Palms & Company Document

THE STEPS TO CAPITAL - FOR RUSSIAN AND CIS COMPANIES

by

Dr. Pyotr Johannevich van de Waal-Palms

Many Russians searching for capital write us to say they are already doing certain things, and need just to receive the money. The do not understand that what they are doing is not correct for the process of obtaining money. Here are some of these statements and our comments about them.

"1 Search, selection analytical definition (determination of investment appeal of the various projects on territory of republics and advertising abroad"

SEARCH & SELECTION:

THE FIRST STEP OR PHASE

The production life and financial and marketing life of a company are woven together like the blood and oxygen of a human mechanism.

Capital is given for the creation by the production enterprise of products, but only if there is first established an export market for its production. Production ability provides only the mechanism for the combination of money with human and natural resources to produce product. It is only half the justification for attracting capital. Such production provides only the "possibility" (mosjabiet) for profits for those providing the capital. But this can be realized only if there is a market.

The ability to realize production is not sufficient to attract capital. Production alone converts money into products. Without a market, the necessary second step to convert products back into money (capital plus profit) cannot occur.

A MARKET MUST BE ESTABLISHED AND CONTRACTED BEFORE PRODUCTION IS MADE because if you make production first, you will be at a disadvantage in negotiating sale of that product. If you have product in inventory the buyer will know you are anxious to sell it and offer a lower price. The buyer knows it costs you interest to keep this product in inventory and he knows you need the cash from selling it in order to start new production and pay for labor and raw materials again.

So my FIRST STEP, with your help, must be to identify the world markets for the existing products which a business is currently producing and also the general types of products which its machinery, together with human resources and natural resources, have the ability to produce in the future. I will also help decide what new machinery and technical assistance are necessary to make new products for which there is a demand in world markets.

The companies which have the fastest possibility for creating real results will be TYPE A * companies which are presently already exporting goods of their manufacture to Europe, Asia and America and wish to increase this activity.

TYPE B * Companies which are not presently exporting but which are producing products for which Palms & Company can find customers in Africa, Asia, Europe, Australia and America

Another possibility will be TYPE C * companies which have land, buildings, machinery and workers, but which produce nothing now, or are not working at full capacity. But it will take longer to accomplish results for such companies. TYPE D: The most difficult will be people who have an idea for creating a new business, but the idea is all they have.

COST OF SEARCH AND SELECTION

The cost will be different for each company depending upon the size of their production capacity, product types.

For type A and type B companies the cost will usually be $25,000 and require about 6 months

For type C companies the cost will usually be about $100,000 and require from 12 to 18 months.

For type D companies the cost will usually be about $300,000 and require 12-18 months

THE FUNCTION OF OUR REPRESENTATIVE IN YOUR COUNTRY

The function of our representatives will be to find companies

who want to make this economic progress and wish to hire Palms & Company as their Investment Bankers to do this work. Payment for this work must be made at the beginning of this work.

MY FUNCTION

My function is for me to evaluate the information given to me and decide if I think I can help the client. If I decide I believe I can help them, then I will invite them to hire me and pay me to do this work. I will then represent them and make contact with international customers in all the world markets for them, and determine how much international customers now pay for products to their existing suppliers.

Then the firm and I an dour representative must together calculate how much it will cost for labor, raw materials and expenses to produce the products and whether a profit will result from selling them for the prices that can be obtained on world markets and if the firm can offer products to world markets at lower prices or higher quality then their international competitors.

If the answer is yes, it will lead to contracts to sell and export production and make a profit. The completion of this work will lead to the NEXT STEP

"2. Search of the prospective investors, classification of their sphere of activity and further work with them under the particular (specific) program, requiring for an investment of the finance."

I have already conducted for thirty years to search for prospective investors. This work does not have to be done by you. I have only to present the results of the FIRST STEP to the potential investors and prepare and present to them a proposal for capital and to negotiate the terms and conditions and advise the company what they should do.

THE STEPS FOR ACCOMPLISHING THIS SECOND STEP OR PHASE:

• When the step of finding markets and customers is completed we will know the other questions which must be answered. Here is a list of some of the possible questions. I have also listed some of the variants for possible solutions. There are many more solutions. I cannot list them all now. I will provide the knowledge and 40 years experience about all variants, as I do the work and decide which variant is the best choice.
• How will we pay suppliers for raw materials?
• How will we pay labor and overhead
• What new machinery and equipment are necessary to make the products the customers have agreed to buy from us and what will it cost and how will it be paid for
• How will we meet customers terms and conditions for guarantee of quality and delivery according to agreed time.
• What methods of shipment will we use
• What agreements are necessary with Customs Department
• What agreements are necessary for instrumentalities of government which claim competence in order to have concurrence and acceptance of government to the business activities of the company and its international customers.

VARIANTS OF SOLUTIONS TO QUESTIONS

• Credit from Export-Import Bank and other contacts of Palms & Co.
• Use of Western Bonded Warehouses for Inventory Financing, quality and delivery guarantees and payment mechanisms and guarantees
• Equity participation by suppliers and investment bankers
• Formation of U.S. or European company by Company as affiliate ( subsidiary or filiaal) which is 100% owned by company
• Compensatory Finance ( raw materials in exchange for finished product)
• Merger with international company
• "Guarantee' of Bank letters of credit by Western Banks and U.S. Government
• Import export "swaps" (exchanges)
• Registration of shares of company on Western stock exchanges.
• Use of GAAP (generally accepted accounting practices) mechanisms to create "Collateral"

COST OF SOLVING QUESTIONS OF CAPITAL & FINANCE

The cost will be different for each company depending upon the size of their production capacity, product types.

• For type A and type B companies the cost will usually be 3% to 5% of the capital that is required and require about 6 months to complete.
• For type C companies the cost will usually be about 3% to 5% of the capital that is required, minus $75,000, and require from 12 to 18 months to complete. (The reason for the discount of $75,000 is that part of this work has already be done in the first step because it must be done in the first step with a company of type C)
• For type D companies the cost will usually be about 3% to 5% of the capital that is required minus $275,000, and require 12-18 months. (The reason for the discount of $275,000 is that part of this work has already be done in the first step because it must be done in the first step with a company of type D).

THE FUNCTION OF OUR REPRESENTATIVE IN YOUR COUNTRY

THE function of the representatives of Palms & Company, will be to obtain copies of all Laws about taxes, customs department, export laws, duty, tariffs, VAT, licenses and instrumentalities of government which claim to exercise competence about international commerce activities of the company. These must be in both English and the official language. You may translate them yourself or hire translators to do it for you. You will also do the work of interlocutor/liaison with the government to obtain their concurrence to the agreements of the company about international activity

MY FUNCTION

My function is for me to evaluate create the agreements for capital and finance and to negotiate them for the company with the investors and financiers and to advise you what agreements you must obtain from the instrumentalities of the government according to the laws you have provided to me. "Now we have begun active activity on item 1. I search for the partners in USA for long term cooperation on attraction of the investments in republic and management of other mutually advantageous work."

ABOUT YOUR REMARKS I ADVISE YOU AS FOLLOWS:

• The step is premature until the STEP ONE, which I have described above. is first finished.
• In any case, this step is performed by me.
• A search is not necessary since I have already completed a search. What is necessary is the presentation of a proposal based upon completion of STEP ONE.

I can make one other suggestion about this variant. It would be useful to the Government to engage my services as consultant to advise them about the way the legislation should be changed to remove the barriers and obstacles in the law which prevent and discourage economic development of their economy and prevent international investment.

As part of this work, I also offer to act as their representative to publicize the changes in law which we design together. This publicize activity will be directed to Western investors for the purpose of renewing their interest in investments in republic and management of other mutually advantageous work, based upon improvements in the laws.

"We begin our work from development of the plan of joint investment activity on territory of republic with allowance for of opportunities of our company for that "smoothly" to begin its (his) realization"

As I have described to you in this message the beginning of your work must lie in a somewhat different direction then you have thought, if you want it to bring concrete results. The result will then be as you wish it to be. I am beforehand grateful for the answer and recommendations for development for our work."

I also am grateful for your proposed collaboration and cooperation in this work and look forward to your opinion about what I have written. Please feel free to ask any questions and also to say your frank opinion about my recommendations and advice.

MY FURTHER GENERAL REMARKS

The economic policies and regulations of your Republic have been destructive to its economy and long term improvement of economic conditions of the people and government. Fear has produced a policy which places short term exploitation and survival ahead of long term interests. This is a shot-sighted and disadvantageous policy because: In the next 50 years the nature of energy will change radically away from fossil fuel orientation. With vision one can see that energy prices will fall. The long term wealth of your republic lies in exporting value added products.

• The long term world demand for fuel is dropping below production and will result in lower prices. Your Republic has productive potential to exchange its production with market economy nations for energy.
• Acceptance of short term solutions will limit the potential for economic development. In the long term, the utilization of human resources is essential for economic development.
• Short term promises of will bring less solution than long term GDP expansion.
• Russia is economically weak. Its short term support of government and an elite will exhaust it natural resources unless human resources are developed as a long term export.

For all these reasons, present economic and political policy destroys opportunities for long term economic development. Only by adopting world norms of economic policy can your Republic join the global economy which is the only possible source of support for its economic advancement.

In the long term, my ability to implement economic development in your Republic and expansion of GDP through capital investment, will be greatly affected by the economic policies and regulations of your government. Without government cooperation, I can only create isolated instances of economic success in industries that will become "islands" or "free trade zones" within a nation that as a whole entity cannot participate in economic progress.

I believe it is useful to create such "islands" to demonstrate to government officials the potential of their nation and to earn their future support for policies that will allow the spread (proliferation) of these "models" throughout the economy. But it would save the government and the population much unnecessary economic problems if government policies would follow global norms of economic policy as soon as possible.

The real priority is not capital, but fair government regulations within your Republic that demonstrate that the existing human, natural and machinery resources can be utilized properly and fully and function freely. If these existing resources are prevented from functioning normally, then no amount of capital can change the problem of low per-capita GDP (Gross Domestic Product) production. These elements of economic life must be permitted function freely without regulations that destroy them. The real assets of your Republic are its human resources. The freeing and enabling of human creative potential to function is the real solution to economic development, not just capital.

There is a lot to be done. The first step is permission to do it. That means legal freedom to function economically.

This article was written in 1996.

Remarks

It has taken longer for Russians to wake up to reality then i thought.

I hope that in 1999, with your collaboration, and with the cooperation of the government, this work can begin, so that life can become the joy it ought to be.

God help us in that work.

God Bless the People of your Republic

Dr. Peter J. Palms, IV

President

Palms & Company, Inc., Investment Bankers

Tel 1 (206) 828-6774

E-mail <palms@PeterPalms.com>

For discussions in Russian language

Comments: Russian General Directors will benefit from the advice of an experienced American Investment Banker in preparing investment capital proposals and dealing with questions about disclosures. we invite your inquiries

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