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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 1997
REGISTRATION NO. 333[ ]
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 4813 13-3769217
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
780 Third Avenue, Suite 1600, New York, New York 10017
(212) 486-2900
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND
PRINCIPAL PLACE OF BUSINESS AND TELEPHONE NUMBER)
RONALD G. NATHAN
President
Russian Wireless Telephone Company, Inc.
780 Third Avenue, New York, New York 10017
(212) 486-2900
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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COPIES TO:
STEVEN D. DREYER, ESQ. LAWRENCE G. NUSBAUM III, ESQ.
HALL DICKLER KENT FRIEDMAN & WOOD, LLP GUSRAE, KAPLAN & BRUNO
909 Third Avenue 120 Wall Street
New York, New York 10022 New York, New York 10005
Telephone No. (212) 339-5400 Telephone No. (212) 269-1400
Telecopier No. (212) 935-3121 Telecopier No. (212) 809-5449
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of the registration statement.
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If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM PROPOSED
OFFERING MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO PRICE PER AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED SECURITY OFFERING PRICE FEE
- ------------------------------------------------------------------------------------------------
Common Stock, $.01 Par Value (the
"Common Stock") to be Sold by
the Registrant................. 1,738,250(1) $ 7.00 $12,167,750 $3,687.20
- ------------------------------------------------------------------------------------------------
Five Year Redeemable Common Stock
Purchase Warrants (the
"Warrants") to be Sold by the
Registrant..................... 2,300,000(2) .50 1,150,000 348.48
- ------------------------------------------------------------------------------------------------
Common Stock Issuable Upon Exer-
cise of Warrants to be Sold by
the Registrant................. 2,300,000(3) 7.25 16,675,000 5,053.03
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Common Stock to be Sold by
Certain Selling
Securityholders................ 1,155,000(4) 7.00 8,085,000 2,450.00
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Warrants to be Sold by Certain
Selling Securityholders........ 2,450,015 .50(5) 1,225,008 371.21
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Common Stock Issuable Upon Exer-
cise of Selling
Securityholders' Warrants...... 2,450,015 7.25(6) 17,762,608 5,382.61
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Common Stock Issuable Upon Exer-
cise of an Option Held by a
Selling Securityholder......... 25,000 2.00(7) 50,000 15.15
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Representative's Warrant......... 1 10.00 10 n/a
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Common stock Issuable Upon Exer-
cise of Representative's
Warrant........................ 225,500(3) 8.40(8) 1,894,200 574.00
- ------------------------------------------------------------------------------------------------
Warrants Issuable Upon Exercise
of Representative's Warrant.... 200,000(3) .60(8) 120,000 36.36
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Common Stock Issuable Upon Exer-
cise of Warrants Issuable Upon
Exercise of Representative's
Warrant........................ 200,000(3) 8.79(8) 1,740,000 527.27
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Totals...................... -- -- $60,869,576 $18,445.33
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(1) Includes 338,250 shares of Common Stock which the Underwriters have the
option to purchase to cover over-allotments, if any.
(2) Includes 300,000 Warrants which the Underwriters have the option to purchase
to cover over-allotments, if any.
(3) Pursuant to Rule 416, there are also being registered such additional shares
of Common Stock as may be issued pursuant to the anti-dilution provisions
of the Warrants and the Representative's Warrants.
(4) Includes 855,000 shares of Common Stock which the Underwriters have agreed
to purchase, and 300,000 shares of Common Stock to be offered on a delayed
basis in non-underwritten transactions by certain selling securityholders.
(5) Based upon the public offering price of the Warrants.
(6) Based upon the exercise price of the Warrants.
(7) Based upon the exercise price of the Option.
(8) Based upon 120% of the maximum offering price of the Common Stock and the
Warrants, as the case may be.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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EXPLANATORY NOTE
The Registration Statement contains a Prospectus (the "Company Prospectus")
which will be used in connection with the underwritten offering of up to(a)
2,255,000 shares of the Common Stock, $.01 par value, of the Registrant (the
"Common Stock"), 1,400,000 shares of which will be offered by the Registrant and
855,000 shares of which will be offered by certain selling securityholders (the
"Selling Stockholders"); and (b) 2,000,000 five year redeemable warrants to
purchase Common Stock (the "Redeemable Warrants"), all of which are being
offered by the Registrant. Following the Company Prospectus, there are alternate
pages to be included in a second prospectus (the "Alternate Prospectus") which
will be used by selling securityholders (the "Selling Securityholders") in
connection with an offering to be made on a delayed, non-underwritten basis by
them for their accounts of 300,000 shares of Common Stock, 2,450,015 Redeemable
Warrants and 25,000 shares of Common Stock to be issued upon exercise of an
option held by one of the Selling Securityholders. The Alternate Prospectus will
be identical to the Company Prospectus, except for the changes indicated by the
alternate pages. Such changes will include alternate front and back outside
cover pages (to be substituted for the cover pages of the Company Prospectus),
alternate pages containing additional information concerning the Selling
Securityholders and the plan of distribution disclosed under the captions
"Selling Securityholders" and "Plan of Distribution." The Alternate Prospectus
will omit matters not applicable to the offering to be made thereby, including
"Underwriting" and the disclosures concerning the counsel to the Representative
set forth under the caption "Legal Matters."
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 28, 1997
PROSPECTUS
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
2,255,000 SHARES OF COMMON STOCK AND
2,000,000 FIVE YEAR REDEEMABLE WARRANTS
Russian Wireless Telephone Company, Inc., a Delaware corporation (the
"Company"), hereby offers (the "Offering") 1,400,000 shares of common stock,
$.01 par value (the "Common Stock") of the Company and 2,000,000 redeemable
common stock purchase warrants (the "Redeemable Warrants"). The initial public
offering prices of the Common Stock and the Redeemable Warrants are $7.00 and
$.50, respectively. This Prospectus also relates to the offering (the "Selling
Stockholders' Offering") of 855,000 shares of Common Stock by certain selling
stockholders (the "Selling Stockholders"). Both the Offering and the Selling
Stockholders' Offering are being sold through a group of underwriters (the
"Underwriters") for whom J.W. Barclay & Co., Inc. (the "Representative") is
acting as the representative. See "Underwriting." The Common Stock and
Redeemable Warrants offered hereby will be separately tradeable immediately upon
issuance and may be purchased separately. Investors will not be required to
purchase shares of Common Stock and Redeemable Warrants together or in any
particular ratio. Each Redeemable Warrant entitles the holder to purchase one
share of Common Stock, at an exercise price of $7.25 (the "Exercise Price"),
subject to adjustment, commencing two years from the date of this Prospectus
(the "Effective Date") until the close of business on [ ], 2002 [the
fifth anniversary of the Effective Date].
The Redeemable Warrants are redeemable, in whole or in part, by the Company
at a price of $.50 per Redeemable Warrant commencing two years after the
Effective Date and prior to their expiration, provided that (i) prior written
notice of not less than 20 days is given to the holders of the Redeemable
Warrants, and (ii) the closing bid price (as defined) for the 20 consecutive
trading days immediately prior to the date on which notice of redemption is
given shall have exceeded $14.50 per share. Notwithstanding the foregoing, the
Redeemable Warrants may be exercised and/or redeemed during the one year period
commencing on [ ], 1998 [the first anniversary of the Effective Date]
upon the express written consent of the Representative. See "Description of
Securities -- Redeemable Warrants."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE [ ] AND
"DILUTION".
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prior to this Offering, there has been no market for the Common Stock or
the Redeemable Warrants. The Company has made applications for inclusion of the
Common Stock and Redeemable Warrants on the Nasdaq SmallCap Market under the
symbols [RWTC] and [RWTW], respectively, and for listing of the Common Stock and
Redeemable Warrants on the Boston Stock Exchange and the Pacific Stock Exchange
under the symbols [RWT] and [RWTW], respectively. There can be no assurance that
any of such applications will be granted, or if any of such applications is
granted, that an active and liquid market in such securities will develop. See
"Risk Factors" and "Underwriting."
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UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS (3)
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Per Share.................................. $7.00 $.70 $6.30 $6.30
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Per Redeemable Warrant..................... .50 .05 .45 --
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Total (4)............................. $16,785,000 $1,678,500 $9,720,000 $5,386,500
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(1) Does not include (i) a warrant to be issued to the Representative to
purchase 225,500 shares of Common Stock and 200,000 Redeemable Warrants, at
exercise prices equal to 120% of the respective public offering prices of
the Common Stock and Redeemable Warrants (the "Representative's Warrant"),
(ii) a non-accountable expense allowance payable to the Representative
equal to 3% of the gross proceeds of the Offering and (iii) a consulting
agreement providing for fees totalling $177,420 which is payable to the
Representative in full on the closing of this Offering. The Company has
agreed to indemnify the Underwriters against, or contribute to losses
arising from, certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting estimated expenses of this Offering, including the
Representative's non-accountable expense allowance( net of a $25,000
advance paid by the Company), of $849,000 in the aggregate (or $924,533 if
the Underwriters' over-allotment option is exercised in full) payable by
the Company.
(3) Before deducting the Representative's non-accountable expense allowance of
$179,550 payable by the Selling Stockholders.
(4) The Company has granted the Representative an option exercisable for a
period of 45 days from the date of this Prospectus to purchase up to an
additional 338,250 shares of Common Stock and 300,000 Redeemable Warrants,
upon the same terms and conditions as the Common Stock and Redeemable
Warrants being offered hereby, solely to cover over-allotments, if any (the
"Over-Allotment Option"). If the Over-Allotment Option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to the Selling Stockholders will be
$19,302,750, $1,731,308, $13,317,750 and $5,985,000, respectively. See
"Underwriting."
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The Common Stock and Redeemable Warrants are being offered by the several
Underwriters named herein on a firm
commitment basis, subject to prior sale, when, as and if delivered to and
accepted by them and subject to certain other conditions. It is expected that
delivery of the certificates representing the Common Stock and Redeemable
Warrants will be made against payment therefor at the offices of J.W. Barclay &
Co., Inc., One Battery Park Plaza, New York, New York 10004, or through the
facilities of the Depositary Trust Company, on or about , 1997.
J.W. BARCLAY & CO., INC.
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THE DATE OF THIS PROSPECTUS IS , 1997
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[INSIDE FRONT COVER OF PROSPECTUS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND REDEEMABLE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
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AVAILABLE INFORMATION
The Company has filed with the Washington, D.C. office of the U.S.
Securities and Exchange Commission (the "Commission" or "SEC") a registration
statement on Form SB-2 (the "Registration Statement") under the Securities Act
which includes this Prospectus. This Prospectus, which constitutes a part of the
Registration Statement does not contain all the information set forth in the
Registration Statement and exhibits thereto. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement and the exhibits thereto. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Company is subject to the reporting requirements of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"). Reports, proxy and
information statements and other information filed by the Company thereunder may
be inspected without charge, and copied at prescribed rates at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.
Washington D.C. 20549; and at the Commission's Regional Offices at Seven World
Trade Center, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. In addition thereto, such reports, proxy and
information statements and other information will be accessible and retrievable
from the Website maintained by the Commission at http://www.sec.gov.
The Company has applied for listing of the Common Stock and Redeemable
Warrants on the Nasdaq SmallCap Market. The Company has also applied for listing
of the Common Stock and Redeemable Warrants on the Boston Stock Exchange and the
Pacific Stock Exchange. Copies of the reports, proxy and information statements
and other information which the Company will file can be inspected and copied at
the public reference facilities maintained by the Nasdaq Stock Market at 1735 K
Street, N.W., Washington, D.C. 20006.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent accountants after the
close of each fiscal year, and will distribute such other periodic reports to
its stockholders as the Company may deem to be appropriate, or as may be
required by law. The Company's fiscal year ends on December 31 of each year.
In addition to (i) the 1,400,000 shares of Common Stock and 2,000,000
Redeemable Warrants being offered by the Company; and (ii) the 855,000 shares of
Common Stock being offered by the Selling Stockholders, the Registration
Statement of which this Prospectus is a part also covers 300,000 shares of
Common Stock, 2,450,015 Redeemable Warrants (and the shares of Common Stock
issuable upon exercise thereof), as well as 25,000 shares of Common Stock
issuable upon exercise of an option, all of which are being offered by certain
selling securityholders (the "Selling Securityholders").
ENFORCEMENT OF CIVIL LIABILITIES
The Company was incorporated in the State of Delaware. However,
substantially all of the assets of the Company are located in the Russian
Federation, and are owned by two closed joint stock companies organized under
the laws of the Russian Federation. The Company is the owner and holder of 75%
of the outstanding capital stock of each of such joint stock companies, and the
balance of the outstanding shares of capital stock of such companies is owned by
an individual who is a former citizen of the Russian Federation, and is now a
citizen of the United States, and who, in his capacity as a key employee of the
Company, spends the majority of his time outside of the United States. By reason
of the foregoing, it may not be possible for investors to effect service of
process within the United States upon such joint stock companies or said key
employee, or to enforce in the United States or outside of the United States
judgments obtained against such joint stock companies or key employee in the
United States courts, or to enforce in the United States courts judgments
obtained against such joint stock companies or key employee in courts in
jurisdictions outside of the United States, in each case, in any action,
including actions predicated upon the civil liability provisions of the United
States securities laws. In addition, it may be difficult for investors to
enforce, in original actions brought in jurisdictions located outside of the
United States, liabilities predicated upon the United States securities laws. No
treaty exists between the United States and the Russian Federation for the
reciprocal enforcement of foreign court judgments. See "Risk Factors -- Legal
Risks."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. As used in this Prospectus, (i) "Corbina" means Closed Joint
Stock Company Corbina Telecommunications, a closed joint stock company organized
under the laws of the Russian Federation which is 75% owned by the Company and
25% owned by Mikhail Leibov ("Mr. Leibov") , a key executive of the Company; and
(ii) "CompTel" means Closed Joint Stock Company CompTel Ltd., a closed joint
stock company organized under the laws of the Russian Federation which is 75%
owned by the Company and 25% owned by Leibov. See Appendix A for the definitions
of certain terms used in this Prospectus. See Appendix B for a description of
recent historical, political and economic conditions in the Russian Federation
(which is sometimes hereinafter referred to as "Russia").
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option or the Representative's
Warrant, and all financial statements and data contained in this Prospectus have
been presented in accordance with U.S. generally accepted accounting principles.
See "Underwriting."
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THE COMPANY
Russian Wireless Telephone Company, Inc., a Delaware corporation, through
its Russian subsidiaries, Corbina and CompTel (the "Subsidiaries"), is a
provider of local, domestic and international telecommunications services,
principally in the metropolitan area of the city of Moscow and the area
encompassing the Moscow Oblast in the Russian Federation (collectively, the
"Moscow Region"). It intends to increase the volume of telecommunications
business that it conducts within the Moscow Region, and expand its business by
offering its telecommunications services in other urban areas of the Russian
Federation.
The Company's goal is to become a preferred provider of telecommunications
services initially to the business community in the Moscow Region, and
subsequently to other markets in the Russian Federation. The Company believes it
can achieve such goal by providing high quality, cost effective local and long
distance telecommunications services in such areas. The Company intends to
provide such services by using the net proceeds of this Offering to construct a
state-of-the-art wireless local loop telecommunications network and to expand
its long distance telecommunications operations.
PROPOSED WIRELESS LOCAL LOOP OPERATIONS
The Company intends to construct and operate, through CompTel,
state-of-the-art wireless local loop telecommunications systems in the Moscow
Region, and in other "under-telephoned" target markets in the Russian Federation
and other countries of the former Soviet Union. CompTel has applied to the
Ministry of Communication of the Russian Federation (the "MOC") for a license to
operate its proposed wireless local loop network, and for assignment of radio
frequencies for its use in connection with such operations. No assurance can be
given that such application will be granted. If such license and frequencies are
not issued, the Company will not be able to construct or operate its proposed
wireless local loop network. See "Risk Factors."
A wireless local loop system is a radiotelephone system that provides
telecommunications service to fixed locations, such as homes and businesses,
without the traditional network of poles and two-wire copper cables. It utilizes
a conventional telephone handset that is plugged into a radio receiver unit and
operates in exactly the same manner as a conventional telephone. In addition,
the system provides the customer at least limited mobility; the communications
system is fully accessible as long as the subscriber moves around within the
system's coverage area. The primary advantage of a wireless local loop network
over traditional wireline technology is speed of installation. The current
worldwide backlog of telephone service, estimated at over forty million lines,
is a direct result of the labor intensive nature of the traditional deployment
process involving laying cables and hard-wiring each line to the switch. A
telephone switch typically takes several weeks to install, and individual phone
lines, in both remote as well as urban areas, can require several years,
depending on the size of the proposed system. With a wireless local loop system,
however, several thousand customers inside a typical coverage area (with a
radius of approximately 18 miles) can obtain instant access to the network when
the system is activated. Deployment of a wireless local loop system drastically
reduces installation time to a few weeks for an entire communications system.
See "Business -- CompTel's Proposed Wireless Local Loop Operations."
LONG DISTANCE TELECOMMUNICATIONS OPERATIONS
Corbina is a switch-based reseller of domestic and international long
distance services primarily to business customers in the Moscow Region. Corbina
began commercial operations in March, 1996 and, based upon information available
to management, it currently is the largest reseller of long distance services in
the Russian Federation and the former Soviet Union. Corbina's long distance
operations consist of reselling the long distance services of Russian long
distance carriers including Rustelnet and Global One ("Global One"), a joint
venture of Sprint Communications Company, Deutche Telekom AG and France Telecom.
Pursuant to agreements that Corbina has entered into with such primary long
distance carriers, it offers to its customers the long distance services of
these carriers at rates lower than those available directly from the carriers.
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RUSSIAN TELECOMMUNICATIONS INDUSTRY OVERVIEW
In the Soviet era, telecommunications in the Russian Federation (and in the
other republics of the former Soviet Union) was viewed as existing principally
to serve the defense and security needs of the state. As a result, the Company
believes that the public telecommunications network in the Soviet Union was
underdeveloped. With the break-up of the Soviet Union and the liberalization of
the economies of its former republics, the demand for telecommunications
services has increased significantly. However, the Company believes that Russia
and the governments of the countries of the former Soviet Union do not currently
have the significant capital necessary for the development of the
telecommunications infrastructure. As a result, they have actively encouraged
market liberalization, privatization and foreign investment in the
telecommunications sector. This has resulted in significant development in the
area of fixed wire overlay systems, private networks and cellular and data
services. As modern telecommunications capability is critical to the successful
transition to a market economy, it is expected that the next stage of
development will focus on basic local telecommunications infrastructure.
The Company believes that the lack of highly developed local and long
distance telecommunications systems in Russia has created a significant market
opportunity for the Company. Inadequate investment in public telecommunications
during the Soviet era and restrictions on access to advanced Western technology
have resulted in an underdeveloped telephone system in the Russian Federation.
According to published reports, the number of access lines per 100 people in the
Russian Federation is significantly lower than in most developed countries. As
private enterprise has developed in the Russian Federation since the break-up of
the former Soviet Union, the demand for quality telecommunications services has
increased dramatically. According to the MOC, there were approximately 26
million telephone lines in Russia with a waiting list for telephone line
installation of 9.7 million at year end 1995, indicating significant pent-up
demand. The lack of highly developed wireline telecommunications systems in
Russia has resulted in some subscribers looking to wireless telecommunications
systems, primarily cellular, as a substitute, rather than a supplement, to
wireline systems. The Company believes that the high cost and lengthy time
required to build the infrastructure necessary to install and upgrade local
wireline services makes it feasible for the Company to provide wireless local
loop services as a primary form of telecommunications in certain ares of the
Moscow Region where wireline services are inadequate or non-existent.
The Company believes that the Moscow Region, as the commercial and
political center of the Russian Federation, has the greatest demand for quality
telecommunications services. According to the MOC, in the Moscow Region there
was a waiting list for line installation of over 164,000 at December 31, 1995.
The Company believes that the Moscow Region, which has a per capita income level
approximately three times the national average of the Russian Federation, has
the ability to support a significant increase in local telecommunications
subscribers.
The telecommunications market in the Moscow Region, an area with a
population of approximately twelve million, is characterized by low activated
penetration rates, substantial bottlenecks on the public network and outdated
switching technology. The Company believes the Moscow Region is an attractive
market for the provision of integrated telecommunications services due to the
current inadequacies of the public network as well as the rapid development of
Russian and foreign businesses in the city. According to published reports, the
public telecommunications market in the Moscow Region, with current spending of
approximately $4.5 billion per annum, has grown by 350% since 1992 in dollar
terms. The Company believes that the Moscow City Telephone Network ("MGTS"), the
government owned provider of local telecommunications services within the Moscow
Region, does not currently have the financial resources to develop the network
infrastructure required to accommodate what the Company perceives to be a
continuing and increasing market demand for more and better local and long
distance telecommunications services.
RUSSIAN LONG DISTANCE MARKET
The Company believes that the Russian long distance market remains
relatively underdeveloped, with poor network infrastructure resulting in limited
network capacity. The size of the Russian long distance market, according to
published reports, has grown significantly, with international and long distance
services
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accounting for approximately 57% of the estimated $4.5 billion market which
currently exists for telecommunications services throughout the Russian
Federation. The Company also believes that the volume of international and long
distance telephone services will continue to grow as current and planned
improvements to the Russian Federation's long distance telecommunications
network infrastructure are made by Rostelecom, the government controlled
provider of national and long distance telecommunications services, and other
privately held licensed long distance carriers.
------------------------
The Company was organized in April 1994 under the name Telcom Group USA,
Inc., and was certified by the New York Public Service Commission to operate as
a reseller of all forms of telephone services via landline telephone company or
other common carrier facilities located in the state of New York. The Company
was engaged principally as aprovider of long distance telecommunications
services in the New York metropolitan area. With the passage of the Federal
Telecommunications Act of 1996, and the subsequent entry of long distance
carriers into local markets, the Company began to phase out operations in New
York and focused its efforts on the international markets, particularly the
Russian Federation. In July 1996, the Company purchased from Mr. Leibov for
$5,000 an option to acquire 105 of the 140 issued shares (i.e., 75%) of the
capital stock of Corbina for $190,000. On January 28, 1997, the Company
exercised its option, and acquired said 75% ownership interest in Corbina. As of
the date of this Prospectus, the Company's sole operations and sole source of
revenue consists of the long distance reselling activities conducted by Corbina
in the Moscow Region. The Company is wholly dependent on the proceeds of this
Offering to construct its proposed wireless local loop network and to expand its
long distance telecommunications reselling operations in the Moscow Region.
Moreover, the Company is also dependent upon CompTel's receipt of the license
and frequency assignments necessary to construct and operate the proposed
wireless local loop network. No assurances can be given that such license will
be granted or that such frequencies will be assigned. In the absence of
CompTel's receipt thereof, the Company will not be able to construct or operate
the proposed wireless local loop network. During the year ended December 31,
1996, the Company incurred a net loss of $1,470,878 on total revenues of $8,043.
During the period from December 1, 1995 (inception) through September 30, 1996,
Corbina incurred a net loss of $204,908 on total revenues of $561,820. See "Risk
Factors."
The Company's office is located at 780 Third Avenue, Suite 1600, New York,
New York 10017, and its telephone number is (212) 486-2900. The Subsidiaries'
offices are located at 30/15 Ryazansky Prospect, Moscow, Russian Federation.
RECENT DEVELOPMENTS
In December 1996, the Company borrowed $750,000 from three nonaffiliated
persons and issued to such persons an aggregate of 450,000 shares of Common
Stock (the "Bridge Financing"). The Company must repay said $750,000, together
with interest thereon accruing at a rate of 8% per annum on the earlier to occur
of (i) three business days following the receipt by the Company of the net
proceeds of the Offering or (ii) October 31, 1998. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Selling Stockholders."
6
10
THE OFFERING
SECURITIES OFFERED BY
The Company.................................. 1,400,000 shares of Common Stock and
2,000,000 Redeemable Warrants
The Selling Stockholders................... 855,000 shares of Common Stock
Common Stock Outstanding
Before the Offering (1).................... 2,985,000 shares
Common Stock to be Outstanding
After the Offering (2).................. 4,385,000 shares
Redeemable Warrants Outstanding
Before the Offering (3).................... 3,200,015
Redeemable Warrants to be Outstanding
After the Offering (4).................. 5,200,015
Exercise Terms.......................... Each Redeemable Warrant entitles the holder
thereof to purchase one share of Common Stock
for $7.25 (subject to adjustment in certain
circumstances) during the three year period
commencing two years after the Effective
Date. (4)
Expiration Date......................... [ ], 2002 [the fifth anniversary of the
Effective Date].
Redemption.............................. Redeemable by the Company, in whole or in
part, at a price of $.50 per Redeemable
Warrant commencing two years after the
Effective Date and prior to their expiration
(subject to earlier redemption with the
Representative's written consent), provided
that (i) prior written notice of not less
than 20 days is given to the holders of the
Redeemable Warrants, and (ii) the closing bid
price (as defined) for the 20 consecutive
trading days immediately prior to the date
onwhich notice of redemption is given shall
have exceeded $14.50 per share.
Use of proceeds.............................. The net proceeds of the Offering will be
used, among other purposes, to provide
additional capital to Corbina, to purchase
switching hardware and software for
connection of CompTel's customers to the
Moscow public telephone system, to purchase
equipment and to acquire antenna sites to be
used in connection with the development and
construction of CompTel's proposed wireless
local loop telecommunications system in the
Moscow Region, to repay $750,000 borrowed in
connection with the Offering and for working
capital. See "Use of Proceeds."
PROPOSED NASDAQ SYMBOLS
Common Stock................................. RWTCW
Redeemable Warrants.......................... RWTCW
PROPOSED BOSTON AND PACIFIC STOCK EXCHANGE
SYMBOLS
Common Stock................................. [ ]
Redeemable Warrants.......................... [ ]
Risk Factors................................. The Offering involves a high degree of risk
including, but not limited to, (i) risks of a
political, economic and social nature
regarding the
7
11
Russian Federation; (ii) currency, and
dividend payment restrictions pertaining to
the Company's Russian subsidiaries; (iii)
risks pertaining to the Russian legal system;
and (iv) risks relating to the Company, such
as its limited operating history, its
dependence on key management in the US and
the Russian Federation, the Company's ability
to manage the growth and expansion that will
be necessary to achieve profitability, the
competitive environment for long distance
services in theRussian Federation, the
problems inherent in introducing new
telecommunications technology such as
wireless local loop service; and (v) other
risks, such as the absence of a prior market
for the Company's securities, the large
number of shares of the Company's Common
Stock that will be available for future sale
and substantial immediate dilution. See "Risk
Factors" beginning on page [ ].
8
12
- ------------------------
(1) Does not include up to 4,475,015 shares of Common Stock issuable upon
(i) exercise of (a) 750,000 common stock purchase warrants issued to
investors in the Company's first private placement of securities (the
"First Private Placement Warrants"); (b) 450,000 common stock purchase
warrants issued to investors in the Company's second private placement
of securities (the "Second Private Placement Warrants"), all of which
are being offered for sale pursuant to a separate prospectus by certain
Selling Securityholders; (c) 2,000,015 common stock purchase warrants
issued to investors in the Company's third private placement of
securities (the "Third Private Placement Warrants"), all of which are
being offered for sale pursuant to a separate prospectus by certain
Selling Securityholders; and (d) an option to purchase 25,000 shares of
Common Stock issued to one of the Company's directors (the "Option");
and (ii) issuance of (a) 1,000,000 of Common Stock reserved for
issuance under the Company's Omnibus Stock Option Plan; and (b) 250,000
shares of Common Stock issuable to Mr. leibov pursuant to his
employment agreement with the Company. See "Description of Securities
-- Warrants Issued in Private Placements;" "Management -- Option Issued
to Non-Employee Director;" "-- Executive Employment Agreements;" and
"Concurrent Registration of Securities."
(2) Does not include up to 5,113,265 shares of Common Stock issuable in the
events that (i) all of the 750,000 First Private Placement Warrants,
the 450,000 Second Private Placement Warrants and the 2,000,015 Third
Private Placement Warrants are fully exercised; (ii) the Company issues
338,250 shares of Common Stock upon full exercise of Underwriters'
over-allotment option (and 300,000 shares of Common Stock are issued
upon full exercise of the Redeemable Warrants to be issued in
connection therewith); (iii) all 1,000,000 of the shares of Common
Stock which have been reserved for issuance under the Company's Omnibus
Stock Incentive Plan shall be issued; (iv) up to 250,000 shares of
Common Stock are issued to Mr. Leibov pursuant to the Company's
employment agreement with him; and (v) the 25,000 shares of Common
Stock underlying the Option are issued. See "Management;" "Description
of Securities;" and "Underwriting."
(3) Consists of 750,000 First Private Placement Warrants, 450,000 Second
Private Placement Warrants and 2,000,015 Third Private Placement
Warrants which will be automatically converted into Redeemable Warrants
upon closing of this Offering. See "Description of Securities."
(4) Consists of (i) 2,000,000 Redeemable Warrants being offered by the
Company in the Offering; (ii) 2,450,015 Redeemable Warrants which are
being offered for sale by certain Selling Securityholders on a
non-underwritten basis pursuant to a separate prospectus (including
450,000 Second Private Placement Warrants); and (iii) 750,000 First
Private Placement Warrants which will be automatically converted into
Redeemable Warrants upon closing of this Offering. See "Concurrent
Registration of Securities;" "Description of Securities;" and
"Underwriting."
9
HISTORICAL AND PROFORMA FINANCIAL DATA
The following historical financial data relating to the Company for the
year ended December 31, 1996 has been derived from the audited financial
statements appearing elsewhere herein. Such information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Financial Statements and notes thereto appearing
elsewhere therein.
The Proforma Combined Company information includes and accounts for the
effects of the merger of Russian Wireless Telephone Company, Inc. ("Russian
Wireless") with and into the Company and the Company's acquisition of a 75%
ownership interest in Corbina (i) on the balance sheet as if the merger and
acquisition had occurred on December 31, 1996; and (ii) on the statement of
operations as if the merger and acquisition had occurred on December 31, 1995.
The Proforma as Adjusted information includes and accounts for the effects
of (a) the payment of the principal and accrued interest on certain indebtedness
owed by the Company to a former stockholder and pursuant to the Second Private
Placement, the Third Private Placement and the Bridge Financing, and (b) the
anticipated results of the completion of the sale of 1,400,000 shares of Common
Stock and 2,000,000 Redeemable Warrants offered hereby (not including 338,250
shares of Common Stock and 300,000 Redeemable Warrants subject to the
Underwriters' Over-allotment Option) at assumed offering prices of $7.00 per
share and $.50 per Redeemable Warrant (after deduction of the estimated
underwriting discounts and commissions and the expenses of the Offering) upon
(i) the balance sheet as if the aforementioned events had occurred on December
31, 1996, and (ii) the statement of operations as if such events had occurred on
December 31, 1995.
10
13
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996:
RUSSIAN
TELCOM WIRELESS CORBINA PROFORMA
GROUP TELEPHONE TELECOMMUNICA- PROFORMA COMBINED TRANSACTION PROFORNA AS
USA, INC. COMPANY, INC. TIONS(1) ADJUSTMENTS COMPANY ADJUSTMENTS ADJUSTED
--------- ------------- -------------- ----------- -------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues.................. -- -- $ 562 -- $ 562 -- $ 562
Cost of Services.......... -- -- 423 -- 423 -- 423
------ ---- ------- ------- ------- -------
Gross Profit.............. -- -- 139 -- 139 -- 139
Commission Income......... $ 8 -- -- -- 8 -- 8
------ ---- ------- ------- ------- -------
Net Revenues.............. 8 -- 139 -- 147 -- 147
Operating Expenses:
Officer's Salaries...... 100 -- -- $ 3,150(2) 3,425 175(7) 3,600
175(4)
Selling, General and
Administrative
Expenses.............. 483 35 241 (70)(4) 689 60(5) 749
------ ---- ------- ------- ------- -------
Writedown of Equipment.. -- -- 40 -- 40 -- 40
Depreciation and
Amortization.......... 210 -- -- 56(3) 266 -- 266
------ ---- ------- ------- ------- -------
Total Operating
Expenses................ 793 35 281 3,311 4,420 235 4,655
------ ---- ------- ------- ------- -------
Operating Loss............ (785) (35) (143) (3,311) 4,273 235 (4,508)
------ ---- ------- ------- ------- -------
Other Expenses:
Interest and
financing costs....... 686 -- -- -- 686 (626)(6) --
1,680(8) 1,740
Other Income............ -- -- 8 -- 8 -- 8
------ ---- ------- ------- ------- -------
Total Other Expenses...... 686 -- 8 -- 694 1,054 1,732
------ ---- ------- ------- ------- -------
Loss Before Provision for
Income.................. (1,471) (35) (134) (3,311) (4,951) 1,289 6,240
------ ---- ------- ------- ------- -------
Provision for Income
Taxes................... -- -- (71) -- (71) -- (71)
------ ---- ------- ------- ------- -------
Net Loss.................. $(1,471) $ (35) $ (205) $(3,311) $(5,021) $(1,289) $(6,311)
------ ---- ------- ------- ------- -------
Net Loss Per Share........ $ (.64) $ (14) $ (1,464) -- $ (1.70) -- $ (2.11)
- ---------------
Statement of Operations Proforma Adjustments:
(1) Corbina's data is presented for the period from December 1, 1995 (inception)
through September 30, 1996.
(2) To record increase in compensation expense based on 60% of the assumed
public offering price of the Common Stock.
(3) To record amortization of goodwill.
(4) To record additional salary expense based upon the Company's employment
agreement with Mr. Leibov. See "Management -- Executive Employment
Agreements."
Transaction Adjustments:
(5) To amortize prepaid consulting fees. See "Underwriting."
(6) To reduce interest expense based upon an assumed application of a portion of
the proceeds of the Offering to reduce debt. See "Use of Proceeds."
(7) To record additional shares of Common Stock issuable pursuant to the
Company's employment agreement with Mr. Leibov. See "Management -- Executive
Employment Agreements."
(8) To write-off deferred financing costs.
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BALANCE SHEET AT DECEMBER 31, 1996:
RUSSION
WIRELESS
TELEPHONE
COMPANY, INC.
(FORMERLY PROFORMA
TELCOM GROUP RUSSIAN PROFORMA COMBINED TRANSACTION PROFORMA AS
USA, INC.) WIRELESS CORBINA ADJUSTMENTS COMPANY ADJUSTMENTS ADJUSTED
------------- -------- ------- ----------- ------- ----------- -----------
(DOLLARS IN THOUSANDS)
Current Assets:
Cash and Cash Equivalents.... $ 488 $ $ 3 $ 2 (3) $ 494 $ (177)(6) $ 5,456
5,140(5)
Accounts Receivable, Net..... 250 250 250
Due from Affiliate........... 30 (30)(4)
Deferred Financing Costs..... 1,680 1,680 (1,680)(5)
Prepaid and Other Expenses... 79 31 (5)(1) 106 177(6) 283
------ --- ---- ---- ------ ------ ------
Total Current Assets......... 2,277 285 (223) 2,530 3,460 5,990
Loan Receivable.............. 190 190(1)
Property and Equipment,
Net........................ 20 43 63 63
Investment in Subsidiary..... $ 195(1)
(195)(2)
Goodwill..................... 280(2) 280 280
Other Assets................. 47 47 (25)(5) 22
------ --- ---- ---- ------ ------ ------
Total Assets............. $ 2,534 $ $ 328 $ 57 $2,919 $ 3,435 $ 6,354
====== === ==== ==== ====== ====== ======
Current Liabilities:
Notes Payable.............. 2,658 2,658 (2,658)(5)
Accrued Interest Payable... 359 359 (359)(5)
Deferred Taxes............. 71 71 71
Accounts Payable and
Accrued Liabilities 30(4)
110 35 342 5(3) 452 452
------ --- ---- ---- ------ ------ ------
Total Current Liabilities.... 3,126 35 413 35 3,539 (3,017) 523
Long Term Debt............... 361 361 (361)
Stockholders' Equity
(Deficiency):
Preferred Stock
Common Stock............... 31(2)
22 3 31 ( 5)(3) 30 14(5) 44
Unpaid Common Stock.......... (3) ( 6) ( 3)(3)
( 6)(2)
95(2)
Additional Paid In Capital... 2,340 95 (3,150)(3) 5,490 (6,438)(5) 11,928
(205)(2)
Accumulated Deficit.......... (3,316) (35) (205) 3,150(3) (6,501) (6,501)
------ --- ---- ---- ------ ------ ------
Total Stockholders'Equity
(Deficiency)............... (954) (35) (85) 92 (981) 6,452 5,470
------ --- ---- ---- ------ ------ ------
Total Liabilities and
Stockholders' Equity
(Deficiency)........... $ 2,534 $ $ 328 $ 57 $2,919 $ 3,435 $ 6,354
====== === ==== ==== ====== ====== ======
- ---------------
Proforma Adjustments:
(1) To record the exercise of the Company's option to acquire 75% of Corbina
from Mr. Leibov and repayment of the loan receivable owed to the Company by
Mikhail Leibov.
(2) To consolidate Corbina.
(3) To record the merger of Russian Wireless with and into the Company.
(4) To eliminate intercompany receivables and payables.
Transaction Adjustments:
(5) To reflect repayment of debt and accrued interest, and the sale of Common
Stock.
(6) To record prepaid consulting fees. See "Underwriting."
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RISK FACTORS
An investment in the Common Stock and Redeemable Warrants offered hereby
involves a high degree of risk. Prospective investors should carefully consider
all of the information in this Prospectus including the following risk factors.
LIMITED RELEVANT OPERATING HISTORY; NO EXPERIENCE IN OPERATING BUSINESSES
LOCATED IN THE RUSSIAN FEDERATION; EARLY STAGE OF DEVELOPMENT IN RUSSIA;
CONTINUING LOSSES AND STOCKHOLDERS' DEFICIENCIES; COMPANY'S AND CORBINA'S
ABILITIES TO CONTINUE AS A GOING CONCERNS
Since 1994, the Company has engaged in limited business activities as a
reseller of long distance telephone services in the United States. Although it
has engaged in such business activities since 1994, it has not heretofore
engaged in any business activities in, and has no experience regarding the
operation of any business in, the Russian Federation. During the past nine
months, the Company's resources have been principally dedicated to identifying
business opportunities in the telecommunications industry in the Russian
Federation. The establishment and operation of a proposed wireless local loop
telecommunications system by the CompTel may require further capital
investments, development and regulatory approvals. The Company may be faced with
problems, delays, expenses and difficulties which are typically encountered by
companies in an early stage of development, many of which may be beyond the
Company's control. These include, but are not limited to, undercapitalization,
unanticipated problems and costs related to development, regulatory compliance,
production, marketing, economic and political factors and competition. There can
be no assurance that the Company will be able to develop, provide at reasonable
cost, or market successfully, any of its products or services. Furthermore,
during the year ended December 31, 1996, the Company incurred losses from
operations of $784,848, had a working capital deficiency of $659,259 and a
stockholders' deficiency of $953,610; and during the period from December 31,
1995 (inception) through September 30, 1996, Corbina incurred losses from
operations of $142,662, had a working capital deficiency of $127,847 and a
stockholders' deficiency of $84,594. Such factors may combine to raise
substantial doubt about the Company's and Corbina's respective abilities to
continue as going concerns. In this regard, see the Reports of Independent
Auditors accompanying the Company's and Corbina's audited financial statements
appearing elsewhere herein which cite substantial doubts about the Company's and
Corbina's abilities to continue as going concerns. There can be no assurance
that the Company or Corbina will achieve profitability in the future, if at all.
If the Company and Corbina fail to achieve profitability, the Company's growth
strategies could be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY MANAGEMENT; NO KEY MAN INSURANCE COVERAGE
The Company's various businesses will be managed by a small number of key
management personnel, both expatriate and local. The Company's proposed business
operations are dependent upon Ronald G. Nathan, the Company's Chief Executive,
and Mikhail Leibov, the Chief Executive Officer of Corbina and CompTel, for
technical guidance and management. In 1995, the Company entered into an
employment agreement with Mr. Nathan for a term of two years which has been
extended through December 1999. Such agreement provides for the rendition of
services by Mr. Nathan to the Company as its Chief Executive Officer on a less
than full time basis. The Company has also entered into an employment agreement
with Mr. Leibov which provides for his rendition of services as Chief Executive
Officer of Corbina and CompTel during the five year term which commenced on
February 1, 1997. The Company does not have any agreement with Mr. Leibov which
would prohibit him from competing with the Company upon termination of his
employment with the Company. In the event that Mr. Leibov's services were to
become unavailable to the Company for any reason, the Company's existing and
proposed operations in the Russian Federation would be severely jeopardized. The
Company has applied for key man insurance coverage in the amount of $1,000,000
on each of such individuals. No assurance can be given that such insurance will
be issued covering any or all of such persons. See "Management -- Executive
Employment Agreements."
12
16
ABSENCE OF CONTROL OF SUBSIDIARIES' OPERATIONS; DEPENDENCE ON MR. LEIBOV
The Company's principal assets are its interests in Corbina and CompTel.
Although the Company owns 75% of each of the Subsidiaries, it is completely
dependent upon Mr. Leibov, who owns the remaining 25% of each of the
Subsidiaries, and is in complete control of the management of the Subsidiaries'
operations. In the event that the Company and Mr. Leibov were to become
embroiled in a serious and/or protracted dispute regarding the management or
control of either of the Subsidiaries, the Company would have to engage in a
very time consuming process to find a suitable replacement for Mr. Leibov.
Furthermore, in light of the uncertainties of enforcement of contractual rights,
as well as the rights of controlling shareholders, under Russian law, no
assurance can be given that the Company would be successful in replacing Mr.
Leibov with its chosen successor within any reasonably foreseeable time frame.
GOVERNMENT REGULATION -- LICENSING AND FREQUENCY ALLOCATION
REQUIREMENTS -- COMPTEL'S INABILITY TO CONDUCT OPERATIONS IF LICENSE IS NOT
GRANTED
CompTel can not construct or operate its proposed wireless local loop
system unless and until it receives an appropriate license from the MOC
authorizing it to do so, and granting it permission to utilize certain segments
of the radio frequency spectrum in connection therewith. The licensing,
construction, operation, sale and interconnection arrangements of wireless local
loop telecommunications systems in Russia are regulated to varying degrees by
the MOC. As of the date hereof, CompTel has applied for a license to construct
and operate a wireless local loop system within the Moscow Region, but has not
received such license. There can be no assurance that the license that it has
applied for will be forthcoming and/or that it will be in the form requested by
CompTel in its application to the MOC. Similarly, in connection with such
license application, CompTel has requested permission to operate its proposed
wireless local loop system over specific frequencies, but it has not received
formal notification that the requested frequencies have been granted to it. If
either a license and/or acceptable frequencies are not obtained by CompTel in a
timely fashion, construction of its proposed wireless local loop system will be
delayed. If a license and frequencies are not obtained, CompTel could not build
its proposed local loop network. See "Business -- CompTel's Proposed Wireless
Local Loop Operations -- Telecommunications License."
USE OF SUBSTANTIAL PORTION OF OFFERING PROCEEDS TO PAY PRIOR INDEBTEDNESS
The Company intends to use approximately $3,259,000 (36.74%) of the net
proceeds of the Offering to pay off its indebtedness to the investors in the
Second Private Placement, the Third Private Placement and the Bridge Financing,
and a former shareholder whose shares of Common Stock were redeemed by the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources;" and "Certain
Relationships and Related Transactions."
EFFECT OF MINORITY OWNERSHIP INTEREST UPON POTENTIAL REVENUES FROM SUBSIDIARIES
By reason of the fact that the Company is the owner of 75% of the
outstanding capital stock of each of the Subsidiaries and Mr. Leibov is the
owner of the 25% balance of each of the Subsidiaries, the Company will only be
entitled to receive 75% of the net income which each of the Subsidiaries derives
from the operation of their respective businesses. In addition, upon
satisfaction of certain performance based incentive criteria contained in Mr.
Leibov's employment agreement with the Company, Mr. Leibov may be entitled to
receive from the Company up to 10% of the capital stock of Corbina owned by the
Company. In such event, the Company's ownership interest in Corbina, and its
entitlement to receipt of Corbina's net income would be reduced from 75% to 65%.
See "Management -- Executive Employment Agreements."
NEED FOR ADDITIONAL FUNDS; NO ASSURANCES OF ABILITY TO OBTAIN ADDITIONAL CAPITAL
IF NEEDED
The Company requires substantial capital to pursue its operating strategy.
The Company's management believes that the net proceeds of the Offering will
enable it to undertake its proposed business activities described herein for
approximately 12 months after the closing of the Offering. However, any number
of unanticipated events, over many of which the Company will have no control,
could increase the Company's operating costs and/or decrease the number of
potential and actual subscribers for its Subsidiaries' services.
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17
Inasmuch as there can be no assurance that the Company's business interests will
generate sufficient cash to satisfy current or future projected capital
requirements, in the event that Company encounters a need for additional funds,
either for the purpose of carrying out or expanding its proposed business
operations, there can not be any assurance that such additional financing will
be available when and if needed or, if available, that the terms upon which it
is available will be favorable or acceptable to the Company. Furthermore, if
such additional financing can be obtained on terms acceptable to the Company,
such financing may result in dilution to stockholders, or a diminution in the
value of the Company or both and, consequently, a reduction in the fair market
value of the Common Stock. See "Use of Proceeds."
POLITICAL AND ECONOMIC SITUATION IN THE RUSSIAN FEDERATION; LACK OF POLITICAL
RISK INSURANCE
A favorable political climate in the Russian Federation and the openness of
its markets to United States trade is essential to the success of the Company.
The Russian Federation appears to have embraced political reforms and market
economies. However, there are no local procedures for such vast changes; the
region has known only totalitarianism and a centrally-planned economy for most
of this century. Any reversal in such perceived new political and economic
trends and policies, or in international trade policy generally, could
materially adversely affect the Company's operations. Moreover, the political
situation in the Russian Federation, where the Company expects to generate all
of its revenues in the near future, remains in constant transition. Since the
arrival of the Yeltsin government in December 1991, the Russian Federation has
experienced a proliferation of political parties, an increase of nationalist
sentiment, and a fragmentation of its economic and political institutions. In
addition, there has been a dramatic increase in crime, including organized crime
which may target businesses in the Russian Federation. The viability of the
Russian government has been tested by various political factions gaining
strength and unsuccessful coup d'etats; there can be no assurance that a coup
d'etat will not again be attempted or that any future attempts will not be
successful. In addition, the privatization process in the Russian Federation has
been sporadic.
Because the Russian Federation is in the early stages of development of a
market economy, its commercial framework in still developing. New marketoriented
laws are being enacted, but their application is still uncertain. Although the
Company believes that the Russian Federation has advanced in the area of
commercial law, Russian laws and courts are not well tested in contract
enforcement. Similarly, although Russian law regarding foreign investment
provides protection against nationalization and confiscation, there is little or
no judicial precedent in this area. In addition, a Presidential Decree issued in
September 1993 provides certain other guarantees to foreign companies and
Russian companies with foreign investments that detrimental changes in Russian
regulations which come into effect following the date of registration of a
company will not apply to that company for a period of three years, and that
only Russian laws and decrees of the Russian President may place restrictions on
the activities of foreign investors. However, the position of the Russian
authorities has been that this decree applies only to changes that are directed
specifically at foreign investors, and no foreign company has been able to
obtain an official exemption from detrimental changes under the decree. There
can be no assurance that additional detrimental changes in Russian regulations
will not occur.
The various government institutions and the relations between them, as well
as the government's policies and the political leaders who formulate and
implement them, are subject to rapid and potentially violent change. The
Constitution of the Russian Federation (the "Russian Constitution") gives the
President of the Russian Federation substantial authority, and any major changes
in, or rejection of, current policies favoring political and economic reform by
the President may have a material adverse effect on the Company and the
operations of its Subsidiaries.
The Russian Federation is constituted as a federation of republics,
territories, regions (one of which is an autonomous region), cities of federal
importance and autonomous areas, all of which are equal members of the Russian
Federation. The delineation of authority among the regions, the internal
republics and the federal governmental authorities is, in many instances,
uncertain, and in some instances, contested. In Chechnya, for example, regional
and local authorities openly defied the powers of the federal government,
resulting in a protracted military confrontation. Lack of consensus between
local and regional authorities and the federal government often results in the
enactment of conflicting legislation at various levels and may result in
political
14
18
instability. This lack of consensus may have negative economic effects, which
could be material to the Company and its Subsidiaries.
Furthermore, the political and economic changes in Russia in recent years
have resulted in significant dislocations of authority, as previously existing
structures have collapsed and new structures are only beginning to take shape.
The local press and international press have reported that significant organized
criminal activity has arisen, particularly in large metropolitan centers.
Moreover, the combination of the sudden loss of the tight social control that
was characteristic of the Soviet Union, a large but poorly paid police force, an
increase in unemployment, an influx of unemployed persons from outlying areas to
metropolitan centers and a decline in real wages has led to a substantial
increase in property crime in large cities. In addition, the local press and
international press have reported high levels of official corruption in the
Moscow Region, and elsewhere in the Russian Federation. In an effort to decrease
the levels of criminal activity and corruption, President Yeltsin has issued a
series of decrees granting the security forces very broad powers. It has been
acknowledged that many provisions of these anti-crime decrees violate the
Russian Constitution as well as the Criminal Code of the Russian Federation and
these decrees have been viewed by many as a threat to civil rights. While the
Company and Corbina have not been adversely affected by these factors to date,
no assurance can be given that the depredations of organized or other crime will
not in the future have a material adverse effect on the Company and both of its
Subsidiaries.
The failure of many state-controlled enterprises to pay full salaries on a
regular basis, and the failure of salaries and benefits generally to keep pace
with the rapidly increasing cost of living have led in the past, and could lead
in the future, to labor and social unrest. Such labor and social unrest may have
political, social and economic consequences, such as increased support for a
renewal of centralized authority, increased nationalism (with restrictions on
foreign involvement in the economy of the Russian Federation) and increased
violence, any of which could have a material adverse effect on the Company and
its Subsidiaries.
In addition, a lack of consensus exists over the manner and scope of
government control over the telecommunications industry. Because the
telecommunications industry is widely viewed as strategically important to the
Russian Federation, there can be no assurance that, in light of possible changes
in political power, recent government policies liberalizing control over the
telecommunications industry will continue. Any change in or reversal of such
governmental policies could have a material adverse effect on the Company.
The health of Russia's current president, Boris Yeltsin, is poor and, as a
result, he could be forced to step down, could become incapacitated or could
die. In such event, under the Russian Constitution the prime minister would
become acting president and would be required to call new presidential
elections. This could result in a period of political instability that could
have a material adverse effect on companies operating in Russia.
Foreign firms operating in this region may be subject to numerous other
risks that are not present in domestic operations, including political strife,
the possibility of expropriation, inadequate distribution facilities,
restrictions on royalties, dividends and currency remittances, inflation,
fluctuations of foreign currencies, high and unpredictable levels of taxation,
requirements for governmental approvals for new ventures and local participation
in operations. Such problems could have a material adverse effect on the
Company's operations abroad.
CURRENCY RISKS
The recent history of trading in the rouble as against the U.S. Dollar has
been characterized by significant declines in value and considerable volatility.
Although in recent months, the rouble has experienced relative stability against
the U.S. Dollar, there is a risk of further declines in value and continued
volatility in the future. Corbina's tariffs are denominated, and CompTel's
tariffs will be denominated, in U.S. dollars, but charges are and will be
invoiced and collected in roubles, while their respective major capital
expenditures are and/or will be generally denominated and payable in various
foreign currencies, predominantly, roubles. To the extent such major capital
expenditures involve importation of equipment and the like, current law permits
the Subsidiaries to convert their rouble revenues into foreign currency to make
such payments. The rouble is generally not convertible outside Russia. A market
exists within Russia for the conversion of roubles into other
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currencies, but it is limited in size and is subject to rules limiting the
purposes for which conversion may be effected. The limited availability of other
currencies may tend to inflate their values relative to the rouble and there can
be no assurance that such a market will continue to exist indefinitely.
Moreover, the banking system in Russia is not yet as developed as its Western
counterparts and considerable delays may occur in the transfer of funds within,
and the remittance of funds out of, Russia. Any delay in converting roubles into
a foreign currency in order to make a payment or delay in the transfer of such
foreign currency could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Foreign Currency Translation."
CURRENCY CONTROLS; RESTRICTIONS ON REPATRIATION OF PAYMENTS
While applicable legislation in the Russian Federation currently permits
the repatriation of profits and capital and the making of other payments in hard
currency, the ability of the Company to repatriate such profits and capital and
to make such other payments is dependent upon the continuation of the existing
legal regimes for currency control and foreign investment, administrative
policies and practices in the enforcement of such legal regimes and the
availability of foreign exchange in sufficient quantities in those countries.
The illness of President Yeltsin could result in a change in such
administrative policies in Russia, to the extent that the government and the
Central Bank of the Russian Federation (the "Central Bank") feel constrained (or
may be forced, if there is any risk of significant movements of capital from
Russia in the wake of the elections) to limit the ability of Russian citizens
and foreign investors to transfer capital out of Russia.
In addition, under current currency regulations in Russia, while there do
not appear to be additional administrative requirements for the payment of
dividends or interest on debt, specific licenses from the Central Bank are
required for the making of equipment lease payments to a foreign lessor and for
repayments of principal on debt with a term of more than 180 days. Failure to
obtain such currency licenses where required can result in the imposition of
fines and penalties. While the requirements for obtaining such licenses largely
involve the production of documentation, not only are the documentary
requirements themselves burdensome, but there can be no assurance that the
entity granting the licenses may not impose additional, substantive requirements
for the grant of a license or deny a request for a license on an arbitrary
basis. Furthermore, the time typically taken by the Central Bank to issue such
licenses varies from two to six months.
Finally, the Company's ability to repatriate distributions and other
payments in hard currency will be dependent upon the ability of the Company's
Subsidiaries to bill their customers in U.S. Dollars or the equivalent amount of
local currency, as well as their ability to freely exchange local currency
receipts into U.S. Dollars.
Accordingly, there can be no assurance that, because of various local
currency regulations, the Company will be able fully and/or timely to realize
benefits from its operations in Russia through the receipt of hard currency
payments.
LEGAL RISKS
Russia lacks a fully developed legal system. Russian law is evolving
rapidly and in ways that may not always coincide with market developments,
resulting in ambiguities, inconsistencies and anomalies, and ultimately in
investment risk that would not exist in more developed legal systems. For
example, the ability of a creditor both to obtain a lien or other similar
priority in payment and to enforce such priority is uncertain. Furthermore,
effective redress in Russian courts in respect of a breach of law and
regulation, or in an ownership dispute, may be difficult to obtain.
Risks associated with the Russian legal system include: (i) the untested
nature of the independence of the judiciary and its immunity from economic,
political or nationalistic influences; (ii) the relative inexperience of judges
and courts in commercial dispute resolution, and generally in interpreting legal
norms; (iii) inconsistencies among laws, presidential decrees and governmental
and ministerial orders and resolutions; (iv) oftentimes conflicting local,
regional and national laws, rules and regulations, particularly in the Russian
Federation; (v) the lack of judicial or administrative guidance on interpreting
the applicable rules; and (vi) a
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high degree of discretion on the part of government authorities and arbitrary
decision making which increases, among other things, the risk of property
expropriation. The result has been considerable legal confusion, particularly in
areas such as company law, property, commercial and contract law, securities
law, foreign trade and investment law and tax law. No assurance can be given
that the uncertainties associated with the existing and future laws and
regulations of Russia will not have a material adverse effect on the Company.
In January 1995 and March 1996, respectively, newly legislated provisions
the First and Second Parts of the Civil Code of the Russian Federation (the
"Civil Code") became effective. Also, in January 1996 and April 1996,
respectively, the Federal Law on Joint Stock Companies and the Federal Law on
the Securities Market became effective. The recent creation of many Russian
laws, the lack of consensus about the scope, content and pace of economic and
political reform and the rapid evolution of the Russian legal system in ways
that may not always coincide with market developments, could lead to
ambiguities, inconsistencies and anomalies, the enactment of laws and
regulations without a clear constitutional or legislative basis, and ultimately
in investment risks that do not exist in more developed legal systems. In
addition, Russian legislation often contemplates implementing regulations that
have not yet been promulgated, leaving substantial gaps in the regulatory
infrastructure. No assurance can be given that, in some instances, the evolution
of Russia's laws and the enactment of new legislation will not have a material
adverse effect on the Company and/or its Subsidiaries.
Disclosure and reporting requirements, and anti-fraud and insider trading
legislation have only recently been enacted and most Russian companies and
managers are not accustomed to such restrictions on their activities. The
concept of fiduciary duties on the part of management or directors to their
companies or shareholders is also relatively new and is not well developed.
Moreover, Russia has not yet recognized the concept of class action lawsuits and
has only recently enacted legislation providing for shareholder derivative
lawsuits. To date, Russian courts do not have experience with respect to such
derivative suits.
Both the independence of the judicial system and its immunity from
economic, political and nationalistic influences, remain largely untested.
Judges and courts are generally inexperienced in the area of business and
corporate law, and judicial precedents generally have no binding effect on
subsequent decisions. There is no guarantee that a foreign investor would obtain
effective redress in any court. Substantially all of the assets of the Company
are located in the Russian Federation, and are, or will be, owned by Corbina and
CompTel, two closed joint stock companies organized under the laws of the
Russian Federation. The Company is the owner and holder of 75% of the
outstanding capital stock of Corbina and CompTel. The balance of the outstanding
shares of capital stock of such companies is owned by Mikhail Leibov, a former
citizen of the Russian Federation who is now a citizen of the United States, and
who, in his capacity as a key employee of the Company, spends the majority of
his time outside of the United States. By reason of the foregoing, it may not
be possible for investors to effect service of process within the United States
upon the Company's Subsidiaries or Mr. Leibov, or to enforce in the United
States or outside of the United States judgments obtained against the Company's
Subsidiaries or Mr. Leibov in the United States courts, or to enforce in the
United States courts judgments obtained against the Company's Subsidiaries or
Mr. Leibov in courts in jurisdictions outside of the United States, in each
case, in any action, including actions predicated upon the civil liability
provisions of the United States securities laws. In addition, it may be
difficult for investors to enforce, in original actions brought in jurisdictions
located outside of the United States, liabilities predicated upon the United
States securities laws. No treaty exists between the United States and the
Russian Federation for the reciprocal enforcement of foreign court judgments.
See "Enforceability of Civil Liabilities."
Furthermore, the relative infancy of business and legal cultures in Russia
is reflected in the inadequate commitment of local business people, government
officials and agencies, and the judicial system to honor legal rights and
agreements, and generally to uphold the rule of law. Accordingly, the Company
may, from time to time, confront threats of, or actual, arbitrary or illegal
revision or cancellation of its licenses and agreements, and face uncertainty or
delays in obtaining legal redress, any of which could have a material adverse
effect on the Company.
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SOCIAL RISKS
The political and economic changes in Russia since the break up of the
former Soviet Union have resulted in significant social dislocations, as
existing structures of authority have collapsed and new ones are only beginning
to take shape. The resulting broad decline in the standard of living has
resulted in substantial political pressure on the government to slow or even
reverse the economic policies currently being pursued.
In addition, the local and international press have reported significant
organized criminal activity, particularly in large metropolitan centers,
directed at revenue-generated businesses, and an increased integration of
Russian organized crime and major international criminal organizations. In
addition, a substantial increase in property crime in large cities has been
reported. Finally, the local and international press have reported high levels
of official corruption in the locations where the Company operates. No assurance
can be given that organized or other crime or claims that the Company or any of
its Subsidiaries has been involved in official corruption will not in the future
have a material adverse effect on the Company.
INFLATION
The Russian economy is in transition and has been characterized by high
rates of inflation. The Russian Government adopted a number of measures in 1995
and 1996 and these have begun to have a favorable impact on inflation rates. In
1994, the average monthly inflation rate was 10.0%. In 1995, the average monthly
inflation rate decreased to 7.2% and during 1996, the average monthly inflation
rate was 1.8%. The devaluation of the rouble in recent years has not kept pace
with inflation. Corbina prices its services, and CompTel intends to price its
equipment and services in U.S. dollars thereby mitigating the effects of the
devaluation of the rouble. However, the Company believes that such pricing may
not be able to fully offset the effects of inflation because a substantial
portion of all collections will be in roubles. In addition, the Company also
believes that Corbina and CompTel may experience increased costs in hard
currency terms due to the devaluation of the rouble. If the Subsidiaries are
unable to maintain prices in line with inflation, due to competitive pressures
or otherwise, it may have a material adverse effect on the Company.
TAXATION
Generally, taxes payable by Russian companies are substantial. In addition,
taxes payable by Russian companies are numerous, they are charged by federal,
regional and local authorities and they are subject to frequent change. The
profit tax, which is imposed pursuant to federal legislation, is payable at the
rate of 13% to the federal tax authorities, and it is payable to the regional
tax authorities at such rates as they deem to establish, subject to an absolute
ceiling on such rates of 22%. Businesses engaged in commercial operations in
Russia must be registered with the taxing authorities in each location in which
they conduct business, and must submit an annual tax declaration. Social
Security contributions by employers are payable to four different governmental
funds, and aggregate 38.5% of wages and salaries paid to Russian employees. A
value-added tax (the "VAT") is imposed at the rate of 20% of the customs value
of imported goods, on goods supplied within the Russian Federation and on
certain services, including the services provided by Corbina, and which CompTel
intents to provide. At the local level, the Moscow taxing authorities impose an
advertising tax which is currently 5% of the value of advertising services
purchased, transport and education taxes each of which is currently levied at
the rate of 1% of salary expenses and housing and road-users taxes which are
currently levied at the rates of 1.5% and 2.5% of revenues, respectively.
Currently, dividends are taxed at 15% and the payor is required to withhold the
tax when paying the dividend.
The taxation system in Russia is at an early stage of development and is
subject to varying interpretations, frequent changes and inconsistent
enforcement at the federal, regional and local levels. In certain instances, new
taxes have been given retroactive effect. Although the Russian Government has
initiated a revision of the Russian tax system, including the enactment of a tax
code with the assistance of tax experts from throughout the world, no assurance
can be given that this proposed legislation will be enacted and, if enacted,
will result in a reduction of the tax burden on Russian companies and the
establishment of a more efficient tax system. To date, the system of tax
collection has been relatively ineffective, resulting in the continual
imposition of new taxes in an attempt to raise government revenues. This
history, plus the existence of large government budget
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deficits, raises the risk of a sudden imposition of arbitrary or onerous taxes,
which could adversely affect investments in Russia, including an investment in
the Company.
UNCERTAINTY OF MARKET ACCEPTANCE; LIMITED MARKETING EXPERIENCE;
DEVELOPMENT OF NEW TELECOMMUNICATIONS SYSTEMS
Although the Company believes that there will be a substantial and
receptive market for services and products which it expects to market in the
Russian Federation, wireless local loop services have not, as of the date of
this Prospectus, been offered in the Russian Federation. Given the limited
economic resources of the newly privatized businesses which will encompass a
material portion of the proposed market for the Company's services and products,
there can be no assurance that the wireless local loop services and products to
be offered by the Company will achieve commercial acceptance or that a
sufficient number of customers will be able to afford such services. In
addition, achieving market acceptance for the Company's proposed products and
services will require substantial marketing efforts to inform potential
customers of the distinctive characteristics and benefits thereof. The Company
has limited marketing experience in the United States, and no marketing
experience in the Russian Federation. There can be no assurance that its
proposed products and services will ultimately be accepted by its targeted
Russian customers.
The Company has not previously developed a telecommunications system. The
Company believes that the wireless loop telecommunications system it is planning
to develop through CompTel, and the long distance telephone service that it is
planning to expand through Corbina, will be able to operate effectively. There
can be no assurance that such systems will be able to provide services on a
competitive basis. In addition, there can be no assurance that the Company's
estimates of the ultimate costs of such systems will prove to have been accurate
or that the proceeds allocated will be sufficient to construct and/or expand
such systems.
POTENTIAL NEED FOR ADDITIONAL PARTNERS; RELIANCE ON PARTNERS
The Company's strategy for providing telecommunications services in the
Moscow Region and other parts of the Russian Federation may require it, or one
or both of its Subsidiaries, to enter into collaborative arrangements with other
parties. Such arrangements may include the provision of long distance
telecommunications, wireless local loop services and/or technical assistance
through joint ventures with strategic Russian manufacturing conglomerates or
governmental authorities which own or operate, local telecommunications exchange
networks, or with other entities who have contracts to provide such services to
the owners and operators of such local networks. No assurance can be given that
the Company will be able to successfully identify and/or negotiate acceptable
agreements with other parties, or that if such agreements are consummated, that
the Company will be successful in completing the transactions contemplated
thereby.
COMPETITION
Competition for business by Western companies in the Russian Federation is
intense. The MGTS has entered into joint ventures for the provision of long
distance telecommunications services to consumers and businesses located in the
Moscow Region with several of the world's largest telecommunications companies,
including AT&T (TelMos), Belgacom and Alcatel Bell (Combellga), British Telecom
(Comstar) and Global Telesystems (Sovintel). Each of such joint ventures has
greater financial, technical and marketing resources than the Company. CompTel
will not have an exclusive license to provide telecommunications services in the
Moscow Region, and a number of other entities, including Russian companies and
the above mentioned international joint ventures, may compete with CompTel for
shares of the local telecommunications market in the Moscow Region. Many of such
companies (and all of the above-mentioned joint ventures) will be larger than
CompTel and have significantly greater financial and other resources. There can
be no assurance that the Company will be able to compete effectively in any
aspect of its current or proposed business activities or that developments by
others will not render the Company's products and services noncompetitive.
Moreover, the Company may have to compete with unlicensed businesses or with
businesses capitalizing on personal relationships with the fluid power structure
in the Russian Federation. In the Russian Federation, in addition to competition
from private telecommunications companies, the Company may be competing with
partially and wholly state-owned communications enterprises. There can be no
assurance that the implementation of
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the Company's strategy of having local partners will give it any competitive
advantage. In addition, there can be no assurances that competition in the
Company's targeted markets will not increase as economic activity grows and that
larger, better capitalized competitors will not enter the market in these areas.
See "Business -- CompTel's Proposed Wireless Local Loop
Operations -- Competition;" and "-- Corbina's Long Distance Telecommunications
Operations -- Competition."
WIRELESS LOCAL LOOP NETWORK CONSTRUCTION AND OPERATIONAL RISKS
General. The proposed development and operation of CompTel's wireless
local loop network involves a high degree of risk. CompTel has completed the
initial design for its network, has initiated the site selection process and has
begun to hire key operating personnel in each market. CompTel intends to
commence marketing efforts and launch commercial service in 1997 and expects to
complete initial construction of its network by the end of 1998. There can be no
assurance that CompTel will be able to construct its network in accordance with
its current construction plan and schedule. If CompTel is not able to implement
its construction plan, it may not be able to provide services comparable to
those provided by MGTS and providers of cellular telecommunications services in
its market and, as a result, CompTel's anticipated subscriber growth may be
limited. Failure to comply with MOC licensing requirements could cause
revocation or forfeiture of any license which may be issued to or the imposition
of fines on CompTel by the MOC. The construction of CompTel's wireless local
loop network is subject to successful completion of the network design, site and
facility acquisitions, the purchase and installation of the network equipment
and network testing. Delays in any of these areas could have a material adverse
effect on CompTel's ability to construct its network in a timely manner.
Location of Base Station Transmitter Equipment. The construction of
CompTel's wireless local loop network will depend, to a significant degree, on
CompTel's ability to lease or acquire sites for the location of the equipment
which will receive the radio signals emanating from buildings and other
locations from which CompTel's customers will be placing and receiving
telecommunications transmissions, and/or re-transmit such signals directly to
other buildings or locations within CompTel's proposed network, or through the
public telephone network operated by MGTS, or to Corbina or another provider of
long distance telecommunications services. The site selection process in the
Moscow Region will require the negotiation of lease or acquisition agreements
for approximately three sites for the proposed network, and may require CompTel
to obtain governmental approvals or permits. The Company expects that the site
acquisition process will continue throughout the construction of CompTel's
network. Each stage of the process involves various risks and contingencies,
many of which are not within the control of CompTel and any of which could
adversely affect the construction of the network should there be delays or other
problems. No assurance can be given that CompTel will be able to obtain such
governmental approvals or permits, or that it will be able to successfully
negotiate such site leases or site acquisition agreements, or that it will be
able to obtain such sites, or lease same at costs which it will be able to
afford or within a time frame which will enable it to establish and commence
operations in a timely manner.
Demands on Managerial, Operational and Financial Resources. The
development, construction and operation of CompTel's wireless local loop network
and the expansion of Corbina's long distance telecommunication services are
expected to place significant demands on the Company's managerial and
operational and financial resources. The Company's future performance will
depend, in part, on the Company's ability to implement and improve its
operational and financial systems and to attract, train and manage its employee
base and those of its Subsidiaries, including customer support and marketing and
sales personnel. There can be no assurance that the Company will be able to
manage planned operations successfully. Any failure to manage growth effectively
(including implementing adequate systems, procedures and controls in a timely
manner) could have a material adverse effect on the Company's financial
condition and the results of current and proposed operations.
Dependence on Interconnect Parties. In order to operate its proposed
network successfully, CompTel must maintain interconnection agreements with the
telephone companies, including MGTS, operating or providing service in the areas
where it intends to deploy its proposed wireless local loop network. Although,
CompTel believes that it will be able to negotiate agreements providing for
favorable tariffs for interconnection
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fees and carrier charges with MGTS and such other telephone companies, no
assurance can be given in this regard. If CompTel does not consummate an
interconnection agreement with MGTS providing for reasonable terms and tariffs,
or it is completely unable to obtain such an agreement, it would not be able to
connect its subscribers' telecommunications traffic to the Moscow local public
switched telephone network. Such an eventuality would materially adversely
affect CompTel's proposed business activities. See "Business -- CompTel's
Proposed Wireless Local Loop Operations -- Billings, Tariffs and Interconnection
Charges."
TECHNOLOGICAL OBSOLESCENCE AND NEW TECHNOLOGY
The telecommunications industry is undergoing rapid and significant
technological change. Future technological advances may result in new services
or products directly competitive with the telecommunications services which the
Company proposes to provide. Large manufacturers have dominated the
technological development of a variety of wireless one-way and two-way
communication technologies, including cellular telephone service, personal
communications services, enhanced specialized mobile radio, low-speed data
networks, and mobile satellite services, all of which currently are in use or
under development. There can be no assurance that the Company would not be
adversely affected by further developments of such technologies, or any changes
therein. The Company will need access to improving technology in order to remain
competitive. There can be no assurance that it can obtain access to such new
technology through licensing agreements, joint ventures or otherwise. The
Company does not intend to allocate any of the proceeds of the Offering to basic
research and has not devoted any resources to research and development thus far.
Such technology has generally been available on an "off-the-shelf" basis, but
such technology may not be available to the Company in the future, or may render
the Company's systems obsolete. If such technology is no longer available on an
"off-the-shelf" basis, the Company's small size may hinder its ability to obtain
necessary technology.
SUSCEPTIBILITY TO POLITICAL AND OTHER PRESSURES
Although the governments of the Russian Federation and geographic locales
in which the Company intends to operate (such as the Moscow Region) may be
limited in the extent to which they can legally direct the Company's policies,
in practice they may be able to exercise significant influence. As a
consequence, not only may the Company's activities be restrained if a
governmental entity or instrumentality is not supportive, but the Company may be
forced to take action to support policies or agendas of the government which are
not in its commercial or other interests.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company is not currently considering the acquisition of any business,
or a joint venture with any other business or individual. From time to time in
the future, the Company and/or its Subsidiaries may enter into negotiations with
respect to potential acquisitions or joint ventures, some of which may result in
preliminary agreements. In the course of such negotiations and/or due diligence,
these negotiations and/or preliminary agreements may be abandoned or terminated.
No assurance can be given that the Company and/or its Subsidiaries will find
suitable acquisition or joint venture candidates, or that future acquisitions or
joint ventures will be financed and made on acceptable terms, or if completed,
that such acquisitions or ventures will be successful.
OFFICIAL DATA RELIABILITY
The official data published by the Russian federal, regional and local
governments and federal agencies are substantially less reliable than the
comparable data published in the United States. There can be no assurance that
the official sources from which certain of the information set forth in this
Prospectus has been drawn are reliable. Official statistics may also be produced
on different bases than those used in the United States. Any discussion of
matters relating to the Russian Federation must therefore be subject to
uncertainty due to concerns about the completeness and reliability of available
official and public information.
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EFFECT OF CERTAIN SECURITIES TRANSACTIONS UPON THE COMPANY'S EARNINGS
As a result of the Company's issuance of Common Stock to certain of its
stockholders during the 12 month period which preceded the date of initial
filing of the Registration Statement of which this Prospectus forms a part for
consideration which was less than the offering price of the Common Stock set
forth on the cover page hereof, the Company incurred deferred financing costs of
$1,890,000, debt discounts of $465,000, and amortization of deferred financing
costs and debt discounts of $416,500. In the event that the Company issues up to
250,000 shares of Common Stock to Mr. Leibov pursuant to the incentive
compensation provisions of his employment agreement, the Company will recognize
a substantial noncash charge to earnings equal to the fair value of such shares
on the date of their issuance. In the event that the Company issues Common Stock
pursuant to its Omnibus Stock Incentive Plan for less than the fair value of
such shares at the time of such issuance, the Company will recognize a
substantial noncash charge to earnings equal to the difference between the fair
value of such shares on the date of their issuance and the amount received
therefor. Such transactions would have the effect of significantly increasing
the Company's loss or reducing or eliminating earnings, if any, at such time.
The recognition of such expense may have a depressive effect on the market price
of the Company's securities. See "Management -- Executive Employment
Agreements;" "-- Omnibus Stock Incentive Plan;" and "Certain Relationships and
Related Transactions."
DIVIDEND POLICY AND RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company has never paid cash dividends on its Common Stock. The Board of
Directors does not anticipate paying cash dividends on its Common Stock in the
foreseeable future as it intends to retain future earnings to finance the growth
of the business. The payment of future cash dividends on the Common Stock will
depend on such factors as earnings levels, anticipated capital requirements, the
operating and financial condition of the Company and other factors deemed
relevant by the Board of Directors. See "Dividend Policy."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
REDEEMABLE WARRANTS
The Company will be able to issue shares of its Common Stock upon exercise
of the Redeemable Warrants only if there is then in effect a current prospectus
relating to such Common Stock, and only if such Common Stock is qualified for
sale or exempt from such qualification under applicable state securities laws of
the jurisdictions in which the various holders of the Redeemable Warrants
reside. Although the Company has undertaken to, and intends to, file and keep
current a prospectus which will permit the purchase and sale of the Common Stock
underlying the Redeemable Warrants, there can be no assurance that the Company
will be able to do so. Redeemable Warrants may not be exercised after
[ ], 1997 (nine months after the date of this Prospectus) unless and
until a Post-Effective Amendment has been filed with the Securities and Exchange
Commission ("SEC" or Commission") and becomes effective. Although the Company
intends to seek to qualify for sale the shares of Common Stock underlying the
Redeemable Warrants in those states in which the Common Stock and Redeemable
Warrants are to be offered, no assurance can be given that such qualification
will occur. The Redeemable Warrants may be deprived of any value and the market
for the Redeemable Warrants may be limited if a current prospectus covering the
Common Stock issuable upon exercise of the Redeemable Warrants is not kept
effective or if such Common Stock is not qualified or exempt from qualification
in the jurisdictions in which the holders of the Redeemable Warrants then
reside. See "Description of Securities -- Redeemable Warrants."
MARKET FOR COMMON STOCK AND REDEEMABLE WARRANTS; POSSIBLE VOLATILITY OF PRICES
The Company has applied for listing of the Common Stock and Redeemable
Warrants on the Nasdaq SmallCap Market, the Boston Stock Exchange and the
Pacific Stock Exchange. Such listings will not provide any assurance that an
active public market for the Common Stock or Redeemable Warrants will develop or
be sustained. If an active public market does not develop or is not sustained,
the market price and liquidity of the Common Stock and/or Redeemable Warrants
may be adversely affected. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of companies. These
fluctuations as well as general economic
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and market conditions may adversely affect the market price of the Common Stock
and/or Redeemable Warrants prevailing from time to time.
DILUTION
Purchasers of the Common Stock offered by this Prospectus will suffer an
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price. At an assumed initial
public offering price of $7.00 per share, new investors will experience a
dilution of $5.31 per share based upon a pro forma net tangible book value per
share after the Offering. This represents a dilution of 75.9% from the initial
public offering price. By reason of the fact that the Company's stockholders and
Russian Wireless' stockholders acquired their shares of the Company's Common
Stock at prices which were substantially below the assumed public offering price
of the Common Stock, purchasers of the Common Stock pursuant to this Offering
will be bearing a substantial proportion of the risks which the Company will be
encountering subsequent to the closing of this Offering. See "Dilution."
POSSIBLE REDEMPTION OF REDEEMABLE WARRANTS
The Redeemable Warrants may be redeemed by the Company, whether or not a
current prospectus is available, at any time during the three year period
commencing two years after the date of this Prospectus at a price of $.50 per
Redeemable Warrant, provided that the closing price of the Common Stock as
quoted on the principal market on which such shares shall then be trading shall
be not less than the $14.50 per share during any period of 20 consecutive
trading days ending on the third day preceding the date of such notice, and
further provided, that with the Representative's prior written consent, the
Company may redeem the Redeemable Warrants commencing two years after the date
of this Prospectus. Although a Redeemable Warrant holder has the right to
exercise his Redeemable Warrants through the date of redemption, he may not be
able to exercise because of lack of funds at the time of redemption or if there
is not then in effect a current prospectus relating to the Common Stock
underlying such Redeemable Warrants. Furthermore, in the event that the Company
timely and properly issues a notice of redemption of the Redeemable Warrants, no
trading in such securities shall be permitted after the close of business on the
date of redemption. At such time the value of all Redeemable Warrants which
shall not have been timely exercised prior thereto shall be reduced to the
redemption price. See "Underwriting."
AUTHORIZATION OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
preferred stock with designations, rights and preferences determined from time
to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of Common Stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. The issuance of preferred stock with anti-takeover measures could have
a depressive effect on the market price of the Common Stock (should a market
develop for the Common Stock) and could discourage hostile bids in which
shareholders may receive premiums for their shares. See "Description of
Securities -- Preferred Stock."
IMPACT ON THE MARKET OF EXERCISE OF REPRESENTATIVE'S WARRANTS
The holders of the Representative's Warrants may exercise them at a time
when the Company would, in all likelihood, be able to obtain equity capital by
the sale of securities on terms more favorable than those provided by the
Representative's Warrants. If the Representative's Warrants are exercised, the
dilution of the voting and equity interests of the Company's shareholders which
shall result therefrom could cause a decrease in the market price of the
Company's securities, and may also adversely affect the Representative's ability
to make and maintain an orderly market in the Company's securities. See
"Description of Securities -- Representative's Warrants."
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27
THE REPRESENTATIVE'S INFLUENCE ON THE MARKET FOR THE COMPANY'S SECURITIES
A significant amount of the securities offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of such securities with the
Representative. Although it has no obligation to do so, the Representative
intends to make a market in the Common Stock and Redeemable Warrants and may
otherwise effect transactions in such securities. If it participates in the
market, the Representative may exert significant influence on the market, if one
develops, for the securities described in this Prospectus. Such market making
activity may be discontinued at any time. The price and liquidity of the Common
Stock and Redeemable Warrants may be significantly affected by the degree, if
any, of the Representative's participation in such market. Additionally, the
Representative may participate in the solicitation of the exercise of the
Redeemable Warrants, in which event, it may be prohibited from engaging in any
market making activities with respect to the Common Stock and Redeemable
Warrants during certain periods while the Redeemable Warrants are exercisable.
Such restrictions may adversely affect the price and liquidity of the Common
Stock and Redeemable Warrants. Furthermore, if the Representative should
exercise its registration rights to effect the distribution of the Common Stock
and Redeemable Warrants underlying the Representative's Warrants, the
Representative, prior to and during such distribution, will be unable to make a
market in the Common Stock and Redeemable Warrants. If the Representative ceases
making a market, the market and market prices for the Common Stock and
Redeemable Warrants may be adversely affected, and the holders thereof may be
unable to sell such securities.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of the Common Stock in the public market after this Offering could
adversely affect the market price of the Common Stock. Upon completion of this
Offering, the Company will have outstanding 4,385,000 shares of Common Stock
(4,723,250 shares if the Underwriters' over-allotment option is exercised in
full). Of these shares, 2,255,000 shares will be freely tradeable without
restriction under the Securities Act. The remaining 2,130,000 shares of Common
Stock held by existing shareholders are restricted securities within the meaning
of Rule 144. In accordance with Rule 144, 1,380,000 of such shares are presently
eligible for sale to the public notwithstanding the fact that they have not been
registered under the Securities Act. The Representative has required, as a
condition to the closing of the Offering, that each of the holders of said
2,130,000 shares, as well as the holders of warrants and an option to purchase
3,225,015 shares of the Company's Common Stock must execute written lockup
agreements providing that, for a period of 24 months from the date of this
Prospectus, they shall not offer, register, sell, contract to sell, grant an
option for the sale of, issue, assign, transfer or otherwise dispose of any of
the Company's securities held by them without the Representative's prior written
consent. See "Description of Securities -Registration Rights," "Shares Eligible
for Future Sale"and "Underwriting."
INDEMNIFICATION OF DIRECTORS AND OFFICERS; POSSIBLE INABILITY TO OBTAIN
OFFICERS'
AND DIRECTORS' LIABILITY INSURANCE
The Company's Bylaws provide for the indemnification of directors and
officers to the fullest extent permitted by law. The Company has entered into
indemnification agreements with each of its officers and directors which also
provide for their indemnification to the fullest extent permitted by law. The
Company intends to apply for officers' and directors' liability insurance
providing limits of $1,000,000 per occurrence. There can be no assurance that
the Company will be able to obtain or maintain such insurance on acceptable
terms. Failure to maintain such insurance could have a material adverse effect
on the Company's ability to attract and retain directors and officers. Any
amounts which the Company may be required to pay under such indemnification
agreements which are not reimbursed by insurance, either because no insurance
policy is then in effect or because the amount of such required payments exceeds
the policy limit, could have a material adverse effect on the Company. See
"Management -- Indemnification of Directors and Officers."
24
28
NASDAQ MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF SECURITIES FROM NASDAQ
SYSTEM;
RISKS OF LOW-PRICED STOCKS
The Company has applied to the Nasdaq SmallCap Market for listing of the
Common Stock and Redeemable Warrants. If the Company is unable to satisfy
Nasdaq's listing criteria for the Common Stock and/or Redeemable Warrants, or if
such securities are listed on the Nasdaq SmallCap Market, and the Company
thereafter fails to satisfy the maintenance criteria for continued listing of
any or all of such securities, they will be subject to being delisted, and
trading, if any, would thereafter be conducted in the OTC Bulletin Board. As a
consequence of such non-listing or delisting, an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
the Common Stock and/or the Redeemable Warrants. The Securities Enforcement and
Penny Stock Reform Act of 1990 requires additional disclosure relating to the
market for penny stocks. The SEC regulations generally define a penny stock to
be any equity security that has a market price or exercise price of less than
$5.00 per share, subject to certain exceptions. Such exceptions include any
equity security listed on Nasdaq and any equity security issued by an issuer
that has (i) net tangible assets of at least $2,000,000, if such issuer has been
in continuous operation for three (3) years, (ii) net tangible assets of at
least $5,000,000 if such issuer has been in continuous operation for less than
three years, or (iii) average annual revenue of at least $6,000,000 during such
issuer's last three years of operations. Unless an exception is available, the
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated therewith. Furthermore, in connection with any transaction in a penny
stock, brokers must also provide investors with current bid and offer quotations
therefor, the compensation of the broker and its salesperson in connection
therewith and monthly account statements showing the market value of each penny
stock in the investor's account. See "Description of Securities -- Nasdaq
SmallCap Market Listing; Boston Stock Exchange and Pacific Stock Exchange
Listing Applications."
Recently, a proposal has been made to increase the continued listing
criteria on the Nasdaq SmallCap Market. If implemented as proposed, stricter
criteria for continued listing on the Nasdaq SmallCap Market would be imposed,
including the implementation of a $2,000,000 net tangible assets test,
requirements for a greater number of publicly held securities and a higher
market value for such securities and the implementation of new corporate
governance criteria. No assurance can be given that such proposal will be
adopted, or, if adopted, will be adopted in its current form.
In addition, if the Common Stock or Redeemable Warrants are not quoted on
Nasdaq, or the Company does not have $2,000,000 in net tangible assets, trading
in the Common Stock and Redeemable Warrants would be covered by Rule 15g-9
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") for non-Nasdaq and non-exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. Securities also are exempt from this rule if the
market price is at least $5.00 per share.
As of the date of this Prospectus, the Company believes that the Common
Stock and Redeemable Warrants will be outside the definitional scope of a penny
stock. In the event the Company's securities were subsequently to become
characterized as penny stocks, the market liquidity for such securities could be
adversely affected. In such an event, the regulations on penny stocks could
limit the ability of broker/dealers to sell the Common Stock and/or the
Redeemable Warrants and thus the ability of purchasers of the Common Stock and
Redeemable Warrants to sell such securities in the secondary market would be
adversely affected.
25
29
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,400,000 shares of
Common Stock and 2,000,000 Redeemable Warrants offered by the Company hereby at
the assumed initial public offering prices of $7.00 per share and $.50 per
Redeemable Warrant, are estimated to be $8,871,000 ($11,061,442 if the over-
allotment option granted to the Underwriters is exercised in full) after
deducting the underwriting discounts and commissions, the Underwriters'
non-accountable expense allowance and the other estimated expenses of this
Offering. The Company expects to use the net proceeds, as follows:
AMOUNT PERCENT
---------- -------
Contribution of capital to Corbina for its use in connection with
the expansion of its services as a switch-based provider of long
distance telecommunications services in the Moscow Region (see
"Business -- Corbina's Long Distance Telecommunications
Operations")..................................................... $ 655,000 7.38%
Purchase of switching hardware and software for connection of
CompTel's customers' telecommunication transmissions to the
Moscow public switched telephone network and to Corbina's long
distance carriers................................................ 3,000,000 33.82%
Purchase of equipment (in-building network wiring components,
wireless local loop transmitters and receivers and telephone
handsets) to be employed by CompTel with respect to the creation
and expansion of its proposed wireless local loop network in the
Moscow Region.................................................... 1,000,000 11.27%
Purchase of three antennas and ancillary equipment to be employed
by CompTel for interconnection of telecommunication transmissions
throughout its proposed wireless local loop network.............. 250,000 2.82%
Payment of antenna site rents for three antenna sites in the Moscow
Region during first year of CompTel's operations................. 60,000 0.68%
Retirement of promissory notes issued in connection with the
Company's Second and Third Private Placements (including accrued
interest) (See "Capitalization" and Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources").................. 2,329,000 26.26%
Retirement of Bridge Financing (including accrued interest) owed to
unrelated third parties (See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources").................. 780,000 8.79%
Pre-payment of fee due pursuant to a financial consulting agreement
to be entered into by the Company with the Representative at the
closing of the Offering (See "Underwriting") (1)................. 177,420 2.00%
Retirement of promissory note issued in connection with the
redemption of Common Stock previously owned by a former
shareholder (see "Certain Relationships and Related
Transactions")................................................... 150,000 1.69%
Working capital (2)................................................ 469,580 5.29%
---------- -------
$8,871,000 100.00%
========== =======
- ---------------
(1) Such fee will be equal to 2% of the net proceeds derived by the Company from
the sale of the Common Stock and Redeemable Warrants offered hereby. In the
event that the over-allotment option is exercised in full, the total amount
of such proceeds will be approximately $11,061,442. In such event, the
amount of the fee to be paid by the Company to the Representative pursuant
to the financial consulting agreement will be approximately $221,229.
(2) If the over-allotment option is exercised in full, the Company will realize
additional net proceeds of approximately $2,190.442. All of such additional
proceeds, except for $43,809 thereof which must be added to the payment to
be made pursuant to the Company's financial consulting agreement with the
Representative, will be incorporated into the Company's working capital and
used for general corporate purposes. The proceeds, if any, from the exercise
of the Redeemable Warrants and any outstanding warrants and options will be
added to working capital and used for general corporate purposes.
26
30
The allocation of the net proceeds of this Offering by the Company, as set
forth above, represents the Company's best estimate, based upon its present
plans and certain assumptions regarding general economic and industry conditions
and the issuance of a license authorizing CompTel to construct and operate its
proposed wireless local loop system. If any of such plans or assumptions should
change, the Company may find it necessary or advisable to reallocate some of the
Offering proceeds within the above-described categories, or to other purposes.
Proceeds of the Offering which are not immediately required for the purposes
described above will be invested in United States government securities,
short-term certificates of deposit, money market funds and other high-grade,
short-term interest-bearing investments.
The Company believes that the proceeds from the Offering, together with
cash flow from operations (if any), should be sufficient to fund its operations,
including the proposed expansion of Corbina's operations and the proposed
build-out and operation of CompTel's wireless local loop operations, for
approximately 12 months. However, there can be no assurance that events
affecting the Company's operations will not result in the Company depleting its
funds before such time. The Company may need to raise substantial additional
capital to continue to fund its proposed operations. The Company may seek such
capital through public or private financings, corporate collaborations or other
sources. However, there can be no assurance that additional financing will be
available through any of such sources or, if available, that such financing will
be on acceptable terms. See "Risk Factors -- Need for Additional Funds; Limited
Sources of Liquidity;" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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31
DILUTION
The difference between the initial public offering price per share of
Common Stock and the proforma net tangible book value per share of Common Stock
after this Offering constitutes the dilution to investors in this Offering. Net
tangible book value per share is determined by dividing the net tangible book
value of the Company (total tangible assets reduced by the amount of total
liabilities) by the number of outstanding shares of Common Stock. The following
discussion allocates no value to the Redeemable Warrants.
The proforma net negative tangible book value of the Company, as of
December 31, 1996, assuming that the merger of Russian Wireless and the
acquisition of the Company's 75% ownership interest in Corbina took place on
said date, was approximately $(1,268,500) or $(.42) per share of Common Stock.
After giving effect to the estimated net proceeds from the sale of the
securities offered by the Company at the assumed initial public offering prices
of $7.00 per share and $.50 per Redeemable Warrant, the proforma net tangible
book value of the Company as of December 31, 1996 would have been approximately
$7,400,000 or $1.69 per share of Common Stock. This represents an immediate
increase in proforma tangible book value of $2.11 per share to existing common
stockholders and an immediate dilution of $5.31 per share (or 76%) to new
investors. The following table illustrates the per share dilution in proforma
net tangible book value to new investors:
Assumed public offering price per share.............................. $7.00
Proforma net tangible book value per share before offering(1)........ $(.42)
Increase per share attributable to new investors..................... $2.11
Proforma net tangible book value per share
after offering(1).................................................. 1.69
-----
Proforma dilution per share to new investors(1)...................... $5.31
=====
- ---------------
(1) After giving effect to the merger of Russian Wireless with and into the
Company, and the acquisition of the Company's 75% ownership interest in
Corbina.
The following table summarizes on a pro forma basis as of December 31,
1996, the differences in the total consideration paid and the average price per
share paid between existing holders of Common Stock and new investors with
respect to the number of shares of Common Stock purchased from the Company
assuming an initial public offering price of $7.00 per share:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT* PERCENT PER SHARE
---------- ----- ------------ ----- ---------
Existing Shareholders(1).......... 2,985,000 68.1% $276,350 2.8% $0.09
New Investors..................... 1,400,000 31.9% 9,800,000 97.2% $7.00
Total(1).......................... 4,385,000 100.0% $10,076,350 100.0% $2.30
- ---------------
* Prior to deduction of expenses of the Offering.
(1) Adjusted to reflect the effects of the merger of Russian Wireless with and
into the Company.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996. The Proforma -- Merger and Proforma Offering information
includes and accounts for the effects of (a) the merger of Russian Wireless with
and into the Company; and (b) the anticipated results of the completion of the
sale of 1,400,000 shares of Common Stock and 2,000,000 Redeemable Warrants
offered hereby (not including 338,250 shares of Common Stock and 300,000
Redeemable Warrants subject to the Underwriters' over-allotment option) at
assumed public offering prices of $7.00 per share and $.50 per Redeemable
Warrant (after deduction of the estimated underwriting discounts and
commissions, and expenses of the Offering).
ADJUSTMENTS
DECEMBER 31, ------------------------- PROFORMA
1996 MERGER(1) OFFERING(2) AS ADJUSTED
------------ ----------- ----------- -----------
Notes Payable............................... $2,658,000 $(2,658,000) $ 0
Long Term Debt.............................. 361,000 (361,000) 361,000
Stockholders' Deficiency
Common Stock -- $.01 par value, authorized
15,000,000, issued and outstanding;
2,235,000 shares at December 31, 1996:
2,985,000 shares -- Proforma Merger;
4,385,000 shares -- Proforma
Offering............................... 22,350 $ 7,500 14,000 43,850
Preferred Stock -- $.01 par value,
authorized 1,000,000 shares, issued and
outstanding at December 31, 1996: 0.... -- -- -- --
Additional Paid in Capital.................. 2,340,000 3,150,000 6,438,000 11,928,000
Accumulated Deficit......................... (3,316,000) (3,185,000) (6,501,000)
Total Stockholders' Deficiency.............. (953,650) (27,500) 6,452,000 5,470,850
------------ ----------- ----------- -----------
Total Capitalization........................ $2,065,350 $ (27,500) $3,794,000 $ 5,831,850
============ ========== ========== ===========
- ---------------
(1) Reflects the issuance of 250,000 shares of Russian Wireless' common stock to
Mr. Nathan and 500,000 shares of such common stock to Mr. Leibov at a value
of 60% of the assumed public offering price of the Company's Common Stock.
See "Certain Relationships and Related Transactions."
(2) Net equity impact of the issuance of 1,400,000 shares of Common Stock and
2,000,000 Redeemable Warrants offered hereby at assumed public offering
prices of $7.00 per share and $.50 per Redeemable Warrant.
-----------------------------
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Board of
Directors does not anticipate paying cash dividends on its Common Stock in the
foreseeable future as it intends to retain future earnings to finance the growth
of the business. The payment of future cash dividends on the Common Stock will
depend on such factors as earnings levels, anticipated capital requirements, the
operating and financial condition of the Company and other factors deemed
relevant by the Board of Directors.
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33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The discussion set forth below with regard to the Company relates to the
business operations conducted by the Company from the time of its organization
in April 1994, through December 31, 1996. Such operations were conducted on a
limited basis while the Company's management devoted the bulk of their time and
resources to the tasks of developing what was then anticipated to be the
Company's intended business, i.e., the provision, as a competitive access
provider (a "CAP"), of single source local and long distance telecommunications
services to commercial customers in the New York Metropolitan area. See
"Business -- General Overview." The limited operations which the Company
conducted during said period consisted of the provision of services as an agent
to a reseller of long distance telecommunications services to commercial
customers. Corbina maintains its books and records on the basis of a fiscal year
which ends on September 30. The discussion set forth below with regard to
Corbina relates to the business operations conducted by it during the period
from December 1, 1995 (Corbina's date of organization) through September 30,
1996.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
The Company
The Company generated revenues in the form of commission income earned with
regard to the income generated by long distance telephone service providers for
whom the Company acted as an agent during 1995 and 1996 in the amount of $21,172
and $8,043, respectively. The 62% decrease in such revenues was directly
attributable to the conclusion reached by the Company in mid-1996 that it would
have to re-position the Company in a different segment of the telecommunications
industry.
Operating expenses amounted, in the aggregate, to $851,318 and $792,881
during the years ended December 31, 1995 and 1996, respectively. Although the
comparative difference between the aggregate amounts varied by less than 7%
between 1995 and 1996, the primary components thereof, consisting of officers'
salaries and selling, general and administrative expenses varied significantly
between such years. By reason of a reduction from three executives to one which
took place during and at the end of 1995, officers' salaries were reduced by
approximately 51% from $203,125 in 1995 to $100,000 in 1996. The Company's
employee salary payment obligations began to increase on February 1, 1997, i.e.,
the date of commencement of Mr. Leibov's employment by the Company. See
"Management -- Executive Employment Agreements."
Selling, general and administrative expenses increased by approximately 13%
from $426,228 in 1995 to $482,891 in 1996. Such expenses were incurred by the
Company in 1995 as it undertook to create, with the proceeds of its first and
second private placements of securities, the infrastructure which it would need
to engage in business as a single source local and long distance
telecommunications service provider to commercial customers in the New York
Metropolitan area. Although the Company curtailed expenditures relating to its
originally anticipated business activities by mid-1996, it continued to incur
general and administrative expense obligations while it undertook to explore
opportunities involving the delivery of various categories of telecommunications
products and services in the Russian Federation and elsewhere.
During 1995 and approximately the first half of 1996, the Company conducted
business on a limited basis as a reseller of long distance telecommunications
services to commercial customers while it undertook to develop and establish its
anticipated business activities as a competitive access provider of
telecommunications services. By reason of the high level of general and
administrative expenses incurred during such periods, as compared to the minimal
revenues generated from the Company's limited long distance telephone reselling
activities, the Company incurred operating losses of $830,146 and $784,848,
respectively, in 1995 and 1996. Such operating losses, when coupled with the
interest expense incurred by the Company in connection with its outstanding
principal indebtedness aggregating $1,724,000 at December 31, 1995 and
$3,531,000 at December 31, 1996, resulted in net losses of $1,227,502 ($.34 per
share) in 1995 and, $1,470,878 ($.64 per share) in 1996.
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PERIOD ENDED DECEMBER 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1996
Corbina
Corbina was organized on December 1, 1995 and began providing long distance
telecommunications services to customers in the Moscow Region in March 1996.
During the ten month period which ended on September 30, 1996, the first five of
which were primarily devoted to organizational and start-up activities, Corbina
generated revenue of $561,820. During the ten month period between May 1996 and
February 1997, Corbina's business has grown from a few customers purchasing
approximately 30,000 minutes of long distance services per month to
approximately 350 customers purchasing approximately 282,000 minutes per month.
The following chart presents the month by month growth in Corbina's business,
expressed in terms of aggregate monthly minutes of long distance
telecommunications services purchased by Corbina's customers and Corbina's
aggregate monthly billings to such customers (in US$) between May 1996 and
February 1997.
1996 MINUTES PURCHASED AGGREGATE BILLINGS
------------------------------------ ----------------- ------------------
May................................. 31,605 $ 34,449
June................................ 47,447 51,717
July................................ 66,808 72,821
August.............................. 114,673 114,673
September........................... 106,453 101,130
October............................. 123,750 117,563
November............................ 175,817 158,235
December............................ 166,800 141,840
1997
------------------------------------
January............................. 184,177 156,550
February............................ 281,784 228,245
During the ten month period ended September 30, 1996, one customer
accounted for 23% of Corbina's revenues and 40% of its accounts receivable. No
customer is currently responsible for 10% or more of Corbina's revenues or
accounts receivable.
By reason of the facts that (a) the efforts of Corbina's management during
the ten month period ended September 30, 1996 were primarily directed toward (i)
negotiating agreements with Rustelnet and Global One, and (ii) the establishment
of a network of field services representatives to market Corbina's services; and
(b) Corbina's operations were in the early stages of expansion in business
volume that is still taking place, the selling, general and administrative
expenses incurred by Corbina in providing the services purchased by its
customers were $281,467, which was $110,659 greater than the $138,805 gross
profit which Corbina generated from its revenues during said period. By reason
thereof, Corbina sustained a loss from operations, and a net loss for the period
amounting to $142,662, and $204,908, respectively. Corbina's management believes
that the investment it has heretofore made in creating its existing operating
infrastructure, coupled with the investment that it will be making with the
proceeds of this Offering, will be sufficient to support its operations at a
profitable level. Corbina's management further believes that Corbina's business
operations, as they are currently being implemented, will result in an increase
in its customer base, and a concomitant increase in telephone traffic purchased
by such customers. However, no assurances can be given that the growth in
Corbina's customer base, and/or the growth in telephone services purchased by
those customers from Corbina will continue at the rates heretofore experienced,
or at all. In the event of a slowdown or cessation of such growth, Corbina would
continue to suffer operating losses which would have a material adverse effect
on Corbina and the Company.
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35
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its initial operations, and it has been financing the
activities it has been conducting in the Russian Federation, with the investment
capital that it has raised through three private placements of its securities
and the Bridge Financing.
The Company obtained $750,000 pursuant to its initial private placement
(the "First Private Placement") which was completed in June 1994. In connection
therewith, the Company issued 12% unsecured promissory notes in the aggregate
principal amount of $735,000, and warrants to purchase 750,000 shares of Common
Stock. See "Description of Securities -- Warrants Issued in Private Placements."
The Company obtained $1,000,000 pursuant to its second private placement
(the "Second Private Placement") which was completed in October 1994. In
connection therewith, the Company issued 12% unsecured promissory notes in the
aggregate principal amount of $980,000, and warrants to purchase 500,000 shares
of Common Stock. The Company used $750,000 of the proceeds of the Second Private
Placement to pay off the indebtedness its owed to the holders of the promissory
notes issued in the First Private Placement. In connection with an agreement to
rescind a $98,000 investment made by one of the investors in the Second Private
Placement, the Company has agreed to pay $100,000 to such investor in four
monthly installments, the first of which became due and was paid on February 15,
1997, and such investor's warrant to purchase 50,000 shares of Common Stock has
been canceled. The balance of the Company's indebtedness to the holders of the
promissory notes issued in the Second Private Placement will become due and
payable on June 19, 1997, or three days after the closing of this Offering,
whichever first occurs. The Company intends to use a portion of the proceeds of
this Offering to pay such indebtedness in full. See "Use of Proceeds;" and
"Description of Securities -- Warrants Issued in Private Placements."
The Company obtained $1,050,000 pursuant to its third private placement
(the "Third Private Placement") which was completed in February 1996. In
connection therewith, the Company issued 8% unsecured promissory notes in the
aggregate principal amount of $1,050,000, 300,000 shares of Common Stock and
warrants to purchase 2,000,015 shares of Common Stock. The Company's
indebtedness to the holders of the promissory notes issued in the Third Private
Placement will become due and payable in August 1997, or upon closing of this
Offering, whichever first occurs. The Company intends to use a portion of the
proceeds of this Offering to pay such indebtedness in full. See "Use of
Proceeds;" "Description of Securities -- Warrants Issued in Private Placements;"
and "Selling Securityholders."
Pursuant to a private placement transaction in December 1996, the Company
borrowed $250,000 from each of Messrs. L.W. Cave, James Condakes and Howard M.
Pack, none of whom is affiliated with the Company (the "Bridge Financing"). The
Company must repay said $750,000, together with interest thereon accruing at a
rate of 8% per annum on the earlier to occur of (i) three business days
following the receipt by the Company of the net proceeds of the Offering or (ii)
October 31, 1998. As an inducement to such lenders to make such loans, the
Company originally issued 150,000 shares of Common Stock to each of them, for no
additional consideration. The issuance of such shares resulted in a $1,890,000
discount of the Bridge Financing debt and a corresponding increase to capital.
The Company intends to use a portion of the proceeds of this Offering to pay off
its indebtedness to the Bridge Financing Lenders. See "Use of Proceeds."
The Company will rely exclusively upon the proceeds of the Offering to
provide the financing that it will need to expand Corbina's operations, and to
develop CompTel's proposed wireless local loop network.
BASIS OF PRESENTATION OF FINANCIAL RESULTS
Corbina and CompTel maintain their records and prepare their statutory
financial statements in accordance with Russian accounting principles and tax
legislation. The financial statements presented in this Prospectus have been
prepared from Russian accounting records for presentation in accordance with
U.S. generally accepted accounting principles ("U.S. GAAP"). These financial
statements and results differ from the financial statements issued for statutory
purposes in Russia in that they reflect certain adjustments not recorded in
either Corbina's or CompTel's Russian accounting records, which are appropriate
to present the financial position, results of operations and cash flows in
accordance with U.S. GAAP. The principal
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adjustments relate to: (i) revenue recognition; (ii) recognition of interest
expense and other operating expenses; (iii) valuation and depreciation of
property and equipment; (iv) foreign currency translation; (v) deferred income
taxes; (vi) capitalization and amortization of telephone line capacity; (vii)
valuation allowances for unrecoverable assets; and (viii) capital leases.
Corbina pays, and CompTel will pay, taxes computed on income reported for
Russian tax purposes. This computation is based on Russian accounting principles
which differ substantially from U.S. GAAP. Certain items that are capitalized
under U.S. GAAP are recognized under Russian accounting principles as an expense
in the year paid. As a consequence, the effective tax charges of Corbina and
CompTel are lower under Russian accounting principles than under U.S. GAAP. See
Note 2 to Corbina's Financial Statements.
INFLATION
The Russian economy is in transition and has been characterized by high
rates of inflation. The Russian Government adopted a number of measures in 1995
and 1996 and these have begun to have a favorable impact on inflation rates. In
1994, the average monthly inflation rate was 10.0%. In 1995, the average monthly
inflation rate decreased to 7.2% and during 1996, the average monthly inflation
rate was 1.8%. The devaluation of the rouble in recent years has not kept pace
with inflation. Corbina prices its services, and CompTel intends to price its
equipment and services in U.S. dollars thereby mitigating the effects of the
devaluation of the rouble. However, the Company believes that such pricing may
not be able to fully offset the effects of inflation because a substantial
portion of all collections will be in roubles. In addition, the Company also
believes that Corbina and CompTel may experience increased costs in hard
currency terms due to the devaluation of the rouble. If the Subsidiaries are
unable to maintain prices in line with inflation, due to competitive pressures
or otherwise, it may have a material adverse effect on the Company.
FOREIGN CURRENCY TRANSLATION
Corbina reports, and CompTel will report, to the Russian tax authorities in
roubles and its accounting records are maintained in that currency. The
financial statements of Corbina contained elsewhere in this Prospectus have been
prepared in accordance with U.S. GAAP and are stated in U.S. dollars. Corbina's
functional currency is, and CompTel's functional currency will be, the U.S.
dollar because the majority of their respective revenues, costs, property and
equipment purchased, and debt and trade liabilities are, or will be in the case
of CompTel, either priced, incurred, payable or otherwise measured in U.S.
dollars. Accordingly, transactions and balances not already measured in U.S.
dollars have been remeasured into U.S. dollars in accordance with the relevant
provision of FAS No. 52, "Foreign Currency Translation" as applied to entities
in highly inflationary economies. Under FAS No. 52, revenues, costs, capital and
non-monetary assets and liabilities are translated at historical exchange rates
prevailing on the transaction dates. Monetary assets and liabilities are
translated at exchange rates prevailing on the balance sheet date. Exchange
gains and losses arising from remeasurement of monetary assets and liabilities
that are not denominated in U.S. dollars are credited or charged to operations.
The operating currency of Corbina and CompTel is Russian roubles. This
currency is not convertible outside of Russia and has been very volatile in the
past. From 1995 to date, the Russian Government and Central Bank have
successfully kept the rouble trading within a fixed band and as a result the
currency has been declining at a relatively stable rate. Corbina does not
engage, and neither Corbina nor CompTel plan to engage, in hedging or other
transactions intended to manage risks relating to fluctuations in foreign
currency exchange rates, inflation or interest rates. However, to minimize the
risk of rouble fluctuations and consequent devaluation, the Subsidiaries have
adopted a number of measures, including listing tariffs for customers in U.S.
dollars and calculating customers' monthly bills in U.S. dollars and requesting
payment in roubles (in accordance with the applicable law) based on the exchange
rate on the date the bill is sent to the customer. All invoices include a 1%
charge to cover the devaluation exposure for the 15-day payment period. Payments
received after 15 days are converted into U.S. dollars at the prevailing rate of
exchange on the date payment is received and adjustments due to any rouble
fluctuations from the date of billing are made to the customer's account in the
next billing period. See "Risk Factors -- Currency Risks."
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BUSINESS
GENERAL OVERVIEW
The Company through its Subsidiaries, is a provider of local, domestic and
international telecommunications services, principally in the Moscow Region. It
intends to increase the volume of telecommunications business that it conducts
within the Moscow Region, and expand its business by offering its
telecommunications services in other urban areas of the Russian Federation.
The Company was formed in April 1994 under the name of Telcom Group USA,
Inc. ("Telcom Group"). On August 19, 1994, the Company was certified by the New
York State Public Service Commission to operate as a reseller of all forms of
telephone services via landline telephone company and other common carrier
facilities located in New York. During the period between the Company's
inception and December 31, 1996, the Company conducted business on a limited
basis as a reseller of long distance telecommunications services to commercial
customers. Such services were provided by the Company while it attempted to
finance and establish the business which it originally had intended to
undertake, i.e., the provision, as a CAP, of single source local and long
distance telecommunications services to commercial customers in the New York
Metropolitan area. CAPs enable users of local and long distance telephone
services to connect the network of telephones and other telecommunication
devices which comprise the telephone system employed within the customer's
business via dedicated telephone transmission lines leased by the CAP from the
local exchange carrier (e.g., NYNEX) directly to their long distance carriers,
thereby bypassing all, or most of the local exchange carrier's network and
charges. By integrating local and long distance services on a single network,
the Company believed that its prospective customers would be able to obtain less
expensive local and long distance service through it by reason of its
anticipated ability to make volume purchases of local telephone transmission
lines, and the ability of the long distance carrier to avoid payment of a
portion of the access charges imposed by the local exchange carrier on switched
access long distance telephone traffic. However, with the passage of the Federal
Telecommunications Act of 1996 (and the subsequent entry into the local
telephone markets by long distance carriers) the Company determined that future
growth lay in the international arena -- particularly in the Russian Federation.
In 1996, the Company's management undertook to explore opportunities
involving the delivery of various categories of telecommunications products and
services throughout the former Soviet Union. On January 28, 1997, TelCom Group
exercised an option to purchase 75% of the outstanding capital stock of Corbina
which had been granted to it by Mr. Leibov in July 1996. See "Business -- The
Company's Acquisition of Corbina;" and "Certain Relationships and Related
Transactions."
On February 10, 1997, the Company changed its name to Russian Wireless
Telephone Company, Inc. in connection with the merger of a Delaware corporation
with and into the Company which had been known by that name ("Russian
Wireless"). Russian Wireless was formed by Messrs. Nathan and Leibov to provide
wireless local loop telecommunications services to business customers in the
Moscow Region, particularly to subscribers who generate significant amounts of
outgoing domestic and international long distance traffic. Such services will be
provided through CompTel.
TELECOMMUNICATIONS INDUSTRY
General. The Company believes that the current international
telecommunications landscape is being reshaped by the convergence of three major
trends: (i) the accelerating growth in demand for high speed, high capacity
digital telecommunication services, (ii) the deregulation of telecommunications
markets; and (iii) the rapid advances in wireless technologies. The growth in
demand for high speed digital telecommunications services is being driven by the
revolution in microprocessor power and advances in new multimedia and on-line
applications such as the Internet. The ability to access and distribute
information quickly has become critical to business and government users of
telecommunications services. The rapid growth of local area networks ("LANs"),
Internet services, video teleconferencing and other data intensive applications
is significantly increasing the volume of broadband telecommunications traffic.
The inability of the existing infrastructure to meet this demand is creating a
"last mile" bottleneck in the copper wire networks of the
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incumbent local exchange carriers ("LECs"). This increasing demand, together
with changes in the regulatory environment, is creating, in the Company's view,
an opportunity to offer cost effective, high capacity access using wireless
local loop solutions.
Russia. In the Soviet era, telecommunications in the Russian Federation
(and in the other republics of the former Soviet Union) was viewed as existing
principally to serve the defense and security needs of the state. As a result,
the public telecommunications network in the Soviet Union was underdeveloped.
With the break-up of the Soviet Union and the liberalization of the economies of
its former republics, the demand for telecommunications services has increased
significantly. However, Russia and the governments of the countries of the
former Soviet Union do not currently have the significant capital necessary for
the development of the telecommunications infrastructure. As a result, they have
actively encouraged market liberalization, privatization and foreign investment
in the telecommunications sector. This has resulted in significant development
in the area of fixed wire overlay systems, private networks and cellular and
data services. As modern telecommunications capability is critical to the
successful transition to a market economy, it is expected that the next stage of
development will focus on basic local telecommunications infrastructure.
The Company believes that the lack of highly developed local and long
distance telecommunications systems in Russia has created a significant market
opportunity for the Company. Inadequate investment in public telecommunications
during the Soviet era and restrictions on access to advanced Western technology
have resulted in an underdeveloped telephone system in the Russian Federation.
According to published reports, the number of access lines per 100 people in the
Russian Federation is significantly lower than in most developed countries. As
private enterprise has developed in the Russian Federation since the break-up of
the former Soviet Union, the demand for quality telecommunications services has
increased dramatically. According to the MOC, there were approximately 26
million telephone lines in Russia with a waiting list for telephone line
installation of 9.7 million at year end 1995, indicating significant pent-up
demand. The lack of highly developed wireline telecommunications systems in
Russia has resulted in some subscribers looking to wireless telecommunications
systems, primarily cellular, as a substitute, rather than a supplement, to
wireline systems. The Company believes that the high cost and lengthy time
required to build the infrastructure necessary to install and upgrade local
wireline services makes it feasible for the Company to provide wireless local
loop services as a primary form of telecommunications in certain ares of the
Moscow Region where wireline services are inadequate or non-existent.
The Company believes that the Moscow Region, as the commercial and
political center of the Russian Federation, has the greatest demand for quality
telecommunications services. According to the MOC, in the Moscow Region there
was a waiting list for line installation of over 164,000 at December 31, 1995.
The Company believes that the Moscow Region, which has a per capita income level
approximately three times the national average of the Russian Federation, has
the ability to support a significant increase in local telecommunications
subscribers.
The telecommunications market in the Moscow Region, an area with a
population of approximately twelve million, is characterized by low activated
penetration rates, substantial bottlenecks on the public network and outdated
switching technology. The Company believes the Moscow Region is an attractive
market for the provision of integrated telecommunications services due to the
current inadequacies of the public network as well as the rapid development of
Russian and foreign businesses in the city. According to published reports, the
public telecommunications market in the Moscow Region, with current spending of
approximately $4.5 billion per annum, has grown by 350% since 1992 in dollar
terms. The Company believes that the Moscow Region does not currently have the
financial resources to develop the network infrastructure required to
accommodate what it perceives to be a continuing and increasing market demand
for more and better local and long distance telecommunications services.
COMPTEL'S PROPOSED WIRELESS LOCAL LOOP OPERATIONS
The Company intends to construct and operate, through CompTel,
state-of-the-art wireless local loop telecommunications systems in
"under-telephoned" target markets in the Russian Federation and other countries
of the former Soviet Union. The first system will be built in the Moscow Region.
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A wireless local loop system is a radiotelephone system that provides
telecommunications service to fixed locations, such as homes and businesses,
without the traditional network of poles and two-wire copper cables. It utilizes
a conventional telephone handset that is plugged into a radio receiver unit and
operates in exactly the same manner as a conventional telephone. In addition,
the system provides the customer at least limited mobility; the communications
system is fully accessible as long as the subscriber moves around within the
system's coverage area. The primary advantage of wireless local loop network
over traditional wireline technology is speed of implementation. The current
worldwide backlog of telephone service, estimated by the Company at over forty
million lines, is, in the Company's estimation, a direct result of the labor
intensive nature of the traditional deployment process involving laying cables
and hard-wiring each line to the switch. A telephone switch typically takes
several weeks to install, and individual phone lines, in both remote as well as
urban areas, can require several years, depending on the size of the proposed
system. With a wireless local loop system, however, several thousand customers
inside a typical coverage area (with a radius of approximately 18 miles) can
obtain instant access to the network when the system is activated. Deployment of
a wireless local loop system drastically reduces installation time to a few
weeks for an entire communications system.
The "local loop" is the critical segment of a telecommunications network
that connects a customer's premises to the nearest local telephone company
switch or central office. The Company believes that CompTel's technical
expertise, capital investment and management capability will enable it to
provide subscribers with fully integrated "bundled" telecommunications services,
including access to high quality local, and cost-effective long distance and
international telecommunications services (through Corbina), cellular and paging
(as an agent for Moscow Region-based providers) as well as value-added services
including prepaid calling cards, Internet, ISDN, voice mail, call-waiting,
call-forwarding and three-way call conferencing features. It is the Company's
intention that CompTel will provide to its subscribers, primarily
telecommunications intensive Russian and foreign commercial enterprises,
non-profit organizations, diplomatic missions, and governmental authorities "one
stop" shopping (and a single bill) for all telecommunications services and
equipment. It will "bundle" this package of local, long distance and other
services in a manner similar to the integrated services provided by AT&T prior
to its divestiture and now offered in certain cities in the United States by
carriers previously designated as primarily "local" (e.g. Ameritech) or "long
distance" (e.g. MCI) carriers.
NETWORK BUILD-OUT
CompTel currently anticipates commencing the initial build-out of its
wireless local loop network in the Moscow Region in the Summer of 1997, and will
immediately begin to provide coverage to customers in built-out areas as such
areas come "on-line." The Company expects that CompTel will complete its network
build-out by the last calendar quarter of 1998. The Company anticipates that
CompTel will be able to provide full wireless local loop service to as many as
3,000 customers within its Moscow Region license area by the end of 2000.
However, no assurances can be given that the build-out will be completed within
such time frame, or that CompTel will be able to attract and maintain as many
customers as it is planning to service.
CompTel intends to construct its wireless local loop network with equipment
designed by Tadiran Telecommunications, Ltd. ("Tadiran"), a publicly owned
Israeli company which has a class of securities which trades on the Nasdaq
National Stock Market. The Tadiran system is closest in design to a cordless low
power radio system and utilizes small radio ports rather than high power base
stations. In the Company's estimation, it is best suited for deployment in dense
urban areas, such as the Moscow Region. A wireless local loop system utilizing
the Tadiran equipment is currently in place in Ryazan, Russia and Glasgow,
Scotland.
The build-out of CompTel's network will involve systems design (the initial
stages of which have been completed by CompTel), acquisition of sites, equipment
procurement, interconnection with other communications providers, purchase and
installation of switches, and the purchase and implementation of advanced
management information and billing systems. A planning and engineering team,
comprised of engineering and operations employees and independent contractors
and consultants, all of whom will be hired upon, and subject to completion of
the Offering, will complete the design of CompTel's network based on the
marketing and product requirements necessary to meet the Company's targets for
consistency, uniformity and reliability.
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CompTel's proposed equipment vendor, Tadiran will, in conjunction with
CompTel's management, oversee the deployment of the network. CompTel will hire
construction companies located within the Moscow Region as necessary. CompTel
has initiated site selection in its proposed Moscow Region license area and has
begun to hire key operating personnel, including a Chief Operating Officer. The
initial coverage of the network will include a major metropolitan area within
the Moscow Region. CompTel expects to complete the initial buildout of its
network by the last calendar quarter of 1998 at which time its network is
expected to cover approximately 80% of the population within the geographic area
of the Moscow Region for which it expects to receive its license (the "Projected
License Area"). As economic potential merits (and financing is available), the
Company will consider seeking additional licenses and/or entering into joint
ventures with other license holders and operators.
PRODUCTS AND SERVICES
CompTel intends to provide its customers (i) direct dial local, i.e.,
within the Moscow Region, telecommunications services utilizing wireless local
loop technology; (ii) direct dial domestic and international long distance
services (utilizing, its Corbina subsidiary, as well as other long distance
carriers) for transmission services; (iii) value added services including
prepaid phone cards, Internet, ISDN, voice-mail call waiting, call forwarding
and three-way conferencing; and (iv) access to cellular and paging services as
an agent for Moscow Region-based providers of these services.
Local Telecommunications Services. If CompTel's license application is
granted, CompTel intends to provide wireless local loop telecommunications
services to its customers in the Projected License Area as, in effect, a
competitive local exchange carrier competing with the local Moscow public
network -- MGTS. The Company's management believes that there is a significant
demand for quality, cost-effective local network services in the Moscow Region.
The Company further believes that the aggregate of the per-subscriber income
that CompTel expects to receive for one-time installation, line and number
charges, and equipment charges will be less than CompTel's aggregate costs
therefor, including the costs and charges payable by CompTel to MGTS for the
lines and numbers. Once "connected," a CompTel customer will have complete
access to any other telephone -- whether or not on the CompTel network -- as
CompTel actually connects with the local public network for transmission and
termination of the local and/or long distance call, as the case may be.
Long Distance Services. CompTel intends to provide its customers both
domestic and international long distance services through the Company's Corbina
subsidiary as well as through primary long distance carriers. The
telecommunications traffic of CompTel's customers within the Russian Federation
will be connected at Corbina's switching station in the Moscow Region for
delivery throughout the Russian Federation, usually via the long distance
network owned and operated by Global One. CompTel intends to route its
customers' international telecommunications traffic through Corbina, or such
traffic will be directed to other carriers via Corbina's existing switching
facility to their final destination. See " -- Corbina's Long Distance
Telecommunications Operations -- Network and Operations."
Value Added Services. CompTel intends to introduce a number of value-added
services to complement the basic fixed local and long distance services it
intends to provide to its customers. Management believes that the ability to
provide such services on CompTel's proposed network will be a key competitive
advantage in the Moscow Region marketplace. Planned services include the
following: operator/prepaid calling card services, audiotext services offering a
combination of recorded information and live entertainment, equipment sales
offering CompTel's customers a wide range of telecommunications equipment as a
means of enhancing its service, including PBXs, key systems, handsets, and a
full range of customer terminals and maintenance service for the equipment and
Internet access through Corbina which is currently offering services to its
customers as an internet service provider ("ISP").
BILLING, TARIFFS AND INTERCONNECTION CHARGES
Billing. CompTel intends to provide monthly and/or semi-monthly itemized
bills to its customers denominated in U.S. Dollars. Installation and use/number
charges, equipment charges, monthly line rental, value added services and local
and domestic long distance call charges will be paid in Roubles at the U.S.
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Dollar/Rouble exchange rate on the date when the customer makes payment.
Currency regulations govern the currency in which international call charges may
be paid and, usually, depend on the residency status of the customer. Russian
resident customers are required to pay in Roubles while non-resident companies
may pay in Roubles or U.S. Dollars. By denominating its bills in U.S. Dollars
(and exchanging Roubles at the then current U.S. Dollar/Rouble Exchange rate),
CompTel will limit the exchange rate risk otherwise associated with transacting
business in a foreign currency. See Risk Factors -- Currency Controls;
Restrictions on Repatriation of Payments.
Tariffs. Currently, there are no specific regulations regarding tariffs
which may be charged by CompTel for its various proposed product and service
offerings. CompTel will set its tariffs taking into account those rates charged
by MGTS (and long distance providers) and competitive pressures in the
marketplace. CompTel will charge its customers separately for equipment,
installation, line/number charges, and for local, domestic long distance,
international long distance and value added services.
Interconnection. CompTel's proposed network will connect to the Moscow
public switched telephone network, (MGTS). Such interconnection is required to
facilitate originating and terminating traffic between CompTel's facilities and
both MGTS and long distance carriers. CompTel is negotiating, or intends to
negotiate, interconnection agreements with telephone companies, including MGTS,
operating or providing service in the areas where it intends to deploy its
network. CompTel believes that it will be able to negotiate favorable tariffs
for interconnection fees and carrier charges with MGTS and such other telephone
companies. However, no assurances can be given in that regard. The failure to
obtain an interconnection agreement with MGTS would, and the failure to obtain
interconnection agreements with other telephone companies could, have a material
adverse effect on the Company's business, in general, and CompTel's proposed
business operations, in particular. See "Risk Factors -- Dependence on
Interconnect Parties."
TELECOMMUNICATIONS LICENSE
On November 20, 1996, CompTel applied for a license to provide local, long
distance and international telecommunication services within the Projected
License Area. It is expected that the license will be granted, and that it will
designate a specific geographic area within the Moscow Region, the number of
lines which CompTel may have as well as set requirements that a certain number
of such lines be in place and in operation by a certain date. If the MOC failed
or refused, for any reason, to grant CompTel's license application, the
Company's business, in general, and CompTel's proposed business operations, in
particular would be materially adversely affected by reason of CompTel's
resulting inability to construct or operate its proposed wireless local loop
network. See "Risk Factors -- Government Regulation -- Licensing and Frequency
Allocation Requirements -- CompTel's Inability to Conduct Operations if License
is Not Granted."
MARKETING, SALES AND DISTRIBUTION
The Company's marketing objective is to create demand for CompTel's
services by clearly differentiating its service offerings from those of other
providers of similar services. It is anticipated that CompTel will use both mass
marketing and specific customer segment marketing. Mass marketing efforts will
emphasize the value of the high-quality, innovative services which it intends to
provide. CompTel also plans to create marketing programs for particular customer
segments. For each targeted segment CompTel intends to create a specific
marketing program including a service package, pricing plan, promotional
strategy and distinctive distribution channels. Initially, CompTel plans to be
positioned as a provider of high quality telecommunications services to a select
group of potential commercial customers including Russian and foreign
businesses, governmental organizations, diplomatic missions, non-profit groups
and wealthy individuals with high monthly telecommunications expenditures. In
addition to these market segments, substantial demand is expected to come from
new customer segments as the number of small and mid-sized Russian and foreign
businesses increase in the Moscow Region.
CompTel intends to develop a distribution network to market its
telecommunications services including an in-house sales force as well as
independent dealer/agents. It plans to solicit direct sales from entities such
as large corporate accounts and embassies with each such account having a
designated account representative.
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It is anticipated that independent agents engaged for such purposes will receive
a one-time payment per customer installation as well as ongoing commissions
based on the monthly volume of traffic -- local and long distance -- of the
subscribers enrolled by such dealer/agent.
COMPETITION
The Company believes that providers of strictly local telecommunications
services in Russia do not currently compete to attract and retain customers on
the basis of services and enhancements offered, customer service and price.
Nevertheless, CompTel intends to build and operate its business in a highly
competitive Moscow Region environment as MGTS is an entrenched provider. CompTel
will not have an exclusive license to provide telecommunications services in the
Moscow Region, and a number of other entities, including Russian companies and
international joint ventures, may compete with CompTel for shares of the local
telecommunications market in the Moscow Region. Many of such companies will be
(or their joint venture partners are) larger than CompTel and have significantly
greater financial and other resources. MGTS and CompTel must be regarded as
competitors inasmuch as MGTS can offer its customers the same core local
services as CompTel intends to offer to its customers. Although CompTel believes
that MGTS would require substantial additional capital to modernize its network,
MGTS is free, at any time, to enter into joint venture arrangements with other
foreign partners to modernize its network. See "Risk Factors -- Competition"
Other local and long distance competitors to CompTel currently include: (i)
Combellga, a joint venture of Comin Com, BelgaCom, Alcatel Bell and MGTS which
operates an international overlay network in the Moscow Region; (ii) Global One,
which provides national and international voice and data services to certain
destinations; and (iii) Metrocom, which provides local data access in St.
Petersburg and has additional capacity through Comstar in Moscow. In addition,
there are currently three Russian cellular operators in the Moscow Region who
will be competitors of CompTel as they, too, offer local, long distance and
international access. Potential users of wireless local loop systems may find
their communications needs satisfied by other current and developing
technologies, particularly in the broadband personal communications services. In
the future, cellular service may also compete more directly with traditional
wireline as well as wireless local loop telephone service providers. Continuing
technological advances in telecommunications make it impossible to predict the
extent of future competition. Several consortiums including Motorola
Corporation, Globalstar, Odyssey and ICO, have plans to provide mobile satellite
service in Russia for low-orbit or medium-orbit satellite systems that would
offer a customer worldwide voice and data mobile communications coverage. See
"Risk Factors -- Technological Obsolescence and New Technology."
There can be no assurance that the Company will be able to compete
effectively in any aspect of its current or proposed business activities or that
developments by others will not render the Company's products and services
noncompetitive. Moreover, the Company may have to compete with unlicensed
businesses or with businesses capitalizing on personal relationships with the
fluid power structure in the Russian Federation. In the Russian Federation, in
addition to competition from private telecommunications companies, the Company
may be competing with partially and wholly state-owned communications
enterprises. There can be no assurance that competition in the Company's
targeted markets will not increase as economic activity grows and that larger,
better capitalized competitors will not enter the market in these areas.
CORBINA'S LONG DISTANCE TELECOMMUNICATIONS OPERATIONS
OVERVIEW
Corbina is engaged primarily as a provider of long distance
telecommunications services to commercial customers in the Moscow Region.
Corbina does not operate on the basis of a telecommunications license, and
instead, operates through agency agreements entered into with long distance
companies, primarily Rustelnet, TelMos and Global One, through which it offers
long distance service through its private telecommunications network.
Inasmuch as Corbina contracts with other long distance carriers to provide
network transmission, it has not needed to commit significant capital for its
own network and transmission facilities. As a result, Corbina's
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ability to expand has not been limited by the capacity, geographic coverage or
configuration of a particular network. As the volume of its customers' traffic
has reached sufficient levels in certain metropolitan markets, Corbina has
expanded and upgraded its switch capacity to direct call traffic over selected
transmission networks. Such flexibility in the routing of calls (which is
referred to as "least cost routing") enables Corbina to realize higher per call
profit margins by directing a call over the network which, at the particular
time of day, and to the destination in question, costs Corbina the least amount.
Although the long distance resale business in the United States is a major
component of the overall long distance industry with annual revenue estimated in
excess of one billion dollars, in Russia it is still in its infancy. As is the
case in the United States, however, primary carriers in Russia require
alternative means of marketing their long distance services in order to increase
total traffic volume. Providers, such as Corbina, by offering effective and
dedicated marketing efforts, are able to attract customers more effectively (and
with fewer direct costs) than the carriers themselves. In order to attract (and
retain) this new customer base, the primary carriers are willing to accept lower
per-minute rates than the rates offered to their direct customers. Corbina's
customers include numerous offices of major Western and Russian businesses
located within the Moscow Region.
An integral component of long distance telecommunications transmission is
the switching equipment necessary to direct calls or data over the appropriate
transmission line. Facilities-based providers, like Corbina, maintain their own
switches as part of their networks. Smaller non-facilities-based providers
generally contract for the use of switches in connection with their contractual
arrangements for the use of a network.
THE CORBINA ACQUISITION
On July 23, 1996, the Company acquired from Mr. Leibov, the then sole owner
of all of Corbina's 140 shares of outstanding capital stock, an option (the
"Option") expiring on December 31, 1997 to purchase 105, i.e., 75%, of such
shares for $190,000.
Between July 23, 1996, and November 20, 1996, the Company made loans to Mr.
Leibov in the aggregate principal amount of $190,000. Each of said loans was
payable on demand, and bore interest at the rate of 8% per annum. On January 28,
1997, the Company exercised the Option, and paid the $190,000 exercise price by
canceling and returning to Mr. Leibov the promissory notes which had been issued
by him to the Company in the aggregate amount of $190,000.
INDUSTRY BACKGROUND
The Company believes that the Russian long distance market remains
relatively underdeveloped, with poor network infrastructure resulting in limited
network capacity. The size of the Russian long distance market, according to
published reports, has grown significantly, with international and long distance
services accounting for approximately 57% of the estimated $4.5 billion market
which currently exists for telecommunications services throughout the Russian
Federation. The Company also believes that the volume of international and long
distance telephone services will continue to grow as current and planned
improvements to the Russian Federation's long distance telecommunications
network infrastructure are made by Rostelecom, and other privately held licensed
long distance carriers..
There are several impediments impacting expansion of long distance
telecommunications services in Russia, among which are: (1) relative
backwardness of the currently installed systems; (2) Soviet style structure and
management of major telephone companies; (3) lack of capital for infrastructure
development; (4) slow development of market-oriented economic environment,
limiting capital investment and the attraction of Western services; and (5)
limited adherence to international telecommunications standards. The Company
believes that significant opportunities exist in the Russian Federation (and the
former Soviet Union) for long distance companies capable of establishing and
maintaining telephone services typically available throughout the United States
and Western Europe.
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PRODUCTS AND SERVICES
Through contractual arrangements with facilities-based carriers and other
providers, Corbina offers a wide-variety of long distance telecommunications
services. To date, substantially all of Corbina's revenues have been generated
by basic outgoing long distance services. Corbina offers switched and dedicated
outbound long distance services carried by large national or regional long
distance carriers such as Global One and Rustelnet. The Company believes that
Corbina has been successful as a provider of these basic services because of the
discounts it has been able to negotiate with its underlying carriers, and its
ability to route its customers' traffic over the transmission networks of more
than one carrier. Corbina can direct a single customer's calls among different
carriers' networks to take advantage of the most favorable rates to different
destinations at different times of the day.
Direct Dial. Corbina's primary focus has been the provision of domestic
and international long distance services to business customers in the Moscow
Region including those which generate significant amounts of outgoing
international traffic. Corbina targets both foreign and, increasingly, Russian
businesses which have requirements for high quality and cost-effective long
distance and international telecommunications services. As of December 31, 1996,
foreign businesses represented approximately 60% of Corbina's business customers
and Russian businesses represented the balance. Corbina intends to expand its
provision of direct dial capability by entering into agreements with various
international carriers to lease capacity on private lines (e.g. Moscow -- New
York) which will significantly increase Corbina's gross profit margins on such
traffic. By so doing, it will no longer rely on its present carriers for
transmission, but will, in effect operate its own long distance network and
enhanced switching facilities.
Value Added Services. In addition to basic outgoing services, Corbina has
recently expanded its product line to provide its customers with access to the
Internet. Corbina intends to further expand its product line to provide its
customers with additional value-added services that generally produce higher
margins than basic long distance service including, voicemail and information
services, private lines for voice and data transmission over all-digital
fiber-optic transmission facilities, fax broadcast services that will allow a
user to send a facsimile to many destinations simultaneously, fax mailbox
services which will provide for the storage and retrieval of facsimiles in a
manner similar to electronic mail and prepaid phone cards which will permit
users to place long distance and international calls from touchtone telephones,
eliminating the need for coins and collect calls. Card users will be able to
easily access telephone service by dialing a toll-free number and entering a
personal identification number (PIN) printed on the back of the card.
Corbina intends to use approximately $150,000 of the $655,000 capital
contribution which the Company will be paying to it upon completion of this
Offering to enable it to provide voicemail and information services, fax and
debit card services through its existing switch. Corbina anticipates that it
will be offering such enhanced services during the fourth calendar quarter of
1997. No assurance can be given that the offer of such enhanced services will
increase Corbina's revenues, or that it will derive any profits with respect
thereto. See "Use of Proceeds."
MARKETING AND SALES
Corbina markets its services by direct sales and through independent
distributors. Corbina targets commercial customers with telecommunications usage
of under $10,000 per month. Corbina's target customers generally do not qualify
for the major carriers' volume discounts or for the level of support services
made available to higher volume users. Corbina intends to use approximately
$155,000 of the $655,000 capital contribution which the Company will be paying
to it upon completion of this Offering to purchase print and other forms of
advertising through which it intends to create greater awareness among potential
customers of Corbina and its services.
Corbina relies heavily on its direct sales and field service
representatives. Typically, businesses become customers of Corbina by purchasing
long distance service from its direct sales representatives, who receive an
initial commission for securing the sale and a trailing commission so long as
that customer remains with Corbina. Thereafter, Corbina's field service
representatives follow up with existing customers by offering them new
value-added services, for which the representatives also receive a commission.
On February 28, 1997,
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Corbina had eight direct sales and field service representatives. Corbina's
future growth will depend in part on expansion of its direct sales force.
Corbina intends to supplement its direct sales efforts by increasing to
approximately 20, the number of independent distributors, who solicit customers
for Corbina and receive commissions on the business they generate for Corbina.
Corbina anticipates that some of its new distributors will employ telemarketing
programs, and it is expected that sales through this channel will increase the
number of Corbina's customers with smaller volumes of use. Although there are
higher costs associated with sales to smaller customers, sales to such customers
generally have higher margins. At February 28, 1997, Corbina had seven
independent distributors.
NETWORK AND OPERATIONS
Corbina currently operates an advanced telecommunications network
consisting of a digital switch capable of handling up to 1,000 concurrent
telephone communications, leased fiber-optic transmission lines and
sophisticated network management systems designed to optimize traffic routing.
Corbina's network currently originates traffic within the entire Moscow Region.
Corbina operates an "open network," meaning that any customer within the Moscow
Region can access Corbina's long distance network by dialing one of Corbina's
access codes, or by pre-subscribing to the Company as its long distance service
provider and utilizing its routes.
Switching Facilities. Corbina currently operates a digital
telecommunications switch in Moscow. Switches are digital computerized routing
facilities that receive calls, route calls through transmission lines to their
destination and record information about the source, destination and duration of
the calls. The Company's switch, a Northern Telecom Meridian Model 61 is capable
of handling up to 1,000 simultaneous telephone transmissions. As Corbina's long
distance traffic routing needs increase, it intends to expand its existing
switch and acquire additional switches to increase its call routing capacity The
Company believes that Corbina's intended acquisition of additional switching
equipment will improve Corbina's gross margins and provide greater control over
its customers.
Leased Fiber-Optic Transmission Lines. Corbina presently leases
fiber-optic transmission lines from the Moscow Area Communications Network
("Macomnet"), an unaffiliated company which has constructed a fiber-optic
telecommunications transmission network in the Moscow Region. Through its
Macomnet lines, Corbina's switching facilities are directly connected to the
international fiber-optic transmission lines operated by Global One. Corbina
also employs its Macomnet-provided fiber-optic lines to establish direct
fiber-optic connections between Corbina's long distance customers and its
switching facilities. Corbina may also lease fiber-optic and wire-based
transmission lines from a variety of facilities-based and long distance
carriers. Corbina will contract with these entities with terms ranging from 12
to 60 months. Corbina may supplement its leased "on-network" capacity with
"off-net" services from a variety of facilities-based long distance carriers.
Network Management Systems. Once calls are originated over circuits, i.e.,
loops, connecting Corbina's customers to the Moscow public switched telephone
network (MGTS), the calls are routed over the public switched network to
Corbina's switching facility, and then re-routed on a least-cost basis over
leased digital, fiber-optic, e.g., Macomnet's, transmission facilities to one of
Corbina's long distance carriers. Corbina utilizes a state-of-the-art system to
electronically cross-connect circuits thereby increasing call routing and
circuit provisioning efficiency and providing better network monitoring
capabilities. This network protocol reduces connect time delays and provides
additional technical capabilities and efficiencies for call routing.
Network Surveillance and Diagnostics. Macomnet provides, pursuant to its
five year fiber-optic transmission lines lease agreement with Corbina, network
surveillance and diagnostic services which generally enable Corbina to
anticipate and correct problems before they result in service interruption.
Macomnet's technicians monitor Corbina's network 24 hours a day, 7 days a week.
To reduce the potential impact of any equipment or transmission failure, Corbina
intends to use approximately $100,000 of the $655,000 capital contribution which
the Company will be paying to it upon completion of this Offering to purchase or
lease an additional switch which will enable it to which will provide it with
the standby transmission capacity needed to
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reroute or restore transmissions in the event that its primary system goes off
line. Corbina's technicians monitor the network for fraud on a real-time basis,
using computer systems that detect unusual or high volume calling patterns. See
"Use of Proceeds."
Customer Installation Services. Corbina maintains a staff of installation
technicians who perform the services necessary to enable a customer to route its
long distance calls through Corbina's switching facility. Such services
typically include installation of a pre-programmable routing device at the
customer's premises permits the customer to make long distance calls through
Corbina without having to manually dial an access number or personal
identification number. The routing device can also be programmed to route calls
to other telecommunications providers and to prevent a customer's employee from
attempting to route a call through an unauthorized telecommunications provider.
Such installation services also may encompass the wiring of a customer's
premises or the building housing the customer's business either to provide
access, or increased access to the Moscow public switched telephone network.
Corbina intends to use approximately $250,000 of the $655,000 capital
contribution which the Company will be paying to it upon completion of this
Offering as working capital to be used, among other purposes, for the purchase
of an inventory of the above-described routing devices, and to finance the costs
which it incurs in providing the above-mentioned building and premises wiring
services.
Billing and Management Reports. Corbina is currently able to collect many
call data items for each phone call placed by a customer, including employee
name, call origination point, call destination point, billing code, minutes,
date, time and rate code. From this data, Corbina can organize the customer's
monthly phone calls into a wide variety of report formats. The Company believes
that Corbina's focus on billing as a differentiating service has been and will
continue to be an important factor in its ability to successfully compete for
its targeted customer.
Revenue Management Systems. Corbina has implemented a revenue management
process which enables it to monitor costs and volumes of use for each of its
products and services.
Customer Information. Corbina is able to process customer information from
the initiation of the customer's order by permitting its sales personnel to
enter data about a new customer into the system either from Corbina's field
offices or directly from a customer's office. This capability is intended to
minimize both delays in provisioning and the repetition of tasks that could lead
to error. Corbina has other features designed to minimize error, such as its
ability to recognize and reject inconsistent or incomplete information from
suppliers.
INFORMATION SYSTEMS
The Company believes that maintaining sophisticated and reliable billing
and customer service information systems that integrate billing, accounts
receivable and customer support is a core capability necessary to record and
process the massive amounts of data that are generated by a telecommunications
service provider. Corbina has developed new proprietary information systems
which will integrate customer service, management information, billing and
financial reporting. These systems, which are in the process of being phased in:
(i) provide sophisticated billing information tailored to the requirements of
its customer base, (ii) increase the accuracy and speed of customer billing,
(iii) respond promptly to customer needs, (iv) integrate acquired customer
bases, (v) facilitate customer retention by identifying customers who change
their usage patterns, (vi) verify payables to suppliers, and (vii) support
operations and collection efforts.
LONG DISTANCE CARRIERS
Corbina has supply contracts with Rustelnet, Global One and TelMos for long
distance telecommunications services. Corbina determines which carrier to use
for its traffic on the basis of routing costs per unit of time. All of such
costs are programmed into Corbina's switch which makes all routing decisions
instantaneously on the basis of such programmed data.
During 1996, TelMos, Rustelnet and Global One were responsible for carrying
traffic representing approximately 15%, 60% and 25%, respectively, of Corbina's
revenues. During the first two months of 1997,
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TelMos, Rustelnet and Global One were responsible for carrying traffic
representing approximately 40%, 5% and 55%, respectively, of Corbina's revenues.
In addition to its contracts with TelMos, Rustelnet and Global One, Corbina
intends to enter into contracts with other carriers. Corbina has not been
required to commit to purchase minimum volumes of long distance services during
stated periods.
Each month Corbina receives invoices from its underlying carriers. Due to
the multitude of billing rates and discounts which must be applied by carriers
to the calls completed by Corbina customers, Corbina has disagreements, at
times, with its carriers concerning the sums invoiced for its customers'
traffic. It has been Corbina's experience that the amounts it is invoiced often
do not precisely reflect actual call traffic. Accordingly, the carrier may
consider Corbina to be in arrears in its payments until the amount in dispute is
resolved. These disputes have generally been resolved on terms favorable to
Corbina, although there can be no assurance that this will continue to be the
case. In accordance with generally accepted accounting principles, Corbina
records as expense amounts in dispute that correspond to the aggregate amount
that the Company believes it will be required to pay and adjusts that amount as
the underlying disputes are resolved.
COMPETITION
The long distance telecommunications industry in Russia is highly
competitive and affected by regulatory and rapid technological change. Many
competitors, including among them, Rostelecom, Sovintel (a joint venture between
Global Telesystems and Rostelecom), Comstar, TelMos, Combellga and Global One,
have considerably greater resources than those of the Company and Corbina, and
there can be no assurance that Corbina will remain competitive in this
environment. The Company believes that the principal competitive factors in
Corbina's business include pricing, customer service, network quality,
value-added services and the flexibility to adapt to changing market conditions.
While the Company believes that Rostelecom and Corbina's other larger
competitors, all of whom are considered by Corbina to be dominant in the Russian
long distance telecommunications industry, historically have chosen not to
concentrate their direct sales efforts at Corbina's target group of customers,
i.e., smaller commercial users, these carriers have recently introduced new
services and pricing options that are attractive to smaller commercial users,
and there can be no assurance that they will not market to these customers more
aggressively.
The Company believes that Corbina currently competes favorably in its
targeted market segment, principally due to its economies of scale, personalized
service and enhanced billing and reporting. The Company also believes that
Corbina's ability to succeed as a competitor in the Russian long distance
telecommunications industry will increasingly depend on its ability to offer on
a timely basis new services based on evolving technologies and industry
standards. There can be no assurance that new technologies or services will be
made available to Corbina on favorable terms.
Regulatory trends in the Russian Federation have had, and may have in the
future, significant effects on competition in the telecommunications industry.
Under current industry conditions, the underlying carriers do not have access to
information regarding Corbina's customers for which they provide the actual call
transmissions. If this situation were to change and since these carriers are
potential competitors of Corbina, they could use information about its
customers, such as their calling volume and patterns of use, to their advantage
in attempts to gain such customers' business, although the Company believes that
such practices could be unlawful. In addition, Corbina's future success will
depend, in part, on its ability to continue to buy transmission services from
these carriers at a significant discount below the rates these carriers
otherwise make available to Corbina's target customers.
International Telecommunications Services. In providing international
circuits and direct dial services to business customers in the Moscow Region,
Corbina faces competition from a number of operators in the Moscow Region
offering similar services. Such operators, including Comstar, Combellga, Telmos
and Sovintel, all of whom are significantly larger and better capitalized than
Corbina, are primarily targeting Russian and foreign businesses in the Moscow
Region, replicating the services that Corbina is providing. In terms of
providing international circuits, Corbina faces direct competition from
Rostelecom, the state owned operator which transmits calls both to Intelsat and
the Russian satellites, and indirectly from Rostelecom,
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which also owns capacity in and operates the international cable facilities
connecting the Russian Federation to the telecommunications networks of the
major global carriers.
Russian Long Distance Services. In terms of the Russian long distance
market, Corbina's competition will come from a number of sources both on a
national and regional basis. Nationally, Corbina will face competition from
Rostelecom, as the operator of the terrestrial public long distance network of
the Russian Federation. There are no other commercial national networks of the
same scale as the Rostelecom network, although there are a number of private
networks, including those of the Ministries of Defense and Railways, that could,
if funding were made available, provide further competition to Corbina. In
addition, Sviazinvest has been offered a long distance carrier's license and
may, if it becomes adequately capitalized, become a serious competitor. See
"Risk Factors -- Competition.
Corbina will face satellite-based competition from Russian TeleSystems
("RTS"), an affiliate of Global TeleSystems Group, a privately owned US-Russian
joint venture which has been developing a digital overlay satellite network for
transmission of long distance and international telecommunications traffic
within the countries which comprised the former Soviet Union. Management
believes that RTS has a small number of regional sites in operation offering
connectivity between regions of the Russian Federation and the Moscow Region.
Corbina will also face competition from a number of satellite-based service
providers focusing on providing service in and between specific regions of the
Russian Federation.
EMPLOYEES
As of the date of this Prospectus, the Company had four employees,
including Messrs. Nathan and Leibov, Corbina had 23 full time employees,
including Mr. Leibov, and CompTel had three full time employees, including Mr.
Leibov. As CompTel's proposed network begins to grow over the next three years,
it intends to hire approximately 20 full time employees, 15 of whom will provide
installation services to its customers, three of whom will provide customer
service, and two of whom will be involved in accounting and bill collection
activities. In order to support anticipated increased growth in Corbina's
service offerings, Corbina expects to hire up to five new full time employees
over the next 12 months, three of whom will provide programming and technical
support services, and two of whom will provide customer support services. The
Company's future success will depend in significant part on the continued
service Mr. Leibov, and the key technical sales and service management personnel
employed by its Subsidiaries. There can be no assurance that the Company can
retain such key management, sales and technical employees or that it can
attract, assimilate or retain other highly qualified technical sales and
management personnel in the future. Neither the Company nor either of its
Subsidiaries has experienced any work stoppages, and the Company believes that
its relationships with its employees, and the relationships which its
Subsidiaries have with their respective employees are good.
FACILITIES
Pursuant to a lease expiring on April 30, 2001, the Company leases
approximately 2,000 square feet of space at 780 Third Avenue, Suite 1600, New
York, New York 10017 which it uses as an executive and administrative office at
an annual rent of approximately $76,000 per year. Corbina leases approximately
186 square meters of space in Moscow at 30-15 Ryazansky Prospect, Moscow,
Russian Federation. In accordance with its lease, Corbina must pay rent of
approximately $38,000 per year during the five year term ending in 2000. CompTel
has entered into a lease for approximately 182 square meters of space on a
different floor of the same building which houses Corbina's offices in Moscow.
Such lease obligates CompTel to pay rent of approximately $37,000 per year
during the five year term ending in 2002.
LITIGATION
Neither the Company nor either of its Subsidiaries is involved in any legal
or administrative proceedings.
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REGULATION OF TELECOMMUNICATIONS IN THE RUSSIAN FEDERATION
The provision of telecommunications services in the Russian Federation
falls within federal jurisdiction. The principal legal act regulating
telecommunications in the Russian Federation is the federal Law on
Communications, enacted on February 16, 1995 (the "Communications Law"), which
establishes the legal basis for all activities in the telecommunications sector
and provides, among other things, for licensing to provide communication
services, the requirement to obtain a radio frequency allocation, certification
of equipment, and fair competition and freedom of pricing.
The Communications Law is a framework law which anticipates and references
various regulations to be enacted by the competent supervisory authorities. No
substantial regulations have been promulgated since the enactment of the
Communications Law. The practice in the Russian Federation is for regulations
which were promulgated under a predecessor law to continue to be applied until
new regulations are issued to the extent such pre-existing regulations do not
contradict the newly enacted law. There is no indication that the MOC or other
regulatory authorities are taking a different approach at this time.
The Communications Law provides for equal rights of individuals and legal
entities to participate in the telecommunications operations and does not
contain any special restrictions with regard to participation by foreign
persons. All users and operators have access to the Interconnected
Telecommunications Network ("ITN"), a centrally managed complex of
telecommunications networks belonging to different enterprises and governmental
agencies of the Russian Federation, and have the right to interconnect their
networks with ITN in compliance with the connection conditions set forth in
their licenses.
Regulatory Authorities. The MOC and the Federal Agency of Governmental
Communications and Information under the President of the Russian Federation
("FAPSI") are the federal organizations which have executive power over the
telecommunications industry. The MOC is responsible for allocating federal
budget resources in the telecommunications industry and has supervisory
responsibility for the technical condition and development of all types of
communications. The role of FAPSI is not clearly defined in the Communications
Law. FAPSI is subordinate to the President of the Russian Federation on matters
within the President's jurisdiction pursuant to the Russian Constitution.
In addition, the State Commission on Radio Frequencies and the State
Supervisory Commission on Communications (the "SSCC") are regulatory agencies
under the MOC. The State Commission on Radio Frequencies is primarily
responsible for the development and implementation of a long-term policy for
frequency allocation and issues frequency permits. The SSCC is responsible for
technical supervision of network and equipment throughout Russia, including
supervision of compliance of network operators with applicable regulations and
of licensees with the terms of their licenses.
Licensing to Provide Services. The Communications Law requires that any
person providing telecommunications services must obtain a license prior to
commencing such services, unless such services are essentially "in house"
(including within an automobile, on a ship, in an airplane or another means of
transportation), or are for internal production or technological purposes, or
are used solely to service public administration, defense, security and law
enforcement authorities.
The Communications Law expressly provides that any person, including
foreign legal entities and citizens, is authorized to own and operate
communication facilities, but equally provides that Russian legislation may
establish a list of communications facilities which may be owned exclusively by
the state. Such a list has not yet been established.
Licenses to provide telecommunications services are issued by the MOC on
the basis of a decision by the Licensing Commission of the MOC. No new licensing
regulations have been issued since the enactment of the Communications Law and
in practice the MOC continues to issue licenses based on the "Regulations on
Licensing in the field of Telecommunications in the Russian Federation" which
were enacted by decree No. 642 of the Russian Government on June 5, 1994 (the
"Licensing Regulations") prior to the enactment of the Communications Law.
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Under the Licensing Regulations, licenses for rendering telecommunications
services may be issued and renewed for periods ranging from 3 to 10 years and
several different licenses may be issued to one person. Renewals may be obtained
upon application to the MOC and verification by appropriate government
authorities that the licensee has conducted its activities in accordance with
the licenses. Officials of the MOC have fairly broad discretion with respect to
both the issuance and renewal procedures. Both the Communications Law and the
Licensing Regulations provide that a license may not be transferred. Thus, a
license cannot be contributed to the capital stock of another person.
Furthermore, this restriction is interpreted to prohibit assignment or pledge of
a license to provide collateral for obligations of the licensee or a third
party. however, pursuant to a letter issued by the Deputy Minister of
Communications, a licensee may enter into agreements with third parties in
connection with the provision of services under the licensee's license.
Licenses to provide telecommunications services may be revoked or suspended
by the MOC for several reasons. The Licensing Regulations provide that licenses
may be suspended for the following reasons:
- failure to comply with the terms and conditions of the license;
- failure to provide services within three months from the
start-of-service date set forth in the license;
- provision of inaccurate information bout the communication services
rendered to consumers; and
- refusal to provide documents requested by the MOC.
Licenses may be revoked for the following reasons:
- failure to remedy the circumstances which resulted in a suspension of
the license within the established time;
- established practices of unfair competition by the license holder in
performing the licensed services; and
- other grounds set forth by Russian law or international treaties.
The fees for issuing licenses are established as multiples of the monthly
minimum wage ("MMW") (which is currently 85,900 roubles or approximately
US$15.00). Currently, licensing fees vary from 20 times the MMW for local
telephone services, 30 times the MMW for mobile radio-communication services, 40
times the MMW for mobile radiotelephone and cellular communication services to
90 times the MMW for inter-city and international communication services.
Licenses generally contain a number of other detailed conditions, including
a date by which service must begin, requirements for adhering to technical
standards, and often a schedule of the number of lines which must be in service
and percentage of the licensed territory which must be covered by specified
dates.
Corbina has been informed by the MOC that it does not need to have a
license to conduct operations in the manner which it currently employs, i.e., as
a reseller of long distance services provided by carriers licensed by the MOC.
CompTel has filed a license application for its proposed wireless local loop
activities, which application, if granted, will also include appropriate
licensing for the provision of domestic and international long distance
services.
Radio Frequency Allocation Regulation of the use of radio frequencies and
spectrum allocation are under the exclusive control of the Russian Government
represented by the MOC which has for this purpose established the State
Commission on Radio Frequencies within the MOC. A frequency allocation by the
State Commission on Radio Frequencies is a preliminary condition to receiving a
license for providing radio telephone communication services.
Once a licensee receives a license and general frequency allocation from
the State Commission on Radio Frequencies, the licensee must develop its
frequency allocation and site plan, which is subject to approval by the SSCC.
The plan is then reviewed by the SSCC and may be corrected in order to ensure
electromagnetic compatibility of the proposed cellular network with other radio
equipment operating in the area. Based on the results of this study, the SSCC
gives its final approval to use specific frequencies in specific areas.
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Each licensee must pay to the SSCC certain fees. No assurance can be given
as to the effect of such fees on the Company's future results of operations.
Equipment Certification Certain telecommunication equipment used in the
Russian Federation is subject to mandatory certification to confirm its
compliance with the established standards and technical requirements.
Certificates of Compliance are issued to the supplier by the MOC on the basis of
a decision by the Department of Certification. Certificates of Compliance have
been issued by the MOC for all of the equipment currently employed by Corbina.
Further, all radio-electronic (high-frequency) equipment (involving
frequencies in excess of 9KHz) manufactured or used in, or imported into, the
Russian Federation require special permission from the SSCC. Such special
permissions are issued to a person for its own use and do not permit use of such
radio-electronic equipment by other persons.
In addition, a Presidential Decree requires a license and equipment
certification from FAPSI to design, produce, sell, use or import encryption
devices. Some commonly-used digital cellular telephones are designed to be
capable of encryption of communications, whether or not this feature is
activated on the network in which they are used, and therefore must be certified
by FAPSI.
Competition and Pricing The Communications Law requires the federal
regulatory agencies to encourage and promote fair competition in the provision
of communication services and prohibits abuse of a dominant position to hinder,
limit or distort competition. The Communications Law also provides that tariffs
for communication services may be established on a contractual basis between the
provider and the user of telecommunications services, thus confirming the
liberalization of prices for telecommunications services introduced by
Presidential decree in 1992. However, the Communications Law simultaneously
provides that "tariffs may be regulated by the state for some types of
communication services."
Presidential Decree No. 221, dated February 28, 1995, "On Measures for
Streamlining State Regulation of Prices ("Tariffs") and its implementing
Governmental Decree No. 239, dated March 7, 1995, as amended, provide that the
prices and tariffs on certain telecommunications services to be established by
the subjects of the Russian Government are subject to state regulation.
Governmental Decision No. 793, dated August 7, 1995, as amended, has established
that the following communication services are subject to such price controls by
the executive authorities of the Russian Federation: subscription charges,
installation fees, charges for local calls and charges for international calls
using zonal systems.
Further, Presidential Decree No. 220 of February 28, 1995 "On Certain
Measures for the State Regulation of Natural Monopolies in the Russian
Federation" classifies activities in the field of public telecommunications
services as a "natural monopoly" and calls for the creation of a specialized
federal agency to regulate providers of telecommunications services.
Subsequently, the Federal Service of Regulating the Natural Monopolies of
Communications was created and bestowed with responsibility for tariff
regulation in the sector of public. telecommunications.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
- ----------------------------- --- ------------------------------------------
Jack W. Buechner............. 56 Chairman of the Board
Ronald G. Nathan............. 52 Director and President, Chief Executive
Officer, Treasurer and Chief
Financial Officer
Richard N. Holwill........... 51 Director
Steven D. Dreyer............. 50 Director and Secretary
Former Congressman Buechner has been a director of the Company since
October 1994, the Chairman of the Board of the Company since January 1995 and
has been a partner in the Washington, D.C. office of Manatt, Phelps and
Phillips, a Los Angeles based law firm since 1994. He specializes in Russian and
Eastern European matters including those dealing with international financial
institutions. Between 1993 and 1994, Mr. Buechner was engaged in various
national and international government and industry related projects as a
Principal of The Hawthorne Group, a Virginia based public affairs firm. Between
1991 and 1993, he served as President of the International Republican Institute,
the international arm of the Republican Party. In that capacity, Mr. Buechner
participated in the development of civil governance programs for countries
located in the former Soviet Union and Eastern Europe. Between 1986 and 1991, he
was a member of the United States House of Representatives from St. Louis
County, Missouri, and served in the leadership of the House as Deputy Minority
Whip and Vice Chairman of the Republican Study Committee. Mr. Buechner received
a B.A from St. Benedict's College in Atkinson, Kansas in 1958, and a J.D. from
St. Louis University in 1962.
Mr. Nathan has been the Company's President and Chief Executive Officer,
Treasurer (Chief Financial Officer) and a Director since its inception in April
1994, and was the Company's Chairman of the Board from April 1994 until January
1995. Mr. Nathan received a Masters degree from the London School of Economics
in 1967 and a law degree from the University of Pennsylvania in 1970. He was a
law clerk for the Hon. James Hunter III, at the United States Court of Appeals
for the Third Judicial Circuit from 1970 to 1971, and he was employed as an
associate in the Washington, D.C. law firm of Arnold & Porter from 1971 to 1978.
In 1978, Mr. Nathan was appointed by President Carter (with U.S. Senate
confirmation) to the Board of Directors of the National Railroad Passengers
Association (AMTRAK) on which he served through 1982. From 1982 to the present,
Mr. Nathan has been an independent businessman involved in various business
ventures including, among other things, the structuring and financing of
business opportunities in the telecommunications industry, particularly cellular
telecommunications. In 1993, he formed a telecommunications company to engage
in, among other things, long distance resale, the operations of which were
terminated in 1994 so that he could concentrate his efforts on the business of
the Company. From 1988 until 1993, Mr. Nathan was a principal of Omni
Investments, a privately owned firm which specialized in acquiring energy and
petrochemical assets in addition to being engaged in international petroleum
marketing.
Hon. Richard N. Holwill served as Counsellor to the United States Arms
Control and Disarmament Agency from 1990 to 1993, and as United States
Ambassador to the Republic of Ecuador from 1988 to 1990. From 1983 to 1988, he
served as Deputy Assistant Secretary of State for Inter-American Affairs. During
1985 to 1988, Mr. Holwill also served as a member of the Board of Directors of
the Panama Canal Commission. Since January 1993, Mr. Holwill has been Managing
Director of Pierce Investment Banking, Inc., a privately held investment banking
firm. He graduated from Louisiana State University in 1968 and has undertaken
post-graduate studies in Finance at the University of Missouri and in Economics
at the Wharton School of Business. Mr. Holwill was elected to the Board on
February 10, 1997.
Mr. Dreyer has been a practicing attorney in New York City since 1971, and
has specialized in representing corporations and other business entities in
connection with public and private capital formation, acquisition and
divestiture transactions for the last 15 years. From 1984 to February 1995, he
was a partner in
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the law firm of Ohrenstein & Brown, and since March 1995, he has been a partner
in the law firm of Hall Dickler Kent Friedman & Wood, LLP, the Company's
corporate and securities counsel. Mr. Dreyer received a B.A. from the University
of California at Los Angeles in 1968, and J.D. and Ll.M. (Taxation) degrees in
1971 and 1981, respectively, from The New York University School of Law. He was
elected to the Board, and appointed as Secretary of the Company, on February 10,
1997.
MANAGEMENT OF THE SUBSIDIARIES
Mikhail Leibov is the Managing Director and Chief Executive Officer of
Corbina and CompTel. Mr. Leibov was born in Moscow, Russia in 1950, and
emigrated to the United States in 1977. In 1972, Mr. Leibov earned an MS degree
in applied mathematics (specializing in telecommunications and computer
sciences) from Moscow University. Between 1972 and 1976, he served as project
manager for the Soviet Ministry of Railroad Transportation in connection with
the creation of the first real-time railroad tracking system built in the USSR.
Between 1977 and 1986, Mr. Leibov was employed by IBM, and served as a member of
the software architecture group that designed and implemented one of the world's
first distributed databases. From 1986 to 1987, he was employed by AT&T as
project manager with respect to the design and implementation of large
databases. From 1987 to 1994, Mr. Leibov was employed by Prodigy Corporation as
a developer of the Prodigy Information Services. Between 1994 and 1995, Mr.
Leibov was employed by Access General Corporation, a corporation he organized as
a designer and developer of specialized tools for tuning very large local and
remote databases. In 1995, he organized Corbina as a provider of long distance
telecommunications services in Moscow, and has been involved in its management
on a full time basis since its inception.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company entered into an employment with Mr. Nathan pursuant to which he
has been employed as the Company's Chief Executive Officer for a term which
commenced on January 1, 1995, and which has been extended from its original
termination date of December 31, 1997 to December 31, 1999. Such agreement, as
extended, provides that Mr. Nathan must perform services consistent with his
position, but does not require him to devote full time services in the
performance of his duties. In accordance with such agreement, Mr. Nathan
receives an annual base salary of $100,000, and is entitled to such bonuses as
the Board of Directors may deem appropriate. The agreement contains a
non-competition covenant which is applicable during the term of the agreement,
and the one year period immediately following such term. The agreement further
provides for a severance payment of two year's salary which is payable to Mr.
Nathan upon termination of his employment due to a change of control of the
Company.
In connection with the Company's acquisition of its 75% ownership interest
in Corbina, the Company has entered into an employment agreement with Mr.
Leibov, pursuant to which he has agreed to serve as chief executive officer of
Corbina and CompTel during the five year term which commenced on February 1,
1997. Such agreement further provides that (i) between February 1, 1997 and the
last day of the month in which the closing of this Offering occurs, Mr. Leibov
shall be paid a base salary by the Company of $125,000 per annum, less the
aggregate amount of the annual salaries which he shall receive from Corbina and
CompTel; (ii) during the balance of the term of the agreement, his base salary
shall be $175,000 per annum, less the aggregate amount of the annual salaries
which he shall receive from Corbina and CompTel; (iii) he shall be paid such
cash bonuses and other additional compensation as the Company's Board of
Directors may, in its absolute discretion, determine to award to him, (iv) his
life shall be insured to the extent of $500,000 which shall be paid to the
beneficiary of his choice; (v) he and his immediate family will be covered by
Company-provided and paid for health insurance; (vi) as soon after the Offering
as is reasonably possible, the Company shall issue 25,000 shares of the
Company's Common Stock to Mr. Leibov pursuant to the Omnibus Plan, subject to
such vesting conditions as the Compensation Committee of the Company's Board of
Directors shall reasonably determine; and (vii) Mr. Leibov shall receive
incentive compensation benefits, as follows: 1) in the event that Corbina's
operating income for any of its fiscal years ending during the five year term
(the "Term") of the employment agreement (the "Income"), determined pursuant to
the same US generally acceptable accounting principles which would be applicable
if Corbina's financial statements were to be prepared in the
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same manner as the Company's annual audited financial statements, shall be
greater than US$3,400,000, then, the Company shall transfer, subject to the
restrictions on transfer and right of first refusal hereinbelow described, a
block of the Corbina shares held by it equal to 10% of the total number of
outstanding shares of Corbina (the "Corbina Incentive Shares"), thereby reducing
the Company's ownership of Corbina to 65%; and 2) if, during any fiscal year of
the Term which shall be subsequent to the fiscal year in which Mr. Leibov shall
have earned the Corbina Incentive Shares, Corbina's Income shall be greater than
$3,400,000, Mr. Leibov shall receive from the Company, pursuant to the Omnibus
Plan, shares of the Company's common stock, valued at the mean of the bid and
asked prices therefor on the ten trading dates immediately preceding the
issuance thereof, equal to the difference between the Income and $3,400,000. The
number of shares of the Company's Common Stock to be issued to Mr. Leibov
pursuant to the foregoing provisions shall not exceed 250,000, in the aggregate.
Mr. Leibov shall not be entitled to transfer any ownership interest in any of
the Corbina Incentive Shares to any person, firm or entity affiliated or
associated with him (a "Related Transferee") unless, prior to such transfer, the
Related Transferee agrees to be bound in writing by the provisions of the right
of first refusal described in the immediately succeeding sentence. In the event
that Mr. Leibov intends to sell any of the Corbina Incentive Shares to any
person, firm or entity who is not a Related Transferee, and who has made a bona
fide offer to purchase such shares for value, the Company shall have a right of
first refusal to purchase such shares subject to such offer pursuant to the same
terms and conditions pertaining thereto.
EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to, earned by or paid
to the Chief Executive Officer during the three years ended December 31, 1996.
No other officer of the Company earned a salary and bonus of more than $100,000
during such periods. During said three year period, the Company did not grant
any restricted stock awards, options, or pay compensation that would qualify as
"All Other Compensation" and it did not make payments to any executive officer
which may be categorized as "LTIP Payouts."
SUMMARY COMPENSATION TABLE
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING
COMPEN- STOCK OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) AWARDS($) SARS(#)
- ---------------------------------------- ---- -------- -------- -------- -------- --------
Ronald G. Nathan, Pres.................. 1996 $100,000 -- -- -- --
1995 100,000 -- -- -- --
1994 100,000 $180,000 -- -- --
OMNIBUS STOCK INCENTIVE PLAN
The Company has adopted an Omnibus Stock Incentive Plan (the "Omnibus
Plan") to permit the grant of awards to employees of the Company (including
officers and directors who are employees of the Company or a subsidiary of the
Company) of restricted shares of the Company's common stock, performance shares
of the Company's Common Stock, stock appreciation rights relative to the
Company's common stock and both incentive stock options and non-qualified
options to purchase shares of the Company's common stock. A maximum of 1,000,000
shares may be issued under the Omnibus Plan. The Omnibus Plan was adopted in
order that the participants in the Omnibus Plan will have financial incentives
to contribute to the Company's growth and profitability, and to enhance the
ability of the Company to attract and retain in its employ individuals of
outstanding ability. As of the date of this Prospectus, no grants or awards have
been made under the Omnibus Plan, except for one option issued to Jack Buechner.
See "-- Option Issued to Non-Employee Director."
OPTION ISSUED TO NON-EMPLOYEE DIRECTOR
On August 22, 1995, the Board of Directors of the Company granted an option
to Mr. Buechner entitling him to purchase 25,000 shares of Common Stock at an
exercise price of $2.00 over the three year period
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ending on August 21, 1998. The shares of Common Stock issuable upon exercise of
said option are being offered for sale, subject to their issuance, on a
non-underwritten basis by Mr. Buechner pursuant to a separate prospectus
included in the Registration Statement of which this Prospectus forms a part.
See "Concurrent Registration of Securities."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's By-Laws provide that, except as expressly prohibited by the
Delaware Corporation Law, the Company shall indemnify each person made or
threatened to be made a party to any action or proceeding, whether civil or
criminal, by reason of the fact that such person, or such person's testator or
administrator was a director, officer or employee of the Company, against
judgments, fines, penalties, amounts paid in settlement and reasonable expenses,
including attorney's fees, incurred in connection with such action or
proceeding, or any appeal therein. Such By-Laws further provide that no such
indemnification shall be made if (i) a judgment establishes that such person's
acts were committed in bad faith or were the result of active and deliberate
dishonesty and were material to the cause of action so adjudicated, or that he
or she personally gained in fact a financial profit or other advantage to which
he or she was not legally entitled, and (ii) a settlement or other
non-adjudicated disposition of a threatened or pending action or proceeding
occurs without the Company's prior consent thereto.
The Company has entered into indemnification agreements with each of its
directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
The Company has applied for directors' and officers' liability insurance
providing for limits of $1,000,000 per occurrence.
DIRECTORS' COMPENSATION
Directors do not receive cash compensation for services rendered to the
Company in such capacity.
Non-employee directors are reimbursed for the reasonable costs of travel to
and from meetings of the Board of Directors.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's organization in April 1994, Ronald G.
Nathan, the then Chairman of the Board and Chief Executive Officer of the
Company, received 1,178,000 shares of Common Stock for services rendered in the
amount of $11,780. In addition, during December 1994, the Company granted Mr.
Nathan a bonus in the amount of $180,000. In January 1995, the Company issued
600,000 shares of Common Stock to Mr. Nathan as payment for such $180,000
obligation. Such shares were subsequently resold by Mr. Nathan during January
1995 at a price of $.30 per share. In June 1995, 628,000 shares of Common Stock
were contributed back to the Company by Mr. Nathan for no consideration.
A founder and principal stockholder of the Company, Harvey Bloch, received
1,160,000 shares of Common Stock at inception for financial consulting services
rendered prior to inception and for services rendered through June 15, 1994 in
the amount of $11,600. In addition, Mr. Bloch received $74,167 and $40,832
during the period from June 16, 1994 to December 31, 1994 and the five months
ended May 31, 1995, respectively, for consulting services rendered to the
Company. In June 1995, 595,000 shares of Common Stock were contributed back to
the Company by Mr. Bloch for no consideration. In August 1995, the Company
repurchased 488,000 shares of Mr. Bloch's Common Stock in exchange for the
issuance to Mr. Bloch of a promissory note in the aggregate principal amount of
$244,000, bearing interest at the rate of 2% per annum. The Company paid
$100,000 of said obligation in February 1996. The Company intends to apply
approximately $150,000 of the net proceeds of the Offering to repay the
remaining balance (including accrued interest) of the note. See "Use of
Proceeds."
Mr. Leibov and Mr. Nathan were the sole stockholders of Russian Wireless.
In October 1996, Mr. Nathan subscribed for 250,000 shares of Russian Wireless'
$.01 par value common stock (the "Russian Wireless Common Stock") and agreed to
pay $2,500 therefor, and in January 1997, Mr. Leibov received 500,000 shares of
Russian Wireless Common Stock in consideration for his services rendered during
the period between October 1996 and December 1996 in organizing Russian
Wireless' operations in the Russian Federation. Upon consummation of the merger
of Russian Wireless with and into the Company, Messrs. Leibov and Nathan
received, respectively, 500,000 shares and 250,000 shares of the Company's
Common Stock in exchange for and extinguishment of their shares of Russian
Wireless' common stock.
Although no specific measures to resolve conflicts of interest have been
formulated, the officers and directors of the Company have a fiduciary
obligation to deal fairly and in good faith with the Company. The Company's
management believes that the terms and conditions pertaining to each of the
foregoing transactions were comparable to and competitive with the terms and
conditions which it would have obtained if such transactions had been effected
with persons and entities unaffiliated with the Company. All ongoing and future
transactions between the Company and any of its affiliates will be no less
favorable to the Company than such transactions would be if consummated with
unaffiliated third parties, and will be approved by a majority of the Company's
disinterested directors. The directors intend to exercise reasonable judgment
and take such steps as they deem necessary under all of the circumstances in
resolving any specific conflict of interest which may occur and will determine
what, if any, specific measures, such as retention of an independent advisor,
independent counsel or special committee, may be necessary or appropriate. There
can be no assurance that the Company will employ any of such measures or that
conflicts of interest will be resolved in the best interest of the shareholders
of the Company.
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PRINCIPAL SECURITY HOLDERS
The following table sets forth the holdings of the Common Stock of the
Company as of the date of this Prospectus by (1) each person or entity known to
the Company to be the beneficial owner of more than five percent (5%) of the
outstanding shares of common stock of the Company; (2) each director and named
executive officer; and (3) all directors and executive officers as a group. All
of the holders of the Company's Common Stock are entitled to one vote per share.
See "Description of Securities."
COMMON STOCK
--------------------------------------------------------------
NAME OF NUMBER OF SHARES PERCENT OWNED PRIOR PERCENT OWNED AFTER
BENEFICIAL OWNER BENEFICIALLY OWNED TO OFFERING (1) OFFERING (2)
- ---------------------------------- ------------------ ------------------- -------------------
Ronald G. Nathan (3).............. 800,000 26.8% 18.2.%
Mikhail Leibov (4)................ 500,000 16.8% 11.4%
Paul Signoracci (5)............... 285,000 9.5% none(6)
J. P. Downey (7).................. 285,000 9.5% none(6)
Ernest Ferrante (8)............... 285,000 9.5% none(6)
Howard M. Pack (9)................ 160,000 5.4% 3.6%
Royal Bank of Scotland (10)....... 150,000 5.0% 3.4%
James Condakes (11)............... 150,000 5.0% 3.4%
L. W. Cave (12)................... 150,000 5.0% 3.4%
Jack W. Buechner (3).............. 25,000(13) * *
All Directors and Executive
Officers as a Group (4
Persons)........................ 825,000(13) 27.4% 18.7%
- ---------------
* Represents less than one percent
(1) Based on 2,985,000 shares of Common Stock outstanding as of the date of
this Prospectus.
(2) Based upon 4,385,000 shares of Common Stock outstanding after the Offering.
Does not include up to 7,088,265 shares of Common Stock issuable in the
events that (i) all of the 750,000 First Private Placement Warrants, the
450,000 Second Private Placement Warrants and the 2,000,015 Third Private
Placement Warrants are fully exercised; (ii) the Company issues 338,250
shares of Common Stock upon full exercise of Underwriters' over-allotment
option (and 300,000 shares of Common Stock are issued upon full exercise of
the Redeemable Warrants to be issued in connection therewith); (iii) all
1,000,000 of the shares of Common Stock which have been reserved for
issuance under the Company's Omnibus Stock Incentive Plan shall be issued;
(iv) up to 250,000 shares of Common Stock are issued to Mr. Leibov pursuant
to the Company's employment agreement with him; and (v) the 25,000 shares
of Common Stock underlying the Option are issued. See "Management;" and
"Underwriting."
(3) The address of Messrs. Nathan and Buechner is 870 Third Avenue, Suite 1600,
New York, NY.
(4) Mr. Leibov's address is c/o Corbina, Ryazansky Prospect 30/15, Moscow,
Russian Federation.
(5) The address of Mr. Signoracci is 2716 Grand Avenue, Belmore, NY.
(6) The shares of Common Stock held by Messrs. Signoracci, Downey and Ferrante
have been registered for sale by them under the Securities Act, pursuant to
the Registration Statement of which this Prospectus is a part, are being
purchased by the Underwriters pursuant to the Underwriting Agreement among
the Company, the Selling Stockholders and the Representative and are being
offered for sale a part of the Offering. See "Selling Stockholders," and
"Underwriting."
(7) The address of Mr. Downey is 29 Hewlett Road, Towaco, NJ.
(8) The address of Mr. Ferrante is 88A Bay Terrace, Staten Island, NY.
(9) The address of Mr. Pack is 12 Herkimer Road, Scarsdale, NY.
(10) The address of the Royal Bank of Scotland is Talstr. 82 Positach 6084,
Zurich, 8023 Switzerland.
(11) The address of Mr. Condakes is 100 Everette Avenue, Chelsea, MA.
(12) The address of Mr. Cave is 3800 Airport Boulevard, Suite 201, Mobile, AL.
(13) Includes 25,000 shares of Common Stock which Mr. Buechner has the right to
acquire within 60 days from the date hereof upon the exercise of options
held by him. Such shares are being offered for sale by Mr. Buechner,
subject to their issuance, on a non-underwritten basis pursuant to a
separate prospectus included in the Registration Statement of which this
Prospectus forms a part. See "Concurrent Registration of Securities."
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SELLING STOCKHOLDERS
The following table sets forth the name of each Selling Stockholder, the
number of shares of Common Stock that each Selling Stockholder beneficially
owned directly or indirectly on the date immediately preceding the date of this
Prospectus, the number of shares of Common Stock that are being offered under
this Prospectus on behalf of each of the Selling Stockholders hereunder, the
amount of Common Stock to be owned by each Selling Stockholder after completion
of the offering and the percentage of Common Stock which such Selling
Stockholder will own after the Offering is completed. None of the Selling
Stockholders was an officer, director, or employee of the Company during the
past three years, or had any other relationship with the Company during such
period, other than as an investor. See "Underwriting."
SHARES OF COMMON STOCK
SHARES OF SHARES OF TO BE OWNED AFTER
COMMON STOCK COMMON STOCK OFFERING
OWNED PRIOR BEING ------------------------
NAME TO OFFERING OFFERED NUMBER PERCENT
- -------------------------------- ------------ ------------ ------ -------
Paul Signoracci................. 285,000 285,000 -0- -0-
Ernest Ferrante................. 285,000 285,000 -0- -0-
J. P. Downey.................... 285,000 285,000 -0- -0-
CONCURRENT REGISTRATION OF SECURITIES
Concurrently with this Offering, 2,450,015 Redeemable Warrants (and the
shares of Common Stock issuable upon exercise thereof), and 325,000 shares of
Common Stock, 25,000 of which are issuable upon exercise of an option issued by
the Company to Mr. Buechner, have been registered for sale under the Securities
Act for immediate resale. Except for Mr. Buechner, who is Chairman of the
Company's Board of Directors, none of holders of such securities or their
affiliates has ever held any position or office with the Company or had any
material relationship with the Company. The holders of such securities have
agreed with the Representative not to sell any of the registered securities for
a period of 24 months from the date of this Prospectus without the prior written
consent of the Representative.
DESCRIPTION OF SECURITIES
GENERAL
The Company, a Delaware corporation, is authorized to issue 15,000,000
shares, of which 14,000,000 may be Common Stock, $.01 par value, and 1,000,000
may be preferred shares, $.01 par value, which may be authorized for issuance by
the Board and issued without further action by the shareholders in classes or
series possessing such designations, powers, preferences and relative,
participating, optional or other special rights within each class or series, and
further possessing such qualifications, limitations and restrictions as the
Board may determine, subject to any limitations imposed thereon by the Company's
Certificate of Incorporation.
COMMON STOCK
As of the date of this Prospectus, 2,985,000 shares of Common Stock are
issued and outstanding.
Except as otherwise required by law, each holder of Common Stock is
entitled to one vote per share on all matters on which shareholders are entitled
to vote. There are no cumulative voting rights regarding elections of directors.
Holders of shares of Common Stock are entitled to share pro rata in dividends,
if any, as may lawfully be declared on the Common Stock from time to time by the
Company's Board of Directors.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
shareholders, to issue up to 1,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including divided rights, conversion rights, voting rights, terms of redemption,
liquidation preferences and the number of shares constituting any series and the
designation of such series. The issuance
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of preferred stock could, among other things, adversely affect the voting power
of holders of Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company.
As of the date of this Prospectus, no shares of preferred stock of any
class or series have been issued, or have been authorized to be issued by the
Board. The Company has no present intention to issue any preferred shares in the
foreseeable future. However, no assurance can be given regarding the change of
such intentions in the event that the Board deems it appropriate to issue such
securities in connection with any transaction or other circumstance which is not
presently known to the Board.
REDEEMABLE WARRANTS
The Redeemable Warrants will be exercisable at a price of $7.25 per share
at any time during the three year period commencing [on the second anniversary
of the date of this Prospectus] until [ ] [the day immediately
preceding the fifth anniversary of the date of this Prospectus], provided, that,
the Redeemable Warrants may be exercised during the one year period between [the
first anniversary of the date of this Prospectus] and [the second anniversary of
the date of this Prospectus] upon the express written consent of the
Representative. Commencing on [the second anniversary of the date of this
Prospectus], the Redeemable Warrants are subject to redemption at $.50 per
Redeemable Warrant, upon 30 days' prior written notice, if the closing bid price
of the Common Stock as quoted on the principal market on which it shall then be
trading shall be not less than $14.50 per share during any period of 20
consecutive trading days ending on the third day preceding the date of such
notice, provided, that, with the Representative's express written consent, the
Redeemable Warrants may be redeemed commencing on [ ] [the first
anniversary of the date of this Prospectus] at the aforementioned redemption
price, subject to the aforementioned trading price conditions, if the Redeemable
Warrants shall have been exercisable for a period of not less than 30 days prior
to the date upon which notice of redemption shall be given.
The Redeemable Warrants contain protections against dilution affecting both
the exercise price of, and number of shares of Common Stock purchasable under,
such warrants. Such protections shall become operative upon (a) any issuance of
Common Stock, warrants or other securities convertible into Common Stock at a
price below the then market value of the Common Stock during a period of five
years from the date of this Prospectus; (b) any issuance of Common Stock,
warrants or other securities convertible into Common Stock as a dividend; or (c)
a subdivision or combination of the outstanding Common Stock, warrants or other
securities convertible into Common Stock as the result of a merger,
consolidation, spin-off or otherwise.
The holders of the Redeemable Warrants have no right to vote on matters
submitted to the shareholders of the Company and have no right to receive
dividends. The holders of the Redeemable Warrants are not entitled to share in
the assets of the Company in the event of liquidation, dissolution, or the
winding up of the Company's affairs.
The Redeemable Warrants issued pursuant to this Prospectus may not be
exercised unless the Company maintains an effective registration statement
covering the shares of Common Stock issuable upon exercise of the Redeemable
Warrants with the SEC and the various securities administrators for the states
in which the Redeemable Warrant holders reside, or unless issuance of such
shares of Common Stock is exempt from registration. Although the Company will
make every reasonable effort to maintain the effectiveness of such registration,
no assurances can be given that the Company will be successful in this regard.
The Redeemable Warrants may not be exercised after [nine months after the
date of this Prospectus] unless and until a Post-Effective Amendment has been
filed with the SEC and becomes effective. Although the Company has undertaken
and intends to file and keep current a prospectus that will permit the purchase
and sale of the Common Stock underlying the Redeemable Warrants, there can be no
assurance that the Company will be able to do so.
The Redeemable Warrants, which will be issued pursuant to a warrant
agreement between the Company and American Stock Transfer & Trust Company, will
be in registered form and will be saleable, assignable, and conveyable
separately and apart from the Common Stock. American Stock Transfer & Trust
Company, as warrant agent, will be responsible for all record keeping and
administrative functions in connection with the
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Redeemable Warrants. A copy of the form of Redeemable Warrant Agreement is filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part. The discussion of the Redeemable Warrants herein does not purport to be
complete and is qualified in its entirety by reference to the Warrant Agreement.
WARRANTS ISSUED IN PRIVATE PLACEMENTS
The Company issued warrants to purchase 3,200,015 shares of its Common
Stock to investors who participated in three private placements during 1994 and
1995. In accordance with the documents which governed each of such placements,
such warrants will be automatically converted into Redeemable Warrants on the
date of closing of this Offering.
First Private Placement In June 1994, the Company successfully completed a
$750,000 private placement of 7.5 units, each of which consisted of an unsecured
12% promissory note in the principal amount of $98,000, and a warrant to
purchase 100,000 shares of Common Stock (750,000 shares in the aggregate) at an
exercise price of $1.00 per share during the three year period ending on
December [ ], 1998 (the "First Private Placement Warrants"). In accordance
with the provisions of the First Private Placement Warrants, if a Registration
Statement with respect to an initial public offering of securities is filed
under the Securities Act with the SEC by the Company during the term of the
First Private Placement Warrants, then upon the declaration of effectiveness of
such Registration Statement, any unexercised First Private Placement Warrants
would be automatically converted into warrants having terms identical to those
of the Redeemable Warrants offered hereby. Inasmuch as none of the 750,000 First
Private Placement Warrants has been exercised as of the date of this Prospectus,
all of such First Private Placement Warrants are deemed to have been
automatically converted into Redeemable Warrants to purchase 750,000 shares of
Common Stock at an exercise price of $7.25 per share, during the same term, and
in accordance with the same provisions which are applicable to the Redeemable
Warrants. None of such warrants is being registered for sale by the holders
thereof.
Second Private Placement In October 1994, the Company successfully
completed a $500,000 private placement of 10 units, each of which consisted of
an unsecured 12% promissory note in the principal amount of $98,000, and a
warrant to purchase 50,000 shares of Common Stock (500,000 shares in the
aggregate) at an exercise price of $1.00 per share during the three year period
ending on February [ ], 1999 (the "Second Private Placement Warrants"). The
Second Private Placement Warrants contain automatic conversion provisions which
are identical to the conversion provisions of the First Private Placement
Warrants. Inasmuch as none of the 500,000 Second Private Placement Warrants has
been exercised as of the date of this Prospectus, all of such Second Private
Placement Warrants are deemed to have been automatically converted into
Redeemable Warrants to purchase 500,000 shares of Common Stock at an exercise
price of $7.25 per share, during the same term, and in accordance with the same
provisions which are applicable to the Redeemable Warrants. All of such
Redeemable Warrants are being offered for sale by the holders thereof on a
non-underwritten basis pursuant to a separate prospectus included in the
Registration Statement of which this Prospectus forms a part. See "Concurrent
Registration of Securities."
Third Private Placement In February 1996, the Company successfully
completed a $1,050,000 private placement of 30 units, each of which consisted of
an unsecured 8% promissory note in the principal amount of $35,000, 10,000
shares of Common Stock (300,000 shares in the aggregate) and a warrant to
purchase 66,667 shares of Common Stock (2,000,015 shares in the aggregate) at an
initial exercise price of $5.75 per share during the five year period commencing
on the effective date of the Registration Statement relating to the Company's
initial public offering of securities (the "Third Private Placement Warrants).
The provisions of the Third Private Placement Warrants obligate the Company to
issue one share of Common Stock in exchange for each Third Private Placement
Warrant in the event that no initial public offering of the Company's securities
is consummated before July 1, 1997. The provisions of the Third Private
Placement Warrants further provide that upon consummation of the Company's
initial public offering of securities, the Third Private Placement Warrants will
be automatically converted into warrants having terms identical to those of the
Redeemable Warrants offered hereby. Accordingly, all 2,000,015 Third Private
Placement Warrants are deemed to have been automatically converted into
Redeemable Warrants to purchase 2,000,015 shares of Common Stock at an exercise
price of $7.25 per share, during the same term, and in accordance with the same
provisions which
57
61
are applicable to the Redeemable Warrants. All of such Redeemable Warrants are
being offered for sale by the holders thereof on a non-underwritten basis
pursuant to a separate prospectus included in the Registration Statement of
which this Prospectus forms a part. See "Concurrent Registration of Securities."
REGISTRATION RIGHTS
The Representative's Warrant confers certain registration rights upon the
holders thereof. See "Underwriting -- Representative's Warrant."
The holders of the First Private Placement Warrants were given, pursuant to
the First Private Placement's offering documents, the right to include in this
Offering the Redeemable Warrants into which their First Private Placement
Warrants were converted, and the shares of Common Stock issuable upon exercise
thereof. However, such registration rights were subject to the right of the
Representative to exclude such warrants and shares from the Offering, subject to
the proviso that an election by the Representative to effect such exclusion
would thereupon confer upon the holders of the First Private Placement Warrants
to demand on only one occasion that the Company file a registration statement
with the SEC registering the shares of Common Stock underlying the First Private
Placement Warrants for sale under the Securities Act. Such demand registration
rights may be exercised at any time during the period commencing six months
after the date of this Prospectus and the expiration of the term of the
Redeemable Warrants into which the First Private Placement Warrants have been
converted, and must be exercised by the holders of a majority of the First
Private Placement Warrants. If such rights are exercised, the Company must
prepare and file a registration statement on an appropriate form to register the
Common Stock underlying the Redeemable Warrants into which the First Private
Placement Warrants of the electing holders have been converted, so as to permit
a public offering and sale thereof for a period of nine months. The Company must
bear all costs of such registration, except for filing fees, any underwriter's
discounts and commissions, any stock transfer taxes and the fees and expenses of
such holders' counsel.
The Representative has elected to exclude from the Registration Statement
of which this Prospectus is a part the shares of Common Stock issuable upon
exercise of the Redeemable Warrants into which the First Private Placement
Warrants have been converted. Accordingly, the holders of such warrants now
possess the above-described demand registration rights.
In accordance with the provisions of the offering documents pertaining to
the Second Private Placement Warrants and the Third Private Placement Warrants,
(i) the Redeemable Warrants into which the Second Private Placement Warrants
have been converted, and the shares of Common Stock issuable upon exercise of
such warrants, have been included in a separate prospectus included in the
Registration Statement of which this Prospectus forms a part; and (iii) the
Redeemable Warrants into which the Third Private Placement Warrants have been
converted, and the shares of Common Stock issuable upon exercise of such
warrants, have been included in this Prospectus, at the Company's sole cost and
expense, except the fees and expenses of the counsel for the holders of such
securities, if any, and any underwriting or selling commissions or other charges
of any broker-dealer acting on behalf of such holders.
The above-described registration rights pertaining to the First Private
Placement Warrants could result in substantial future expense to the Company and
could adversely affect the Company's ability to complete future equity or debt
financings. Furthermore, the registration and sale of securities of the Company
held by or issuable to the holders of registration rights, or even the potential
of such sales, could have an adverse effect on the market price of the
securities offered hereby.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005, serves as the transfer agent and registrar of the Common Stock, and as
warrant agent of the Redeemable Warrants.
58
62
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
4,385,000 shares of Common Stock (4,723,250 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, 2,255,000 shares
will be freely tradeable without restriction under the Securities Act. The
remaining 2,130,000 shares of Common Stock held by existing shareholders are
restricted securities within the meaning of Rule 144. In accordance with Rule
144, 1,380,000 of such shares are presently eligible for sale to the public
notwithstanding the fact that they have not been registered under the Securities
Act.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least two years but less than three
years, will be entitled to sell in any three month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock (approximately 43,850 shares immediately after the Offering) or
(ii) the average weekly trading volume during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or person whose shares
are aggregated) who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding the sale and who has
beneficially owned his or her shares for at least three years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the limitations
described above. Rule 144A under the Act as currently in effect permits the
immediate sale of restricted shares to certain qualified institutional buyers
without regard to volume restrictions. The Commission has adopted an amendment
to Rule 144, effective April 30, 1997, which reduces the above mentioned two
year and three year holding periods to one year and two years, respectively.
The Representative has required, as a condition to the closing of the
Offering, that each of the holders of said 2,130,000 shares, as well as the
holders of warrants and an option to purchase 3,225,015 shares of the Company's
Common Stock must execute written lockup agreements providing that, for a period
of 24 months from the date of this Prospectus, they shall not offer, register,
sell, contract to sell, grant an option for the sale of, issue, assign, transfer
or otherwise dispose of any of the Company's securities held by them without the
Representative's prior written consent. The lockup agreements will have no
effect on the date on which shares become eligible for sale pursuant to Rule
144.
There has been no prior market for the Common Stock or the Redeemable
Warrants, and there can be no assurance a significant public market for such
securities will develop or be sustained after the offering. Sales of substantial
amounts of Common Stock or Redeemable Warrants in the public market could
adversely affect the market prices of the Company's securities.
59
63
UNDERWRITING
The underwriters named below, for whom J.W. Barclay & Co., Inc. is acting
as the Representative (the "Underwriters"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company and the Selling Stockholders, and the Company and the Selling
Stockholders have agreed to sell to the Underwriters, the respective numbers of
shares of Common Stock and Redeemable Warrants set forth opposite each
Underwriter's name below:
NUMBER OF
---------------------
UNDERWRITERS SHARES WARRANTS
-------------------------------------------------------- --------- ---------
J.W. Barclay & Co., Inc. ...............................
--------- ---------
Total......................................... 2,255,000 2,000,000
========= =========
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock and
Redeemable Warrants offered hereby through the Representative, if any are
purchased.
The Company and the Selling Stockholders have been advised by the
Representative that, the Underwriters propose initially to offer the Common
Stock and Redeemable Warrants to the public on the terms set forth on the cover
page of this Prospectus. The Underwriters may allow concessions of not more than
$[ ] and $[ ] per share of Common Stock and Redeemable
Warrant, respectively, to selected dealers; and the Underwriters may allow, and
such dealers may reallow, concessions of not more than $[ ] and
$[ ] per share of Common Stock and Redeemable Warrant, respectively, to
certain other dealers. After the consummation of the Offering, the concessions
to selected dealers and the reallowances to other dealers may be changed by the
Underwriters. The Common Stock and Redeemable Warrants are offered subject to
receipt and acceptance by the Underwriters and to certain other conditions,
including the right to reject orders in whole or in part.
The Company has granted to the Underwriters an option to purchase up to
338,250 additional shares of Common Stock and/or up to 300,000 additional
Redeemable Warrants solely to cover over-allotments, if any. The option is
exercisable within 45 days from the date of this Prospectus at the prices to
public, less the underwriting discounts and commissions set forth for such
securities on the cover page of this Prospectus. To the extent the Underwriters
exercise the option, the Underwriters will be committed, subject to certain
conditions, to purchase the additional shares of Common Stock and/or Redeemable
Warrants.
See "Shares Eligible For Future Sale" for a description of certain lock-up
agreements.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against, or contribute to the losses arising from, certain
liabilities, including liabilities arising under the Securities Act.
The Company and the Selling Stockholders have agreed to pay the
Underwriters a non-accountable expense allowance equal to 3% of the aggregate
offering price of the Common Stock and Redeemable Warrants to be sold in the
Offering. The Company has paid the Representative a $25,000 advance with respect
to its expense allowance obligation.
60
64
The Company has agreed to sell to the Representative or its designees, at a
price of $10, the Representative's Warrants, which entitle the Representative to
purchase up to 225,500 shares of Common Stock of the Company and 200,000
Redeemable Warrants to purchase up to an additional 200,000 shares of Common
Stock of the Company, respectively. The Representative's Warrants will be
exercisable at a price of $[ ] per share and $[ ] per
Redeemable Warrant, respectively, for a period of four years commencing one year
from the date of this Prospectus, and will not be transferable except to
selected dealers and officers and partners of the Representative and such
selected dealers. The Company has agreed, that on one occasion during the period
of five years from the date of this Prospectus, it will file a post-effective
amendment to the Registration Statement of which this Prospectus forms a part
with respect to the registration of the Representative's Warrants and the
underlying securities under the Securities Act at its expense, and at the
expense of the holders thereof on another occasion, upon the request of a
majority of the holders thereof. The Company has also agreed to certain
"piggy-back" registration rights for the holders of the Representative's
Warrants and the underlying securities. Such piggy-back registration rights will
expire seven years from the date of this Prospectus.
The Representative has informed the Company that it does not expect sales
to be made to discretionary accounts to exceed 1% of the shares of Common Stock
and Redeemable Warrants offered hereby.
The Underwriting Agreement also provides that the Company, its current or
future subsidiaries, if any, and its principal stockholders, or their respective
affiliates, will for a period of three years from the Effective Date provide the
Representative with a right of first refusal with respect to any public or
private offering of securities to raise capital. The Representative must agree
to undertake any such financing on the same or better terms as any other
financing proposal.
The Company has agreed for itself, and for its current and future
subsidiaries, and its officers, directors and its 5% or greater stockholders
have agreed that, during the five year period commencing on the date of closing
of the Offering, the Representative shall have a right of first refusal with
respect to any public or private offering of their respective securities.
The Company has agreed that, during the five year period commencing on the
date of closing of the Offering, the Representative shall have the right to
engage a designee of the Representative to serve as an advisor to the Company's
Board of Directors who shall receive notice of, and have the right to attend,
all meetings of the Board. Such advisor shall be entitled to receive
compensation equal to the entitlement of all non-employee directors, and shall
be entitled to reimbursement of all costs incurred in attending such meetings.
In lieu of the designation of an advisor to the Board, the Representative shall
have the right, during the same five year period, to designate one person for
election to the Company's Board of Directors. The Company must utilize its best
efforts to obtain the election of such person, and if he or she is elected, such
director shall be entitled to receive the same compensation and the same rights
of reimbursement enjoyed by all other non-employee directors of the Company. The
Representative has advised the Company that, as of the date of this Prospectus,
the Representative has not made any determination as to whether, and if so,
when, it may exercise either of the above-described rights.
The Company has entered into an agreement with the Representative providing
that, during the three year period which commenced on [ ], 1997, it
will pay the Representative a sum equal to 2% of the net proceeds derived by the
Company from the sale of the Common Stock and Redeemable Warrants offered
hereby, i.e., $177,420. In the event that the over-allotment option is exercised
in full, such fee will be approximately $221,229.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the forms of
Underwriting Agreement and Representative's Warrant Agreement, copies of which
are on file as exhibits to the Company's Registration Statement of which this
Prospectus forms a part. See "Additional Information."
61
65
LEGAL MATTERS
The validity of the Common Stock and Redeemable Warrants being offered
hereby will be passed upon for the Company by Hall Dickler Kent Friedman & Wood,
LLP, New York, New York. Steven D. Dreyer, Esq., a partner of said firm, is a
director of the Company. Certain legal matters concerning Russian law will be
passed upon by Irina Igitova, Esq., Moscow, Russian Federation, Russian counsel
for the Company. Certain legal matters in connection with this Offering will be
passed upon for the Representative by Gusrae, Kaplan & Bruno, New York, New
York.
EXPERTS
The financial statements of Russian Wireless Telephone Company, Inc. at
December 31, 1996, and for each of the two years in the period ended December
31, 1996 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon (which contains an explanatory paragraph with respect to the going
concern mentioned in Note 1 to the financial statements) appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of said firm as an expert in accounting and auditing.
The financial statements of Corbina Telecommunications at September 30,
1996, and for the period December 1, 1995 (inception) through September 30, 1996
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young (CIS) Limited, independent auditors, as set forth in their report
thereon (which contains an explanatory paragraph with respect to the going
concern mentioned in Note 1 to the financial statements) appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of said firm as an expert in accounting and auditing.
62
66
INDEX TO FINANCIAL STATEMENTS
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 & 1995
PAGE
-----------
Report of Independent Auditors.................................................. F-2
Balance Sheet as of December 31, 1996........................................... F-3
Statements of Operations for the years ended December 31, 1996 and 1995......... F-4
Statements of Shareholders' Deficiency for the years ended December 31, 1996 and
1995.......................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1995......... F-6
Notes to Financial Statements................................................... F-8
CORBINA TELECOMMUNICATIONS
AUDITED FINANCIAL STATEMENTS
FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1996
Report of Independent Auditors.................................................. F-16
Balance Sheet................................................................... F-17
Statement of Operations......................................................... F-18
Statement of Shareholder's Deficiency........................................... F-19
Statement of Cash Flows......................................................... F-20
Notes to Financial Statements................................................... F-21
F-1
67
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Russian Wireless Telephone Company, Inc.
We have audited the accompanying balance sheet of Russian Wireless
Telephone Company, Inc. (formerly Telcom Group USA, Inc., "the Company") as of
December 31, 1996, and the related statements of operations, stockholders'
deficiency, and cash flows for each of the two years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Russian Wireless Telephone
Company, Inc. (formerly Telcom Group USA, Inc.) at December 31, 1996, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations, a working capital deficiency and shareholders'
deficiency raise substantial doubt about its ability to continue as a going
concern. Management's plans as to those matters are also described in Note 1.
The 1996 financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
ERNST & YOUNG LLP
New York, New York
February 28, 1997
F-2
68
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 487,772
Due from affiliate......................................................... 30,000
Deferred financing costs, net of accumulated amortization of $210,000...... 1,680,000
Prepaid expenses and other current assets.................................. 79,445
-----------
Total current assets............................................................ 2,277,217
Loan receivable................................................................. 190,000
Equipment, net of accumulated depreciation of $15,851........................... 19,596
Security deposits and other assets.............................................. 47,053
-----------
Total assets.................................................................... $2,533,866
===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Notes payable, net of discounts of $266,000................................ $2,658,000
Accrued interest payable................................................... 358,813
Accounts payable and accrued expenses...................................... 109,663
-----------
Total current liabilities....................................................... 3,126,476
Long-term debt, net of discount of $239,000..................................... 361,000
Commitments and contingencies
Shareholders' deficiency:
Preferred stock, par value $.01; 1,000,000 shares authorized;
none issued and outstanding
Common stock, par value $.01; 15,000,000 shares authorized;
2,235,000 shares issued and outstanding.................................. 22,350
Additional paid-in capital................................................. 2,340,218
Accumulated deficit........................................................ (3,316,218)
-----------
Total shareholders' deficiency.................................................. (953,610)
-----------
Total liabilities and shareholders' deficiency.................................. $2,533,866
===========
See accompanying notes.
F-3
69
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995
---------- ---------
Commission income............................................ $ 8,043 $ 21,172
-----------
Operating expenses:
Officers' salaries...................................... 100,000 203,125
Selling, general and administrative..................... 482,891 426,228
Amortization of deferred financing costs................ 210,000 221,965
-----------
Total operating expenses..................................... 792,891 851,318
-----------
Operating loss............................................... (748,848) (830,146)
Interest, including $497,500 ($36,500 in 1995) of
amortization of discount on notes payable, and
financing expenses, net.................................... 686,030 397,356
-----------
Net loss..................................................... $(1,470,878) $(1,227,502)
===========
Net loss per common share.................................... $ (.67) $ (.34)
===========
Weighted average number of shares outstanding................ 2,210,000 3,603,614
===========
See accompanying notes.
F-4
70
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- -------- ---------- ---------- ----------
Balance at December 31, 1994....... 4,707,000 $ 47,070 $ 31,538 $ (617,838) $ (539,230)
Contribution of shares............. (2,834,000) (28,340) 28,340
Issuance of common stock for
services rendered in January
1995............................. 600,000 6,000 174,000 180,000
Issuance of common stock........... 300,000 3,000 27,000 30,000
Repurchase and retirement of common
stock in exchange for promissory
note in May 1995................. (800,000) (8,000) (277,000) (285,000)
Repurchase and retirement of common
stock in exchange for promissory
note in August 1995.............. (488,000) (4,880) (201,120) (206,000)
Net loss........................... (1,227,502) (1,227,502)
--------- -------- ---------- ---------- ----------
Balance at December 31, 1995 1,485,000 14,850 (217,242) (1,845,340) (2,047,732)
Issuance of common stock and
warrants in connection with a
private placement in February
1996............................. 300,000 3,000 645,000 648,000
Issuance of common stock in
connection with a private
placement in December 1996....... 450,000 4,500 1,912,500 1,917,000
Net loss........................... (1,470,878) (1,470,878)
--------- -------- ---------- ---------- ----------
Balance at December 31, 1996....... 2,235,000 $ 22,350 $2,340,258 $(3,316,218) $ (953,610)
========= ======== ========== ========== ==========
See accompanying notes.
F-5
71
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(1,470,878) $(1,227,502)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 6,604 6,490
Amortization of organization costs..................... 1,227 1,229
Amortization of deferred financing costs............... 210,000 221,965
Write-off of deferred underwriting costs............... -- 61,652
Amortization of discount on notes payable.............. 486,500 36,500
Changes in operating assets and liabilities:
Due from affiliate................................ (30,000) --
Prepaid expenses and other current assets......... (66,984) 8,742
Security deposits................................. (12,828) 7,315
Accounts payable and accrued expenses............. (210,870) 242,815
Accrued interest payable.......................... 198,377 142,061
---------- ----------
Net cash used in operating activities....................... (888,852) (498,733)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of stock option.................................... (5,000) --
Acquisition of property and equipment....................... (14,832) (2,403)
Deferred registration fees.................................. (25,000) --
---------- ----------
Net cash used in investing activities....................... (44,832) (2,403)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable................................. 1,800,000 100,000
Loan receivable............................................. (190,000) --
Repayment of notes payable.................................. (200,000) --
Proceeds from issuance of common stock...................... -- 30,000
---------- ----------
Net cash provided by financing activities................... 1,410,000 130,000
---------- ----------
Net increase (decrease) in cash and cash equivalents........ 476,316 (371,136)
Cash and cash equivalents at beginning of year.............. 11,456 382,592
---------- ----------
Cash and cash equivalents at end of year.................... $ 487,772 $ 11,456
========== ==========
See accompanying notes.
F-6
72
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
-------- --------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Issuance of 600,000 shares of common stock for services
rendered...................................................... $ -- $180,000
Repurchase and retirement of 1,288,000 shares of common stock in
exchange for promissory notes payable......................... -- 491,000
Contribution of 2,834,000 shares of common stock................ -- 28,340
Issuance of 300,000 shares of common stock and 2,000,000
warrants in connection with a private placement offering...... 648,000 --
Issuance of 450,000 shares of common stock in connection with a
private placement offering.................................... 1,917,000 --
See accompanying notes.
F-7
73
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION
Description of Business
Telcom Group USA, Inc. ("Telcom") was incorporated on April 26, 1994 under
the laws of the State of Delaware. On August 19, 1994, Telcom obtained the
required State of New York Public Service Commission Certification allowing it
to operate as a reseller of all forms of telephone services via landline
telephone company or other common carrier facilities located in New York State.
Telcom was engaged primarily as a provider of long distance telecommunications
services to commercial customers, initially in the New York metropolitan area.
With the passage of the Federal Telecommunications Act of 1996 and the
subsequent entry into the local markets by long distance carriers, Telcom began
to phase out operations in New York State and focused its efforts on the
international markets, particularly the Russian Federation.
In 1996, Telcom's management began exploring opportunities involving the
delivery of various categories of telecommunications products and services
throughout the former Soviet Union including Russia, Georgia, Latvia and
Aberbaijan. In July 1996, Telcom purchased an option for $5,000 to purchase for
$190,000, 75% of Corbina Telecommunications, ("Corbina"), a closed joint stock
company organized under the laws of the Russian Federation which has been
providing long distance telephone services to businesses located in the Moscow
metropolitan area since March 1996. Corbina does not operate on the basis of a
telecommunication license but, rather, through agreements entered into with long
distance companies, primarily Rustelnet, Global One and TelMos, through which it
offers long distance service features through its private telecommunications
network. In connection with this option purchase, during 1996, Telcom loaned
Corbina's sole shareholder $190,000 bearing interest at 8% per annum, receivable
on demand.
On February, 10, 1997, Telcom changed its name to Russian Wireless
Telephone Company, Inc.("Russian Wireless") in connection with the merger of a
Delaware corporation with and into Telcom which had been known by that name
(Telcom and Russian Wireless collectively the "Company"). Russian Wireless was
formed on October 21, 1996 by Telcom's chief executive officer and by Corbina's
sole shareholder to provide wireless local loop telecommunications services to
business customers in Moscow, particularly to subscribers who generate
significant amounts of outgoing domestic and international long distance
traffic. The shareholders of Russian Wireless exchanged all of the issued and
outstanding shares for 750,000 shares of Telcom's common stock. Russian Wireless
has had minimal activity from the date of inception (October 21, 1996) through
December 31, 1996. At December 31, 1996 and for the period from the date of
inception through December 31, 1996, Russian Wireless' financial position and
result of operations were as follows:
Total Assets............................................... $ 68
Shareholder's Deficiency................................... $34,932
Net Loss................................................... $35,032
On January 28, 1997, Telcom exercised its option to purchase 75% of Corbina
and the $190,000 loan to Corbina's sole shareholder was exchanged for the shares
of Corbina.
In October 1996, CompTel Ltd. ("CompTel") a closed joint stock Company
organized under the laws of the Russian Federation was formed to operate a
wireless local loop network in the Russian Federation. In March 1997, the
Company acquired a 75% interest in CompTel.
F-8
74
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
1. ORGANIZATION -- (CONTINUED)
Basis of Presentation
During the years ended December 31, 1996 and 1995, the Company incurred
losses from operations aggregating $784,848 and $830,146, respectively, and had
a working capital deficiency and stockholders' deficiency of $659,259 and
$953,610, respectively, at December 31, 1996. Such losses and the
above-described deficiencies were primarily attributable to the facts that, (i)
from the time of its organization in April 1994, through December 31, 1996, the
Company conducted operations on a limited basis while the Company's management
devoted the bulk of their time and resources to the tasks of developing what was
then anticipated to be the Company's intended business, i.e., the provision, as
a competitive access provider of single source local and long distance
telecommunications services to commercial customers in the New York Metropolitan
area; and (ii) by reason of the passage of the Federal Telecommunications Act of
1995 (and the subsequent entry into the local telephone markets by long distance
carriers), the Company undertook during 1996 to explore other opportunities in
the telecommunications industry, particularly in international venues. In order
to meet its obligations and finance the activities it undertook during the two
year period ended December 31, 1996 in the absence of any meaningful revenues
generated from operations, the Company made use of funds obtained through
private placement financing transactions. The foregoing factors have resulted in
a deterioration of the Company's financial condition and raise substantial doubt
about its ability to continue as a going concern. These financial statements
have been prepared assuming the Company will continue as a going concern and do
not include any adjustments that may result form the outcome of this
uncertainty.
In order for the Company to strengthen its financial condition and to
operate profitably in future periods, (a) its 75% owned Russian subsidiary,
Corbina Telecommunications ("Corbina"), must attain a sustaining level of
profitability from operations through expansion of its service offerings and
continued increases in the telecommunications traffic purchased from it by its
existing and new customers, (b) the Company's other 75% owned Russian
subsidiary, CompTel must successfully construct and then operate profitably the
wireless local loop telecommunications network which it proposes to establish in
the Moscow metropolitan area, and ( c) both subsidiaries must provide the
Company with sufficient distributions from the income that they intend to derive
from such operations so that the Company will be able to finance its activities
solely from such distributions. The Company intends to provide its subsidiaries
with the financial necessary for them to achieve the requisite levels of
operations through an IPO transaction which it intends to commence during 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
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 reported period. Actual
results could differ from those estimates.
Equipment
Equipment is stated at cost and depreciated using the straight-line method
over the estimated useful lives (five years) of the underlying assets.
F-9
75
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Deferred Financing Costs
Deferred financing costs, related principally to the issuance of debt, are
amortized over the period of the related debt.
Organization Costs
Organization costs are being amortized over a period of five years.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At December 31,
1996, the Company has substantially all of its cash in one financial
institution.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Notes Payable: The carrying amounts of the Company's notes payable
approximate their fair value due to the short-term nature of these instruments.
Long-Term Debt: The fair value of the Company's long-term debt is
estimated using discounted cash flow analysis, based on the Company's
incremental borrowing rate for similar types of borrowing arrangements and
approximates fair value.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 is effective for all fiscal years beginning
after December 15, 1995 and prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations with pro forma disclosure of what net income and
earnings per share would have been had the Company adopted the new fair value
method. The Company is accounting for its stock-based compensation plans in
accordance with the provisions of APB 25.
Income Taxes
Income taxes are recorded pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109
prescribes the liability method of accounting for deferred income taxes, which
bases such deferred income taxes on the temporary differences between the
financial reporting and income tax bases of assets and liabilities, using
currently-enacted income tax rates and regulations.
F-10
76
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Revenue Recognition
The Company recognizes commission income in its capacity as a reseller of
long distance telephone service when the customers they have contracted with on
behalf of long distance carriers are billed for usage.
Net Loss Per Share
Net loss per share computations are based upon net loss divided by the
weighted average number of shares of common stock outstanding during the
respective periods. The weighted average number of common stock outstanding have
been calculated in accordance with Staff Accounting Bulletin 83 ("SAB 83") of
the Securities and Exchange Commission. SAB 83 requires that shares of common
stock, warrants and options issued one-year prior to the initial filing of a
registration statement relating to an initial public offering at amounts below
the public offering price be considered outstanding for all periods presented in
the Company's registration statement.
3. DUE FROM RUSSIAN WIRELESS
Amounts due from Russian Wireless represent non-interest bearing advances
receivable on demand which were advanced to by Telcom prior to the merger.
4. RELATED PARTY TRANSACTIONS
In December 1994, the Company granted its Chief Executive Officer a bonus
in the amount of $180,000. In January 1995, the Company issued 600,000 shares of
its common stock as payment of the $180,000 obligation.
5. NOTES PAYABLE
Pursuant to a Second Private Placement (the "Second Placement") which
closed on October 19 and November 3, 1994, the Company sold to five accredited
investors, an aggregate of ten units of 12% interest bearing notes aggregating
$980,000 and 500,000 warrants for an aggregate of $20,000. Each unit was
comprised of a $98,000 12% interest bearing note and 50,000 warrants.
The principal and interest on the promissory notes is payable at the
earlier of (i) June 19, 1997 or (ii) the Company's consummation of a public or
private financing of its equity securities raising net proceeds equal to or
greater than the gross proceeds raised in the Second Placement. The Company
received net proceeds of $870,000 after payment of $100,000 in commissions and
$30,000 in other costs paid to the placement agent. The $130,000 in commissions
and placement agent fees were amortized over the original maturity of the
promissory notes (February 19, 1996). The Company used $765,447 of the proceeds
from the Second Placement to repay in full the notes and accrued interest
outstanding under the first private placement.
On February 6, 1997, the Company and one of the accredited investors agreed
to rescind the purchase of one unit. In consideration thereof, the Company is to
pay the sum of $100,000, without any interest, to the investor in four equal
monthly installments of $25,000 commencing February 15, 1997. As part of this
rescission, 50,000 warrants were immediately canceled.
F-11
77
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
5. NOTES PAYABLE -- (CONTINUED)
On August 29, 1995, the Company purchased and retired 488,000 shares of its
common stock from a shareholder in exchange for a $244,000 note payable. The
note accrues interest at 2% per annum. The Company recorded a discount on this
note payable in the amount of $38,000 based on its incremental borrowing rate at
the time of the transaction. The discount is being amortized as interest expense
over twenty months. The unamortized balance at December 31, 1996 is $7,500.
Proceeds from the Third Private Placement on February 2, 1996 (the "Third
Placement") were used to repay $100,000 of this note with the balance payable at
consummation of the Company's Initial Public Offering (the "IPO").
Pursuant to the Third Placement, the Company sold to sixteen accredited
investors 30 units of 8% interest bearing notes aggregating $1,050,000. Each
unit was comprised of (i) the Company's promissory note in the principal amount
of $35,000 (ii) 10,000 shares of the Company's common stock and (iii) 66,667
warrants; each warrant entitles the holder to purchase one share of common stock
at $5.75 per share (or such other exercise price as will be the exercise price
of the warrants to be issued in conjunction with the Company's IPO). The Company
recorded a discount on these notes payable in the aggregate amount of $648,000
based on its incremental borrowing rate at the time of the transaction and
management's estimate of the value of the common stock issued. The discount is
being amortized as interest expense over fourteen months (through the
anticipated IPO date). The unamortized balance at December 31, 1996 is $237,000.
The promissory notes and accrued interest are due and payable on the earlier of
eighteen months from the date of issuance, or the consummation of the Company's
IPO. If the Company's IPO is not consummated by August 2, 1997 based upon the
Company's decision not to proceed with the IPO, the notes payable (including all
accrued interest) will become immediately due and payable and each warrant will
convert into one share of common stock. If the Company's IPO is not consummated
for any other reason by August 2, 1997, the promissory notes (including all
accrued interest) will become immediately due and payable and each warrant will
become null and void.
On December 19, 1996, the Company issued promissory notes to three
accredited investors in the aggregate amount of $750,000. The notes bear
interest at 8% per annum and are due upon the earlier of consummation of the
Company's IPO or October 31, 1998. If the Company fails to file a Registration
Statement with the Securities and Exchange Commission relating to the Company's
IPO by March 31, 1997, the notes will become due and payable immediately. The
Company recorded a discount on these notes payable in the amount of $27,000
based on its incremental borrowing rate at the time of the transaction. The
discount is being amortized over four and one-half months (through the
anticipated IPO date). The unamortized balance at December 31, 1996 is $21,500.
In connection with the December 19, 1996 promissory notes, the Company issued
150,000 shares of common stock to each of the three accredited investors. The
Company valued these shares of common stock at $4.20 per share, representing 60%
of the anticipated IPO price. As a result, the Company incurred deferred
financing costs of $1,890,000 which are being amortized over four and one-half
months (through the anticipated IPO date). During 1996, $210,000 was amortized
into expense leaving an unamortized balance at December 31, 1996 of $1,680,000.
F-12
78
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
6. LONG-TERM DEBT
On May 22, 1995, the Company repurchased and retired 800,000 shares of its
common stock from a shareholder in exchange for a $600,000 note payable. The
note accrues interest at 2% per annum and is due on May 22, 2000. The Company
recorded a discount on this note payable in the amount of $315,000, based on its
incremental borrowing rate at the time of the transaction, which is being
amortized as interest expense over the life of the note.
7. STOCK OPTIONS AND WARRANTS
In May 1995, the Company under its 1995 Director's Stock Option Plan (the
"Directors Plan") granted to each of its two Directors, at that time, options to
purchase 25,000 shares of the Company's common stock at an exercise price of
$2.00 per share. These options are currently exercisable and expire in May 1998.
As of December 31, 1996, an aggregate of 50,000 shares of the Company's common
stock are reserved for issuance. The Option Plan have been replaced by the
options issued under the Omnibus Plan.
Pursuant to the Company's First Private Placement (the "First Placement")
on June 15, 1994, the Company sold to eleven accredited investors an aggregate
of 750,000 warrants for $15,000. Each warrant entitles the holder to purchase
one share of the Company's common stock at $1.00 per share. The warrants are
exercisable for a period of three years commencing on December 15, 1995.
On October 19, and November 3, 1994, pursuant to the Second Placement, the
Company granted to five accredited investors warrants to purchase 500,000 shares
of common stock at a price of $1 per share. The warrants are exercisable for a
period of three years commencing on February 19, 1996.
On February 2, 1996, pursuant to the Third Placement, the Company granted
to sixteen accredited investors warrants to purchase 2,000,015 shares of common
stock at a price of $5.75 per share or such other exercise price as will be the
exercise price of the warrants to be issued in conjunction with the IPO. The
warrants are exercisable during the period commencing on the effective date of
the registration statement to be filed by the Company in connection with its IPO
and terminating on the close of business on the five-year anniversary of the
effective date.
In accordance with the terms of the offering documents of the First, Second
and Third Placements, upon completion of the IPO, all of the aforementioned
warrants will be replaced by warrants setting forth the same terms as the
warrants the Company intends to issue in its IPO.
As of December 31, 1996, no warrants have been exercised and an aggregate
of 3,250,015 shares of the Company's common stock are reserved for issuance
under the warrants. On February 6, 1997, 50,000 warrants were canceled.
Subsequent to December 31, 1996, the Company has adopted an Omnibus Stock
Incentive Plan (the "Omnibus Plan") to permit the grant of awards to employees
of the Company (including officers and directors who are employees of the
Company or a subsidiary of the Company) of restricted shares of the Company's
common stock, performance shares of the Company's Common Stock, stock
appreciation rights relative to the Company's common stock and both incentive
stock options and non-qualified options to purchase shares of the Company's
common stock. A maximum of 1,000,000 shares may be issued under the Omnibus
Plan. No grants or awards have been made under the Omnibus Plan, except for one
option issued to the Company's Chairman.
F-13
79
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
8. INCOME TAXES
The significant components of deferred tax assets consist of the following:
1996 1995
----------- -----------
Start-up expenditures........................ $ 70,000 $ 98,000
Net operating loss carryforwards............. 1,446,000 730,000
----------- -----------
Total deferred tax assets.................... 1,516,000 828,000
Valuation allowance.......................... (1,516,000) (28,000)
----------- -----------
Net deferred taxes........................... $ 0 $ 0
=========== ===========
The Company has a net operating loss carryforward of $3.2 million as of
December 31, 1996 of which $338,000 expires by 2009; $1,285,000 expires by 2010
and $1,580,000 expires by 2011.
The difference between the statutory federal income tax rate of 34% and the
income taxes reported in the Statement of Operations are as follows:
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1996 1995
----------- -----------
Net loss..................................... ($1,534,378) ($1,227,502)
----------- -----------
Statutory benefit............................ (521,689) (417,351)
Loss for which no benefit was provided....... 521,609 417,351
----------- -----------
Total taxes.................................. $ 0 $ 0
=========== ===========
9. COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has entered into an employment agreement with its Chief
Executive Officer for a term of five years commencing January 1, 1995. The
agreement provides for an annual base salary of $100,000 per year and further
provides for a severance payment of two years salary upon termination of
employment due to a change of control of the Company.
The Company entered into an employment agreement dated September 30, 1994
pursuant to which an individual was employed as the Executive Vice President of
Sales and Marketing of the Company for a term of three years commencing October
21, 1994. The employment agreement provided for an annual base salary of
$100,000. The Company terminated the employment agreement on June 13, 1995 for
cause.
In connection with the Company's exercise of its option to acquire a 75%
ownership interest in Corbina, the Company has entered into an employment
agreement with Corbina's minority stockholder pursuant to which he has agreed to
serve as chief executive officer of Corbina and CompTel (collectively the
subsidiaries) for a five year term commencing on February 1, 1997. Such
agreement further provides a base salary of $125,000 per annum (prior to the
date of closing at the IPO, and $175,000 per annum thereafter), less the
aggregate amount of the annual salary to be paid by the subsidiaries; (ii) cash
bonuses and other additional compensation as the Company's Board of Director
may, in its absolute discretion, determine to award to him, (iii) life insurance
to the extent of $500,000 which shall be paid to the beneficiary of his choice,
(iv) he and
F-14
80
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
(FORMERLY TELCOM GROUP USA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
9. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
his immediate family to be covered by Company-provided and paid for health
insurance; (v) as soon after the IPO as is reasonably possible, the Company
shall issue 25,000 shares of the Company's Common Stock to the minority
stockholder pursuant to the Omnibus Plan; subject to such vesting conditions as
the Compensation Committee of the Company's Board of Directors shall reasonably
determine and (vi) should Corbina's operating income during any of the years of
the agreement exceed $3,400,000, the Company will transfer 10% of the
outstanding shares of Corbina to the Chief Executive Officer. Additionally,
should Corbina's revenue after the aforementioned fiscal year exceed $3,400,000,
the Chief Executive Officer will be entitled to shares of the Company's stock
equal to the difference between operating income less $3,400,000 divided by the
share price, as defined. Shares of the Company's stock issued to the Chief
Executive Officer will be limited to 250,000 shares.
The Company leases office space for its operations under an operating
lease. Future minimum rent payments at December 31, 1996 are as follows:
Year ending December 31:
1997............................... $ 76,000
1998............................... 76,000
1999............................... 76,000
2000............................... 76,000
2001............................... 25,000
-----------
$ 329,000
===========
Total rent expense incurred for the years ended December 31, 1996 and 1995
amounted to approximately $32,000 and $43,000, respectively.
10. INITIAL PUBLIC OFFERING
The Company intends to enter into an underwriting agreement for an initial
public offering ("IPO") of its common stock.
F-15
81
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Corbina Telecommunications
We have audited the accompanying balance sheet of Corbina
Telecommunications (a Russian legal entity) as of September 30, 1996, and the
related statements of operations, shareholder's deficiency, and cash flows for
the period December 1, 1995 (inception) through September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Corbina Telecommunications
as of September 30, 1996, and the results of its operations and its cash flows
for the period December 1, 1995 (inception) through September 30, 1996 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company experienced a net loss of $204,908, has a
working capital deficiency of $127,847 and has a shareholder's deficiency of
$84,594. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 1. The accompanying financial statements do not include
adjustments to reflect the possible effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
ERNST & YOUNG (CIS) LIMITED
Moscow, Russian Federation
January 24, 1997
F-16
82
CORBINA TELECOMMUNICATIONS
BALANCE SHEET
SEPTEMBER 30, 1996
(US dollars)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 3,493
Accounts receivable, net of allowance for doubtful accounts of $43,300..... 250,427
Prepaid expenses and other current assets.................................. 31,175
---------
Total current assets............................................................ 285,095
Property and equipment (Note 4)................................................. 53,549
Less accumulated depreciation................................................... (10,296)
---------
43,253
---------
TOTAL ASSETS.................................................................... $ 328,348
=========
LIABILITIES AND SHAREHOLDER'S DEFICIENCY
Current liabilities:
Trade payables............................................................. $ 192,832
Accrued taxes and other liabilities........................................ 149,610
Deferred tax liabilities (Note 3).......................................... 70,500
---------
Total current liabilities....................................................... 412,942
Shareholder's deficiency:
Common stock, one million roubles par value, 140 shares authorized, issued
and outstanding (Note 4).................................................. 30,568
Common stock receivable.................................................... (5,504)
Additional paid-in capital (Note 4)........................................ 95,250
Accumulated deficit (204,908)
---------
TOTAL SHAREHOLDER'S DEFICIENCY.................................................. (84,594)
---------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIENCY.................................. $ 328,348
=========
See accompanying notes.
F-17
83
CORBINA TELECOMMUNICATIONS
STATEMENT OF OPERATIONS
FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION)
THROUGH SEPTEMBER 30, 1996
(US dollars)
Revenues......................................................................... $561,820
Cost of services................................................................. 423,015
--------
Gross profit..................................................................... 138,805
Selling, general and administrative expenses..................................... 281,467
Foreign exchange translation gain on net monetary items.......................... (8,254)
--------
Loss before provision for income taxes........................................... 134,408
Provision for income taxes (Note 3).............................................. 70,500
--------
Net loss......................................................................... $204,908
========
Loss per share................................................................... $ 1,464
Weighted average shares outstanding.............................................. 140
See accompanying notes.
F-18
84
CORBINA TELECOMMUNICATIONS
STATEMENT OF SHAREHOLDER'S DEFICIENCY
FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION)
THROUGH SEPTEMBER 30, 1996
(US dollars)
COMMON STOCK COMMON ADDITIONAL
---------------- STOCK PAID-IN ACCUMULATED
SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT TOTAL
------ ------- ---------- ---------- ----------- --------
Capital contribution December 1,
1995................................ 140 $30,568 (5,504) $ 25,064
Capital contributions, 1996........... $ 95,250 95,250
Net loss.............................. $(204,908) (204,908)
--- ------- ------- ------- --------- --------
Balance at September 30, 1996......... 140 $30,568 $ (5,504) $ 95,250 $(204,908) $(84,594)
=== ======= ======= ======= ========= ========
See accompanying notes.
F-19
85
CORBINA TELECOMMUNICATIONS
STATEMENT OF CASH FLOWS
FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION)
THROUGH SEPTEMBER 30, 1996
(US dollars)
OPERATING ACTIVITIES
Net loss........................................................................ $(204,908)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation............................................................... 10,296
Provision for doubtful accounts............................................ 43,300
Write-down of equipment.................................................... 40,000
Foreign exchange gain...................................................... (8,254)
Deferred income tax provision.............................................. 70,500
Changes in operating assets and liabilities:
Accounts receivable........................................................ (293,727)
Prepaid expenses and other assets.......................................... (31,175)
Trade payables............................................................. 201,086
Accrued taxes and other liabilities........................................ 149,610
---------
NET CASH USED BY OPERATING ACTIVITIES........................................... (23,272)
Investing activities -- Purchases and advances for property and equipment....... (68,485)
FINANCING ACTIVITIES -- Capital contributions................................... 95,250
---------
Net increase in cash and cash equivalents....................................... 3,493
Cash and cash equivalents at beginning of period................................ --
---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 3,493
=========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 140 shares of common stock in exchange for equipment........... $ 25,064
See accompanying notes.
F-20
86
CORBINA TELECOMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1996
(In US Dollars unless otherwise indicated)
1. DESCRIPTION OF BUSINESS
Corbina Telecommunications (the "Company"), a Russian legal entity
registered as a closed joint stock company, was founded on December 1, 1995. The
Company is engaged primarily as a provider of long distance telecommunications
services to commercial customers, in the Moscow metropolitan area. The Company
does not operate on the basis of a telecommunication license but, rather,
through agreements entered into with long distance companies, primarily
Rustelnet, a Russian legal entity, through which it offers long distance service
features through its private telecommunications network.
From December 1, 1995 (inception) through September 30, 1996, the Company
incurred losses aggregating $204,908, and as of September 30, 1996, its current
liabilities exceeded its current assets by $127,847 and its total liabilities
exceeded total assets by $84,594. Such losses were primarily attributable to the
facts that, during said period of time, (1) management's efforts were primarily
directed toward negotiating agreements with Rustelnet and other primary and
regional long distance carriers and the establishment of a network of field
service representatives to market its services, and (2) the Company was unable
to generate a volume of long distance telecommunications traffic with its
customers which was large enough to provide sufficient revenues to support its
operations. These matters have resulted in a deterioration of the Company's
financial condition and raise substantial doubt about its ability to continue as
a going concern. These financial statements have been prepared assuming the
Company will continue as a going concern and do not include any adjustments that
may result from the outcome of this uncertainty. In order for the Company to
strengthen its financial condition and to operate profitably in future periods,
it will need to continue to increase the telecommunications traffic purchased
from it by its customers. Such increases are largely dependent upon the
Company's ability to expand its existing customer base. The Company intends to
achieve such increases through an enhancement of the product and service
offerings made available to its existing customers, and that it intends to make
available to prospective customers, and by engaging in a marketing and
advertising campaign to be disseminated by print and other media.
In order to acquire the capital which the Company will need in order to be
able to provide such enhanced products and services, and to engage in such
advertising and marketing activities, the Company's original shareholder has
entered into an agreement with Russian Wireless Telephone Company, Inc.
("Russian Wireless"), a Delaware corporation with which such shareholder is
affiliated, which provides, among other things, that upon completion of an
initial public offering transaction which Russian Wireless intends to commence
during the first half of 1997, Russian Wireless will contribute $655,000 to the
Company's capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in Preparation of Financial Statements
The preparation of these financial statements, in conformity with
accounting principles generally accepted in the United States of America ("US
GAAP"), 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.
Basis of Presentation
The Company maintains its records and prepares its financial statements in
Russian roubles in accordance with the requirements of Russian accounting and
tax legislation. The accompanying financial statements differ from the financial
statements used for statutory purposes in Russia in that they reflect certain
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CORBINA TELECOMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1996
(In US Dollars unless otherwise indicated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
adjustments, not recorded on the Company's books, which are appropriate to
present the financial position, results of operations and cash flows in
accordance with US GAAP. The principal adjustments are related to foreign
currency translation, revenue recognition, depreciation and valuation of
property and equipment, and certain debt, equity and expense transactions.
Foreign Currency Translation
The Company's functional currency is the US dollar because the majority of
its revenues, costs, property and equipment purchased, and debt and trade
liabilities are either priced, incurred, payable or otherwise measured in US
dollars. Accordingly, transactions and balances not already measured in US
dollars (primarily Russian roubles) have been remeasured into US dollars in
accordance with the relevant provisions of US Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation".
Under SFAS No. 52, revenues, costs, capital and non-monetary assets and
liabilities are translated at historical exchange rates prevailing on the
transaction dates. Monetary assets and liabilities are translated at exchange
rates prevailing on the balance sheet date. Exchange gains and losses arising
from remeasurement of monetary assets and liabilities that are not denominated
in US dollars are credited or charged to operations.
The exchange rate used for translation purposes is the rate established by
the Central Bank of Russia ("CBR"). The CBR rate at September 30, 1996 for one
US dollar was RUR 5,376. At January 24, 1997, the CBR rate had increased to RUR
5,609. The effect of this devaluation of the rouble on monetary assets and
liabilities has not been determined.
The rouble is not a convertible currency outside the territory of Russia.
Within Russia official exchange rates were determined principally through
trading on the Moscow Interbank Currency Exchange ("MICEX") until May 17, 1996.
Although MICEX rates do occasionally diverge from market rates, they are
generally considered to be a reasonable approximation. Beginning May 17, 1996,
official exchange rates were determined daily by the Central Bank of Russia and
are generally considered to be a reasonable approximation of market rates. The
translation of rouble denominated assets and liabilities into US dollars for the
purpose of these financial statements does not indicate that the Company could
realize or settle in US dollars the reported values of the assets and
liabilities. Likewise, it does not indicate that the Company could return or
distribute the reported US dollar values of capital to its shareholders.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in the bank.
Accounts Receivable
Accounts receivable are shown at their net realizable value which
approximates their fair value.
Property and Equipment
Property and equipment are recorded at their historical cost. Depreciation
and amortization are provided on the straight-line method over the following
estimated useful lives:
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CORBINA TELECOMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1996
(In US Dollars unless otherwise indicated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Network equipment................................... 7 years
Computers........................................... 5 years
Office furniture and equipment...................... 5 years
Revenue Recognition and Taxes on Revenue
Revenues from telecommunication traffic are recognized in the period in
which the traffic occurs. Revenues are stated net of any value-added taxes
("VAT") charged to customers. Certain other taxes on revenues were charged at
rates ranging from 1.9% to 3% during the period, and are charged to selling,
general and administrative expenses.
Net Loss Per Common Share
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. Average common equivalent shares
outstanding have not been included, as the computation would not be dilutive.
Weighted average common shares outstanding were 140 for the period ended
September 30, 1996.
Advertising
The cost of advertising, which is minimal, is expensed as incurred.
Income Taxes
Company computes and records income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes".
Government Pension Funds
The Company contributes to the Russian Federation state pension fund,
medical insurance fund, social funds and unemployment charters on behalf of all
its Russian employees. Contributions are 38.5% of salaries and are expensed as
incurred.
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivables. The Company
deposits its available cash with a Russian financial institution. The Company's
sales and accounts receivables are made to and due from a variety of
international and Russian business customers. In 1996, one customer accounted
for 23% of revenues and 40% of accounts receivable. As of September 30, 1996,
the Company had no other significant concentrations of credit risk.
Fair Value of Financial Instruments
The fair value of financial instruments included in current assets and
liabilities are considered to be their carrying values.
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CORBINA TELECOMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1996
(In US Dollars unless otherwise indicated)
3. INCOME TAXES
The provision for income taxes consists of the following:
Deferred............................................................ $ 70,500
Current............................................................. --
--------
Total............................................................... $ 70,500
--------
Income taxes were paid during the period.
The provision for income taxes differs from the amount computed by applying
the statutory rate of 35% because of the effect of the following items:
Tax at statutory rate............................................... $(47,000)
Non-deductible expenses and non-taxable foreign exchange
differences....................................................... 55,000
Deferred tax valuation allowances................................... 62,500
-------
Provision for income taxes.......................................... $ 70,500
=======
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income taxes purposes. The significant
components of the Company's deferred tax balance are as follows:
Deferred tax assets:
Depreciation differences........................................ $ 3,400
Accruals not currently deductible............................... 29,200
Tax loss carryforwards.......................................... 45,100
Valuation allowance............................................. (62,500)
-------
15,200
Deferred tax liability -- revenue recognition................... 85,700
-------
$ 70,500
=======
As of September 26, 1996, for Russian income tax purposes, the Company had
tax loss carryforwards of $129,000 which may be used, subject to certain
restrictions, in 20% increments over each of the five calendar years from 1997
to 2001.
4. COMMON STOCK
The Company's common stock was issued in exchange for a contribution of
fixed assets and software. All items were new at the time of contribution and
were valued at their invoiced costs. Common stock receivable represents the
portion of the contribution not made as of the balance sheet date. Additional
paid-in capital represents amounts paid by the Company's shareholder to fund the
operations of the business.
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CORBINA TELECOMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1996
(In US Dollars unless otherwise indicated)
5. COMMITMENTS
The Company has an operating lease for office space with a term of five
years. The total future minimum lease commitments are as follows:
1997............................................................ $ 38,000
1998............................................................ 38,000
1999............................................................ 38,000
2000............................................................ 9,586
--------
................................................................ $123,586
--------
Total rent expense for the period was $29,000.
6. CONTINGENCIES
The tax and legal systems in Russia are evolving as the central government
transforms from a command to a market oriented economy. The Russian Federation
has and continues to introduce laws, decrees and related regulations. These
laws, decrees and regulations are not always clearly written and are, at times,
conflicting. In addition, their interpretation is subject to the opinions of a
variety of local, regional and federal tax inspectors, Central Bank officials
and the Ministry of Finance. Instances of inconsistent opinions among and
between these authorities are not unusual.
The current regime of penalties and interest related to reported and
discovered violations of Russia's laws, decrees and related regulations are
severe. Penalties include confiscation and/or fines of up to 300% of the amounts
at issue. Interest is assessable at rates of 0.3% to 0.7% per day. As a result,
penalties and interest often result in amounts that are multiples of any
unreported taxes. Also, the authorities have the right to seize bank accounts
and detain individuals for known or suspected violations.
The Company's policy is to accrue contingencies in the accounting period in
which a loss is deemed probable and the amount is reasonably determinable. In
this regard, because of the uncertainties associated with the Russian tax and
legal systems, the ultimate taxes as well as penalties and interest, if any,
assessed may be in excess of the amount expensed to date and accrued at
September 30, 1996. Although such future assessments are possible and may be
material, it is the opinion of the Company's management that such amounts, if
any, will not have a material effect on the financial condition of the Company.
The Company's operations and financial position will continue to be
affected by Russian political developments, including the application of
existing and future legislation and tax regulations. The likelihood of such
occurrences and their effect on the Company could have a significant impact on
the Company's ability to continue operations.
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APPENDIX A
GLOSSARY OF SELECTED TERMS
Set forth below are certain technical terms defined as they are used in
this Prospectus.
ACCESS: Access refers to the means by which a call is
connected from the end user's telephone to a long
distance carrier (i.e., regular local lines or
dedicated private lines). See Dedicated Access and
Switched Access.
BASE STATION: Transmitter, receiver, signaling and related
equipment located within an area served by
CompTel's proposed wireless local network.
COMMON CARRIERS: Companies which own or operate transmission
facilities and offer telecommunication services to
the general public on a non-discriminatory basis.
COMPETITIVE ACCESS
PROVIDERS: or CAPs, are businesses that offer local transport,
i.e., telecommunications facilities to other
interconnecting carriers in competition with the
LEC.
DEDICATED ACCESS: Access to a long-distance network over private
lines-analog or digital-reserved for the specific
use of a single entity.
DIGITAL: A method of storing, processing and transmitting
information through the use of distinct electronic
or optical pulses that represent the binary digits
0 and 1. Digital transmission/switching
technologies employ a sequence of descrete,
distinct pulses to represent information, as
opposed to the continuously variable analog signal.
EXCHANGE An exchange is a call switching center, or an area
in which a carrier provides services under the
regulations and tariffs for that area.
FACILITIES-BASED: A facilities-based provider of telecommunications
services possesses it own call switching equipment
and transmission lines, regionally or nationally.
FACILITY: A facility is a transmission path between two or
more points provided by a carrier.
FIBER-OPTIC: A technology using light as a transmission
mechanism.
LATA: Local Access Transport Area -- a geographic area
within which a LEC can provide telephone services,
and between which a long distance carrier provides
services.
LEC: A LEC is a local exchange carrier-that is, a
carrier which provides local exchange services in a
LATA or LATAs, but not between LATAs.
LOCAL LOOP: That portion of the public telecommunications
network which extends from the service provider's
switch to the individual home or business end-user.
LOCAL LOOP SERVICES: Local telephony services.
PROTOCOL: An all-inclusive term used to describe the various
control functions, tuning and methodology standards
by which a communications system operates, as well
as any other equipment system characteristics
necessary to ensure compatibility.
SWITCH: A switch is equipment that routes local and long
distance telephone calls over communications paths
between geographic points, opens or closes
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circuits or selects the paths or circuits to be
used for transmission of voice or data. Switching
is the process of interconnecting circuits to form
a transmission path between users.
SWITCH-BASED RESELLER: Switch-based resellers lease facilities from
national carriers or large private line networks.
They resell long distance services over those
facilities under their own name and provide sales,
customer service, billing and technical support.
Switch-based resellers own or lease their own call
switching equipment and, in some cases, own their
own transmission facilities. They typically provide
originating telecommunications service on a
regional basis.
SWITCHED ACCESS: Access to long distance carriers via switches over
lines that are provided for public use rather than
over dedicated private lines.
WIRELESS LOCAL LOOP Wireless Local Loop is a system that eliminates the
need for a wire (loop) connecting users to the
public switched telephone network, which is used in
conventional wired telephone systems, by
transmitting voice messages over radio waves for
the "last mile" connection between the location of
the customer's telephone and a base station
connected to the network equipment.
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APPENDIX B
THE RUSSIAN FEDERATION
The information set forth in this appendix has been derived from various
governmental and private publications which have not been prepared or
independently verified by the Company the Selling Stockholders or the
Underwriters or any of their respective advisors or affiliates. The Company is
not aware of any material misstatement with respect to the information set forth
in this appendix. Statistical data may vary from source to source as a result of
differences in the underlying assumptions or methodology used. Furthermore,
because of significant political, economic and other structural changes in
Russia in recent years, any such historical information presented herein may not
be indicative of future developments. In addition, the Company makes no
representation that any correlation will exist between Russia or its economy in
general and the performance of the Company. Prospective investors should
consider carefully the factors discussed in the Prospectus under "Risk Factors."
GENERAL
The Russian Federation is constituted as a federation of republics,
territories, regions (one of which is an autonomous region), cities of federal
importance and autonomous areas, all of which are equal subjects of the Russian
Federation. It is the largest state to emerge from the former Union of Soviet
Socialist Republics (the "Soviet Union"), covering an area of approximately
17,075,000 square kilometers, which is approximately 76% of the territory of the
former Soviet Union. Spanning eleven time zones, Russia covers one-eighth of the
world's land surface, making it the largest country in the world, almost twice
the size of the United States. The Russian Federation has a population of
approximately 148 million people.
Russia is a member of the United Nations (and a permanent member of its
Security Council), the International Monetary Fund (the "IMF"), the World Bank,
the International Finance Corporation and the European Bank for Reconstruction
and Development. The Russian Federation succeeded to the former Soviet Union's
observer status to the General Agreement on Tariffs and Trade which was granted
in May 1990 and has been granted Most Favored Nation status by some members of
the Organization for Economic Cooperation and Development ("OECD").
Russia and eleven other former Soviet republics joined together to form the
Commonwealth of Independent States (the "CIS") on December 21, 1991. Members of
the CIS have entered into a series of political and economic agreements among
themselves.
POLITICAL STRUCTURE AND RECENT POLITICAL DEVELOPMENTS
The Soviet Union, established in 1922, was a centralized communist system
comprised of 15 republics, including the Russian Soviet Federation Socialist
Republic (the "RSFSR"). In the mid-1980s, then-Soviet President Mikhail
Gorbachev introduced economic reforms under the principles of "glasnost" and
"perestroika." In August 1991, certain high ranking members of the Soviet
military and the Communist Party attempted a military coup which failed and
indirectly led to the disintegration of the Soviet Union.
After the collapse of the Soviet Union, Boris Yeltsin, who had been elected
President of the RSFSR in June 1991, continued to hold office as President of
the Russian Federation (the successor of the RSFSR). The Congress of People's
Deputies and the Supreme Soviet, the members of which were elected under the
Soviet Union, continued to act as the Russian Parliament until it was dissolved
in October 1993 by President Yeltsin. In response to such dissolution, on
October 3, 1993, certain members of the dissolved parliament and their
supporters led an insurrection which failed after President Yeltsin ordered the
military to take over the parliament building in Moscow.
On December 12, 1993, a new constitution (the "Constitution"), drafted
largely by President Yeltsin's administration and approved in a national
referendum, was adopted. The Constitution established a federal democracy with a
strong executive branch. The Constitution provides for a President with broad
powers, and a
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bicameral parliament. The lower house of parliament, called the State Duma,
comprises 450 deputies, half of whom are elected based on their party
affiliation. The other half are elected by a majority of voters in single
constituencies. The upper house, the Federation Council, is comprised of two
representatives from each of the country's 89 regions, one from the regional
legislative body and one from the regional executive body. Because the President
appoints the head of the regional executive body, the President can indirectly
influence the appointment of one-half of the upper house. The President appoints
the head of government, the Prime Minister, who must then be approved in a
majority vote by the State Duma. The Prime Minister, in close consultation with
the President, then designates a cabinet of ministers. The President retains
considerable power in his ability to dissolve parliament.
Following the most recent parliamentary vote in December 1995, the
parliament was highly fragmented with the largest party in the State Duma, the
Communist Party of the Russian Federation, failing to achieve an absolute
majority. The next parliamentary vote is due before December 17, 1999.
President Boris Yeltsin, who has served as President of the Russian
Federation since the dissolution of the Soviet Union in December 1991, was
re-elected on July 3, 1996. He will serve a four-year term, with the next
presidential election due in June 2000. In the event that President Yeltsin is
forced to step down due to his poor health, becomes incapacitated or dies, the
Prime Minister would serve as acting head of state for three months, during
which time an election for a new President would be organized. Viktor
Chernomyrdin has served as Prime Minister since December 1992.
ECONOMIC CONDITIONS AND RECENT ECONOMIC DEVELOPMENTS
In the aftermath of the dissolution of the Soviet Union, particularly in
1991 and 1992, Russia's centrally planned economy experienced a crisis,
evidenced by a decline in living standards and gross domestic product ("GDP"),
hyperinflation and a rapid devaluation of the rouble.
In order to facilitate the redirection and stabilization of the economy,
the Russian government began in 1991 to implement several new policy
initiatives. Partly as a result of such initiatives, several economic indicators
began to show positive improvements. For example, the budget deficit contracted
from 11.1% of GDP in 1994 to 4.2% of GDP in 1995 and to 3.5% of GDP in 1996; and
inflation declined from 224% in 1994 to 131% in 1995 and to 21.8% in 1996. In
addition, high real interest rates and a 75% real appreciation of the exchange
rate were accompanied by a current account surplus and a reduction in the GDP
decline, with GDP falling 4% in 1995 as compared to 15% in 1994.
Although certain economic indicators improved, other aspects of the economy
have remained stagnant or worsened over the same period. Reported unemployment
rose to 8.2% by the end of 1995 from 7.1% a year earlier, and household incomes
declined 12% during 1995.
Since 1991, the rouble has experienced a substantial devaluation. On
December 31, 1991, the Rouble/Dollar exchange rate set by the Moscow Interbank
Currency Exchange (the "MICEX"), the largest currency exchange in Russia, was
130 roubles per dollar. On July 5, 1995, the Russian Government and the Central
Bank announced their intention to support the rouble within a band of 4,300 to
4,900 roubles per dollar until October 1, 1995 and later extended the band until
December 31, 1995. The policy was subsequently extended to June 30, 1996 within
a new band of 4,550 to 5,150 roubles per dollar, and the policy was re-extended
to December 31, 1996 with the establishment of a new "crawling corridor"
declining from 5,000 to 5,600 roubles per dollar as of July 1, 1996 to 5,500 to
6,100 roubles per dollar as of December 31, 1996. On May 16, 1996, the day the
new "crawling" rouble corridor was announced, the Central Bank effectively
replaced the daily MICEX exchange rate with a new daily fixing, known as the
Central Bank mid-market rate. On December 31, 1996, the MICEX rate was 5,547
roubles per dollar.
During the first part of 1996, monthly inflation slowed from 4.1% in
January to 0.8% in July. The rouble steadily devalued from 4,689 roubles per
dollar in January to 5,547 roubles per dollar in December, while remaining
within the rouble band. The budget deficit rose from 1.5% of GDP in January to
over 3.5% of GDP by the end of 1996. A Presidential decree in mid-1996 ordered a
transfer of 5 trillion roubles of Central Bank "profits" to cover the budget
deficit. Also, in 1996, an agreement was reached with the Paris Club of
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international creditors (a committee of sovereign creditors to Russia) to
reschedule US$40 billion of debt over 25 years with an initial six-year grace
period on principal payments. Final terms and conditions for the restructuring
of US$32 billion of the London Club (a committee of commercial creditors of
Russia). Both Paris and London Club restructurings are expected to enable Russia
to access the global capital markets.
LEGAL ENVIRONMENT
The Russian Federation has a legal system based on civil law, of which the
fundamental body of legislation is the Civil Code, which has priority over most
other legislation. Bodies of law which were non-existent in the Soviet period
have been adopted in the last few years, covering a wide range of substantive
areas including, among other things, antitrust, banking, bankruptcy, corporate,
privatization, property and securities. For instance, substantial sections of
the First and Second Parts of the Civil Code became effective in January 1995
and March 1996, respectively, the Federal Law on Joint Stock Companies became
effective in January 1996, the Federal Law on the Securities Market in April
1996 and the Federal Law on Banks and Banking Activities became effective in
February 1996.
The Russian judicial system consists of three branches of courts. General
practice cases fall within the jurisdiction of district courts and regional
courts under the supervision of the Supreme Court of the Russian Federation.
Disputes regarding commercial matters fall within the jurisdiction of a system
of civil courts under the supervision of the High Arbitration Court of the
Russian Federation. Constitutional matters are resolved by the Constitutional
Court. In instances involving a foreign party (or a Russian party which has
foreign shareholders) or an economic activity outside the Russian Federation;
parties may submit a dispute to arbitration before the International Commercial
Arbitration Court established under the Chamber of Trade and Industry of the
Russian Federation.
FOREIGN INVESTMENT
Since 1991, the Government has undertaken a number of legal and economic
measures designed to stimulate foreign investment. The first major step was the
adoption of the Law on Foreign Investment in July 1991 (the "Foreign Investment
Law"), which permits a wide range of foreign investment activities in Russia.
The Foreign Investment Law is the primary body of legislation relating to
foreign investment although specific provisions in various other legislation
including the basic corporate, tax, customs, accounting and other laws
applicable to businesses operating in Russia often create practical difficulties
for foreign investors. The Foreign Investment Law allows the repatriation of
profits, duty-free import and export of goods and services for enterprises with
over 30% foreign equity participation and lower tax rates for foreign investment
in certain sectors of the economy. The Foreign Investment Law prohibits
nationalization without quick, adequate and effective compensation.
According to information provided by the MOC, the aggregate amount of
direct foreign investment (excluding portfolio investments), including
investment credits, in the Russian telecommunications industry approximated
US$520.3 million in 1995.
EXCHANGE CONTROLS AND REPATRIATION
Russian currency exchange legislation limits the exchange of roubles for
foreign currency and the use of foreign currency in Russia. Russian currency
legislation currently permits, and Russian foreign investment legislation
currently guarantees, the right of foreign investors to transfer abroad income
received on investments in Russia (including, without limitation, profits,
dividends and interest), provided such income was received in foreign currency
and was subject to payment of all applicable taxes and duties. Russian currency
legislation also permits legal entities to convert roubles into foreign currency
for purposes of making dividend and interest payments.
Foreign currency may be freely exchanged for roubles in Russia, but the
exchange of roubles for foreign currency in Russia is restricted and roubles may
not be exported or exchanged outside of Russia. Residents are required to
convert 50% of all amounts received in foreign currency from export transactions
into roubles, but may exchange roubles for foreign currency if they can document
"current" foreign currency transactions
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(including payments of interest and dividends), or have permission from the
Central Bank to engage in certain other transactions. Non-residents may freely
convert foreign currency into roubles, but may only do so through rouble
accounts which are subject to strict regulations.
The currency exchange rules govern transactions in foreign currency and
currency valuables (including foreign currency-denominated securities) between
Russian residents (including citizens, permanent residents and legal entities
established under Russian law) and between residents and non-residents. Russian
currency legislation distinguishes between "current" foreign exchange
transactions and foreign currency transactions involving a "movement of
capital."
"Current" foreign currency transactions generally may be freely carried out
between residents and between residents and non-residents. "Movement of capital"
transactions in foreign currency, including the purchase and sale of securities
and real estate transactions, generally require a license from the Central Bank.
The prevailing view is that the license is only required for Russian residents
involved in such "movement of capital" transactions. Cash transactions in
foreign currency are generally prohibited within the Russian Federation;
however, certain obligations may be paid in foreign currency by means of credit
cards or wire transfers.
Foreign investors which are legal entities may purchase rouble-denominated
shares from, and sell rouble-denominated shares to, Russian residents with
settlement in roubles via a special rouble investment account. Foreign investors
may also use such rouble investment account to receive rouble proceeds from
investments in rouble-denominated shares (profit, dividends and proceeds from
the sale of such rouble-denominated shares). Roubles received into such rouble
investment account may be converted into foreign currency and subsequently may
be repatriated, subject to payment of all applicable taxes and duties. Russian
tax legislation currently requires a foreign investor to register with the tax
authorities prior to opening such a rouble investment account. The Central Bank
recently further relaxed restrictions on the use of roubles by foreign investors
for transactions in government securities.
TAXATION AND DUTIES
Entities engaged in commercial activity in Russia must be registered with
the tax inspectorate in each location in which they operate and must submit an
annual tax declaration.
Taxes are charged by federal, regional and local authorities. The profit
tax, which is imposed on the basis of federal legislation, is payable to the
federal tax authorities at the rate of 13% and to the regional tax authorities
at rates which the regional tax authorities establish, but in no case more than
22%. The profit tax is calculated on the basis of a company's net profits,
calculated according to Russian accounting principles, which does not provide
for deduction of certain expenses which would be deductible under U.S. GAAP.
Social security contributions by employers are payable to four different
funds and total 38.5% of wages and salaries paid to Russian employees (or more,
depending on the locality).
A value-added tax ("VAT") of 20% is imposed on the customs value of
imported goods, on goods supplied within the Russian territory and on certain
services. Exemptions from VAT are available in certain circumstances for goods
imported as contributions to the capital stock of Russian companies. Customs
duties are imposed at high rates on a wide range of imports.
In addition to the foregoing taxes and duties, each Russian jurisdiction
may impose certain regional and local taxes. In Moscow, for example, such taxes
include an advertising tax (currently 5% of the value of advertising services
purchased), a transport tax (currently 1% of salary expenses), an education tax
(currently 1% of salary expenses), a housing tax (currently 1.5% of revenues),
and a road-users tax (currently 2.5% of revenues).
CITY OF MOSCOW
Moscow is the largest city of the Russian Federation. According to the
Russian State Statistical Committee ("Goskomstat"), the City of Moscow has a
population of nearly 8,717,400, with a further
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6,625,700 in the surrounding region. Moscow is the capital of the Russian
Federation, Russia's principal commercial and financial center and is also a
major Russian industrial center.
Like many other Russian cities, Moscow has experienced a significant
downturn in the industries that were the traditional base of its economy,
including the automobile, heavy equipment, chemicals, pharmaceutical and food
processing industries. Many major companies have been forced to suspend
operations temporarily for various periods. This reduction in economic activity
has been somewhat ameliorated by substantial growth in the financial, tourist
and service sectors in Moscow, the development of the hotel sector and the
growth of private wealth among a small but growing class of entrepreneurs based
primarily on trading activities. Thus, although the purchasing power of most
Moscow residents has fallen since 1991, there is a growing group of
entrepreneurs and individuals employed directly or indirectly by domestic and
international firms and joint ventures in Russia, hotels, banks and investment
institutions that have substantially more purchasing power than they had in
1991. This is evidenced by the rapidly growing market for imported consumer
goods in Moscow.
B-5
98
======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, BY ANY PERSON
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER,
SOLICITATION OR SALE MADE HEREUNDER, SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THE PROSPECTUS.
------------------------
TABLE OF CONTENTS
PAGE
----
Available Information.................
Prospectus Summary....................
Risk Factors..........................
Use of Proceeds.......................
Capitalization........................
Dividend Policy.......................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business..............................
Management............................
Certain Transactions..................
Principal Security Holders............
Selling Stockholders..................
Concurrent Registration of
Securities..........................
Shares Eligible for Future Sale.......
Underwriting..........................
Legal Matters.........................
Experts...............................
Financial Statements..................
UNTIL , 1997 (TWENTY-FIVE DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENT OR SUBSCRIPTIONS.
======================================================
======================================================
RUSSIAN WIRELESS
TELEPHONE COMPANY, INC.
1,400,000 SHARES OF
COMMON STOCK
AND
2,000,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
------------------------
PROSPECTUS
------------------------
J. W. BARCLAY & CO., INC.
, 1997
======================================================
99
[ALTERNATE PROSPECTUS -- COVER PAGE]
PROSPECTUS
RUSSIAN WIRELESS TELEPHONE COMPANY, INC.
2,450,015 FIVE YEAR REDEEMABLE WARRANTS
AND 2,450,015 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF SUCH WARRANTS
30,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF AN OPTION
OFFERED BY CERTAIN SELLING SECURITYHOLDERS
This Prospectus relates to 300,000 shares of the Common Stock, $.01 par
value (the "Common Stock"), of Russian Wireless Telephone Company, Inc., a
Delaware corporation (the "Company"), 2,450,015 Five Year Redeemable Common
Stock Purchase Warrants (the "Redeemable Warrants"), and the shares of Common
Stock issuable upon exercise thereof, as well as 25,000 shares of Common Stock
issuable upon exercise of a three year common stock purchase option held by one
of the Company's directors (the "Option"), all of which are being offered by
certain selling securityholders (the "Selling Securityholders"). The Company
will not receive any of the proceeds from the sale of such securities.
Each Redeemable Warrant entitles the holder to purchase one share of Common
Stock, at an exercise price of $7.25 (the "Exercise Price"), subject to
adjustment, commencing two years from the date of this Prospectus (the
"Effective Date") until the close of business on [ ], 2002 [the
fifth anniversary of the Effective Date]. The Redeemable Warrants are
redeemable, in whole or in part, by the Company at a price of $.50 per
Redeemable Warrant commencing two years after the Effective Date and prior to
their expiration, provided that (i) prior written notice of not less than 20
days is given to the holders of the Redeemable Warrants, and (ii) the closing
bid price (as defined) for the 20 consecutive trading days immediately prior to
the date on which notice of redemption is given shall have exceeded $14.50 per
share. Notwithstanding the foregoing, the Redeemable Warrants may be exercised
or redeemed during the one year period commencing on [ ], 1998
[the first anniversary of the Effective Date] upon the express written consent
of the Representative. See "Description of Securities -- Redeemable Warrants."
Prior to this offering, there has been no market for either the Common
Stock or the Redeemable Warrants being offered by the Company concurrently with
this Offering.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE [ ] AND
"DILUTION".
The Company has made applications for inclusion of the Common Stock and
Redeemable Warrants on the Nasdaq SmallCap Market under the symbols [RWTC] and
[RWTW], respectively, and for listing of the Common Stock and Redeemable
Warrants on the Boston Stock Exchange and the Pacific Stock Exchange under the
symbols [RWT] and [RWTW], respectively. There can be no assurance that any of
such applications will be granted, or if any of such applications is granted,
that an active and liquid market in such securities will develop. See "Risk
Factors."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1996
100
[Alternate Prospectus Page]
THE OFFERING
SECURITIES OFFERED BY
The Selling
Securityholders............... 300,000 shares of Common Stock; 2,450,015
Redeemable Warrants; and 25,000 shares of
Common Stock, subject to issuance upon exercise
of the Option
OFFERING PRICE
per share of Common
Stock......................... $[ ]
per Redeemable Warrant... $[ ]
Net proceeds to the Company... The Company will not receive any proceeds from
the sale of shares offered by the Selling
Securityholders
Common Stock Outstanding
Before the Offering (1)..... 2,985,000 shares
Common Stock to be Outstanding
After the Offering (2)...... 4,385,000 shares
Redeemable Warrants
Outstanding Before the
Offering.................... - 0 -
Redeemable Warrants to be
Outstanding After the
Offering (3) 5,200,015
Exercise Terms........... Each Redeemable Warrant entitles the holder
thereof to purchase one share of Common Stock
for $7.25 (subject to adjustment in certain
circumstances) during the three year period
commencing two years after the Effective Date.
(4)
Expiration Date.......... [ ], 2002 [the fifth anniversary of
the Effective Date].
Redemption............... Redeemable by the Company, in whole or in part,
at a price of $.50 per Redeemable Warrant
commencing two years after the Effective Date
and prior to their expiration (subject to
earlier redemption with the Representative's
written consent), provided that (i) prior
written notice of not less than 20 days is
given to the holders of the Redeemable
Warrants, and (ii) the closing bid price (as
defined) for the 20 consecutive trading days
immediately prior to the date on which notice
of redemption is given shall have exceeded
$14.50 per share. (4)
PROPOSED NASDAQ SYMBOLS
Common Stock.................. RWTC
Redeemable Warrants........... RWTCW
PROPOSED BOSTON AND PACIFIC
STOCK
EXCHANGE SYMBOLS
Common Stock.................. [ ]
Redeemable Warrants........... [ ]
101
CONCURRENT OFFERING BY THE COMPANY
Securities offered by the
Company....................... 1,400,000 shares of Common Stock and 2,000,000
Redeemable Warrants
Offering price per share...... $7.00
Offering price per Redeemable
Warrant..................... $.50
Net Proceeds to the Company... $8,871,000
Use of proceeds............... To provide additional capital to Corbina, to
purchase switching hardware and software for
connection of CompTel's customers to the Moscow
public telephone system, to purchase equipment
and to acquire antenna sites to be used in
connection with the establishment of CompTel's
wireless local loop telecommunications system
in the Moscow Region, to repay $750,000
borrowed in connection with the Offering and
for working capital. See "Use of Proceeds."
Risk Factors.................. The Offering involves a high degree of risk
including, but not limited to, (i) risks of a
political, economic and social nature regarding
the Russian Federation; (ii) currency, and
dividend payment restrictions pertaining to the
Company's Russian subsidiaries; (iii) risks
pertaining to the Russian legal system; and
(iv) risks relating to the Company, such as its
limited operating history, its dependence on
key management in the US and the Russian
Federation, the Company's ability to manage the
growth and expansion that will be necessary to
achieve profitability, the competitive
environment for long distance services in the
Russian Federation, the problems inherent in
introducing new telecommunications technology
such as wireless local loop service; and (v)
other risks, such as the absence of a prior
market for the Company's securities, the large
number of shares of the Company's Common Stock
that will be available for future sale and
substantial immediate dilution. See "Risk
Factors" beginning on page [ ].
- ---------------
(1) Does not include up to 4,475,015 shares of Common Stock issuable upon (i)
exercise of (a) 750,000 common stock purchase warrants issued to investors
in the Company's first private placement of securities (the "First Private
Placement Warrants"); (b) 450,000 common stock purchase warrants issued to
investors in the Company's second private placement of securities (the
"Second Private Placement Warrants"), all of which are being offered for
sale pursuant to this prospectus by the Selling Securityholders; (c)
2,000,015 common stock purchase warrants issued to investors in the
Company's third private placement of securities (the "Third Private
Placement Warrants"), all of which are being offered for sale pursuant to
this prospectus by the Selling Securityholders; and (d) an option to
purchase 25,000 shares of Common Stock issued to one of the Company's
directors (the "Option"); and (ii) issuance of (a) 1,000,000 of Common Stock
reserved for issuance under the Company's Omnibus Stock Option Plan; and (b)
250,000 shares of Common Stock issuable to Mr. leibov pursuant to his
employment agreement with the Company. See "Description of
Securities -- Warrants Issued in Private Placements;" "Management -- Option
Issued to Non-Employee Director;" " -- Executive Employment Agreements;" and
"Concurrent Registration of Securities."
(2) Does not include up to 5,113,265 shares of Common Stock issuable in the
events that (i) all of the 750,000 First Private Placement Warrants, the
450,000 Second Private Placement Warrants and the 2,000,015 Third Private
Placement Warrants are fully exercised; (ii) the Company issues 338,250
shares
102
of Common Stock upon full exercise of Underwriters' over-allotment option
(and 300,000 shares of Common Stock are issued upon full exercise of the
Redeemable Warrants to be issued in connection therewith); (iii) all
1,000,000 of the shares of Common Stock which have been reserved for
issuance under the Company's Omnibus Stock Incentive Plan shall be issued;
(iv) up to 250,000 shares of Common Stock are issued to Mr. Leibov pursuant
to the Company's employment agreement with him; and (v) the 25,000 shares of
Common Stock underlying the Option are issued. See "Management;"
"Description of Securities;" and "Underwriting."
(3) Consists of 750,000 First Private Placement Warrants, 450,000 Second Private
Placement Warrants and 2,000,015 Third Private Placement Warrants which will
be automatically converted into Redeemable Warrants upon closing of this
Offering. See "Description of Securities."
(4) Consists of (i) 2,000,000 Redeemable Warrants being offered by the Company
in the Offering; (ii) 2,450,015 Redeemable Warrants which are being offered
for sale by Selling Securityholders on a non-underwritten basis pursuant to
this prospectus (including 450,000 Second Private Placement Warrants); and
(iii) 750,000 First Private Placement Warrants which will be automatically
converted into Redeemable Warrants upon closing of this Offering. See
"Concurrent Registration of Securities;" "Description of Securities;" and
"Underwriting."
103
[ALTERNATE PROSPECTUS PAGE]
CONCURRENT OFFERING BY THE COMPANY
Concurrently with this Offering, the Company is Offering, the Company is
offering, pursuant to a separate prospectus included in the Registration
Statement of which this Prospectus forms a part, 1,400,000 shares of Common
Stock and 2,000,000 Redeemable Warrants. The Common Stock and Redeemable
Warrants offered by the Company will be separately tradeable immediately upon
issuance and may be purchased separately. Investors will not be required to
purchase shares of Common Stock and Redeemable Warrants together or in any
particular ratio.
104
[ALTERNATE PROSPECTUS PAGE]
SELLING SECURITYHOLDERS
In accordance with the Company's obligations to the investors who purchased
securities in the Second Private Placement and the Third Private Placement, the
Company has registered for sale, pursuant to this Prospectus, 300,000 shares of
Common Stock and 2,450,015 Redeemable Warrants for sale by the Selling
Securityholders identified below. The Company has also registered for sale,
pursuant to this Prospectus, 25,000 shares of Common Stock which shall be
issuable to Jack W. Buechner, the Chairman of the Company's Board of Directors,
upon his exercise of a three year option to purchase such shares at an exercise
price of $2.00 per share (the "Option"). Said Option will expire on May 21,
1998. Except for Mr. Buechner, none of the Selling Securityholders was an
officer, director, or employee of the Company during the past three years, or
had any other relationship with the Company during such period, other than as an
investor. Such securities represent each investor's total beneficial holdings of
the Company's Common Stock and Redeemable Warrants. The Selling Securityholders
have agreed with J.W. Barclay & Co., Inc. (the "Representative"), the
representative of the Underwriters of the concurrent offering being made by the
Company, not to sell any of the securities which have been registered for sale
pursuant to the Registration Statement of which this Prospectus forms a part for
a period of 24 months from the date of this Prospectus without the prior written
consent of the Representative. All of the Common Stock and Redeemable Warrants
held by the Selling Securityholders are being offered for sale pursuant to this
Prospectus for their respective accounts. Accordingly, it is anticipated that
none of such securities will be owned by such Selling Securityholders after
completion of the Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Plan of Distribution."
The following table sets forth the name of each Selling Securityholder, and
the number of shares of Common Stock and Redeemable Warrants that each Selling
Securityholder beneficially owned directly or indirectly on the date of this
Prospectus.
SECURITIES OWNED AND OFFERED BY
EACH SELLING SECURITYHOLDER
---------------------------------
REDEEMABLE
NAME COMMON STOCK WARRANTS
----------------------------------------- ------------ ------------------
Royal Bank of Scotland................... 150,000 1,000,005
Per Eric Dahl............................ 350,000
Jerome and Ann Coppola................... 40,000 266,668
Harold Singer............................ 30,000 200,001
Jack W. Buechner(1)...................... 25,000
Dale Bertling............................ 10,000 66,667
Kenneth Delonge.......................... 10,000 66,667
Howard M. Pack........................... 10,000 66,667
Michael Ciasulli......................... 50,000
Wayne and Louella Adams.................. 5,000 33,334
Christopher Cirillo...................... 5,000 33,334
Boyd Corliss............................. 5,000 33,334
Richard David............................ 5,000 33,334
Leon Feldan.............................. 5,000 33,334
David Hanos, Jr.......................... 5,000 33,334
Bernard Kolkana.......................... 5,000 33,334
Charles Leithauser....................... 5,000 33,334
E. Dale Miller........................... 5,000 33,334
Thomas Zenick............................ 5,000 33,334
Lawrence Dunn............................ 25,000
Slate Daiagi Realty...................... 25,000
325,000 2,450,015
============== ==================
- ---------------
(1) As of the date of this Prospectus, Mr. Buechner does not own, but does
possess, pursuant to the Option, the right to purchase such shares of Common
Stock. Such shares are being offered hereby subject to their issuance upon
Mr. Buechner's timely exercise of the Option.
105
PLAN OF DISTRIBUTION
The Selling Securityholders have advised the Company that sales of their
Common Stock and Redeemable Warrants may be effected from time to time in
transactions (which may include block transactions) in the over-the-counter
market, in negotiated transactions, or a combination of such methods of sale, at
fixed prices which may be changed, at market prices prevailing at the time of
sale, or at negotiated prices. The Selling Securityholders may effect such
transactions by selling the their Common Stock and Redeemable Warrants directly
to purchasers or to or through broker-dealers which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Securityholders and/or
the purchasers of the Selling Securityholders' Common Stock and/or Redeemable
Warrants for whom such broker-dealers may act as agents or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer might be
in excess of customary commissions). The Selling Securityholders and any
broker-dealer that acts in connection with the sale of the Selling
Securityholders' Common Stock and/or Redeemable Warrants might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Each
of the Selling Securityholders is obligated to comply with certain rules
promulgated by the SEC designed to prevent manipulative and deceptive practices,
including Rules 10b-2, 10b-6 and 10b-7 promulgated under the Securities Exchange
Act of 1934. The Representative does not currently plan to participate in the
sale of securities of the Selling Securityholders.
At the time any offer of securities is made by or on behalf of a Selling
Securityholder, a prospectus supplement might need to be circulated to disclose
the number of shares being offered and the terms of the offering, the name or
names of any underwriters, dealers or agents participating in the offering, the
purchase price paid by any underwriter for shares purchased from the Selling
Securityholders, and any discounts, commissions or concessions allowed or
reallowed or paid to dealers, and the proposed selling price to the public.
The Selling Securityholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of their
securities against certain liabilities, including liabilities arising under the
Securities Act.
All costs, expenses and fees in connection with the registration of the
shares of Common Stock and Redeemable Warrants offered by the Selling
Securityholders will be borne by the Company. Brokerage commissions, if any,
attributable to the sale of the securities offered by the Selling
Securityholders will be borne by the Selling Securityholders.
106
[ALTERNATE OUTSIDE BACK PROSPECTUS COVER PAGE]
======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, BY ANY PERSON
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER,
SOLICITATION OR SALE MADE HEREUNDER, SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THE PROSPECTUS.
------------------------
TABLE OF CONTENTS
PAGE
----
Available Information.................
Prospectus Summary....................
Risk Factors..........................
Use of Proceeds.......................
Capitalization........................
Dividend Policy.......................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business..............................
Management............................
Certain Transactions..................
Principal Security Holders............
Selling Securityholders...............
Plan of Distribution..................
Shares Eligible for Future Sale.......
Concurrent Offering by the Company....
Legal Matters.........................
Experts...............................
Financial Statements..................
======================================================
======================================================
2,450,015 FIVE YEAR REDEEMABLE
WARRANTS
2,450,015 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF SUCH
WARRANTS
30,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF AN OPTION
OFFERED BY CERTAIN
SELLING SECURITYHOLDERS OF
RUSSIAN WIRELESS
TELEPHONE COMPANY, INC.
------------------------
PROSPECTUS
------------------------
, 1997
======================================================
107
PART II -- INFORMATION NOT REQUIRED IN PRO SPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VIII of the bylaws of Russian Wireless Telephone Company, Inc. (the
"Company") provides for the indemnification of directors and officers to the
fullest extent permitted by law.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
grants corporations the right to limit or eliminate the personal liability of
their Directors in certain circumstances in accordance with provisions therein
set forth. Article 10 of the Company's Certificate of Incorporation, a copy of
which is filed as an exhibit to this Registration Statement, and incorporated
herein by reference, provides for the elimination of personal liability of a
Director to the Corporation or its stockholders for monetary damages for the
breach of the Director's fiduciary duty to the full extent allowable under
Section 102(b)(7).
Section 145 of the General Corporation Law of the State of Delaware grants
corporations the right to indemnify their Directors, officers, employees and
agents in accordance with the provisions therein set forth. Article 8 of the
Company's Bylaws, filed as an exhibit to this Registration Statement, and
incorporated herein by reference, provides for indemnification of such person to
the full extent allowable under applicable law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
The Company has applied for directors' and officers' liability insurance
coverage with limits of $1,000,000 per occurrence.
In the Underwriting Agreement relating to the Common Stock and Warrants
being offered hereunder, the underwriters have agreed to indemnify the Company's
directors and certain of its officers, upon the terms and under the
circumstances described therein, as to certain civil liabilities, including
liabilities under the Securities Act. The Company has also entered into
indemnification agreements with each of its directors and officers which provide
for indemnification to the fullest extent permitted by law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
Common Stock being registered. All amounts are estimates except the registration
fee, the NASD and Nasdaq SmallCap Market fees and the Boston Stock Exchange and
Pacific Stock Exchange fees.
AMOUNT TO
BE PAID
---------
SEC Registration fee............................................. $ 18,445
NASD Filing fee.................................................. 6,587
Nasdaq SmallCap Market fees...................................... 10,000
Boston Stock Exchange listing fees............................... 15,000
Pacific Stock Exchange filing fees............................... 22,500
Printing expenses................................................ 75,000
Legal fees and expenses.......................................... 175,000
Accounting fees and expenses..................................... 150,000
Blue sky fees and expenses....................................... 45,000
Warrant agent fees............................................... 7,500
Stock and Redeemable Warrant certificates........................ 5,000
Miscellaneous.................................................... 19,968
--------
Total..................................................... $550,000
II-1
108
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the three year period which ended on the date of filing of this
Registration Statement, the Registrant sold the unregistered securities
hereinbelow described:
April 26, 1994 -- issuance of 550,000 shares of Registrant's Common Stock,
$.01 par value (the "Common Stock") to Ronald G. Nathan in consideration for
payment of $11,600. No underwriter, no discounts, no commissions. Exempt from
registration pursuant to Section 4(2) of the Securities Act.
June 15, 1994 -- issuance of 488,000 shares of Common Stock to Harvey Bloch
at inception for financial consulting services rendered prior to inception and
for services rendered through June 15, 1994 in the amount of $11,600. Exempt
from registration pursuant to Section 4(2) of the Securities Act.
December 15, 1994 -- issuance of 600,000 shares of Common Stock to Ronald
G. Nathan in consideration for services rendered to the Registrant in the amount
of $180,000. Exempt from registration pursuant to Section 4(2) of the Securities
Act.
December 23, 1994 -- issuance of 800,000 shares of Common Stock to
Inversiones Santa Catalina, N.V. in consideration for payment in the amount of
$8,000. Exempt from registration pursuant to Section 4(2) of the Securities Act.
December 23, 1994 -- issuance of 5,000 shares of Common Stock to Solomon
Klotz in consideration for payment in the amount of $50.00. Exempt from
registration pursuant to Section 4(2) of the Securities Act.
December 23, 1994 -- issuance of 5,000 shares of Common Stock to James
Staff in consideration for payment in the amount of $50.00. Exempt from
registration pursuant to Section 4(2) of the Securities Act.
December 23, 1994 -- issuance of 5,000 shares of Common Stock to Thomas
Turnure in consideration for payment in the amount of $50.00 Exempt from
registration pursuant to Section 4(2) of the Securities Act.
June 1994 -- Registrant issued 12% unsecured promissory notes in the
aggregate principal amount of $735,000, and warrants to purchase 750,000 shares
of Common Stock to the investors identified below in connection with a private
placement of 7.5 units consisting of such securities at an offering price of
$100,000 per unit which was exempt from registration pursuant to Regulation D
promulgated under the Securities Act ("Reg D") and/or Section 4(2) of the
Securities Act. White Rock Partners & Co., Inc. served as placement agent in
connection with said placement and received a consulting fee and non-accountable
expense allowance of $75,000 and $22,500, respectively, in connection therewith.
NUMBER NUMBER
OF OF
NAME UNITS WARRANTS
-------------------------------------------------------- ------- --------
Hilda O'Connor.......................................... 1/4 25,000
Timothy Martin.......................................... 1-1/2 150,000
Elliot Braun............................................ 1/2 50,000
Jeffrey Muhlgeier....................................... 1/2 50,000
James Noonan............................................ 1/2 50,000
Jai Guar................................................ 1/2 50,000
Leah Hammerman.......................................... 1/4 25,000
George Rutland.......................................... 1-1/2 150,000
Charles Burkridge....................................... 1/2 50,000
Zoger Investment Corp................................... 1 100,000
Sean Leahy.............................................. 1/2 50,000
----- -------
Total............................................ 7-1/2 750,000
October 1994 -- Registrant issued 12% unsecured promissory notes in the
aggregate principal amount of $980,000, and warrants to purchase 500,000 shares
of Common Stock to the investors identified below in
II-2
109
connection with a private placement of 10 units consisting of such securities at
an offering price of $100,000 per unit which was exempt from registration
pursuant to Reg D and/or Section 4(2) of the Securities Act. White Rock Partners
& Co., Inc. and CMA Analytical Service, Inc. served as placement agents in
connection with said placement and received a consulting fee and non-accountable
expense allowance of $100,000 and $30,000, respectively, in connection
therewith.
NAME NUMBER OF UNITS NUMBER OF WARRANTS
--------------------------------------- --------------- ------------------
Slate Daiagi Realty.................... 1/2 25,000
Larry Dunn............................. 1/2 25,000
Michael Ciasulli....................... 1 50,000
Lehman Brothers........................ 7 350,000
Colonial Electric...................... 1 50,000
--
-------
Total........................... 10 500,000
February 1996 -- Registrant issued 8% unsecured promissory notes in the
aggregate principal amount of $1,050,000, 300,000 shares of Common Stock and
warrants to purchase 2,000,015 shares of Common Stock to the investors
identified below in connection with a private placement of 30 units consisting
of such securities at an offering price of $35,000 per unit which was exempt
from registration pursuant to Reg D and/or Section 4(2) of the Securities Act.
J.W. Barclay & Co., Inc. served as placement agent in connection with said
placement and received a consulting fee and non-accountable expense allowance of
$105,000 and $31,500, respectively, in connection therewith.
NO. OF NO. OF NO. OF
NAME UNITS SHARES WARRANTS
--------------------------------------- ----------- ------------ --------------
Dale Bertling.......................... 1 10,000 66,667
Howard Pack............................ 1 10,000 66,667
Thomas Zenick.......................... 1/2 5,000 33,334
Royal Bank of Scotland................. 15 150,000 1,000,005
David Hanos, Jr........................ 1/2 5,000 33,334
Charles Leithauser..................... 1/2 5,000 33,334
Bernard Kolkana........................ 1/2 5,000 33,334
Richard Davis.......................... 1/2 5,000 33,334
Leon Feldan............................ 1/2 5,000 33,334
Jerome and Ann Coppola................. 4 40,000 266,668
E. Dale Miller......................... 1/2 5,000 33,334
Boyd Corliss........................... 1/2 5,000 33,334
Wayne Adams and Lovella Adams.......... 1/2 5,000 33,334
Kenneth A. DeLonge..................... 1 10,000 66,667
Harold H. Singer....................... 3 30,000 200,001
Christopher Cirillo.................... 1/2 5,000 33,334
--- ------- ---------
Total........................... 30 300,000 2,000,015
December 19, 1996 -- Registrant borrowed the principal amount of $250,000
from each of Messrs. L.W. Cave, James Condakes and Howard M. Pack pursuant to
agreements which provided for the repayment of such principal, together with
interest accruing thereon at the rate of 8% per annum at the time of closing of
the offering being made pursuant to prospectus contained in this Registration
Statement, or October 31, 1998. As an inducement to such lenders to make such
loans, the Registrant issued 150,000 shares of Common Stock to each of them, for
no additional consideration. Such transactions were exempt from registration
pursuant to Reg D and/or Section 4(2) of the Securities Act.
February 10, 1997 -- Registrant issued 250,000 shares of Common Stock to
Ronald G. Nathan and 500,000 shares of Common Stock to Mikhail Leibov pursuant
to the merger of Russian Wireless Telephone Company, Inc. ("Russian Wireless")
with and into the Registrant, and in consideration for the receipt and
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cancellation of 250,000 and 500,000 shares, respectively, of the common stock of
Russian Wireless from them. Such transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
1.1 -- Form of Underwriting Agreement.*
1.2 -- Form of Agreement Among Underwriters.*
1.3 -- Form of Selected Dealers Agreement.*
2.1 -- Certificate of Merger Between the Company and Russian Wireless Telephone
Company, Inc.
3.1 -- Certificate of Incorporation of the Company.
3.2 -- Bylaws of the Company.
4.1 -- The Company's Omnibus Stock Incentive Plan.
4.2 -- Specimen Stock Certificate of the Company's Common Stock.
4.3 -- Specimen Redeemable Warrant Certificate.*
4.4 -- Form of Redeemable Warrant Agreement.*
4.5 -- Form of Lockup Agreement.*
4.6 -- Form of Representative's Warrant Agreement and Representative's Warrant
Certificate.*
5 -- Opinion of Hall Dickler Kent Friedman & Wood, regarding the legality of the
Common Stock and the Redeemable Warrants.*
10.1 -- Option Agreement Between the Company and Mikhail Leibov.
10.2 -- Option Exercise Agreement Between the Company and Mikhail Leibov.
10.3 -- Employment Agreement Between the Company and Ronald G. Nathan.
10.4 -- Extension of Employment Agreement Between the Company and Ronald G. Nathan.
10.5 -- Employment Agreement Between the Company and Mikhail Leibov.
10.6 -- Lease Between 780 Third Avenue Associates and the Company.*
10.7 -- Lease Between Public Joint Stock Company PKB Proyektenergomash and Corbina
Telecommunications.*
10.8 -- Lease Between CompTel and its Landlord.*
10.9 -- Financial Consulting Agreement Between the Company and the Representative.*
10.10 -- Form of Indemnity Agreement to be entered into between the Company and its
Directors and Officers.
10.11 -- Redemption Agreement between the Company and Harvey Block.*
11 -- Computations of Earnings (Loss) Per Share.
21 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Auditors (See Part II, Page 7).
23.2 -- Consent of Independent Auditors (See Part II, Page 8).
23.3 -- Consent of Counsel (See Part II, Page 9).
23.4 -- Consent of Counsel (See Part II, Page 10).
24 -- Power of Attorney (See Part II, Page 6).
- ---------------
* To be filed by amendment.
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ITEM 28. UNDERTAKINGS.
A. CERTIFICATES
The Registrant hereby undertakes to provide to the Underwriter at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
B. RULE 415 OFFERING
The Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells any of the
securities which are the subject of the prospectus included within this
Registration Statement, a post-effective amendment to this Registration
Statement: (i) to include any prospectus required by Section 10(a)(3) of the
Securities Act; (ii) to reflect in the prospectus any facts or events which,
individually or together, represent fundamental change in the information set
forth in the Registration Statement; (iii) to include any additional or changed
material information with respect to the plan of distribution.
(2) For purposes of determining any liability under the Securities Act, the
Registrant will treat each post-effective amendment as a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
C. REQUEST FOR ACCELERATION OF EFFECTIVE DATE
The Company may elect to request acceleration of the effective date of the
Registration Statement under Rule 461 of the Securities Act of 1933.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
D. RELIANCE ON RULE 430A
(1) For purposes of determining liability under the Securities Act, the
Registrant will treat the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or
497(h) under the Securities Act (sec.sec.230.424(b)(1), (4) or 230.497(h)) as
part of this Registration Statement as of the time the Commission declared it
effective.
(2) For purposes of determining liability under the Securities Act, the
Registrant will treat each post-effective amendment as a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
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SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS OF FILING ON FORM SB-2 AND AUTHORIZED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE CITY, COUNTY AND
STATE OF NEW YORK ON THE 28TH DAY OF MARCH, 1997
RUSSIAN WIRELESS TELEPHONE COMPANY,
INC.
By: /s/ RONALD G. NATHAN
------------------------------------
Ronald G. Nathan, President
(Principal Executive Officer)
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES STATED.
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS RONALD G. NATHAN HIS TRUE AND LAWFUL
ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION,
FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY
AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION
STATEMENT, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEY-IN-FACT AND AGENT, FULL POWER AND AUTHORITY TO DO AND PERFORM
EACH AND EVERY ACT AND THING REQUISITE OR NECESSARY TO BE DONE IN AND ABOUT THE
PREMISES, AS FULL TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON,
HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEY-IN-FACT AND AGENT OR
EITHER OF THEM OR THEIR OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ---------------
/s/ JACK W. BUECHNER Director, Chairman of the March 28, 1997
- --------------------------------------------- Board
Jack W. Buechner
/s/ RONALD G. NATHAN Director, President, Treasurer March 28, 1997
- --------------------------------------------- (Principal Executive and
Ronald G. Nathan Principal Financial Officer)
/s/ RICHARD N. HOLWILL Director March 28, 1997
- ---------------------------------------------
Richard N. Holwill
/s/ STEVEN D. DREYER Director, Secretary March 28, 1997
- ---------------------------------------------
Steven D. Dreyer
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CONSENT OF INDEPENDENT AUDITORS
Russian Wireless Telephone Company, Inc.
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 28, 1997 in the Registration Statement
(Form SB-2) and related prospectus of Russian Wireless Telephone Company, Inc.
dated March 28, 1997.
ERNST & YOUNG LLP
New York, New York
March 28, 1997
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CONSENT OF INDEPENDENT AUDITORS
Corbina Telecommunications
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 24, 1997 with respect to the financial
statements of Corbina Telecommunications included in the Registration Statement
(Form SB-2) and related prospectus of Russian Wireless Telephone Company, Inc.
dated March 28, 1997.
ERNST & YOUNG (CIS) LIMITED
Moscow, Russian Federation
March 28, 1997
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CONSENT OF COUNSEL
We consent to the use of our firm's name and to the statements made with
respect to our Firm, as they appear under the heading "Legal Matters" in the
Prospectus which is included in Part I of this Registration Statement.
HALL DICKLER KENT FRIEDMAN & WOOD LLP
New York, New York
March 28, 1997
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CONSENT OF COUNSEL
I consent to the use of my name and to the statements made with respect to
me, as they appear under the heading "Legal Matters" in the Prospectus which is
included in Part I of this Registration Statement.
IRINA IGITOVA
Moscow, Russian Federation
March 28, 1997
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
------- --------------------------------------------------------------- -----------
2.1 -- Certificate of Merger Between the Company and Russian Wireless
Telephone Company, Inc. .....................................
3.1 -- Certificate of Incorporation of the Company....................
3.2 -- Bylaws of the Company..........................................
4.1 -- The Company's Omnibus Stock Incentive Plan.....................
4.2 -- Specimen Stock Certificate of the Company's Common Stock.......
10.1 -- Option Agreement Between the Company and Mikhail Leibov........
10.2 -- Option Exercise Agreement Between the Company and Mikhail
Leibov.......................................................
10.3 -- Employment Agreement Between the Company and Ronald G. Nathan..
10.4 -- Extension of Employment Agreement Between the Company and
Ronald G. Nathan.............................................
10.5 -- Employment Agreement Between the Company and Mikhail Leibov....
10.10 -- Form of Indemnity Agreement to be entered into between the
Company and its Directors and Officers.......................
11 -- Computations of Earnings (Loss) Per Share......................
21 -- Subsidiaries of the Company....................................
23.1 -- Consent of Independent Auditors (See Part II, Page 7)..........
23.2 -- Consent of Independent Auditors (See Part II, Page 8)..........
23.3 -- Consent of Counsel (See Part II, Page 9).......................
23.4 -- Consent of Counsel (See Part II, Page 10)......................
24 -- Power of Attorney (See Part II, Page 6)........................