are all Common Stock. See "Description of Securities."
<TABLE>
<CAPTION>
Number of Shares Percentage
of Common Stock -----------------------
Name and Address of Beneficially Owned Before After(2)(3)
Beneficial Owner(1) Before Offering Offering Offering
- ------------------- --------------- -------- --------
<S> <C> <C> <C>
IGENOR, INGENIERIE
ET GESTION, S.A.,
a Swiss corporation(4)(5) 900,000 60% 36.6%
ERRAZURIZ Y ASOCIADOS
ARQUITECTOS, LIMITADA,
a Chilean limited partnership(6) 600,000 40% 22.4%
PEDRO P. ERRAZURIZ(7)
President, CEO and Director 450,100 30% 16.8%
BERTA DOMINGUEZ(8) 791,250 52.8% 29.5%
CLAUDE MERMIER(4)(9)
Director 2,250 (10) (10)
SERGIO JIMENEZ
Director -0- -0- -0-
ALBERTO CODDOU(11)
Director -0- -0- -0-
All executive officers and directors
as a group (5 persons)(12) 452,350 30.2% 16.9%
</TABLE>
- --------------------
See footnotes on next page
57
<PAGE>
(1) Unless otherwise indicated, the address of the following is Los
Conquistadores 1700, Piso 21, Santiago, Chile.
(2) Assumes no exercise of the Representative's Over-Allotment Option, (see
"Underwriting") or options issued to Bridge Financing lenders.
(3) Does not give effect to the exercise of Warrants into shares of Common
Stock.
(4) The address is c/o Etude Montavon-Mermier, 22, rue Etienne Dumont, 1211
Geneve 3, Switzerland.
(5) The shareholders are Mr. Pedro P. Errazuriz (50%), the President, Chief
Executive Officer and Chairman of the Board of ADC; Ms. Berta Dominguez
(49.25%), the wife of Mr. Errazuriz and the Chairman, Chief Executive
Officer and director of E&A; Mr. Pedro Pablo Errazuriz, a son of Mr.
Errazuriz and his wife; Mr. Claude Mermier (.25%), a director of Andean
Development Corporation; and Pierre Yves Montavon (.25%), an unrelated
third party.
(6) The partners are Ms. Berta Dominguez (58%), and the six children of Mr.
Pedro P. Errazuriz and Ms. Dominguez, who each owns a 7% interest and
who are (i) Pedro Pablo Errazuriz Dominguez, (ii) Berta Errazuriz
Dominguez, (iii) Magdalena Errazuriz Dominguez, (iv) Juan Andres
Errazuriz Dominguez, (v) Felipe Errazuriz Dominguez, and (vi) Arturo
Errazuriz Dominguez.
(7) Includes shares of Common Stock owned by Igenor, Ingenierie et Gestion,
S.A. of which Mr. Errazuriz owns 50% of the outstanding equity and 100
shares of Common Stock were issued to him on October 19, 1994.
(8) Mrs. Dominguez owns 49.25% of Igenor, Ingenierie et Gestion, S.A. and
58% interest in Errazuriz y Asociados Arquitectos, Ltda. She is the
wife of Mr. Errazuriz, the President, CEO and Chairman of ADC.
(9) M. Mermier owns a 0.25% interest in Igenor, Ingenierie et Gestion, S.A.
(10) Less than 1%.
(11) The address is Santa Lucia 280-OF, 12 Santiago, Chile.
(12) All of these shares are held indirectly through either Igenor,
Ingenierie et Gestion, S.A. and/or Errazuriz y Asociados Arquitectos,
Ltda.(5)
After giving effect to the Reorganization, all but one share of the
outstanding stock of each of these subsidiaries will be held by ADC. The
remaining one share of INA will be owned by E&A; the remaining one share of E&A
will be owned by INA and thus there will be, at all times, at least two
different entities having an ownership interest in E&A and in INA, a condition
for Chilean corporations, which requires that a corporation have at least two
different shareholders at any given time.
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<PAGE>
DESCRIPTION OF SECURITIES
The Company is currently authorized to issue up to 20,000,000 shares of
Common Stock, par value $.0001, of which 1,500,100 shares were outstanding as of
the date of this Prospectus, after giving effect to the Reorganization, which
will be effective as of the closing of this Offering. The Company has also
reserved up to 250,000 shares of Common Stock pursuant to its Stock Option Plan
and Directors Plan.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on
all matters to be voted on by the shareholders and do not have cumulative voting
rights which means that the holders of more than 50% of the shares voting for
the election of directors can elect all of the directors if they choose to do
so, and in such event, the holders of the remaining shares will not be able to
elect any directors. Following the Offering made hereby, the Company's
management will own or have the ability to vote 1,500,100 shares or
approximately 55.5% of the outstanding Common Stock (without giving effect to
the exercise of the Representative's Over-Allotment Option, the Representative's
Purchase Warrants, the Warrants or the Bridge Warrants). The Bylaws of the
Company require that only a majority of the issued and outstanding shares of
common stock of the Company need be represented to constitute a quorum and to
transact business at a shareholders' meeting.
Holders of shares of Common Stock are entitled to share, on a ratable
basis, such dividends as may be declared by the Board of Directors out of funds
legally available therefor. ADC has never paid dividends on its common stock
since its inception on October 19, 1994; however, both INA and E&A paid
dividends to their shareholders during 1993, 1994 and 1995 of (an aggregate of)
$835,737, $866,256 and $300,000, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Financial
Statements."
Upon liquidation, dissolution or winding up of the Company, after
payment of creditors and holders of any senior securities of the Company, as
applicable, the assets of the Company will be divided pro rata on a per share
basis among the holders of the shares of Common Stock. The Common Stock has no
preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to such shares. All
outstanding shares of common stock are, and the shares of common stock offered
hereby will be, upon completion of this Offering, fully paid and non-assessable.
WARRANTS
The Warrants will be issued in registered form pursuant to an agreement
dated the date of this Prospectus (the "Warrant Agreement"), between the Company
and American Stock Transfer and Trust Company as Warrant Agent (the "Warrant
Agent"). The following discussion of certain terms and provisions of the
Warrants is qualified in its entirety by reference to the Warrant Agreement. A
form of the certificate representing the Warrants which form a part of the
Warrant Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part.
Each of the Warrants entitles the registered holder to purchase one
share of Common Stock. The Warrants are exercisable at a price of $5.00 (which
exercise price has been arbitrarily determined by the Company and the
Representative) subject to certain adjustments. The Warrants are entitled to
the benefit of adjustments in their exercise prices and in the number of shares
of Common Stock or other securities deliverable upon the exercise thereof in the
event of a stock dividend, stock split, reclassification, reorganization,
consolidation or merger.
The Warrants may be exercised at any time and continuing thereafter
until the close of five years from the date hereof, unless such period is
extended by the Company. After the expiration date, Warrant holders
shall have no further rights. Warrants may be exercised by surrendering the
certificate
59
<PAGE>
evidencing such Warrant, with the form of election to purchase on the reverse
side of such certificate properly completed and executed, together with payment
of the exercise price and any transfer tax, to the Warrant Agent. If less than
all of the Warrants evidenced by a warrant certificate are exercised, a new
certificate will be issued for the remaining number of Warrants. Payment of the
exercise price may be made by cash, bank draft or official bank or certified
check equal to the exercise price.
Warrant holders do not have any voting or any other rights as
shareholders of the Company. The Company has the right at any time beginning six
months from the date hereof to redeem the Warrants, at a price of $.05 per
Warrant, by written notice to the registered holders thereof, mailed not less
than thirty (30) nor more than sixty (60) days prior to the Redemption Date. The
Company may exercise this right only if the closing bid price for the Common
Stock for twenty-one (21) trading days during a thirty (30) consecutive trading
day period ending no more than 15 days prior to the date that the notice of
redemption is given, equals or exceeds $10.00 per share subject to adjustment.
If the Company exercises its right to call Warrants for redemption, such
Warrants may still be exercised until the close of business on the day
immediately preceding the Redemption Date. If any Warrant called for redemption
is not exercised by such time, it will cease to be exercisable, and the holder
thereof will be entitled only to the repurchase price. Notice of redemption will
be mailed to all holders of Warrants of record at least thirty (30) days, but
not more than sixty (60) days, before the Redemption Date. The foregoing
notwithstanding, the Company may not call the Warrants at any time that a
current registration statement under the Act is not then in effect. Any
redemption of the Warrants during the one-year period commencing on the date of
this Prospectus shall require the written consent of the Representative.
The Warrant Agreement permits the Company and the Warrant Agent without
the consent of Warrant holders, to supplement or amend the Warrant Agreement in
order to cure any ambiguity, manifest error or other mistake, or to address
other matters or questions arising thereafter that the Company and the Warrant
Agent deem necessary or desirable and that do not adversely affect the interest
of any Warrant holder. The Company and the Warrant Agent may also supplement or
amend the Warrant Agreement in any other respect with the written consent of
holders of not less than a majority in the number of the Warrants then
outstanding; however no such supplement or amendment may (i) make any
modification of the terms upon which the Warrants are exercisable or may be
redeemed; or (ii) reduce the percentage interest of the holders of the Warrants
without the consent of each Warrant holder affected thereby.
In order for the holder to exercise a Warrant, there must be an
effective registration statement, with a current prospectus on file with the
Commission covering the shares of Common Stock underlying the Warrants, and the
issuance of such shares to the holder must be registered, qualified or exempt
under the laws of the state in which the holder resides. If required, the
Company will file a new registration statement with the Commission with respect
to the securities underlying the Warrants prior to the exercise of such Warrants
and will deliver a prospectus with respect to such securities to all holders
thereof as required by Section 10(a)(3) of the Securities Act of 1933, as
amended. See "Risk Factors - Necessity to Maintain Current Prospectus" and
"State Blue Sky Registration Required to Exercise Warrants."
CERTAIN FLORIDA LEGISLATION
Florida has enacted legislation that may deter or frustrate takeovers
of Florida corporations. The Florida Control Share Act generally provides that
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless such voting rights are approved by a majority of a
corporation's disinterested shareholders. The provisions of the "Control Share
Act" apply to the Company. The Florida Affiliated Transactions Act generally
requires super majority approval by disinterested shareholders of certain
specified transactions between a public corporation and holders of more than 10%
of the outstanding voting shares of the corporation (or their affiliates). The
provisions of the Florida Affiliated Transactions Act do not apply to the
Company as it has opted out of the provisions of the Affiliated Transactions
Act. Florida law and the Company's Articles of Incorporation and Bylaws also
authorize the Company to indemnify the Company's directors, officers, employees
60
<PAGE>
and agents. In addition, the Company's Articles and Florida law presently limit
the personal liability of corporate directors for monetary damages, except where
the directors (i) breach their fiduciary duties and (ii) such breach constitutes
or includes certain violations of criminal law, a transaction from which the
directors derived an improper personal benefit, certain unlawful distributions
or certain other reckless, wanton or willful acts or misconduct.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS
Certain provisions of the Articles of Incorporation and Bylaws of the
Company summarized in the following paragraphs will become operative upon the
closing of the Offering and may be deemed to have an anti-takeover effect and
may delay, defer or prevent a tender offer or takeover attempt, including
attempts that might result in a premium being paid over the market price for the
shares held by shareholders. The following provisions may not be amended in the
Company's Articles or Bylaws without the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Common Stock. Such provisions
could: (1) result in the Company being less attractive to a potential acquiror;
(2) result in shareholders receiving less for their shares in the event of a
take-over attempt.
SPECIAL MEETING OF SHAREHOLDERS.
The Articles and Bylaws provide that special meetings of shareholders
of the Company may be called only by a majority of the Board of Directors, the
Company's Chief Executive Officer or holders of not less than ten percent (10%)
of the Company's outstanding voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and Warrants is
American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New York,
NY 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have 2,700,100
shares of Common Stock outstanding (2,820,100 shares if the Representatives'
Over-Allotment Option is exercised in full but without giving effect to the
exercise of the Warrants) of which 1,500,100 shares of Common Stock outstanding
are restricted securities as such term is defined under the Securities Act of
1933, as amended.
Of the shares of Common Stock, 1,200,000 shares sold in this Offering
(1,320,000 if the Representative's Over-Allotment Option is exercised in full)
will be freely tradeable without restriction or further registration under the
Act, except for any shares purchased by an "affiliate" of the Company (in
general, a person who has a control relationship with the Company) which shares
will be subject to the resale limitations of Rule 144 under the Act. An
additional 1,200,000 shares of Common Stock have been registered (1,320,000 if
the Representative's Over-Allotment Option is exercised in full) and reserved
for issuance upon exercise of the Warrants.
In general, Rule 144, promulgated under the Securities Act of 1933, as
amended, permits a shareholder of the Company who has beneficially owned
restricted shares of Common Stock for at least two years to sell without
registration, within a three-month period, such number of shares not exceeding
the greater of one percent of the then outstanding shares of Common Stock or,
generally, the average weekly trading volume during the four calendar weeks
preceding the sale, assuming compliance by the Company with certain reporting
requirements of Rule 144. Furthermore, if the restricted shares of Common Stock
are held for at least three years by a person not affiliated with the Company
(in general, a person who is not an executive officer, director or principal
shareholder of the Company during the three month period prior to resale), such
restricted shares can be sold without any volume limitation. Since the Company
was not organized until October 1994, as of the date hereof none of the
Company's
61
<PAGE>
Common Stock currently outstanding would have been deemed held for at least two
years and will be eligible for sale upon consummation of this Offering, subject
to the volume limitations and other restrictions of Rule 144. Any sales of
shares by shareholders pursuant to Rule 144 may have a depressive effect on the
price of the Company's Common Stock.
Notwithstanding the foregoing, all of the Company's holders of Common
Stock prior to the closing of this Offering (including shareholders of E&A and
INA who will exchange their shares of INA and E&A for shares of ADC as of the
closing of this Offering) have agreed not to, directly or indirectly, offer to
sell, contract to sell, sell, transfer, assign, encumber, grant an option to
purchase or otherwise dispose of any beneficial interest in such securities for
a period of 24 months from the date hereof without the prior written consent of
the Company and the Underwriter. An appropriate legend referring to these
restrictions will be marked on the face of the certificates representing all
such securities.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom Barron Chase Securities, Inc. is acting as
Representative, have severally agreed to purchase from the Company an aggregate
of 1,200,000 Shares of Common Stock ("Shares") and 1,200,000 Warrants
(collectively the "Securities"). The number of Shares and Warrants which each
Underwriter has agreed to purchase is set forth opposite its name.
NUMBER OF NUMBER OF
UNDERWRITER SHARES WARRANTS
----------- --------- ---------
Barron Chase Securities, Inc. ................. 1,020,000 1,200,000
First London Securities Corporation............ 180,000 --
--------- ---------
TOTAL..................................... 1,200,000 1,200,000
========= =========
The Securities are offered by the Underwriters subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
approval of certain legal matters by counsel and certain other conditions. The
Underwriters are committed to purchase all Securities offered by this
Prospectus, if any are purchased.
The Company has been advised by the Representative that the
Underwriters propose initially to offer the Securities offered hereby to the
public at the offering price set forth on the cover page of this Prospectus. The
Representative has advised the Company that the Underwriters propose to offer
the Securities through members of the National Association of Securities
Dealers, Inc. ("NASD"), and may allow a concession, in their discretion, to
certain dealers who are members of the NASD and who agree to sell the Securities
in conformity with the NASD Conduct Rules. Such concessions shall not exceed the
amount of the underwriting discount that the Underwriters are to receive.
The Company has granted to the Representative options, exercisable for
30 days from the date of this Prospectus, to purchase up to an additional
120,000 Shares and an additional 120,000 Warrants at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus
(the "Over-Allotment Option"). The Representative may exercise this option
solely to cover over-allotments in the sale of the Securities being offered by
this Prospectus.
Officers and directors of the Company may introduce the Representative
to persons to consider this offering and purchase Securities either through the
Representative, other Underwriters, or through participating dealers. In this
connection, officers and directors will not receive any commissions or any other
compensation.
The Company has agreed to pay the Representative a commission of ten
percent (10%) of the gross proceeds of the offering (the "Underwriting
Discount"), including the gross proceeds from the sale of the Over-Allotment
Option, if exercised. In addition, the Company has agreed to pay to the
Representative a non-accountable
62
<PAGE>
expense allowance of three percent (3%) of the gross proceeds of this Offering,
including proceeds from any Securities purchased pursuant to the Over-
Allotment Option. The Representative's expenses in excess of the non-accountable
expense allowance will be paid by the Representative. To the extent that the
expenses of the Representative is less than the amount of the non-accountable
expense allowance received, such excess shall be deemed to be additional
compensation to the Representative. The Representative has informed the
Company that it does not expect sales to discretionary accounts to exceed five
(5%) of the total number of Securities offered by the Company hereby.
The Company has agreed to engage the Representative as a financial
advisor for a period of three (3) years from the consummation of this Offering,
at a fee of $108,000, all of which is payable to the Representative on the
closing date. Pursuant to the terms of a financial advisory agreement, the
Representative has agreed to provide, at the Company's request, advice to the
Company concerning potential merger and acquisition and financing proposals,
whether by public financing or otherwise.
Prior to the Offering, there has been no public market for the Shares
of Common Stock or Warrants of the Company. Consequently, the initial public
offering price for the Securities, and the terms of the Warrants (including the
exercise price of the Warrants), have been determined by negotiation between
the Company and the Representative. Among the factors considered in
determining the public offering price were the history of, and the prospect for,
the Company's business, an assessment of the Company's management, its past
and present operations, the Company's development and the general condition of
the securities market at the time of the offering. The initial public offering
price does not necessarily bear any relationship to the Company's assets, book
value, earnings or other established criterion of value. Such price is subject
to change as a result of market conditions and other factors, and no assurance
can be given that a public market for the Shares and/or Warrants will develop
after the close of the Public Offering, or if a public market in fact develops,
that such public market will be sustained, or that the Shares and/or Warrants
can be resold at any time at the offering or any other price. See "Risk
Factors."
At the closing of the Offering, the Company will issue to the
Representative and/or persons related to the Representative, for nominal
consideration, Common Stock Representative Warrants and Warrant Representative
Warrants (the "Representative's Warrants") to purchase up to 120,000 Shares
and 120,000 Warrants ("Underlying Warrants"). The Representative's Warrants will
be exercisable for a five year period commencing on the date of this Prospectus.
The initial exercise price of each Common Stock Representative Warrant shall be
$7.50 per share (150% of the public offering price). The initial exercise price
of each Warrant Representative Warrant shall be $.1875 per Underlying Warrant
(150% of the public offering price). Each Underlying Warrant will be
exercisable for a five (5) year period commencing on the date of this
Prospectus to purchase one Share of Common Stock at an exercise price of $7.50
per share of Common Stock. The Representative's Warrants will not be
transferable for one year from the date of this Prospectus, except (i) to
officers of the Representative, other Underwriters, and members of the selling
group and officers and partners thereof; (ii) by will; or (iii) by operation of
law.
The Representative's Warrants contain provisions providing for
appropriate adjustment in the event of any merger, consolidation,
recapitalization, reclassification, stock dividend, stock split or similar
transaction. The Representative's Warrants contain net issuance provisions
permitting the holders thereof to elect to exercise the Representative's
Warrants in whole or in part and instruct the Company to withhold from the
securities issuable upon exercise, a number of securities, valued at the current
fair market value on the date of exercise, to pay the exercise price. Such net
exercise provision has the effect of requiring the Company to issue shares of
Common Stock without a corresponding increase in capital. A net exercise of the
Representative's Warrants will have the same dilutive effect on the interests of
the Company's shareholders as will a cash exercise. The Representative's
Warrants do not entitle the holders thereof to any rights as a shareholder of
the Company until such Representative's Warrants are exercised and shares of
Common Stock are purchased thereunder.
The Representative's Warrants and the securities issuable thereunder
may not be offered for sale except in compliance with the applicable provisions
of the Securities Act of 1933. The Company has agreed that if it shall
63
<PAGE>
cause a post-effective amendment, a new registration statement, or similar
offering document to be filed with the Commission, the holders shall have the
right, for seven years from the date of this Prospectus, to include in such
registration statement or offering statement the Representative's Warrants
and/or the securities issuable upon their exercise at an expense to the holders.
Additionally, the Company has agreed that, upon request by the holders of 50% or
more of the Representative's Warrants and Registrable Securities during the
period commencing one year from the date of this Prospectus and expiring four
years thereafter, the Company will, under certain circumstances, register the
Representative's Warrants and/or any of the securities issuable upon their
exercise.
The Company has also agreed that if the Company participates in any
merger, consolidation or other such transactions which the Representative has
brought to the Company during a period of five years after the closing of this
offering, and which is consummated after the closing of this offering
(including an acquisiton of assets or stock for which it pays, in whole or in
part, with Shares or other securities), or if the Company retains the services
of the Representative in connection with any merger, consolidation or other such
transaction, then the Company will pay for the Representative's services an
amount equal to 5% of up to one million dollars of value paid or received in the
transaction, 4% of the next million dollars of such value, 3% of the next
million dollars of such value, 2% of the next million dollars of such value and
1% of the next million dollars and of all such value above $4,000,000.
The Company has agreed to indemnify the Underwriters against any costs
or liabilities incurred by the Underwriters by reasons of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement and the Prospectus. The Underwriters have in turn agreed
to indemnify the Company against any liabilities by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Prospectus, based on information relating to the Underwriters and furnished in
writing by the Underwriters. To the extent that this section may purport to
provide exculpation from possible liabilities arising from the federal
securities laws, in the opinion of the Commission, such indemnification is
contrary to public policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
Legal matters in connection with the Common Stock and Warrants being
offered hereby will be passed upon for the Company by Atlas, Pearlman, Trop &
Borkson, P.A., Fort Lauderdale, Florida. Atlas, Pearlman, Trop & Borkson, P.A.
will own 10,000 shares effective as of the Closing of this Offering of the
Common Stock. The Company is being represented as to matters of Chilean law by
Figeroa & Coddou. Certain legal matters will be passed upon for the Underwriters
by David A. Carter, P.A.
EXPERTS
The supplemental consolidated balance sheets of the Company and subsidiaries as
of December 31, 1995, and the related supplemental consolidated statements of
earnings, statements of shareholders'
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<PAGE>
equity and cash flows for each of the two years, in the period ended December
31, 1995, included in this Prospectus have been so included in reliance upon the
report of Mutnick & Associates, P.A., independent accountants, given on
authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act of
1933, as amended, with respect to the securities being offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits thereto. For further information about the Company
and the securities offered hereby, reference is made to the Registration
Statement and to the exhibits filed as a part thereof. The statements contained
in this Prospectus as to the contents of any contract or other document
identified as exhibits in this Prospectus are not necessarily complete, and in
each instance, reference is made to a copy of such contract or document filed as
an exhibit to the Registration Statement, each statement being qualified in any
and all respects by such reference. The Registration Statement, including
exhibits, may be inspected without charge at the principal reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Los Angeles, California Regional Office of the Commission, 5757
Wilshire Boulevard, Suite 500 East, Los Angeles, California 90036-3648, and
copies of all or any part thereof may be obtained from the Commission upon
payment of fees prescribed by the Commission from the Public Reference Section
of the Commission at its principal office in Washington, D.C. set forth above.
65
ANDEAN DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
AND JUNE 30, 1996 (UNAUDITED)
<PAGE>
<TABLE>
<CAPTION>
ANDEAN DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996 (UNAUDITED)
TABLE OF CONTENTS
<S> <C>
Independent Auditors' Report F2
Supplemental Consolidated Balance Sheets F3 - F5
Supplemental Consolidated Statements of Income F6
Supplemental Consolidated Statements of
Stockholders' Equity F7 - F8
Supplemental Consolidated Statements of
Cash Flows F9 - F11
Notes to Supplemental Consolidated Financial
Statements F12 - F26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Andean Development Corporation
Boca Raton, Florida
We have audited the accompanying supplemental consolidated balance sheet of
Andean Development Corporation and subsidiaries as of December 31, 1995 and the
related supplemental consolidated statements of income, stockholders' equity and
cash flows for each year in the two year period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provided a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of Andean Development Corporation and Errazuriz y Asociados
Ingenieros, S.A. and Igenor Andina, S.A., which will be effectuated at the time
of the closing of a public offering of Andean stock, which has been accounted
for as a pooling of interests as described in Note 1 to the supplemental
consolidated financial statements. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling of interests method in financial statements that do not extend
through the date of consummation, however; they will become the historical
consolidated financial statements of Andean Development Corporation and
subsidiaries after financial statements covering the date of consummation of the
business are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Andean
Development Corporation and subsidiaries as of December 31, 1995 and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the business combination.
MUTNICK & ASSOCIATES, P.A.
Pembroke Pines, Florida
March 29, 1996, except for Note 15 to
which the date is October 21, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
ANDEAN DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
A S S E T S
AS OF
AS OF JUNE 30,
DECEMBER 31, 1996
1995 (UNAUDITED)
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 52,574 $ 49,073
Time deposits 18,361 18,189
Accounts receivable, net 1,403,001 1,768,523
Due from affiliated companies - 16,167
Due from related parties 5,696 -
Deferred income taxes 4,148 4,148
Deferred financing charges - 75,600
Other current assets 177,489 72,496
---------- ----------
TOTAL CURRENT ASSETS 1,661,269 2,004,196
---------- ----------
FIXED ASSETS:
Furniture and equipment 163,638 239,410
Less: Accumulated depreciation (69,328) (72,019)
---------- ----------
TOTAL FIXED ASSETS 94,310 167,391
---------- ----------
OTHER ASSETS:
Undeveloped real estate - held for investment 473,125 481,278
Real estate - held for sale 1,222,248 1,201,878
Capitalization of public offering costs - 244,009
Deferred income taxes 30,329 30,329
Investment in affiliated companies 476,859 283,500
Other assets 2,341 2,553
---------- ----------
TOTAL OTHER ASSETS 2,204,902 2,243,547
---------- ----------
TOTAL ASSETS $3,960,481 $4,415,134
========== ==========
</TABLE>
Please read accompanying notes to the financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ANDEAN DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (CONTINUED)
L I A B I L I T I E S
AS OF
AS OF JUNE 30,
DECEMBER 31, 1996
1995 (UNAUDITED)
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES:
Obligations with banks $ 367,658 $ 387,361
Current portion of long-term debt 205,532 178,162
Accounts payable 384,282 247,830
Due to related parties 132,256 169,161
Income taxes payable 36,014 155,340
Accrued expenses and withholdings 39,599 16,855
Current portion of staff severance
indemnities 22,599 31,366
Dividends payable 300,000 -
Bridge loan payable - 65,000
---------- ----------
TOTAL CURRENT LIABILITIES 1,487,940 1,251,075
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, excluding current portion 688,508 628,243
Staff severance indemnities,
long-term portion 18,116 18,116
---------- ----------
TOTAL LONG-TERM LIABILITIES 706,624 646,359
---------- ----------
TOTAL LIABILITIES $2,194,564 $1,897,434
========== ==========
</TABLE>
Please read accompanying notes to the financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ANDEAN DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (CONTINUED)
STOCKHOLDERS' EQUITY
AS OF
AS OF JUNE 30,
DECEMBER 31, 1996
1995 (UNAUDITED)
------------ -----------
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value,
20,000,000 shares authorized,
2,500,100 issued and outstanding
at December 31, 1995 and
June 30, 1996, respectively $ 150 $ 150
Additional paid-in capital 674,122 749,722
Retained earnings 1,137,736 1,813,919
Cumulative translation adjustment (46,091) (46,091)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,765,917 2,517,700
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,960,481 $4,415,134
========== ==========
</TABLE>
Please read accompanying notes to the financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
ANDEAN DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIOD (UNAUDITED)
ENDED DECEMBER 31, PERIOD ENDED JUNE 30,
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES FROM OPERATIONS:
Revenues $2,042,884 $2,717,341 $1,355,266 $1,472,037
Cost of operations (296,896) (697,599) (266,753) (318,167)
---------- ---------- ---------- ----------
GROSS PROFIT 1,745,988 2,019,742 1,088,513 1,153,870
SELLING AND ADMINISTRATIVE EXPENSES (460,775) (509,563) (321,050) (227,300)
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 1,285,213 1,510,179 767,463 926,570
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSES):
Interest income 1,456 - - -
Interest expense (125,701) (213,618) (97,677) (113,563)
Profit (loss) on foreign currency exchange (75,096) (9,692) (40,829) (12,347)
Realized profit/(loss) on sale of assets (25,326) 8,909 8,909 18,923
Costs of curtailed public offering - (276,506) (276,506) -
Other, net 704 (29,636) 55,345 (24,074)
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSES) (223,963) (520,543) (350,758) (131,061)
INCOME BEFORE INCOME TAXES 1,061,250 989,636 416,705 795,509
INCOME TAXES 51,780 50,636 64,613 119,326
---------- ---------- --------- ----------
NET INCOME $1,009,470 $939,000 $ 352,092 $ 676,183
========== ======== ========== ==========
NET INCOME PER COMMON SHARE $0.67 $0.63 $0.24 $0.45
===== ===== ===== =====
WEIGHTED AVERAGE SHARES OUTSTANDING 1,500,100 1,500,100 1,500,100 1,500,100
========= ========= ========= =========
</TABLE>
Please read accompanying notes to the financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
ANDEAN DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIODS ENDED DECEMBER 31, 1994, 1995, AND JUNE 30, 1996
(UNAUDITED)
ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY
----------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 150 $ 542,704 $ 355,522 $ (97,217) $ 801,159
Additional paid-in capital - 131,418 - - 131,418
Net income - - 1,009,470 - 1,009,470
Dividends to stockholders - - (866,256) - (866,256)
Translation adjustment - - - 91,532 91,532
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1994 $ 150 $ 674,122 $ 498,736 $ (5,685) $1,167,323
========== ========== ========== ========== ==========
Balance at December 31, 1994 $ 150 $ 674,122 $ 498,736 $ (5,685) $1,167,323
Additional paid-in capital - - - - -
Net income - - 939,000 - 939,000
Dividends to stockholders - - (300,000) - (300,000)
Translation adjustment - - - (40,406) (40,406)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 $ 156 $ 674,122 $1,137,736 $ (46,091) $1,765,917
========== ========== ========== ========== ==========
</TABLE>
Please read accompanying notes to the financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
ANDEAN DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1994, 1995 AND JUNE 30, 1996
(UNAUDITED)
ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY
----------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 150 $ 674,122 $1,137,736 $ (46,091) $1,765,917
Additional paid-in capital associated
with detachable stock warrants - 75,600 - - 75,600
Net income - - 676,183 - 676,183
Dividends to stockholders - - - - -
Translation adjustment - - - - -
---------- ---------- ---------- ---------- ----------
Balance at June 30,
1996 (unaudited) $ 150 $ 749,722 $1,813,919 $ (46,091) $2,517,700
========== ========== ========== ========== ==========
</TABLE>
Please read accompanying notes to the financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
ANDEAN DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD (UNAUDITED)
ENDED DECEMBER 31, PERIOD ENDED JUNE 30,
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,009,470 $939,000 $ 352,092 $ 676,183
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Deferred income taxes (5,407) - - -
Depreciation 23,582 20,277 8,086 23,061
Provision for vacations (3,941) 5,217 5,217 -
Provision for severance indemnity (601) 14,025 13,848 8,767
Loss/(profit) on sale of fixed assets 750 (8,909) (8,909) -
Other losses 1,676 20,968 6,670 -
(Increase) decrease in
accounts receivable (204,209) (1,198,792) (553,495) (365,522)
(Increase) in due from sale of
affiliated company stock - - (141,376) -
(Increase) in other assets (50,539) (61,175) (257,202) (212)
Increase in accounts payable 34,255 272,742 222,860 (136,452)
Increase (decrease) in accrued
expenses and withholdings 13,482 (7,958) (8,330) (22,744)
Increase in income taxes payable 8,368 (5,022) 93,122 119,326
(Decrease) increase in deferred income (53,672) - - -
----------- ----------- ----------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 773,214 $ (9,627) $ (267,417) $ 302,407
=========== =========== =========== ==========
</TABLE>
Please read accompanying notes to the financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
ANDEAN DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE PERIOD (UNAUDITED)
ENDED DECEMBER 31, PERIOD ENDED JUNE 30,
1994 1995 1995 1996
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in prepaid expenses $ - $ - $ - $ 104,993
Purchase of fixed assets (62,712) - - (75,772)
Payments for purchase of property
under construction or land for sale (420,575) (89,347) (89,347) (8,153)
Proceeds from sale of fixed assets 31,415 46,281 46,281 -
Proceeds from sale of subsidiary (ITL) - 466,413 - 193,359
Investment in affiliated company (ITL) - (666,304) - -
Investment in subsidiary (A & E) - (283,500) - -
(Increase) decrease in time deposits 20,171 (4,890) (3,996) 172
---------- ----------- ----------- ----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (431,701) (531,347) (47,062) 214,599
---------- ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cost of public offering - - - (244,009)
Proceeds from related parties - 310,174 23,417 42,601
Proceeds from (payments on)
notes payable to banks 718,289 247,628 275,412 (67,932)
Capital contributions 131,418 - - -
Proceeds from bridge loan - - - 65,000
Dividends paid (866,256) - - (300,000)
Payments to related parties (354,349) - (23,646) (16,167)
---------- ----------- ---------- ----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (370,898) 557,802 275,183 (520,507)
---------- ---------- ---------- ----------
</TABLE>
Please read accompanying notes to the financial statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
ANDEAN DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE PERIOD (UNAUDITED)
ENDED DECEMBER 31, PERIOD ENDED JUNE 30,
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
EFFECT OF EXCHANGE RATE CHANGES $ 56,297 $ (31,402) $ 21,470 $ -
---------- ---------- ---------- ----------
NET INCREASE (DECREASE)IN CASH 26,912 (14,574) (17,826) (3,501)
CASH AT BEGINNING OF PERIOD 40,236 67,148 67,148 52,574
---------- ---------- ---------- ----------
CASH AT END OF PERIOD $ 67,148 $ 52,574 $ 49,322 $ 49,073
========== ========== ========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE:
The Company paid $99,518, $169,854, $97,677 and $113,563 for interest and
$97,930, $27,971, $18,617 and $-0- for income taxes in 1994, 1995, and for the
six months ended June 30, 1995 and 1996, respectively. In April of 1996 the
Company capitalized financing costs associated with the issuance of warrants
at a total cost $75,600. This resulted in an increase in additional paid-in
capital in the same amount.
Please read accompanying notes to the financial statements.
F-11
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Andean Development Corporation, (the "Company"), is a
Florida corporation incorporated on October 19, 1994. The Company is
in the business of providing engineering, technical assistance and
equipment in the development of specialized projects throughout the
country of Chile and more recently in Peru.
BASIS OF PRESENTATION - The accompanying supplemental consolidated
financial statements include the accounts of the Company, and its
wholly-owned subsidiaries, Errazuriz y Asociados Ingenieros, S.A. and
Igenor Andina, S.A., two Chilean service corporations. In addition,
the equity method of accounting is used for the Company's 30% owned
subsidiary Inversiones Tiempo Libre, S.A. "ITL", acquired in March
1995, and its 45% owned subsidiary A & E.
The accompanying supplemental consolidated financial statements have
been prepared in conformity with generally accepted accounting
principles and all material intercompany transactions have been
eliminated.
In November of 1995, (subsequently revised in October of 1996), the
Company entered into an agreement to acquire 100% of the issued and
outstanding common stock of Errazuriz y Asociados Ingenieros, S.A.
and Ingenor Andina, S.A., in exchange for 2,500,000 (subsequently
revised to 1,500,000) shares of common stock which will be effective
as of the closing of the initial public offering of the Company's
stock. (See Note 13 for more details.) Generally accepted accounting
principles prescribe giving effect to a consummated business
combination accounted for by the pooling of interests method in
financial statements that do not include the date of consummation.
Accordingly, the supplemental consolidated financial statements for
all periods presented have been prepared assuming the acquisition by
the Company took place on January 1, 1992, that the Company was
incorporated on that date, and the exchange of shares from 1,500,000
was effectuated at that time.
Had the Company presented combined historical financial statements of
the two subsidiaries only, the presentation would not materially
differ from the supplemental consolidated presentation referred to
above. In addition, these financial statements will become the
historical consolidated financial statements of the Company and
subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
F-12
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following table reflects the revenue, net income and intercompany
transactions for the previously separate entities (Errazuriz y
Asociados Ingenieros, S.A. and Igenor Andina, S.A.) prior to the
business combination.
<TABLE>
<CAPTION>
(UNAUDITED)
PERIOD ENDED
AT DECEMBER 31, JUNE 30,
1994 1995 1995 1996
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Errazuriz y Asociados $1,337,940 $1,309,946 $808,450 $720,888
Igenor Andina 746,830 940,052 667,423 569,848
Revenues shared by
E&A and I&A outside
of Chile - 521,134 - 181,301
---------- ---------- --------- ---------
Sub total revenues 2,084,770 2,771,132 1,475,873 1,472,037
Less: Intercompany
rev. (41,886) (53,791) (120,607) -
---------- ---------- ---------- ---------
TOTAL REVENUES 2,042,884 2,717,341 1,355,266 1,472,037
---------- ---------- --------- ---------
NET INCOME:
Errazuriz y Asociados 837,322 661,725 11,874 413,711
Igenor Andina 172,148 277,275 340,218 262,472
INTERCOMPANY TRANSACTIONS:
Due from Igenor to
Errazuriz 136,503 - - -
Due from Errazuriz
to Igenor - 5,661 - 148,486
Fees paid by Igenor
to Errazuriz - - - -
Purchase of land
by Igenor from
Errazuriz 480,655 - - -
Gain on sale of
land to Igenor 89,409 - - -
Consulting services paid by
Errazuriz to Igenor 41,886 53,791 120,607 -
</TABLE>
F-13
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FUNCTIONAL CURRENCY - The financial statements have been translated
in accordance with the provisions set forth in Statement of Financial
Accounting Standards No. 52, from Chilean pesos (the functional
currency) into US dollars (the reporting currency).
REVENUE RECOGNITION - The Company earns income in two basic ways; via
commissions associated with the sale of major equipment items and
from the performing of engineering services.
In the case of equipment sales, the company earns a commission on the
sale of equipment or turn-key jobs when the contract between the
purchasing company (buyer of the equipment), is signed by both
parties or an "Order of Proceed" is issued by the buyer. At this
moment all the work of the Company has been completed and the
commission has been earned regardless of any future developments
between the supplier and the buyer. The time of payment of the
commissions is determined by the practices of the countries involved
in receiving and sending monies from and to other countries. As a
result, it is not unusual for it to take 60-180 days for the funds to
be transferred.
Revenues associated with engineering services are recognized as
services and are performed based on standard billing rates.
TIME DEPOSITS - Time deposits are recorded at the original amount
plus interest accrued at each year end.
INCOME TAXES - In February 1992, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 109
("SFAS 109"), Accounting for Income Taxes. SFAS 109 requires a change
from the deferred method of accounting for income taxes prescribed by
APB Opinion 11, to the asset and liability method of accounting for
income taxes. Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future
income tax assets and liabilities are recognized for the future
income tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
During 1994 and 1995, the Company performed consulting services for
European companies which resulted in income received by the Company
in Europe. Income from European operations was $737,008 and $612,669
in 1994 and 1995, respectively. The make-up by country was $345,365,
$231,643 and $160,000, in Sweden, Norway and England, respectively,
for 1994, and $399,068, $203,601 and $10,000, in Germany, England and
Norway, respectively, in 1995. No consulting services have been
performed for
F-14
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
European companies in 1996. As a result of the adoption of SFAS 109,
the Company provides no deferred income taxes on its European
earnings as the revenues will not be transferred to Chile or the
United States; rather such earnings will be reinvested in European
operations, thereby eliminating any deferred tax liability.
A deferred tax asset was recognized at December 31, 1995 and for the
six months ended June 30, 1996 of $34,477 and $34,477, respectively.
Income tax expense totalled $51,780, $50,636, $64,613 and $119,326
for the years ended December 31, 1994 and 1995, and for the six
months ended June 30, 1995 and 1996, respectively.
FIXED ASSETS - Furniture and equipment are recorded at cost.
Depreciation is provided on a straight-line method based on the
estimated useful life of the asset.
REAL ESTATE - Real estate is recorded at cost, which includes the
cost of acquisition of land plus costs incurred in the construction
of a house. These aggregate carrying costs do not exceed the net
realizable value (selling price less any costs of completion and
disposal) of the property under construction. This estimate was based
on an independent appraisal of the real estate. The basis for this
assessment is the existing contract between Invdemco (a company owned
by Mr. Errazuriz who is Chief Executive Officer and member to the
Board of the Company) and his wife to transfer the house at closing
from the Company to Invdemco at its net book value. As the house has
now been completed, (December 1995), the Company is depreciating it
on the straight-line basis over 30 years with the quarterly
depreciation beginning in March of 1996.
STAFF SEVERANCE INDEMNITIES - The Company provides for certain lump
sum severance indemnities to its employees at the end of their
employment as required by Chilean law. The obligation is calculated
based on the present value of the vested benefits to which an
employee is entitled, the expected service lives of the employees and
current salary levels. The Company believes that the above
calculation is not materially different from the calculation required
by SFAS 87, which would reflect expected future salary increases.
CASH - Cash includes cash on hand.
FOREIGN OPERATIONS - As the Company is a holding company for two
existing Chilean companies, operating exclusively in South America,
one must be aware of the potential for both economic and political
change in the business environment, different than that of the United
States. The success of the Company depends on the success of the
Chilean operations and a stable economic and political environment.
During 1995 the Company performed services for the Westinghouse
Corporation in Peru. The total revenues from this transaction as
reflected in the 1995 financial statements was $312,500 of
commissions. There were no other foreign generated revenues.
F-15
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER COMMON SHARE - Earnings per share are based on the
weighted average number of shares outstanding of 1,500,100 for each
of the three years presented giving effect to the exchange of shares
with the offering.
RECENT PRONOUNCEMENTS - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," which established
a fair value based method of accounting for those stock-based
compensation plans and requires additional disclosures for those
companies who elect not to adopt the new method of accounting. In its
adoption of FASB 123, the Company has decided to retain the existing
measurement values as prescribed under APB 25 and would provide
additional proforma disclosure if and when such options are granted.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," which requires the Company to review for impairment of
long lived assets and certain identifiable assets whenever events or
changes in circumstances indicate that the carrying amount of an
asset might not be recoverable. In certain situations, an impairment
loss would be recognized. As a result, the Company has adopted FASB
121 effective January 1, 1996. The Company has studied the
implications of FASB 121 and, based on its evaluation, has determined
that its adoption does not have a material impact on the Company's
financial condition or results of operations. At June 30, 1996,
there were no impairments.
ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 2 - TIME DEPOSITS
Time deposits consist of funds totalling $18,361 and $18,189 at
December 31, 1995 and at June 30, 1996, respectively, invested in a
local Chilean bank with maturity dates ranging from 3 months to 1
year. These investments earn an annual rate of interest ranging from
1.44% to 3.60%.
F-16
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - OTHER CURRENT ASSETS
Other current assets consist of the following at December 31, 1995
and June 30, 1996, respectively:
AT (UNAUDITED)
DECEMBER 31, AT JUNE 30,
1995 1996
------------ -------------
Prepaid expenses* $ 123,452 $ -
Due from sale of timber 54,037 53,529
Recoverable taxes - 10,323
Other - 8,644
---------- ----------
Total other current assets $ 177,489 $ 72,496
========== ==========
* - This represents payments to suppliers as advances against
future services.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company conducts a substantial amount of its business with
companies that are affiliated with shareholders common to the
corporation. As a result, commissions have been received from both
engineering and consulting services and have been paid for consulting
services to and from these affiliated companies. Following is a list
of those affiliated companies:
<TABLE>
<CAPTION>
RELATION
COMPANY NAME 1994 1995 1996
------------ -------- -------- ------
<S> <C> <C> <C>
Igenor Ingenierie et
Gestion, S.A. Parent Parent Parent
Inversiones y Desarrollo
Demco, S.A. (Invdemco) Equity Related(1) Related
Electromecanica Osorno, S.A. Equity Related(1) Related
Errazuriz y Asociados
Arquitectos, Ltda. Equity Equity Equity
Inversiones Tiempo
Libre, S.A. Equity Equity Not related(2)
Proyectos y Equipos, S.A. Equity Related(1) Related
Norconsult International, S.A. Related Related Not related(3)
Kvaerner Chile, S.A. Related Not related(4) Not related
Kvaerner Hydro, Agencia de
Kvaerner Turbin Aguas y
Ecologia, S.A. Not related Not related Related(5)
Biwater International, L.T.D. Related Related(6) Related(7)
Tacora Related Related Not related(8)
</TABLE>
F-17
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
(1) To clarify the intercompany situation, Inversiones y
Desarrollo Demco S.A., Electromecanica Osomo S.A. and
Proyectos y Equipos S.A. sold their interest in INA and E &
A and vice versa. At present, they are related only by
shareholders that are common to each other.
(2) All the equity of the Company in ITL was sold prior to
June 30, 1996.
(3) The CEO of the Company resigned his power of attorney for
Norconsult A.S.
(4) The CEO of the Company resigned to his place in the Board
of Kvaerner Chile, S.A.
(5) On December 1995, the Company bought 45% of Aguas y
Ecologia S.A. (A&E).
(6)&(7) During 1995, the CEO of the Company resigned his
representation of Biwater, but ADC became related to
Biwater as A&E is a partner of Bayesa, also owned by
Biwater.
(8) The CEO of the Company resigned his power of attorney for
Tacora.
Commissions received by the Company for the engineering of various
projects totalled $470,589, $417,022, $-0- and $62,073 at December
31, 1994, 1995 and for the six months ended June 30, 1995 and 1996,
respectively. Income received for consulting services totalled
$237,754, $244,582, $-0- and $103,800 at December 31, 1994, 1995, and
for the six months ended June 30, 1995 and 1996, respectively. Total
fees charged to the Company for consulting services performed by the
related companies at December 31, 1994 and 1995 and for the six
months ended June 30, 1995 and 1996 were $82,628, $54,794, $-0- and
$-0-, respectively. In addition, fees charged to the Company for
consulting services performed by its principal owners and immediate
family totalled $4,495, $9,825, $-0- and $-0-, at December 31, 1994,
1995, and for the six months ended June 30, 1995 and 1996,
respectively.
The amounts due from the affiliated companies totalled $5,696 and
$-0-, at December 31, 1995 and June 30, 1996, respectively. Funds
payable to these companies totalled $46,035, and $160,645, at
December 31, 1995 and June 30, 1996, respectively.
The Company also carried out transactions with its management,
shareholders and their immediate family. The total amount payable to
them by the Company was $86,221 and $8,516, at December 31, 1995 and
June 30, 1996, respectively. The amount they owed to the Company
totalled $-0- and $-0- at December 31, 1995 and June 30, 1996,
respectively. These balances are reflected in due from and due to
related parties in the balance sheets.
F-18
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
The Company also carried some transactions with IGENOR, an affiliate
company and shareholder based in Geneva, Switzerland, and with
Bayesa, a company that became affiliated in January after the
purchase of a participation in it through Aguas y Ecologia, S.A. The
balances are reflected in "Due from affiliated companies" and total
$-0- and $16,167 at December 31, 1995 and June 30, 1996,
respectively.
NOTE 5 - UNDEVELOPED REAL ESTATE - HELD FOR INVESTMENT
The balance of property for sale relates to land near Villarrica,
Chile, which was acquired for resale after being developed in a
resort area and is being used in the meantime as a guarantee for some
of the financial operations of the Company. The property is being
carried at its cost (that value less than the net realizable value
based on an independent appraisal of the real estate). The Company
has no intention to sell the property in the near future and is
treating it as investment property.
NOTE 6 - REAL ESTATE - HELD FOR SALE
The composition of the real estate - held for sale is as follows:
AT AT
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
Land $ 46,233 $ 46,233
Cost of construction 1,176,015 1,176,015
Less: Depreciation - (20,370)
------------ -----------
$1,222,248 $1,201,878
============ ===========
In March 1996, the Company entered into an agreement with a Chilean
Investment Company, [Inversiones y Desarrollo Demco, S.A.
(Invdemco)], whose shareholders are Mr. Errazuriz, the Company's
President and CEO, his wife, and one of his daughters, to sell them
the non-performing asset real estate for a price of $1,212,063, the
book value of it. Payment terms are 50% in cash at the closing of the
public offering, and the balance in four annual installments with
interest at 8-1/2% per year.
F-19
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - FIXED ASSETS
A detail of furniture and equipment is as follows:
AT (UNAUDITED)
DECEMBER 31, AT JUNE 30,
1995 1996
------------ -------------
Vehicles $118,032 $193,804
Office equipment 42,644 42,644
Furniture and fixtures 2,962 2,962
------------ -------------
Total furniture and equipment
at cost 163,638 239,410
Less: Accumulated depreciation (69,328) (72,019)
------------ -------------
Net fixed assets $ 94,310 $167,391
============ =============
Depreciation expense was $23,582, $20,277, $8,086 and $23,061 for the
years ended December 31, 1994 and 1995, and for the six months ended
June 30, 1995 and 1996, respectively.
NOTE 8 - INCOME TAXES
Deferred tax assets are summarized as follows:
AT (UNAUDITED)
DECEMBER 31, AT JUNE 30,
1995 1996
------------ ------------
CURRENT ASSETS:
Provisions for vacation $ 1,519 $ 1,519
Staff severance indemnities -
current portion 1,163 1,163
Accrued bonuses 879 879
Other 587 587
-------- --------
4,148 4,148
-------- --------
LONG-TERM ASSETS:
Depreciation 16,175 16,175
Staff severance indemnities,
long-term portion (1,920) (1,920)
Property for sale under
construction 5,419 5,419
Property for sale 2,884 2,884
Other 7,771 7,771
-------- --------
30,329 30,329
-------- --------
TOTAL DEFERRED TAX ASSETS $ 34,477 $ 34,477
========= ========
F-20
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - INCOME TAXES (Continued)
The Company is subject to income tax in Chile. Reconciliations
between the statutory income tax rate in Chile, and the Company's
effective income tax rate as a percentage of income before income
taxes is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
AT DECEMBER 31, AT JUNE 30,
1994 1995 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Chilean statutory
tax rate 15.0% 15.0% 15.0% 15.0%
Effect of European
income (8.5) (9.9) 0.0 0.0
Other, net (1.6) 0.0 0.5 0.0
------- ------- ------- --------
Effective income
tax rate 4.9% 5.1% 15.5% 15.0%
======= ======= ======= ========
The provision for income taxes charged to the results of operations
was as follows:
(UNAUDITED)
AT DECEMBER 31, AT JUNE 30,
1994 1995 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current tax expense $ 57,187 $ 50,636 $ 64,613 $119,326
Deferred tax
expense (benefit) (5,407) - - -
-------- -------- -------- --------
Total provision $ 51,780 $ 50,636 $ 64,613 $119,326
-------- -------- -------- --------
</TABLE>
NOTE 9 - OBLIGATION WITH BANKS
Obligations with banks consist of the following:
(UNAUDITED)
AT AT
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
Loans payable to bank for liens
of credit due August 1996 with
variable monthly interest.
Currency: Chilean pesos $105,280 $102,192
F-21
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - OBLIGATION WITH BANKS (Continued)
(UNAUDITED)
AT AT
DECEMBER 31, JUNE 30,
1995 1996
------------ -------------
Short-term loans due July
1996, with interest rates
ranging from 7.6% to 12%.
Currency: Chilean pesos
and UF 262,378 285,169
-------- --------
Total obligations to banks $367,658 $387,361
======== ========
Interest rates on all of these flexible rate loans are based on the
Asociacion de Bancos y Entidades Financieras, (T.A.B.) rate, which
represents a daily average of the interest paid by banks on its
deposits. The rate is then adjusted upwards approximately 1.5% for
the banks profit, and then an additional 1.0%-1.7% reflecting the
individual risk of the bank on the individual loan. The actual
resulting interest rates at December 31, 1994, 1995 and June 30, 1996
were 24%. There are no covenants or restrictions imposed on the
aforementioned obligations with any of the banks involved.
A line of credit for $105,280 and $102,192 at December 31, 1995 and
June 30,1996, respectively, is secured by an assignment of the
Company's term deposits and two cars owned by the Company. Total
credit available on the lines of credit approximate the outstanding
balances adjusted for fluctuations in the market values of the
collateral being provided.
$262,378 and $285,169 of short-term loans at December 31, 1995 and
June 30, 1996, respectively, were collateralized by a mortgage on
real estate held for sale.
It is usual practice in Chile to include every outstanding loan with
the relevant bank, be it short-term or long-term, in the mortgage of
real estate held for sale in favor of that Bank. The Company has
mortgaged the real estate held for sale (Villarrica House) in favor
of Banco del Desarrolo, so all outstanding loans with this bank are
guaranteed by such mortgage. As of June 30, 1996, the Company has the
following loans outstanding with that bank: Long-term debts, (1)
$2,999 at 11% interest payable in UF monthly and maturing in August
1996, (2) $342,128 at 9.5% interest payable in UF monthly and
maturing the 1st of March 2006, (3) $73,235 at 11% interest, payable
monthly in UF and maturing the 1st of January of 2005; and b)
short-term debts as follows, (1) $218,253 at 2.5% monthly interest in
pesos maturing the 31st of August 1996; and (2) $36,459 at 2.5%
monthly interest in pesos maturing the 25th of September 1996, all
totalling $673,074 in debt with Banco del Desarrollo of June 30,
1996.
F-22
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - OBLIGATION WITH BANKS (Continued)
In the same manner the Loncovaca Land (undeveloped real estate held
for investment) is mortgaged to Banco Sudamericano and has two
outstanding loans both of which are long-term. One is in the amount
of $190,696 at 8.7% interest in UF payable monthly and maturing in
December 2002, and the second for $173,024 at 2.5% interest payable
monthly in pesos and maturing in April of 1998.
NOTE 10 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
AT AT
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
<S> <C> <C>
Note payable, collateralized
by land on the real estate held
for sale, due January 2005
with interest at 11%, payable
monthly. Currency: UF $ 75,622 $ 73,235
Note payable, collateralized
by a mortgage on real estate held
for sale, with interest at 9.5%,
due March 2006, payable monthly.
Currency: UF 350,979 342,128
Note payable, collateralized
by mortgage on real estate held
for sale, due August 1996, with
interest at 11%, payable
monthly. Currency: UF 27,629 2,999
Note payable, collateralized
by mortgage on the undeveloped real
estate held for investment,
due December 2002 with interest
at 8.7%, payable monthly commencing
January 1995. Currency: UF 203,025 190,690
Note payable, secured by an assignment
of a vehicle, due April 1997
with interest at 10.9%, payable
monthly. Currency: UF 39,045 24,329
F-23
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - LONG-TERM DEBT (Continued)
(UNAUDITED)
AT AT
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
Note payable, collateralized by
mortgage on undeveloped real
estate held for sale, due
April 1998 with interest at 2.5%.
Currency: Pesos 197,740 173,024
------------ ------------
Total notes payable 894,040 806,405
Less: Current portion (205,532) (178,162)
------------ ------------
Total long-term debt $688,508 $628,243
============ ============
</TABLE>
The UF is an indexed unit of account expressed in pesos and adjusted
according to inflation (CPI). There are no covenants or restrictions
imposed on the aforementioned obligations with any of the banks
involved.
During 1993, the Company repaid its then outstanding loan balance of
$59,186 with the proceeds from a new loan. Subsequently in 1994, this
loan was refinanced with the same bank.
In 1994, the Company's short-term loans totalling $137,026 were
refinanced into two larger long-term loans of $358,240 and $78,038
with the same bank. In 1995, two short-term loans and a line of
credit were refinanced into a long-term loan of $197,740 with the
same bank.
Interest expense for the years ended December 31, 1994, 1995 and for
the period ended June 30, 1995 and 1996 totalled $125,701, $213,618,
$97,677 and $113,563, respectively.
The following table reflects the annual payments due for the next
five years for the long-term debt.
YEAR ENDING
DECEMBER 31, PAYMENTS
------------ --------
1996 $205,532
1997 176,439
1998 106,727
1999 71,570
2000 and after 333,772
--------
Total $894,040
========
F-24
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - STOCKHOLDERS' EQUITY
In November of 1995, (subsequently revised in October of 1996), the
Company entered into an agreement to exchange 2,500,000
(subsequently revised to 1,500,100) shares of $.0001 par value
common stock for 100% of the then outstanding stock of Errazuriz y
Asociados Ingenieros, S.A. and Igenor Andina, S.A., to be effective
as of the closing of the offering.
During the years 1994 and 1995, the Company paid its shareholders
dividends in the amount of $866,256 and $-0-, respectively. During
1995, the Company declared dividends in the amount of $300,000 to
its shareholders, all of which was paid during the first quarter of
1996.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
At December 31, 1993, the Company entered into a contract with
Corporation de Fomento de la Produccion, a state owned corporation
created to develop various industries and the technology of Chile,
(CORDO). One such project is that of the design of a wave-maker for
swimming pools. Under the terms of the contract, the Company can
buy the exclusive rights to the results of the project by paying
the corporation UF 1,102.80 (equivalent to US $30,658). This
obligation would be payable over a maximum period of five years.
In connection with the contract between the Company and the
corporation, the Company has a letter of guarantee for CH
$23,430,486 (equivalent to US $61,317) in case of non-performance
under the terms of the contract.
NOTE 13 - LEASE COMMITMENTS
The Company rents office facilities of 3,300 sq. feet in Santiago,
Chile under a month-to-month operating lease. Monthly rental
payments were $4,351, $4,354 and $4,507 per month during 1994, 1995
and 1996, respectively.
NOTE 14 - INVESTMENTS IN SUBSIDIARIES
In March of 1995, Inversiones Tiempo Libre, S.A., (ITL), a newly
formed company, owned in part by members of Mr. Errazuriz's family,
paid the Company for all the engineering and research costs
incurred by the latter to develop the amusement park project that
will be managed by ITL. The payment was made with 100% of ITL
stock, corresponding to the exact amount of the services billed,
which totalled $666,305 at March 31, 1995. The Company's revenues
for the first quarter of 1995 increased significantly by this
transaction. During the same period, the Company sold 70% of the
ITL stock at their face value, which was their carrying value. A
"Due from sale of affiliated company stock" account was created to
record the receivable of $466,413 at March 31, 1995. The remaining
30% investment has been accounted for using the equity method.
Under this method the original investment is recorded at cost and
is adjusted
F-25
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - INVESTMENTS IN SUBSIDIARIES (Continued)
periodically to recognize the investor's share of earnings or
losses after the date of acquisition. At December 31, 1995 and June
30, 1996, the Company's share of profits from its investment in ITL
totalled $-0-.
During the fourth quarter of 1995, the Company put up for sale the
remaining 30% investment of the ITL stock. This investment has been
recorded as a current asset on the Company's financial statements.
These shares were sold to members of Mr. Errazuriz's family during
the first quarter of 1996 at their book value of $193,359.
The Company purchased 45% of the stock of Aguas y Ecologiz, S.A.
(A&E), which owns 10% of the stock in Bayesa, S.A. from a Chilean
investment company. This equates to a 4.5% ownership of Bayesa,
S.A. by an additional 22.5% of (A&E) 2.25% of Bayesa S.A., which it
intends to purchase. Financial statements of A&E as prepared in
accordance with GAAP are unavailable and impracticable to produce
at this time. At December 31, 1995, the Company's share of profits
from its investment in A&E totalled, $6,532. No income or loss was
recognized at June 30, 1996.
NOTE 15 - SUBSEQUENT EVENTS
(a) The Company has entered into an oral agreement on a firm
commitment basis to sell 1,200,000 shares of common stock
(10,000,000 shares newly authorized, $.0001 par value), at
$5.00; and 1 warrant convertible into 1 share of common stock
at $5.00 per share within the first 60 months after the
effective date of the offering. The Company anticipates
raising approximately $6,150,000, exclusive of costs or
over-allotments. Of the proceeds, approximately $3,000,000
will be used for the development of and investment in various
capital projects; $700,000 to be utilized in the opening of
offices in Spain and the United States; $1,650,500 will be
held available for working capital and operating costs; and
approximately $799,500 will be used for underwriting
discounts and expenses of the offering. As a result, there
will be 2,700,100 shares of common stock outstanding
(1,500,000 par value .0001 common stock and 1,200,100 par
value .0001 common stock), after the offering, without
considering the over-allotment rights, and the shares to be
interchanged with the warrants. (See "Use of Proceeds" and
"Description of Securities" in Prospectus for details.)
(b) During April 1996, the Company consummated loans in the
amount of $65,000. The loans bear interest at the rate of
8-1/2% annually and will be repaid from the proceeds of the
offering of stock, (see Note 13a above), or no later than
January 15, 1997. The lender also received an aggregate of
21,000 warrants to purchase treasury stock at 33% of the
offering price. The warrants were assigned a value of $3.60
per warrant, for a total of $75,600 which has been
capitalized as a deferred financing charge, which will be
amortized
F-26
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - SUBSEQUENT EVENTS (Continued)
over the term of the loan, and resulted in an increase in
additional paid-in capital on the balance sheet. If such
warrants are exercised the common shares cannot be publically
traded for six months from the effective date of the
offering.
(c) In November of 1995 (subsequently revised in October of
1996), the Company entered into an agreement to exchange
2,500,000 (subsequently revised to 1,500,000) shares of
$.0001 par value common stock for 100% of the then
outstanding stock of Errazuriz y Asociados Ingenieros, S.A.
and Igenor Andina, S.A., to be effective as of the closing of
the offering.
F-27
<PAGE>
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, IN ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
--------------------
TABLE OF CONTENTS
Page
Available Information....................................... 2
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Use of Proceeds ............................................ 17
Dividend Policy............................................. 18
Dilution.................................................... 19
Capitalization.............................................. 20
Exchange Rates.............................................. 21
Selected Financial Data..................................... 23
Management's Discussion and
Analysis of Financial Condition
Results of Operations.................................... 24
Business.................................................... 31
Management.................................................. 50
Certain Transactions........................................ 55
Principal Shareholders...................................... 57
Description of Securities................................... 59
Shares Eligible for
Future Sale............................................... 61
Underwriting................................................ 62
Legal Matters............................................... 64
Experts .................................................... 64
Additional Information...................................... 65
Index to Financial
Statements................................................ F-1
--------------------
UNTIL DECEMBER 7, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
1,200,000 SHARES OF
COMMON STOCK
1,200,000 REDEEMABLE
WARRANTS
ANDEAN DEVELOPMENT
CORPORATION
--------------------
PROSPECTUS
--------------------
BARRON CHASE SECURITIES
7770 W. Camino Real
Suite 200
Boca Raton, Florida 33433
(561) 347-1200
Atlanta, Georgia
Beverly Hills, California
Boston, Massachusetts
Chicago, Illinois
Clearwater, Florida
Dallas, Texas
Denver, Colorado
East Boca Raton, Florida
Hoopeston, Illinois
Miami, Florida
Middletown, New Jersey
Minneapolis, Minnesota
Oaklahoma City, Oklahoma
Phoenix, Arizona
Sarasota, Florida
Tampa, Florida
Tuls, Oaklahoma
November 12, 1996
================================================================================
